Document:

Exhibit
10.2

 

THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE SOLD,
TRANSFERRED, OTHERWISE DISPOSED OF OR OFFERED FOR SALE IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE OR
OTHER SECURITIES LAW OR AN EXEMPTION FROM SUCH REGISTRATION AND EXCEPT IN
COMPLIANCE WITH SECTION 14 HEREOF.

 

THIS NOTE IS SUBJECT IN ALL RESPECTS TO THE
SUBORDINATION PROVISIONS SET FORTH IN SECTION 5 HEREOF.

 

MATTRESS FIRM,
INC.

 

SECOND AMENDED AND
RESTATED

SECURED SENIOR SUBORDINATED PROMISSORY NOTE

 

	
  March 31, 2004

  	
   

  	
  $17,000,000.00

  

 

WHEREAS, on
October 18, 2002 (the “Original Issuance Date”), MMA Acquisition
Company, Inc., a Delaware corporation (“Acquisition Company”) issued
that certain $17,500,000 in principal amount Promissory Note (the “Original
Promissory Note”) to Mattress Holdings International, LLC (“MHI”);

 

WHEREAS, on
October 18, 2002, Malachi Mattress America, Inc., a Delaware corporation,
merged (the “Merger”) with and into Acquisition Company, with
Acquisition Company surviving the Merger and changing its name to “Mattress
Firm, Inc.” (such surviving entity, “Borrower”);

 

WHEREAS, on
October 18, 2002, the Original Note was amended and restated pursuant to
that certain Amended and Restated Secured Senior Subordinated Promissory Note
(the “Amended Promissory Note”) by Borrower in favor of MHI;

 

WHEREAS,
contemporaneously herewith, SLN Finance, LLC (together with its successors and
assigns, “Lender”) acquired from MHI all of the indebtedness evidenced by the
Amended Promissory Note (the “Debt Acquisition”);

 

WHEREAS, it is a
condition to the consummation of Debt Acquisition that Lender and Borrower
amend and restate the Amended Promissory Note in the manner set forth herein;
and

 

WHEREAS, as
additional consideration for the agreement of Borrower to amend and restate the
Amended Promissory Note, Lender has agreed to forgive $500,000 of the principal
balance for the Amended Promissory Note, which results in the outstanding
principal balance thereof being reduced to $17,000,000.00.

 

NOW THEREFORE, in
consideration of the mutual covenants contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Lender and Borrower hereby agree to amend and restate the Amended
Promissory Note as follows (all references herein to this “Note” shall mean the
Amended Promissory Note as amended and restated herein):

 

Borrower for value
received, hereby promises to pay, in immediately available funds, to Lender or
registered assigns (but only if such assignment is permitted by and is in
compliance with Section 14 hereof), the principal amount of
$17,000,000.00, on June 28, 2009 (the “Maturity Date”) together
with interest thereon calculated hereunder in accordance with the provisions
contained herein. Borrower will maintain a register in which it will record
Lender’s initial ownership of this Note and any changes in ownership of this
Note which occur as permitted by and in compliance with Section 14 hereof.
The holder of this Note as indicated at any time in such register shall be
referred to herein as the “Registered Holder” of this Note.

 

 

1.            Definitions.

 

(a)                               For
purposes of this Note, the following capitalized terms have the following
meaning.

 

“Accounts”
shall have the meaning given to it in the Security Agreement.

 

“Affiliate”
means, with respect to any Person, any other Person that directly or indirectly
through one or more intermediaries, controls, is controlled by, or is under
common control with, such Person.  For
purposes of this definition, “control” of a Person means the power, directly or
indirectly, either to (i) vote 10% or more of the Capital Stock having ordinary
voting power for the election of directors of such Person or (ii) direct or
cause the direction of the management and policies of such Person whether by
contract or otherwise.  Notwithstanding
anything herein to the contrary, prior to the occurrence of a MFA Triggering
Event, MFA shall not be considered an “Affiliate” of Borrower or any Guarantor.

 

“Authorized
Officer” means, with respect to any Person, the chief executive officer,
chief financial officer, president or any vice president of such Person.

 

“Availability”
has the meaning ascribed thereto in the Senior Loan Agreement.

 

“Bankruptcy
Code” means the United States Bankruptcy Code (11 U.S.C. § 101, et
seq.), as amended, and any successor statute.

 

“Business Day”
means any day other than a Saturday, Sunday or other day on which commercial
banks in New York City are authorized or required to close.

 

“Capital Stock”
means (i) with respect to any Person that is a corporation, any and all shares,
interests, participations or other equivalents (however designated and whether
or not voting) of corporate stock, and (ii) with respect to any Person that is
not a corporation, any and all partnership, membership or other equity
interests of such Person.

 

“Capitalized
Lease” means, with respect to any Person, any lease of real or personal
property by such Person as lessee which is required under GAAP to be
capitalized on the balance sheet of such Person.

 

“Capitalized
Lease Obligations” means, with respect to any Person, obligations of such
Person and its Subsidiaries under Capitalized Leases, and, for purposes hereof,
the amount of any such obligation shall be the capitalized amount thereof
determined in accordance with GAAP.

 

“Cash and Cash
Equivalents” means all cash, deposit or securities account balances,
certificates of deposit or other financial instruments properly classified as
cash or cash equivalents under GAAP.

 

“Change of
Control” means each occurrence of any of the following:

 

(a)          the Permitted Holders
shall cease to have beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act), in the aggregate, of at least 100% of the aggregate outstanding
voting power of the Capital Stock of Parent or at least 51% of the outstanding
non-voting power of the Capital Stock of Parent,

 

(b)          Parent ceases to own and
control directly 100% of the Capital Stock of the Borrower,

 

(c)          the Borrower cease to
own, directly or indirectly, and control 100% of the Capital Stock of any
Guarantor (other than Parent) or any of the Borrower’s Subsidiaries, unless
otherwise permitted hereunder,

 

(d)          (i) Parent consolidates
with or merges into another entity or conveys, transfers or leases all or
substantially all of its property and assets to any Person, or (ii) any entity
consolidates with or merges into Parent, which in either event (i) or (ii) is
pursuant to a transaction in which the outstanding voting Capital Stock of
Parent is reclassified or changed into or exchanged for cash, securities or
other property, other than any such

 

2

 

transaction in which the Permitted Holder have a beneficial ownership
in the aggregate of at least 100% of the aggregate outstanding voting power of
the Capital Stock of the resulting, surviving or transferee entity or at least
51% of the outstanding non-voting power of the Capital Stock of the resulting,
surviving or transferee entity.

 

“Closing Date
Financial Statements” shall have the meaning set forth in
Section 8(c).

 

“Code”
shall mean the Internal Revenue Code of 1986, as amended from time to time, and
related rules and regulations promulgated thereunder by the Internal Revenue
Service.

 

“Collateral”
means all of the property and assets and all interests therein and proceeds
thereof now owned or hereafter acquired by Parent or any of its Subsidiaries
upon which a Lien is granted or purported to be granted by such Person to
Lender pursuant to any of the Loan Documents.

 

“Compliance
Certificate” shall mean a certificate substantially in the form of the
attached Exhibit A and signed by an Authorized Officer.

 

“Contingent
Obligation” means, with respect to any Person, any obligation of such
Person guaranteeing or intended to guarantee any Debt, leases, dividends or
other obligations (“primary obligations”) of any other Person (the “primary
obligor”) in any manner, whether directly or indirectly, including, without
limitation, (i) the direct or indirect guaranty, endorsement (other than for
collection or deposit in the ordinary course of business), co-making,
discounting with recourse or sale with recourse by such Person of the
obligation of a primary obligor, (ii) the obligation to make take-or-pay or
similar payments, if required, regardless of nonperformance by any other party
or parties to an agreement, (iii) any obligation of such Person, whether or not
contingent, (A) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (B) to advance or supply
funds (1) for the purchase or payment of any such primary obligation or (2) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency of the primary obligor, (C) to purchase
property, assets, securities or services primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation or (D) otherwise to assure or hold
harmless the holder of such primary obligation against loss in respect thereof;
provided, however, that the term “Contingent Obligation” shall not include any
product warranties extended in the ordinary course of business.  The amount of any Contingent Obligation shall
be deemed to be an amount equal to the stated or determinable amount of the
primary obligation with respect to which such Contingent Obligation is made
(or, if less, the maximum amount of such primary obligation for which such
Person may be liable pursuant to the terms of the instrument evidencing such
Contingent Obligation) or, if not stated or determinable, the maximum
reasonably anticipated liability with respect thereto (assuming such Person is
required to perform thereunder), as determined by such Person in good faith.

 

“Debt”
means, with respect to any Person, without duplication, (i) all indebtedness of
such Person for borrowed money; (ii) all obligations of such Person for the
deferred purchase price of property or services (other than trade payables or
other accounts payable incurred in the ordinary course of such Person’s
business and not outstanding for more than 90 days after the date such payable
was created (“Current Accounts Payable”)); (iii) all obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments
or upon which interest payments are customarily made; (iv) all
reimbursement, payment or other obligations and liabilities of such Person
created or arising under any conditional sales or other title retention
agreement with respect to property used and/or acquired by such Person, even
though the rights and remedies of the lessor, seller and/or lender thereunder
may be limited to repossession or sale of such property; (v) all Capitalized
Lease Obligations of such Person; (vi) all obligations and liabilities,
contingent or otherwise, of such Person, in respect of letters of credit,
acceptances and similar facilities; (vii) all obligations and liabilities,
calculated on a basis satisfactory to Lender and in accordance with accepted
practice, of such Person under Hedging Agreements; (viii) all Contingent
Obligations; (ix) liabilities incurred under Title IV of ERISA with
respect to any plan (other than a Multiemployer Plan) covered by Title IV
of ERISA and maintained for employees of such Person or any of its ERISA
Affiliates; (x) withdrawal liability incurred under ERISA by such Person
or any of its ERISA Affiliates with respect to any Multiemployer Plan; (xi) all
other items (other than Current Accounts Payable and other than obligations in
respect of deferred taxes, deferred rent, vendor incentives and customer
deposits that are not more than 90 days past due) which, in accordance with GAAP,
would be included as liabilities on the liability side of the balance sheet of
such Person; and (xii) all obligations referred to in clauses (i) through (xi)
of this definition of another Person secured by (or for which the

 

3

 

holder of such Debt has an existing right, contingent or otherwise, to
be secured by) a Lien upon property owned by such Person, even though such
Person has not assumed or become liable for the payment of such Debt.  The Debt of any Person (without duplication)
shall include the Debt of any partnership of or joint venture in which such
Person is a general partner or a joint venturer.

 

“Default”
shall mean any of the events specified in Section 6 of this Note, whether
or not any requirement for the giving of notice or lapse of time or other
condition precedent has been satisfied.

 

“Default Rate”
means a rate of interest per annum equal to the rate of interest otherwise in
effect from time to time pursuant to the terms of this Note plus 4.0 percentage
points, or, if a rate of interest is not otherwise in effect, interest at the
highest rate specified herein prior to the Event of Default plus 4.0 percentage
points.

 

“Designated
Loan Amount” means the sum of (a) $11,041,666.68, and (b) the aggregate
amount added to the principal balance of the term loans evidenced by the
Solunet Loan Agreement.

 

“Designated
Payment Date” means the Final Maturity Date, as such term is defined in the
Senior Loan Agreement.

 

“Disposition”
means any transaction, or series of related transactions, pursuant to which any
Person or any of its Subsidiaries sells, assigns, transfers or otherwise
disposes of any property or assets (whether now owned or hereafter acquired) to
any other Person (other than a transfer of a franchise to any Person), in each
case, whether or not the consideration therefor consists of cash, securities or
other assets owned by the acquiring Person.

 

“Distribution”
shall mean and include (a) the payment of any dividends or other distributions
on capital stock of the corporation (except distributions in such stock) and
(b) the redemption or acquisition of its securities unless made
contemporaneously from the net proceeds of the sale of securities.

 

“Employee Plan”
means an employee benefit plan (other than a Multiemployer Plan) covered by
Title IV of ERISA and maintained (or that was maintained at any time during the
six (6) calendar years preceding the date of any borrowing hereunder) for
employees of Borrower or any Guarantor or any of their respective ERISA
Affiliates.

 

“Equipment”
shall have the meaning given to it in the Security Agreement.

 

“ERISA”
means the Employee Retirement Income Security Act of 1974, as amended, and any
successor statute of similar import, and regulations thereunder, in each case,
as in effect from time to time. 
References to sections of ERISA shall be construed also to refer to any
successor sections.

 

“ERISA
Affiliate” means, with respect to any Person, any trade or business
(whether or not incorporated) which is a member of a group of which such Person
is a member and which would be deemed to be a “controlled group” within the
meaning of Sections 414(b), (c), (m) and (o) of the Code.

 

“Event of
Default” shall mean any of the events specified in Section 6 of this
Note.

 

“Excess
Availability” has the meaning ascribed thereto in the Senior Loan
Agreement.

 

“Exchange Act”
means the Securities Exchange Act of 1934, as amended.

 

“Extraordinary
Receipts” means any cash received (other than in the ordinary course of
business and not consisting of proceeds of Dispositions, Franchise Events or
Debt), by the Parent or any of its Subsidiaries (other than from Borrower or a
Guarantor), including, without limitation, (i) foreign, United States, state or
local tax refunds, (ii) pension plan reversions, (iii) proceeds of insurance,
(iv) judgments, proceeds of settlements or other consideration of any kind in
connection with any cause of action, (v) condemnation awards (and payments in
lieu

 

4

 

thereof), (vi) indemnity payments and (vii) any purchase price
adjustment received in connection with any purchase agreement.

 

“Fiscal Year”
means the fiscal year of the Borrower and its Subsidiaries ending on the
Tuesday closest to January 31st. 
References in any Loan Document to a specific Fiscal Year means the
Fiscal Year roughly corresponding to the referenced calendar year (e.g. “Fiscal
Year 2004” means the Fiscal Year ending February 1, 2005).

 

“Franchise
Event” means (a) the issuance by Borrower or a Guarantor of a new franchise
agreement or (b) the opening of a new store by a franchisee of Borrower or a
Guarantor.

 

“GAAP”
means generally accepted accounting principles in effect from time to time in
the United States, applied on a consistent basis.

 

“Governmental
Authorities” means any nation or government, any Federal, state, city,
town, municipality, county, local or other political subdivision thereof or
thereto and any department, commission, board, bureau, instrumentality, agency
or other entity exercising executive, legislative, judicial, taxing, regulatory
or administrative powers or functions of or pertaining to government.

 

“Guaranty”
shall mean that certain Amended and Restated Guaranty executed by the
Guarantors in favor of the Lender.

 

“Guarantors”
shall mean Parent and all present and future Subsidiaries of the Borrower.

 

“Hedging
Agreement” means any interest rate, foreign currency, commodity or equity
swap, collar, cap, floor or forward rate agreement, or other agreement or
arrangement designed to protect against fluctuations in interest rates or
currency, commodity or equity values (including, without limitation, any option
with respect to any of the foregoing and any combination of the foregoing
agreements or arrangements), and any confirmation executed in connection with
any such agreement or arrangement.

 

“Highest Lawful
Rate” means, with respect to Lender, the maximum non-usurious interest
rate, if any, that at any time or from time to time may be contracted for,
taken, reserved, charged or received on the Obligations under laws applicable
to Lender which are currently in effect or, to the extent allowed by law, under
such applicable laws which may hereafter be in effect and which allow a higher
maximum non-usurious interest rate than applicable laws now allow.

 

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

 

“Inventory”
shall have the meaning given to it in the Security Agreement.

 

“Lien”
means any mortgage, deed of trust, pledge, lien (statutory or otherwise),
security interest, charge or other encumbrance or security or preferential
arrangement of any nature, including, without limitation, any conditional sale
or title retention arrangement, any Capitalized Lease and any assignment,
deposit arrangement or financing lease intended as, or having the effect of,
security.

 

“Loan Documents”
shall mean this Note, the Security Instruments, the Guaranty and such other
instruments, documents, and agreements evidencing, securing, or pertaining to
the loans evidenced by this Note, which have heretofore been or hereafter are
from time to time executed and delivered to Lender by Borrower and its
Subsidiaries, or any other Person pursuant to this Note.

 

“Material
Adverse Effect” means a material adverse effect on any of (i) the
operations, business, assets, properties, condition (financial or otherwise) or
prospects of Borrower or any of its Subsidiaries, (ii) the

 

5

 

ability of Borrower or any Guarantor to perform any of its obligations
under any Loan Document to which it is a party, (iii) the legality, validity or
enforceability of this Note or any other Loan Document, (iv) the rights and
remedies of Lender under any Loan Document, or (v) the validity, perfection or
priority (subject to Permitted Liens) of a Lien in favor of Lender.

 

“MFA” means
Mattress Firm Arizona, LLC, an Arizona limited liability company.

 

“MFA Triggering
Event” means means the date when (a) MFA’s TTM EBITDA at any time is
greater than $250,000, and (b) Senior Agent requests that MFA execute a joinder
to the Senior Loan Agreement and the other Senior Loan Documents.

 

“MFOL”
means Mattress Firm Operating, Ltd., a Texas limited partnership.

 

“MFOL
Management Agreement” the Management, Operation and Services Agreement, by
and between Borrower and MFOL, as in effect on the date hereof.

 

“Multiemployer
Plan” means a “multiemployer plan” as defined in Section 4001(a)(3) of
ERISA to which Borrower, any Guarantor or any of their respective ERISA
Affiliates has contributed to, or has been obligated to contribute, at any time
during the preceding six (6) years.

 

“Net Cash
Proceeds” means, (i) with respect to any Disposition or Franchise Event by
any Person or any of its Subsidiaries, the amount of cash received (directly or
indirectly) from time to time (whether as initial consideration or through the
payment or disposition of deferred consideration) by or on behalf of such
Person or such Subsidiary, in connection therewith after deducting therefrom
only (A) the amount of any Debt secured by any Permitted Lien on any asset
(other than Debt assumed by the purchaser of such asset) which is required to
be, and is, repaid in connection with such Disposition or Franchise Event (other
than Debt under this Note), (B) reasonable expenses related thereto incurred by
such Person or such Subsidiary in connection therewith, (C) transfer taxes paid
to any taxing authorities by such Person or such Subsidiary in connection
therewith, and (D) net income taxes to be paid in connection with such
Disposition or Franchise Event (after taking into account any tax credits or
deductions and any tax sharing arrangements) and (ii) with respect to the
issuance or incurrence of any Debt by any Person or any of its Subsidiaries, or
the sale or issuance by any Person or any of its Subsidiaries of any shares of
its Capital Stock, the aggregate amount of cash received (directly or
indirectly) from time to time (whether as initial consideration or through the
payment or disposition of deferred consideration) by or on behalf of such
Person or such Subsidiary in connection therewith, after deducting therefrom
only (A) reasonable expenses related thereto incurred by such Person or such
Subsidiary in connection therewith, (B) transfer taxes paid by such Person or
such Subsidiary in connection therewith and (C) net income taxes to be paid in
connection therewith (after taking into account any tax credits or deductions
and any tax sharing arrangements); in each case of clause (i) and (ii) to the
extent, but only to the extent, that the amounts so deducted are (x) actually
paid to a Person that, except in the case of reasonable out-of-pocket expenses,
is not an Affiliate of such Person or any of its Subsidiaries and (y) properly
attributable to such transaction or to the asset that is the subject thereof.

 

“Non-Payment
Blockage Period” means, with respect to any Non-Payment Default, the period
from and including the date of receipt by Registered Holder of a Non-Payment
Default Notice relating thereto until the first to occur of (a) the date on
which the holders of the Senior Indebtedness shall have expressly waived or
acknowledged the cure of such Non-Payment Default, in each case, in writing, or
(b) the date on which the holders of the Senior Indebtedness shall expressly
and irrevocably waive the application of Section 5(d) hereof in writing.

 

“Non-Payment
Default” has the meaning specified in Section 5(d) hereof.

 

“Non-Payment
Default Notice” means a written notice from or on behalf of the holders of
the Senior Indebtedness of the existence of a Non-Payment Default and
specifically designating such notice as a “Non-Payment Default Notice.”

 

“Obligations”
means all present and future indebtedness, obligations, and liabilities of
Borrower or any Guarantor to Lender under the Loan Documents, whether or not
the right of payment in respect of such claim is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, disputed, undisputed,
legal, equitable,

 

6

 

secured, unsecured, and whether or not such claim is discharged, stayed
or otherwise affected by any Insolvency Proceeding.  Without limiting the generality of the
foregoing, the Obligations of Borrower and each Guarantor under the Loan
Documents include (a) the obligation to pay principal, interest, charges,
expenses, fees, attorneys’ fees and disbursements, indemnities and other
amounts payable by such Person under the Loan Documents (including any portion
thereof that accrues after the commencement of an Insolvency Proceeding,
whether or not allowed or allowable in whole or in part as a claim in any such
Insolvency Proceeding), and (b) the obligation of such Person to reimburse
any amount in respect of any of the foregoing that Lender (in its sole
discretion) may elect to pay or advance on behalf of such Person.

 

“Parent”
means Mattress Holding Corp., a Delaware corporation.

 

“Payment
Blockage Period” means, with respect to any Payment Default, the period
from and including the date of receipt by Registered Holder of a Payment
Default Notice relating thereto until the first to occur of (a) the date on
which the holders of the Senior Indebtedness have expressly waived or
acknowledged the cure of such Payment Default, in each case in writing, or (b)
the date on which the holders of the Senior Indebtedness shall expressly and
irrevocably waive the application of Section 5(c) hereof, in writing.

 

“Payment
Default” has the meaning specified in Section 5(c) hereof.

 

“Payment
Default Notice” means a written notice from or on behalf of the holders of
the Senior Indebtedness of the existence of a Payment Default and specifically
designating such notice as a “Payment Default Notice.”

 

“PBGC”
means the Pension Benefit Guaranty Corporation or any successor thereto.

 

“Permitted Debt”
shall mean:

 

(a)                               the
Debt included in the Obligations;

 

(b)                              Debt
evidenced by Capitalized Lease Obligations entered into at any time in order to
finance capital expenditures made by Borrower and the Guarantors in accordance
with the provisions of Section 7.02(g) of the Senior Loan Agreement, which
Debt, when aggregated with the principal amount of all Debt incurred under this
clause (b) and clause (c) of this definition, does not exceed $1,500,000 at any
time outstanding;

 

(c)                               purchase
money Debt incurred at any time to enable Borrower or a Guarantor to acquire
equipment in the ordinary course of its business, which Debt, when aggregated
with the principal amount of all Debt incurred under this clause (c) and clause
(b) of this definition, does not exceed $1,500,000 at any time outstanding;

 

(d)                              Debt
under any Hedging Agreement so long as such Hedging Agreements are used solely
as a part of its normal business operations as a risk management strategy
and/or hedge against changes resulting from market operations and not as a
means to speculate for investment purposes on trends and shifts in financial or
commodities markets;

 

(e)                               Subordinated
Debt;

 

(f)                                  Debt
of Borrower consisting of (i) guaranties by Borrower of Debt of a Guarantor
that otherwise constitutes Permitted Debt or (ii) guaranties by Borrower of any
other obligation of a Guarantor provided such obligation itself is otherwise
permitted under the Loan Documents and does not result in an Event of Default;

 

(g)                               Debt
evidenced by the Senior Loan Agreement and the other Senior Loan Documents;

 

(h)                               [intentionally
omitted]

 

7

 

(i)                                   Debt
to customers in respect of warranty claims and rights of return of inventory
which is incurred in the ordinary course of business;

 

(j)                                  Debt
listed on Schedule 9(a) (other than Debt described above in clauses
(b) or (c) above), and the extension of maturity, refinancing or modification
of the terms thereof; provided, however, that (i) such extension, refinancing
or modification is pursuant to terms that are not less favorable to the
Borrower and the Guarantor and Lender than the terms of the Debt being
extended, refinanced or modified and (ii) after giving effect to such extension,
refinancing or modification, the amount of such Debt is not greater than the
amount of Debt outstanding immediately prior to such extension, refinancing or
modification plus accrued interest thereon and the fees incurred in connection
with the extension, refinancing, or modification;

 

(k)                              Debt
permitted by Section 9(b); and

 

(l)                                   Debt
pursuant to the Sun Management Agreement and the MFOL Management Agreement, in
an aggregate amount not to exceed the amount that is permitted to be paid
pursuant to Section 9(i)(F) and Section 9(i)(G),
respectively.

 

“Permitted
Dispositions” means (a) sales or other dispositions of Inventory to buyers
in the ordinary course of business, (b) sales or other dispositions of obsolete
or worn-out equipment in the ordinary course of business, (c) sales or other
dispositions of other property or assets for cash in an aggregate amount not
less than the fair market value of such property or assets, provided that the
Net Cash Proceeds of such Dispositions in the case of clauses (b) and (c) do
not exceed $100,000 in the aggregate in any twelve-month period, (d) the use or
transfer of Cash or Cash Equivalents by Borrower or any Guarantor or their
respective Subsidiaries in a manner that is not prohibited by the terms of this
Note, (e) the licensing by Borrower or any Guarantor or their respective
Subsidiaries, on a non-exclusive basis, of patents, trademarks, copyrights, and
other intellectual property rights in the ordinary course of business, (f) the
granting of leases or subleases to other Persons not materially interfering
with the conduct of business of Borrower or any Guarantor, (g) the return of
Inventory to suppliers in the ordinary course of business, (h) the transfers of
assets described in Section 5.03(b) of the Senior Loan Agreement,
and (i) the disposition of less than five store locations in any one city or
metropolitan area, the approval of the opening by a franchisee of Borrower or a
Guarantor of less than five store locations in any one city or metropolitan
area, or the grant of a franchise, so long as such franchise does not involve
five or more store locations in any one city or metropolitan area.

 

“Permitted
Holders” means Sun Fund and its Affiliates.

 

“Permitted
Investments” shall mean (i) marketable direct obligations issued or
unconditionally guaranteed by the United States Government or issued by any
agency or instrumentality thereof and backed by the full faith and credit of
the United States, in each case, maturing within six months from the date of
acquisition thereof; (ii) commercial paper, maturing not more than 270 days
after the date of issue rated P-1 by Moody’s or A-1 by Standard & Poor’s;
(iii) certificates of deposit maturing not more than 270 days after the date of
issue, issued by commercial banking institutions, and money market or demand
deposit accounts maintained at commercial banking institutions, each of which
is a member of the Federal Reserve System and has a combined capital and
surplus and undivided profits of not less than $500,000,000; (iv) repurchase
agreements having maturities of not more than 90 days from the date of
acquisition which are entered into with banks included in the commercial
banking institutions described in clause (iii) above and which are secured by
marketable direct obligations of the United States Government or any agency
thereof, (v) money market accounts maintained with mutual funds having assets
in excess of $2,500,000,000; (vi) tax exempt securities rated A or better by
Moody’s or A+ or better by Standard & Poor’s; and (vii) advances to
officers and other employees of Borrower or any Guarantor in the ordinary
course of business in an aggregate outstanding amount at any one time not in
excess of $100,000.

 

“Permitted
Liens” shall mean, as applied to the property of any specified Person:

 

(a)                               Liens
created pursuant to any Loan Document or any documents executed in connection
with the Senior Loan Agreement;

 

8

 

(b)                              Liens
for taxes, assessments and governmental charges the payment of which is not
required under Section 7.01(c) of the Senior Loan Agreement;

 

(c)                               Liens
imposed by law, such as carriers’, warehousemen’s, mechanics’, materialmen’s
and other similar Liens arising in the ordinary course of business and securing
obligations (other than Debt for borrowed money) that are not overdue by more
than 30 days or are being contested in good faith and by appropriate
proceedings promptly initiated and diligently conducted, and a reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been
made therefor;

 

(d)                              Liens
arising under Capitalized Leases or securing purchase money Debt permitted
under the definition of Permitted Debt; provided, however, that
(A) no such Lien shall extend to or cover any other property of Borrower or a
Guarantor or any of their respective Subsidiaries, and (B) the principal amount
of the Debt secured by any such Lien shall not exceed the lesser of 80% of the
fair market value or the cost of the property so held or acquired;

 

(e)                               deposits
and pledges of cash securing (i) obligations incurred in respect of workers’
compensation, unemployment insurance or other forms of governmental insurance
or benefits, (ii) the performance of bids, tenders, leases, contracts (other
than for the payment of money) and statutory obligations or (iii) obligations
on surety or appeal bonds, but only to the extent such deposits or pledges are
incurred or otherwise arise in the ordinary course of business and secure
obligations not past due;

 

(f)                                  easements,
zoning restrictions and similar encumbrances on real property and minor
irregularities in the title thereto that do not (i) secure obligations for the
payment of money or (ii) materially impair the value of such property or its
use by Borrower or any Guarantor or any of their respective Subsidiaries in the
normal conduct of such Person’s business;

 

(g)                               leases
or subleases granted to other Persons not materially interfering with the
conduct of the business of the Borrower or any of its Subsidiaries;

 

(h)                               precautionary
UCC financing statement filings regarding operating leases;

 

(i)                                   Liens
in existence as of the date hereof and set forth on Schedule A attached
hereto, but not the extension of coverage thereof to other property or assets;

 

(j)                                  Liens
arising out of the existence of judgments or awards not giving rise to an Event
of Default; and

 

(k)                              [intentionally
omitted]

 

(l)                                   statutory
and common law landlords’ liens under leases to which the Borrower or any of
its Subsidiaries is a party.

 

“Person”
means an individual, corporation, limited liability company, partnership,
association, joint-stock company, trust, unincorporated organization, joint
venture or other enterprise or entity or Governmental Authority.

 

“Plan”
shall mean an employee benefit plan of Borrower or any of its Subsidiaries
subject to ERISA.

 

“Pledge
Agreement” shall mean that certain Amended and Restated Pledge Agreement,
of even date herewith, among Borrower, each Guarantor and Lender, executed in
connection with the loan made hereunder

 

9

 

covering, among other things, Borrower’s and each Guarantor’s Capital
Stock, as may be amended, modified, restated, and affirmed from time to time.

 

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

 

“Reference Bank”
means JPMorgan Chase Bank.

 

“Reference Rate”
means the greater of (a) the rate of interest publicly announced by the
Reference Bank in New York, New York from time to time as its reference rate,
base rate or prime rate.  The reference
rate, base rate or prime rate is determined from time to time by the Reference
Bank as a means of pricing some loans to its borrowers and neither is tied to
any external rate of interest or index nor necessarily reflects the lowest rate
of interest actually charged by the Reference Bank to any particular class or
category of customers, and (b) 4% per annum. 
Each change in the Reference Rate shall be effective from and including
the date such change is publicly announced as being effective.

 

“Reportable
Event” shall mean a reportable event as defined by ERISA.

 

“Requirement of
Law” shall mean, as to any Person, the certificate or articles of
incorporation and by-laws or other organizational or governing documents of
such Person, and any applicable law, treaty, ordinance, order, judgment, rule,
decree, regulation, or determination of an arbitrator, court, or other
Governmental Authority, including, without limitation, rules, decrees, judgments,
regulations, orders, and requirements for permits, licenses, registrations,
approvals, or authorizations (and any authoritative interpretation of any of
the foregoing), in each case as such now exist or may be hereafter amended and
are applicable to or binding upon such Person or any of its property or to
which such Person or any of its property is subject.

 

“Revolving Loan”
means a loan made by a Lender to the Borrower pursuant to
Section 2.01(a)(i) of the Senior Loan Agreement.

 

“Scheduled
Payment Date” has the meaning specified in Section 5(c) hereof.

 

“Securities”
shall mean “securities” as defined in Article 8 of the UCC.

 

“Security
Agreement” shall mean that certain Amended and Restated General Security
Agreement, of even date herewith, among Borrower, each Guarantor and Lender,
executed in connection with the loan made hereunder covering, among other
things, Borrower’s and each Guarantor’s Accounts, Equipment, Inventory, and
Securities, as may be amended, modified, restated, and affirmed from time to time.

 

“Security
Instruments” shall mean the Security Agreement, the Pledge Agreement and
any and all other heretofore and hereafter existing security and other
agreements which create or grant a lien or security interest as security for
the Debt evidenced by this Note or by the Guaranty.

 

“Senior Agent”
means Ableco Finance LLC, a Delaware limited liability company, as
administrative agent and as collateral agent for certain lenders party to the
Senior Loan Agreement.

 

“Senior
Indebtedness” means all indebtedness or other obligations of any kind or
nature of Borrower and the Guarantors under the Senior Loan Documents
(including without limitation the “Obligations”, as such term is defined in the
Senior Loan Agreement), in an aggregate outstanding principal amount not in
excess of $17,000,000 (including any portion thereof that accrues after the
commencement of an Insolvency Proceeding, whether or not allowed or allowable
in whole or in part as a claim in any such Insolvency Proceeding).

 

“Senior Loan
Agreement” shall mean the Financing Agreement, dated of even date herewith,
by and among Parent, Borrower, its Subsidiaries, the lenders from time to time
a party thereto, and Senior Agent, as the same may be amended, restated,
supplemented or otherwise modified from time to time.

 

10

 

“Senior Loan
Documents” means the “Loan Documents”, as such term is defined in the
Senior Loan Agreement.

 

“Solunet Agent”
means Ableco Finance LLC, a Delaware limited liability company, as
administrative agent and as collateral agent for certain lenders party to the
Solunet Loan Agreement.

 

“Solunet Loan
Agreement” means that certain Financing Agreement dated as of even date
herewith, by and among the lenders from time to time a party thereto, Solunet
Agent, and Lender (as Borrower thereunder), as the same may be amended,
restated, supplemented or otherwise modified from time to time.

 

“Standstill
Period” means, with respect to any Payment Default or Non-Payment Default,
the period from and including the date of receipt by Registered Holder of a
Default Notice relating thereto until the first to occur of (a) the date on
which the holders of the Senior Indebtedness shall have expressly waived or
acknowledged the cure of such Payment Default or Non-Payment Default, in each
case, in writing, and (b) the date on which the holders of the Senior
Indebtedness shall expressly and irrevocably waive the application of Sections
5(c) and 5(d) hereof in writing.

 

“Subordinated
Debt” means indebtedness or other obligations of Borrower or any Guarantor
to any other Person other than Borrower, a Guarantor or Senior Agent, the terms
of which are satisfactory to Lender and which has been expressly subordinated
in right of payment to all Obligations of Borrower or such Guarantor under the
Loan Documents and otherwise is on terms and conditions (including, without
limitation, subordination provisions, payment terms, interest rates, covenants,
remedies, defaults and other material terms) satisfactory to Lender.

 

“Subsidiary”
means, with respect to any Person at any date, any corporation, limited or
general partnership, limited liability company, trust, estate, association,
joint venture or other business entity (i) the accounts of which would be
consolidated with those of such Person in such Person’s consolidated financial
statements if such financial statements were prepared in accordance with GAAP
or (ii) of which more than 50% of (A) the outstanding Capital Stock having (in
the absence of contingencies) ordinary voting power to elect a majority of the
board of directors or other managing body of such Person, (B) in the case of a
partnership or limited liability company, the interest in the capital or
profits of such partnership or limited liability company or (C) in the case of
a trust, estate, association, joint venture or other entity, the beneficial
interest in such trust, estate, association or other entity business is, at the
time of determination, owned or controlled directly or indirectly through one or
more intermediaries, by such Person; provided, that prior to the
occurrence of a MFA Triggering Event, MFA shall not be deemed to be a
Subsidiary of Borrower or any Guarantor.

 

“Sun Fund”
shall mean Sun Capital Partners II, L.P.

 

“Sun Management
Agreement” the Management Services Agreement, dated as of October 18,
2002, by and between Sun Capital Partners Management, LLC and Borrower, as in
effect on the date hereof.

 

“Securities Act”
means the Securities Act of 1933, as amended, and the rules promulgated thereunder.

 

“Termination
Event” means (i) a Reportable Event with respect to any Employee Plan, (ii)
any event that causes Borrower, any Guarantor, or any of their respective ERISA
Affiliates to incur liability under Section 409, 502(i), 502(l), 515,
4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 4971 or
4975 of the Code, (iii) the filing of a notice of intent to terminate an
Employee Plan or the treatment of an Employee Plan amendment as a termination
under Section 4041 of ERISA, (iv) the institution of proceedings by the
PBGC to terminate an Employee Plan, or (v) any other event or condition which
might constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Employee Plan.

 

“Triggering
Event” means the earlier to occur of (a) the acceleration of the Debt
evidenced by the Senior Loan Agreement, or (b) the repayment in full of the
Debt evidenced by the Senior Loan Agreement.

 

11

 

“TTM EBITDA”
has the meaning ascribed thereto in the Senior Loan Agreement.

 

“UCC” means
the New York Uniform Commercial Code, as in effect from time to time.

 

(b)          Terms Generally.  The definitions of terms herein shall apply
equally to the singular and plural forms of the terms defined.  Whenever the context may require, any pronoun
shall include the corresponding masculine, feminine and neuter forms.  The words “include”, “includes” and
“including” shall be deemed to be followed by the phrase “without limitation”,
whether or not so expressly stated in each such instance.  The word “will” shall be construed to have
the same meaning and effect as the word “shall”.  Unless the context requires otherwise, (i)
any definition of or reference to any agreement, instrument or other document
herein shall be construed as referring to such agreement, instrument or other
document as from time to time amended, supplemented or otherwise modified
(subject to any restrictions on such amendments, supplements or modifications
set forth herein), (ii) any reference herein to any Person shall be construed
to include such Person’s successors and assigns, (iii) the words “herein”,
“hereof” and “hereunder”, and words of similar import, shall be construed to
refer to this Note in its entirety and not to any particular provision hereof,
(iv) all references herein to Articles, Sections, Exhibits and Schedules shall
be construed to refer to Articles and Sections of, and Exhibits and Schedules
to, this Note and (v) the words “asset” and “property” shall be construed to
have the same meaning and effect and to refer to any and all tangible and
intangible assets and properties, including cash, securities, accounts and
contract rights.  References in this Note
to “determination” by Lender include estimates honestly made by Lender (in the
case of quantitative determinations) and beliefs honestly held by Lender (in
the case of qualitative determinations).

 

(c)          Accounting and Other
Terms.  Unless otherwise expressly
provided herein, each accounting term used herein shall have the meaning given
it under GAAP.  All terms used in this
Agreement which are defined in Article 8 or Article 9 of the UCC and
which are not otherwise defined herein shall have the same meanings herein as
set forth therein.

 

(d)          Time References.  Unless otherwise indicated herein, all
references to time of day refer to Eastern Standard Time or Eastern daylight
saving time, as in effect in New York City on such day.  For purposes of the computation of a period
of time from a specified date to a later specified date, the word “from” means
“from and including” and the words “to” and “until” each means “to but
excluding”; provided, however, that with respect to a computation
of fees or interest payable to Lender, such period shall in any event consist
of at least one full day.

 

2.            Payment of
Principal.

 

(a)          Scheduled Payment.  The outstanding principal amount of this Note
shall be repayable in twenty-four (24) consecutive monthly installments, on the
first day of each month commencing on April 1, 2005, consisting of (i)
twelve (12) consecutive monthly installments, each in an amount equal to
$64,950.98, followed by (ii) twelve (12) consecutive monthly installments, each
in an amount equal to $113,664.22.  On
the Designated Payment Date, Borrower shall make an additional payment in the
amount equal to the difference between (A) the Designated Loan Amount and (B)
the aggregate amount of all other principal payments and prepayments on account
of the Obligations made after the date hereof.  The outstanding principal balance of the
Obligations shall be due and payable in full on the Maturity Date.

 

(b)          Optional Prepayment.  Borrower may prepay the principal amount of
this Note, in whole or in part (together with all interest accrued hereunder),
at any time and from time to time, without premium or penalty.

 

(c)          Mandatory Prepayment.

 

(i)            Immediately upon the
occurrence of a Triggering Event, the Borrower shall prepay the principal
balance of this Note in an amount equal to the difference between (a) the
Designated Loan Amount and (b) the aggregate amount of all other principal
payments and prepayments on account of the Obligations made after the date
hereof, together with all accrued and unpaid interest thereon and all other
Obligations then outstanding.

 

12

 

(ii)           Immediately upon
receipt of any proceeds of any Disposition by Parent or any of its Subsidiaries
(other than a Permitted Disposition of the type described in clauses (a), (d),
(e) or (f) of the definition of Permitted Dispositions) or the up front fees
received by Parent or such Subsidiary in consideration of any Franchise Event
(regardless of whether paid to Parent or such Subsidiary initially or paid over
time) and all other similar fees paid in accordance with historical practices
(such fees, collectively the “Up Front Franchise Fees”), the Borrower
shall prepay the outstanding principal amount of the Obligations in an amount
equal to the lesser of (A) the Designated Loan Amount minus the aggregate
amount of all other principal payments and prepayments on account of the
Obligations made after the date hereof, and (B) 100% of (x) in the case of
Dispositions, the Net Cash Proceeds received by such Person in connection with
such Disposition, or (y) in the case of a Franchise Event, the Up Front
Franchise Fees received by such Person in connection therewith, if the
aggregate amount of Net Cash Proceeds or Up Front Franchise Fees received by
Borrower, the Guarantors and their respective Subsidiaries (and not paid as a
prepayment of the Obligations or the Senior Indebtedness) shall exceed $50,000
(for all such Dispositions or Franchise Events since the date hereof).  Nothing contained in this clause (ii)
shall permit Parent or any of its Subsidiaries to dispose of any property other
than in connection with a Permitted Disposition.

 

(iii)          Upon the issuance or
incurrence by Parent or any of its Subsidiaries of any Debt (other than Debt
referred to in clauses (a), (b), (c), (d), (f), (g), (h), (i), (j), (k) or (l)
of the definition of Permitted Debt), or the sale or issuance by Parent or any
of its Subsidiaries of any shares of its Capital Stock, Borrower shall prepay
the Obligations in an amount equal to the lesser of (A) the Designated Loan
Amount minus the aggregate amount of all other principal payments and
prepayments on account of the Obligations mad after the date hereof, and (B)
100% of the Net Cash Proceeds received by such Person in connection with such
sale or issuance of Debt or Capital Stock. 
The provisions of this clause (iii) shall not be deemed to be
implied consent to any such issuance, incurrence or sale otherwise prohibited
by the terms and conditions of this Note.

 

(iv)         Upon the receipt by
Parent or any of its Subsidiaries of any Extraordinary Receipts, the Borrower
shall prepay the outstanding principal of the Obligations in an amount equal to
the lesser of (A) the Designated Loan Amount minus the aggregate amount of all
other principal payments and prepayments on account of the Obligations after
the date hereof, and (B) 100% of such Extraordinary Receipts, net of any
reasonable expenses incurred in collecting such Extraordinary Receipts; provided
that; if no Event of Default has occurred and is continuing such prepayment
shall only be required if the aggregate amount of all such Extraordinary
Receipts received since the date hereof exceeds $10,000; provided, however,
that so long as (A) no Event of Default has occurred and is continuing or would
result therefrom, and (B) Borrower has not less than $4,000,000 of Excess
Availability, the Borrower may, on or prior to the date of the receipt of the
proceeds of Extraordinary Receipts in the form of proceeds of insurance or
condemnation awards, request that the amount of the required prepayments set
forth in this Section 2(c)(iv), not occur at such time, and that Borrower
be permitted to apply such Extraordinary Receipts to the costs of repairs,
replacement or restoration of the property which is the subject of the loss,
destruction, or taking by condemnation (so long as such proceeds do not relate
to damage or destruction of a warehouse or distribution facility (or the goods
contained therein) of Borrower or a Guarantor). 
If such notice is timely given and if such proceeds do not relate to
damage or destruction of a warehouse or distribution facility (or the goods
contained therein) of Borrower or a Guarantor, the Borrower shall be relieved
of its obligation to make such mandatory prepayments at such time; provided,
further, however, that pending the re-investment of such proceeds
by the Borrower in accordance with the provisions of this Section, such
proceeds shall be paid over to the Senior Agent.  If such notice is timely given and if such
proceeds do relate to damage or destruction of a warehouse or distribution
facility (or the goods contained therein) of Borrower or a Guarantor, and if,
in the sole judgment of the Senior Agent, Borrower or a Guarantor have
Availability, and/or casualty and business interruption insurance proceeds in amounts
sufficient to ensure that the Borrower will be able to make payment as and when
due of each of its Senior Indebtedness and Obligations that will be payable
during the period of repair, replacement, or restoration, the Borrower shall be
relieved of its obligation to make such mandatory prepayments at such
time.  If, within 90 days after the date
of the Borrower’s receipt of the proceeds of such Extraordinary Receipts, the
Borrower provides the Senior Agent reasonably detailed reporting indicating
that the Borrower has invested all or a portion of such proceeds in assets used
or useful in the business similar or ancillary to the business of the Borrower
as it exists as of the date hereof, then the required prepayment shall be
reduced on a dollar-for-dollar basis with the amount of the proceeds so
invested; provided  further, however, that if, on such 90th
day all or any portion of such proceeds have not been so invested, the portion
remaining shall be used to make the required prepayment or repayment, as applicable,
of the Sealy Subordinated Debt, to the extent such prepayment is required above
in this Section 2(c)(iv), or the Loans, to the extent required in
the Senior Loan Agreement, as of such 90th day.

 

13

 

(d)          Interest.  Any prepayment made pursuant to this
Section 2 shall be accompanied by accrued interest on the principal amount
being prepaid to the date upon which such prepayment is credited to Borrower’s
account.

 

(e)          Cumulative
Prepayments.  Except as otherwise
expressly provided in this Section 2, payments with respect to any
subsection of this Section 2 are in addition to payments made or
required to be made under any other subsection of this Section 2.

 

(f)           Irrevocable
Direction.  Lender hereby irrevocably
directs Borrower, until such time as Lender’s Debt to Solunet Agent and the
other lenders under the Solunet Loan Documents has been paid in full, to make
all payments due to Lender under this Note to Solunet Agent on behalf of
Lender.  Any payment made by Borrower to
Solunet Agent on behalf of Lender shall be deemed to be a payment by Borrower
to Lender, and shall be deemed to satisfy the Obligations of Borrower to Lender
to the extent such payment is received by Solunet Agent.  This direction is coupled with an interest,
and is irrevocable until such time as Lender’s Debt to Solunet Agent and the
other lenders under the Solunet Loan Documents has been paid in full.  Upon such satisfaction of such Debt, Lender shall
promptly provide Borrower of evidence of such satisfaction.

 

3.            Interest.

 

(a)          Obligations.  Except as provided in Section 3(b)
below, the Obligations shall bear interest on the principal amount thereof from
time to time outstanding, from the date hereof until such principal is repaid,
at a rate per annum equal to the Reference Rate plus 4.75 percentage points.

 

(b)          Default Interest.  To the extent permitted by law, upon the
occurrence and during the continuance of an Event of Default, the principal of,
and all accrued and unpaid interest on, all Obligations, shall bear interest,
from the date such Event of Default occurred until the date such Event of
Default is cured or waived in writing in accordance herewith, at a rate per
annum equal at all times to the Default Rate.

 

(c)          Interest Payment.  Interest on the Obligations shall be payable
monthly, in arrears, on the first day of each month, commencing on the first
day of the month following the date of this Note and at maturity (whether upon
demand, by acceleration or otherwise). 
Interest at the Default Rate shall be payable on demand.

 

(d)          General.  All interest shall be computed on the basis
of a year of 360 days for the actual number of days, including the first day
but excluding the last day, elapsed.

 

4.            Fees.

 

(a)          Anniversary Fee.  The Borrower shall pay to the Lender a
non-refundable anniversary fee (the “Anniversary Fee”) equal to
$303,645.84, which shall be fully earned on the date hereof and payable on each
anniversary of the date hereof occurring prior to the date on which all Obligations
are paid in full in cash.

 

5.            Subordination.

 

(a)          Anything in this Note to
the contrary notwithstanding, Registered Holder, by its acceptance of this
Note, agrees that the Obligations are and shall be subordinate and junior, to
the extent set forth below, and subject in right of payment to the prior
payment in full of all Senior Indebtedness.

 

(b)          The expression “payment
in full” or “paid in full” or any similar term or phrase when used in this
Section 5 with respect to Senior Indebtedness shall mean the payment in
full of all such Senior Indebtedness in cash and the termination of all
financing commitments in respect thereof.

 

(c)          If (i) Parent, Borrower
or any of their respective Subsidiaries shall default in the payment of any
Senior Indebtedness (whether principal, interest, or other payment) when the
same becomes due and payable, whether at maturity or at a date fixed for
scheduled payment or by declaration or acceleration or otherwise (a “Payment
Default”), and (ii) Registered Holder shall have received a Payment Default
Notice, then Borrower shall

 

14

 

not make, and shall not permit Parent or any of their respective
Subsidiaries to make, and Registered Holder shall not accept or receive any
direct or indirect payment or distribution of any kind or character (whether in
cash, securities, property, by set-off, or otherwise) on account of the
Obligations during the Payment Blockage Period applicable to such Payment
Default; provided, however, that in the case of any payment on or
in respect of any Obligation that would (in the absence of any such Payment
Default Notice) have been due and payable on any date (a “Scheduled Payment
Date”) during such Payment Blockage Period, the provisions of this Section 5(c)
shall not prevent the making of such payment (a “Scheduled Payment”) on
or after the date immediately following the termination of such Payment
Blockage Period.  The foregoing
provisions of this subsection to the contrary notwithstanding, the failure
by Borrower to make a Scheduled Payment on a Scheduled Payment Date during a
Payment Blockage Period shall nevertheless constitute an Event of Default.  If Registered Holder shall have received a
Payment Default Notice from or on behalf of the holders of the Senior
Indebtedness, Registered Holder during the Standstill Period applicable thereto
shall be prohibited from enforcing any of its default remedies (other than the
imposition of interest at the Default Rate, but including the right to exercise
set-off rights) with respect thereto (including any right to sue Parent,
Borrower or any of their respective Subsidiaries, to exercise remedies under
the Security Instruments, or to file or participate in the filing of an
involuntary bankruptcy petition against Parent, Borrower or any of their
respective Subsidiaries) until such Standstill Period shall cease to be in
effect; provided, however, that if Registered Holder had
initiated an enforcement action prior to the commencement of such Standstill
Period at a time when Registered Holder was entitled to do so, then Registered
Holder shall not be prevented during such Standstill Period from taking those
steps, but no others, with respect to such pending enforcement action as are
required by a mandatory provision of law. 
Registered Holder, upon the termination of any Standstill Period
applicable thereto, may, at its sole election, exercise any and all remedies
available to it under this Note, the other Loan Documents, or applicable
law.  In the event that, notwithstanding
the foregoing, Parent, Borrower or any of their respective Subsidiaries shall
make any payment to Registered Holder prohibited by the foregoing provisions of
this Section 5(c), then and in such event such payment shall be segregated
by Registered Holder and held in trust for the benefit of and immediately shall
be paid over to the holders of the Senior Indebtedness or the agent for such
holders (in the same form received, with all necessary endorsements) for
application against the Senior Indebtedness remaining unpaid until the Senior
Indebtedness is paid in full.  Any
Payment Default Notice shall be deemed received by Registered Holder upon the
earlier of: (x) the date of actual receipt by Registered Holder of such Payment
Default Notice in writing, or (y) the date on which the holder of the Senior
Indebtedness or the agent for the holders of the Senior Indebtedness, as
applicable, shall have telephonically notified Registered Holder of the
occurrence of a Payment Default and indicated that it was sending a written
Payment Default Notice to Registered Holder, which such Payment Default Notice
may be sent by messenger, over-night courier service, telefacsimile, or
certified mail return receipt requested, but if such written Payment Default
Notice is not received by Registered Holder within 5 Business Days of the date
of the telephonic notice then such Payment Default Notice shall be deemed never
to have been given.  Registered Holder
shall provide a copy of any Payment Default Notice within 5 Business Days of
its receipt of such Payment Default Notice.

 

(d)          Except under
circumstances when the terms of Sections 5(c) or 5(f) are applicable, if (i) an
event of default shall have occurred and be continuing under the Senior Loan
Documents (a “Non-Payment Default”), and (ii) Registered Holder shall
have received a Non-Payment Default Notice, then Borrower shall not make, and
shall not permit Parent or any of their respective Subsidiaries to make, and
Registered Holder shall not accept or receive any direct or indirect payment or
distribution of any kind or character (whether in cash, property, securities,
by set-off, or otherwise) on account of the Obligations during the Non-Payment
Blockage Period applicable to such Non-Payment Default; provided, however,
that in the case of any Scheduled Payment on or in respect of any Obligation
that would (in the absence of any such Non-Payment Default Notice) have been
due and payable on any Scheduled Payment Date during such Non-Payment Blockage
Period, the provisions of this Section 5(d) shall not prevent the making
of such Scheduled Payment on or after the date immediately following the
termination of such Non-Payment Blockage Period.  The foregoing provisions of this Section 5(d)
to the contrary notwithstanding, the failure by Borrower to make a Scheduled
Payment on a Scheduled Payment Date during a Non-Payment Blockage Period shall
nevertheless constitute an Event of Default. 
If Registered Holder shall have received a Non-Payment Default Notice
from or on behalf of the holders of the Senior Indebtedness, then Registered
Holder during the Standstill Period applicable thereto shall be prohibited from
enforcing any of its default remedies (other than the imposition of interest at
the Default Rate, but including the right to exercise set-off rights) with
respect thereto (including any right to sue Parent, Borrower or any of their
respective Subsidiaries, to exercise remedies under the Security Instruments,
or to file or participate in the filing of an involuntary bankruptcy petition
against Parent, Borrower or any of their respective Subsidiaries) until such
Standstill Period shall cease to be in

 

15

 

effect; provided, however, that if Registered Holder had
initiated an enforcement action prior to the commencement of such Standstill
Period at a time when Registered Holder was entitled to do so, then Registered
Holder shall not be prevented during such Standstill Period from taking those
steps, but no others, with respect to such pending enforcement action as are
required by a mandatory provision of law. 
Registered Holder, upon the termination of any Standstill Period
applicable thereto, may, at its sole election, exercise any and all remedies
(including the acceleration of the maturity of the Obligations) available to it
under this Note or applicable law.  In
the event that, notwithstanding the foregoing, Parent, Borrower or any of their
respective Subsidiaries shall make any payment to Registered Holder prohibited
by the foregoing provisions of this Section 5(d), then and in such event
such payment shall be segregated by such Registered Holder and held in trust
for the benefit of and immediately shall be paid over to the holders of the
Senior Indebtedness or the agent for such holders (in the same form received,
with all necessary endorsements) for application against the Senior
Indebtedness remaining unpaid until the Senior Indebtedness is paid in
full.  Any Non-Payment Default Notice
shall be deemed received by Registered Holder upon the earlier of: (x) the date
of actual receipt by Registered Holder of such Non-Payment Default Notice in
writing, or (b) the date on which the holder of the Senior Indebtedness or the
agent for the holders of the Senior Indebtedness, as applicable, shall have
telephonically notified Registered Holder of the occurrence of a Non-Payment
Default and indicated that it was sending a written Non-Payment Default Notice
to Registered Holder, which such Non-Payment Default Notice may be sent by
messenger, over-night courier service, telefacsimile, or certified mail return
receipt requested, but if such written Non-Payment Default Notice is not
received by Registered Holder within 5 Business Days of the date of the
telephonic notice then such Non-Payment Default Notice shall be deemed never to
have been given.  Registered Holder shall
provide a copy of any Non-Payment Default Notice within 5 Business Days of its
receipt of such Non-Payment Default Notice.

 

(e)          Anything contained in
Sections 5(c) or 5(d) to the contrary notwithstanding, Registered Holder shall
not exercise any of its default remedies (other than the imposition of interest
at the Default Rate, but including any judicial or non-judicial action to
enforce the Obligations, any exercise of remedies under the Security
Instruments, any exercise of set-off rights, and any right to sue Parent,
Borrower or any of their respective Subsidiaries or to file or participate in
the filing of an involuntary bankruptcy petition against Parent, Borrower or
any of their respective Subsidiaries) with respect to an Event of Default prior
to 10 Business Days after the receipt acknowledged in writing by or on behalf
of the holders of the Senior Indebtedness of a written notice from Registered
Holder stating that an Event of Default has occurred and is continuing,
specifying in reasonable detail the nature of such Event of Default, and
specifically designating such notice as a “Junior Default Notice” which
Registered Holder shall deliver to the holders of the Senior Indebtedness prior
to exercising any such rights or remedies.

 

(f)           In the event of (i) the
institution of any insolvency, bankruptcy, liquidation, reorganization, or
other similar proceedings, or any receivership proceedings in connection
therewith, relative to Parent, its Subsidiaries, or their property, (ii) any
proceedings for voluntary liquidation, dissolution, or other winding up of
Parent or any of its Subsidiaries, whether involving insolvency or bankruptcy
proceedings, or (iii) an assignment for the benefit of creditors, or an
arrangement, adjustment, composition or relief of Parent or any of its
Subsidiaries or their respective debts or any marshaling of the property of
Parent or any of its Subsidiaries, then, in each case, (x) all Senior
Indebtedness shall first be paid in full before any payment is made by or on
behalf of Parent or any of its Subsidiaries on the Obligations; (y) any payment
or distribution of any kind or character (whether in cash, securities,
property, by set-off, or otherwise) to which Registered Holder would be
entitled but for the provisions of this Section 5(f) (including, without
limitation, any payment or distribution which may be payable or deliverable to
such holders by reason of the payment of any other Debt of Parent or its Subsidiaries
being subordinated to payment of the Obligations) shall be paid or delivered by
the Person making such payment or distribution, whether a trustee in
bankruptcy, a receiver, a liquidating trustee, or otherwise, directly to the
agent or other representative of the holders of the Senior Indebtedness, for
the benefit of the holders of the Senior Indebtedness, as their interest may
appear, to the extent necessary to make payment in full of all Senior
Indebtedness remaining unpaid.  In the
event that, in the circumstances contemplated by this Section 5(f), and
notwithstanding the foregoing provisions of this Section 5(f), Registered
Holder shall have received any such payment or distribution of any kind or
character (whether in cash, securities, property, by setoff, or otherwise) that
they are not entitled to receive by the foregoing provisions, before all Senior
Indebtedness is paid in full, then and in such event such payment or
distribution shall be segregated and held in trust for the benefit of and immediately
shall be paid over to the agent or other representative of the holders of the
Senior Indebtedness, for the benefit of the holders of the 

 

16

 

Senior Indebtedness, as their interest may appear, for application
against the payment of all Senior Indebtedness remaining unpaid until all such
Senior Indebtedness shall have been paid in full.

 

(g)          If Registered Holder
does not file a proper claim or proof of debt or other document or amendment
thereof in the form required in any proceeding under the Bankruptcy Code prior
to 30 days before the expiration of time to file such claim or other document
or amendment thereof, then the agent or other representative of the holders of
the Senior Indebtedness shall have the right (but not the obligation) in such
proceeding, and hereby irrevocably is appointed lawful attorney of Registered
Holder for the purpose of enabling the agent or other representative of the
holders of the Senior Indebtedness to demand, sue for, collect, receive and
give receipt for the payments and distributions in respect of the Obligations
that are made in such proceeding and that are required to be paid or delivered
to the holders of the Senior Indebtedness as provided in Section 5(f), and
to file and prove all claims therefor and to execute and deliver all documents
in such proceeding in name of Registered Holder or otherwise in respect of such
claims, as the agent or other representative of the holders of the Senior
Indebtedness reasonably may determine to be necessary or appropriate.

 

(h)          Registered Holder hereby
acknowledges and agrees that (i) its Liens in and to the property of Borrower
and the Guarantors shall under all circumstances be junior in priority and
subordinated to the Liens granted at any time and from time to time pursuant to
the Senior Loan Documents and that Registered Holder shall not have any claim
to or in respect of such property, or any proceeds or realization of such
property, on a parity with or prior to the claim of the holders of the Senior
Indebtedness or any agent on behalf thereof, (ii) any Lien at any time granted
to or otherwise obtained by the holders of the Senior Indebtedness or any agent
on behalf thereof with respect to such property shall have priority over, and
shall be senior to, any Lien therein at any time granted to or otherwise
obtained by Registered Holder, and (iii) until the Senior Indebtedness have
been paid in full, the exercise of rights and remedies in respect of the Liens
granted to Registered Holder under the Security Instruments and applicable law
shall be limited to the extent set forth in, and shall be governed by, this
Note.

 

(i)            The priority agreement
set forth above in Section 5(h) shall be applicable irrespective of the
order, time or method of the creation, attachment, or perfection of the Liens
granted pursuant to the Senior Loan Documents, or the order or time of filing
or recordation of any document or instrument for perfecting such Liens, and
notwithstanding any conflicting terms or conditions that may be contained in
the Security Instruments.

 

(j)           No right of any present
or future holder of Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of Parent or any of its Subsidiaries, or by any
non-compliance by Parent or any of its Subsidiaries or by Registered Holder
with the terms, provisions, and covenants of this Note, regardless of any
knowledge thereof any such holder may have or be otherwise charged with.  Without in any way limiting the generality of
the foregoing paragraph, the holders of the Senior Indebtedness may, at any
time and from time to time, without the consent of or notice to Registered
Holder, without incurring responsibility to Registered Holder, and without
impairing or releasing the subordination provided in this Section 5 or the
obligations of Registered Holder to the holders of the Senior Indebtedness, do
any one or more of the following:  (a)
change the manner, place, or terms of payment (including any change in the rate
of interest) or extend the time of payment of, or renew, amend, modify, alter,
or grant any waiver or release with respect to, or consent to any departure
from, any Senior Indebtedness or any instrument evidencing the same or any
agreement evidencing, governing, creating, guaranteeing or securing any Senior
Indebtedness; (b) sell, exchange, release, or otherwise deal with any property
pledged, mortgaged or otherwise securing Senior Indebtedness; (c) release any
Person liable under or in respect of the Senior Indebtedness; (d) fail or delay
in the perfection of Liens securing the Senior Indebtedness; (e) exercise or
refrain from exercising any rights against Parent, Borrower, any of their
respective Subsidiaries and any other Person; or (f) amend, or grant any waiver
or release with respect to, or consent to any departure from, any guarantee for
all or any of the Senior Indebtedness.

 

(k)          The provisions of this
Section 5 are for the purpose of defining the relative rights of the
holders of Senior Indebtedness on the one hand, and Registered Holder on the
other hand, and nothing herein shall impair, as between Borrower and the
Guarantors, on the one hand, and Registered Holder, on the other hand, the obligation
of Borrower and the Guarantors, which is unconditional and absolute, to pay to
the holders thereof the principal thereof and premium, if any, and interest
thereon in accordance with their terms and the provisions hereof, nor shall
anything herein prevent Registered Holder from exercising all remedies
otherwise permitted by applicable

 

17

 

law or hereunder upon default under this Note (including the right to
demand payment and sue for performance hereof and of the Notes and to
accelerate the maturity thereof), subject to the rights of holders of Senior
Indebtedness under this Note.

 

(l)            The agreements
contained in this Section 5 shall continue to be effective or shall be
automatically reinstated, as the case may be, if at any time any payment (or
any part of any payment) on the Senior Indebtedness shall be returned by any
holder of Senior Indebtedness:  (i) under
any state or federal law upon or following the insolvency, bankruptcy, or
reorganization of Parent or any of its Subsidiaries or otherwise; or (ii) by
reason of any settlement or compromise of any claim against such holder for
repayment or recovery of any amount on account of any Senior Indebtedness; in
each case, as though such payment had not been made.

 

(m)         The foregoing provisions
of this Section 5 shall constitute a continuing offer to all Persons who,
in reliance upon such provisions, become holders of Senior Indebtedness, and
such provisions are made for the benefit of, and may be enforced directly by,
holders of Senior Indebtedness, who hereby are expressly stated to be intended
beneficiaries of this Section 5, notwithstanding any rescission of this
Note by the parties hereto.

 

6.            Events of Default.

 

(a)          Definition. Each
of the following shall constitute an Event of Default under this Note:

 

(i)            Payment Default.
The failure by Borrower to pay any principal of or interest on the Obligations
(or any other amount) payable under this Note or any other Loan Document when
due (whether by scheduled maturity, required prepayment, acceleration, demand
or otherwise).

 

(ii)           Non-Payment Default.
The failure by Borrower or any Guarantor to fully and timely observe and comply
with any of its obligations under this Note and the other Loan Documents.

 

(iii)          False Representation.
Any representation or warranty made by Borrower or any Subsidiary in any of the
Loan Documents proves to have been untrue in any material respect.

 

(iv)         Material Adverse
Effect.  An event or development
occurs which could reasonably be expected to result in a Material Adverse
Effect.

 

(v)          Other Debt.
Borrower or any Guarantor shall fail to pay any principal of or interest on any
of its Debt (excluding Debt evidenced by this Note) in excess of $100,000, or
any premium thereon, when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise) and such failure shall continue
after the applicable grace period, if any, specified in the agreement or
instrument relating to such Debt, or any other default under any agreement or
instrument relating to any such Debt, or any other event, shall occur and shall
continue after the applicable grace period, if any, specified in such agreement
or instrument, if the effect of such default or event is to accelerate, or to permit
the acceleration of, the maturity of such Debt; or any such Debt shall be
declared to be due and payable, or required to be prepaid (other than by a
regularly scheduled required prepayment), redeemed, purchased or defeased or an
offer to prepay, redeem, purchase or defease such Debt shall be required to be
made, in each case, prior to the stated maturity thereof;

 

(vi)         Voluntary Insolvency
Proceeding. Parent or any of its Subsidiaries (A) shall institute any
proceeding or voluntary case seeking to adjudicate it a bankrupt or insolvent,
or seeking dissolution, liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief or composition of it or its debts under any law
relating to bankruptcy, insolvency, reorganization or relief of debtors, or
seeking the entry of an order for relief or the appointment of a receiver,
trustee, custodian or other similar official for any such Person or for any
substantial part of its property, (B) shall be generally not paying its debts
as such debts become due or shall

 

18

 

admit in writing its inability to pay its debts generally, (C) shall
make a general assignment for the benefit of creditors, or (D) shall take any
action to authorize or effect any of the actions set forth above in this subsection (vi).

 

(vii)        Involuntary Insolvency
Proceeding.  Any proceeding shall be
instituted against Parent or any of its Subsidiaries seeking to adjudicate it a
bankrupt or insolvent, or seeking dissolution, liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief of debtors, or
seeking the entry of an order for relief or the appointment of a receiver,
trustee, custodian or other similar official for any such Person or for any
substantial part of its property, and either such proceeding shall remain
undismissed or unstayed for a period of 30 days or any of the actions sought in
such proceeding (including, without limitation, the entry of an order for
relief against any such Person or the appointment of a receiver, trustee,
custodian or other similar official for it or for any substantial part of its
property) shall occur.

 

(viii)       Judgments; Settlements.  One or more judgments or orders for the
payment of money exceeding $50,000 in the aggregate shall be rendered against
Parent or any of its Subsidiaries and remain unsatisfied, or the Parent or any
of its Subsidiaries shall agree to the settlement of any one or more pending or
threatened actions, suits or proceedings affecting Borrower or any Guarantor
before any court or other Governmental Authority or any arbitrator or mediator,
providing for the payment of money exceeding $50,000 in the aggregate, and in
the case of any such judgment or order either (i) enforcement proceedings shall
have been commenced by any creditor upon any such judgment or order, or (ii)
there shall be a period of 10 consecutive days after entry thereof during which
a stay of enforcement of any such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; provided, however, that any such
judgment, order or settlement shall not give rise to an Event of Default under
this subsection (viii) if and for so long as (A) the amount of such
judgment, order or settlement is covered by a valid and binding policy of
insurance between the defendant and the insurer covering full payment thereof
(subject to customary deductibles) and (B) such insurer has been notified, and
has not disputed the claim made for payment, of the amount of such judgment,
order or settlement;

 

(ix)         ERISA.  (A) Borrower, any Guarantor, or any of their
respective ERISA Affiliates shall have made a complete or partial withdrawal
from a Multiemployer Plan, and, as a result of such complete or partial
withdrawal, Borrower, any Guarantor, or any of their respective ERISA
Affiliates incurs a withdrawal liability in an annual amount exceeding $50,000;
or a Multiemployer Plan enters reorganization status under Section 4241 of
ERISA, and, as a result thereof Borrower’s, any Guarantor’s, or any of their
respective ERISA Affiliates’ annual contribution requirements with respect to
such Multiemployer Plan increases in an annual amount exceeding $50,000; or (B)
any Termination Event with respect to any Employee Plan shall have occurred,
and, 30 days after notice thereof shall have been given to Borrower or any
Guarantor by Lender, (I) such Termination Event (if correctable) shall not have
been corrected, and (II) the then current value of such Employee Plan’s vested
benefits exceeds the then current value of assets allocable to such benefits in
such Employee Plan by more than $50,000 (or, in the case of a Termination Event
involving liability under Section 409, 502(i), 502(l), 515, 4062, 4063,
4064, 4069, 4201, 4204 or 4212 of ERISA or Section 4971 or 4975 of the
Code, the liability is in excess of such amount).

 

(x)          Cessation of Business.  Any cessation of a substantial part of the
business of Parent or any of its Subsidiaries for a period which materially and
adversely affects the ability of Parent or any of its Subsidiaries to continue
its business on a profitable basis.

 

(xi)         Challenges.  Any provision of any Loan Document shall at
any time for any reason (other than pursuant to the express terms thereof)
cease to be valid and binding on or enforceable against Borrower or any
Guarantor intended to be a party thereto, or the validity or enforceability
thereof shall be contested by any party thereto, or a proceeding shall be
commenced by Borrower or any Guarantor or any Governmental Authority having jurisdiction
over any of them, seeking to establish the invalidity or unenforceability
thereof, or Borrower or any Guarantor

 

19

 

shall deny in writing that it has any liability or obligation purported
to be created under any Loan Document.

 

(xii)        Criminal Indictments.  The indictment, or the threatened indictment
of Borrower or any Guarantor under any criminal statute, or commencement or
threatened commencement of criminal or civil proceedings against Borrower or
any Guarantor, pursuant to which statute or proceedings the penalties or
remedies sought or available include forfeiture to any Governmental Authority
of any material portion of the property of such Person.

 

(xiii)       Destruction of
Collateral.  Any material damage to,
or loss, theft or destruction of, any Collateral, whether or not insured, or
any strike, lockout, labor dispute, embargo, condemnation, act of God or public
enemy, or other casualty which causes, for more than 15 days, the cessation or
substantial curtailment of revenue producing activities at any facility of
Borrower of any Guarantor, if any such event or circumstance could reasonably
be expected to result in a Material Adverse Effect.

 

(xiv)       Senior Loan Agreement.  An Event of Default (as such term is defined
under the Senior Loan Agreement) shall have occurred and is continuing under
the Senior Loan Agreement.

 

(xv)        Lien Priority. The
Liens granted in any Security Instrument, after delivery thereof, shall for any
reason fail or cease to create a valid and perfected and, except to the extent
permitted by the terms hereof or thereof, first priority Lien in favor of
Lender on any Collateral purported to be covered thereby.

 

(b)          Consequences of
Events of Default.  Upon the
occurrence and during the continuance of an Event of Default, Lender may (i)
declare all or any portion of the Obligations then outstanding to be due and
payable, whereupon all or such portion of the aggregate principal of all
Obligations, all accrued and unpaid interest thereon, all fees and all other
amounts payable under this Note and the other Loan Documents shall become due
and payable immediately, without presentment, demand, protest or further notice
of any kind, all of which are hereby expressly waived by Borrower and (ii)
exercise any and all of its other rights and remedies under applicable law,
hereunder and under the other Loan Documents; provided, however,
that upon the occurrence of any Event of Default described in subsection (a)(vi)
or (a)(vii) of this Section 6, without any notice to Borrower,
any Guarantor or any other Person or any act by Lender, all Obligations then
outstanding and all other amounts due under this Note and the other Loan
Documents shall become due and payable automatically and immediately, without
presentment, demand, protest or notice of any kind, all of which are expressly
waived by Borrower.

 

7.            Usury Laws.  It is the intention of Borrower and Lender
that Lender shall conform strictly to usury laws applicable to it.  Accordingly, if the transactions contemplated
hereby or by any other Loan Document would be usurious as to Lender under laws
applicable to it (including the laws of the United States of America and the
State of New York or any other jurisdiction whose laws may be mandatorily applicable
to Lender notwithstanding the other provisions of this Note), then, in that
event, notwithstanding anything to the contrary in this Note or any other Loan
Document or any agreement entered into in connection with or as security for
the Obligations, it is agreed as follows: 
(a) the aggregate of all consideration which constitutes interest under
law applicable to Lender that is contracted for, taken, reserved, charged or
received by Lender under this Note or any other Loan Document or agreements or
otherwise in connection with the Obligations shall under no circumstances
exceed the maximum amount allowed by such applicable law, any excess shall be
canceled automatically and if theretofore paid shall be credited by Lender on
the principal amount of the Obligations (or, to the extent that the principal
amount of the Obligations shall have been or would thereby be paid in full,
refunded by Lender, as applicable, to the Borrower); and (b) in the event that
the maturity of the Obligations is accelerated by reason of any Event of
Default under this Note or otherwise, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest under
law applicable to Lender may never include more than the maximum amount allowed
by such applicable law, and excess interest, if any, provided for in this Note
or otherwise shall be canceled automatically by Lender as of the date of such
acceleration or prepayment and, if theretofore paid, shall be credited by
Lender on the principal amount of the Obligations (or, to the extent that the
principal amount of the Obligations shall have been or would thereby be paid in
full, refunded by Lender to Borrower). 
All sums paid or agreed to be paid to Lender for the use, forbearance or
detention of sums due hereunder shall, to the extent permitted

 

20

 

by law applicable to Lender, be amortized, prorated, allocated and
spread throughout the full term of Obligations until payment in full so that
the rate or amount of interest on account of any Obligations hereunder does not
exceed the maximum amount allowed by such applicable law.  If at an time and from time to time (x) the
amount of interest payable to Lender on any date shall be computed at the
Highest Lawful Rate applicable to Lender pursuant to this Section 7,
and (y) in respect of any subsequent interest computation period the amount of
interest otherwise payable to Lender would be less than the amount of interest
payable to Lender computed at the Highest Lawful Rate applicable to Lender,
then the amount of interest payable to Lender in respect of such subsequent
interest computation period shall continue to be computed at the Highest Lawful
Rate applicable to Lender until the total amount of interest payable to Lender
shall equal the total amount of interest which would have been payable to
Lender if the total amount of interest had been computed without giving effect
to this Section 7.

 

For purposes of
this Section 7, the term “applicable law” shall mean that law in
effect from time to time and applicable to the loan transaction between the
Borrower and the Lender that lawfully permits the charging and collection of
the highest permissible, lawful non-usurious rate of interest on such loan
transaction and this Note, including laws of the State of New York and, to the
extent controlling, laws of the United States of America.

 

8.            Affirmative
Covenants. In addition to the covenants and agreements of Borrower made
elsewhere in the Loan Documents, Borrower covenants and agrees, unless Lender
shall otherwise consent in writing, that Borrower shall:

 

(a)          Corporate Existence.  Maintain and preserve, and cause each of its
Subsidiaries to maintain and preserve, its existence, rights and privileges,
and become or remain, and cause each of its Subsidiaries to become or remain,
duly qualified and in good standing in each jurisdiction in which the character
of the properties owned or leased by it or in which the transaction of its
business makes such qualification necessary.

 

(b)          Comply With Laws.
Comply, and cause each of its Subsidiaries to comply, in all material respects
with all applicable laws, rules, regulations and orders, such compliance to
include, without limitation, (i) paying before the same become delinquent all
taxes, assessments and governmental charges or levies imposed upon it or upon
its income or profits or upon any of its properties, and (ii) paying all other
lawful claims which if unpaid might become a Lien or charge upon any of its
properties, except, in each case, to the extent contested in good faith by
proper proceedings which stay the imposition of any penalty, fine or Lien
resulting from the non-payment thereof and with respect to which adequate
reserves have been set aside for the payment thereof in accordance with GAAP.

 

(c)          Financial Reporting.
Promptly furnish to Lender such information regarding the business affairs,
financial condition, assets, liabilities, operations, and transactions of
Borrower or any Subsidiary as Lender may reasonably request, and, without
limiting the foregoing, furnish to Lender
the following:

 

(i)            As soon as available,
and in any event within 90 days after the Closing Date, a consolidated balance
sheet as at the Closing Date (the “Closing  Date Financial Statement”)
prepared by Borrower, in a form acceptable to Lender, signed by an Authorized
Officer of Borrower, which balance sheet shall be prepared in accordance with
GAAP;

 

(ii)           As soon as available,
and in any event within 30 days from the end of each calendar month of
Borrower, a financial statement, prepared by Borrower, in a form acceptable to
Lender, signed by an Authorized Officer of Borrower, showing the financial
condition of Borrower and each of its Subsidiaries, on a consolidated basis (if
applicable), at the end of such calendar month and the results of operations
during such calendar month, which financial statement shall be prepared in
accordance with GAAP and shall include, but shall not be limited to, a balance
sheet, income statement, and such other matters as Lender may reasonably
request, setting forth, in each case comparisons to Borrower’s annual budget
and to the corresponding period in the preceding fiscal year;

 

(iii)          As soon as available,
and in any event within 45 days from the end of each quarterly period of
Borrower, a financial statement, prepared by Borrower, in a form acceptable to
Lender, signed by an Authorized Officer of Borrower, showing the financial
condition of Borrower and each of its Subsidiaries, on a consolidated basis (if
applicable), at the end of such

 

21

 

quarterly period and the results of operations during such quarterly
period, which financial statement shall be prepared in accordance with GAAP and
shall include, but shall not be limited to, a balance sheet, income statement,
and such other matters as Lender may reasonably request, setting forth, in each
case comparisons to Borrower’s annual budget and to the corresponding period in
the preceding fiscal year;

 

(iv)         A Compliance Certificate
shall be due within 45 days after the end of each fiscal quarter, signed and
certified by an Authorized Officer of Borrower;

 

(v)          As soon as available,
and in any event within 120 days from the end of Borrower’s fiscal year, an
audited financial statement, prepared by an independent certified public
accounting firm acceptable to Lender, showing the financial condition of
Borrower and each of its Subsidiaries, on a consolidated basis (if applicable),
at the close of its fiscal year and the results of its operations during such
fiscal year and which financial statement shall be materially complete and
correct and shall be prepared in accordance with GAAP and shall include, but
shall not be limited to, an operating statement, a balance sheet, an income
statement, a statement of cash flows, a statement of changes in shareholder’s
equity, and such other matters as Lender may reasonably request;

 

(d)          Movement of
Collateral. (i) Comply with [Section 4.4] of the Security Agreement,
(ii) if required by Lender, cause the landlord, warehouseman, tenant, and/or
subtenant at the particular location where Inventory or Equipment is located to
execute and deliver to Lender a lien waiver, in form and substance satisfactory
to Lender, and (iii) take any other actions reasonably required by Lender to
ensure the continued perfection of the security interests granted under the
Security Agreement;

 

(e)          Subsidiary Guaranty.
(i) Cause any now existing or hereafter created direct or indirect Subsidiary
of Borrower to fully and unconditionally guaranty the Obligations in a manner
acceptable to Lender, to grant a first security interest in and to all of its
assets as security for the Obligations, and to cause its outstanding stock to
be pledged as collateral for the Obligations, and (ii) at such time, if ever,
that MFA becomes obligated with respect to, or grants Liens on its assets to
secure, the Debt of Borrower under the Senior Loan Agreement, cause MFA to
similarly become obligated with respect to, or grant Liens on its assets to
secure, the Obligations;

 

(f)           Inspections.
Permit, and cause each of its Subsidiaries to permit, Lender and
representatives of Lender at any time and from time to time during normal
business hours, at the expense of the Borrower, to examine and make copies of
and abstracts from its records and books of account, to visit and inspect its
properties, to verify leases, notes, accounts receivable, deposit accounts and
its other assets, to conduct audits, physical counts, valuations, appraisals,
or examinations and to discuss its affairs, finances and accounts with any of
its directors, officers, managerial employees, independent accountants or any
of its other representatives.

 

(g)          Further Assurances.
Promptly cure any defects in the execution and delivery of the Loan Documents
and immediately execute and deliver to Lender all such other and further
instruments as may be reasonably required by Lender from time to time in order
to satisfy or comply with the covenants and agreements of Borrower made in this
Note;

 

(h)          Reimbursement.
Promptly reimburse Lender upon request for all reasonable amounts expended,
advanced, or incurred by Lender as are reasonably necessary (i) to satisfy any
obligation of Borrower under this Note, (ii) to protect the assets or business
of Borrower or any of its Subsidiaries, (iii) to collect the Senior
Indebtedness, or any other amounts advanced under this Note or otherwise on
behalf of Borrower, or (iv) to enforce the rights of Lender under the Loan
Documents, which amounts will include, without limitation, all reasonable court
costs, attorneys’ fees, and fees of auditors, accountants, and investigators
incurred by Lender in connection with any such matters, together with interest
at the Default Rate on each such amount from 30 days after the date of
notification to Borrower that the same was expended, advanced or incurred by
Lender until the date it is repaid to Lender;

 

(i)            Maintain Insurance.  Maintain, and cause each of its Subsidiaries
to maintain, insurance with responsible and reputable insurance companies or
associations (including, without limitation, comprehensive

 

22

 

general liability, hazard, rent and business interruption insurance)
with respect to its properties and business, in such amounts and covering such
risks as is required by any Governmental Authority having jurisdiction with
respect thereto or as is carried generally in accordance with sound business
practice by companies in similar businesses similarly situated and in any event
in amount, adequacy and scope reasonably satisfactory to Lender;

 

(j)           Copyright. Prior
to the time any property described in or covered by any Security Instrument is
copyrighted, licensed, patented, or trademarked by Borrower or any of its Subsidiaries,
pursuant to any duly filed registration or otherwise, or is subjected to any
registered copyright, license, patent, or trademark by Borrower or any of its
Subsidiaries, notify Lender thereof and take (or cause to be taken) all actions
necessary to preserve the perfection and first priority of Lender’s security
interest in and to such property;

 

(k)          Foreign
Qualification. Qualify as a foreign corporation in all other jurisdictions
wherein the property now or hereafter owned by Borrower, any Subsidiary or the
business now or hereafter transacted by Borrower or any Subsidiary makes such
qualifications necessary;

 

(l)            Reportable Events.
Furnish to Lender (i) as soon as possible, and in any event within 30 days
after Borrower or a duly appointed administrator of a Plan knows or has reason
to know that any Reportable Event with respect to any Plan has occurred, a
statement of the chief financial officer of Borrower setting forth details as
to such Reportable Event and the action which Borrower proposes to take with
respect thereto, together with a copy of the notice of such Reportable Event
given to the Pension Benefit Guaranty Corporation or a statement that said
notice will be filed with the annual report to the United States Department of
Labor with respect to such Plan, if such
filing has been authorized, and (ii) promptly after receipt thereof, a copy of
any notice Borrower may receive from the United States Department of Labor, the
Internal Revenue Service or the Pension Benefit Guaranty Corporation with
respect to any Reportable Event;

 

(m)         Additional Notices.
In addition to, and without in any way limiting, the other requirements in this
Note provide certain notices to Lender, deliver to Lender, promptly upon any
officer of Borrower having knowledge of the occurrence of any of the following
events or circumstances, a written statement with respect thereto, signed by
the chief financial officer of Borrower, or other Authorized Officer of
Borrower, advising Lender of the occurrence of such event or circumstance and
the steps, if any, being taken by Borrower with respect thereto:

 

(i)            any Default or Event
of Default;

 

(ii)           any litigation or
proceeding involving Borrower as a defendant or in which any Property of
Borrower is subject, directly or indirectly, to a claim, and the uninsured
amount in controversy is in excess of $250,000.00;

 

(iii)          any Reportable Event or
imminently expected Reportable Event with respect to any Plan;

 

(iv)         at least 10 Business Days
prior thereto, of Borrower’s or any Subsidiary’s opening of any new office or
place of business or Borrower’s or any Subsidiary’s closing of any existing
office or place of business;

 

(v)          any labor dispute to
which Borrower or any Subsidiary may become a party, any strikes or walkouts
relating to any of its plants or other facilities, and the expiration of any
labor contract to which any of them is a party or by which they are bound, in
each case where the same could reasonably be expected to cause a Material
Adverse Effect;

 

(vi)         any material change in
the management of Borrower or any Subsidiary; and

 

(vii)        any other event or
occasion which could reasonably be expected to cause a Material Adverse Effect.

 

23

 

(n)          INDEMNITY.  BORROWER SHALL AND DOES HEREBY INDEMNIFY AND HOLD HARMLESS
LENDER, THE DIRECTORS, TRUSTEES, SUBSTITUTE TRUSTEES, OFFICERS, PARTNERS,
EMPLOYEES, AGENTS, REPRESENTATIVES, ATTORNEYS, SUCCESSORS AND PERMITTED ASSIGNS
OF LENDER, AND ANY PERSONS OWNED OR CONTROLLED BY, OWNING OR CONTROLLING, OR
UNDER COMMON CONTROL OR AFFILIATED WITH LENDER, FROM AND AGAINST, AND REIMBURSE
THEM ON DEMAND FOR, ANY AND ALL INDEMNIFIED MATTERS (DEFINED BELOW). HOWEVER,
SUCH INDEMNITIES SHALL NOT APPLY TO A PARTICULAR INDEMNIFIED PERSON TO THE
EXTENT THAT THE SUBJECT OF THE INDEMNIFICATION IS CAUSED BY OR ARISES OUT OF
THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PERSON. NOTHING
IN THIS SECTION, ELSEWHERE IN THIS NOTE, OR IN ANY OTHER LOAN DOCUMENT SHALL
LIMIT OR IMPAIR ANY RIGHTS OR REMEDIES OF LENDER, OR ANY OTHER INDEMNIFIED
PERSON, INCLUDING WITHOUT LIMITATION, ANY RIGHTS OF CONTRIBUTION OR
INDEMNIFICATION, AGAINST BORROWER OR ANY OTHER PERSON UNDER ANY OTHER PROVISION
OF THIS NOTE, ANY OTHER LOAN DOCUMENT, ANY OTHER AGREEMENT, OR ANY APPLICABLE
REQUIREMENT OF LAW.  AS USED HEREIN, THE
TERM “INDEMNIFIED MATTERS” MEANS ANY AND ALL CLAIMS, DEMANDS,
LIABILITIES (INCLUDING STRICT LIABILITY), DAMAGES (EXCLUDING CONSEQUENTIAL AND
PUNITIVE DAMAGES), CAUSES OF ACTION, JUDGMENTS, PENALTIES, FINES, COSTS, AND
EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE FEES AND EXPENSES OF
ATTORNEYS AND OTHER PROFESSIONAL CONSULTANTS AND EXPERTS, AND OF THE
INVESTIGATION AND DEFENSE OF ANY CLAIM, WHETHER OR NOT SUCH CLAIM IS ULTIMATELY
DEFEATED, AND THE SETTLEMENT OF ANY CLAIM OR JUDGMENT INCLUDING ALL VALUE PAID)
OR GIVEN IN SETTLEMENT) OF EVERY KIND, KNOWN OR UNKNOWN, FORESEEABLE OR
UNFORESEEABLE, WHICH MAY BE IMPOSED UPON, ASSERTED AGAINST, OR INCURRED OR PAID
BY LENDER OR ANY INDEMNIFIED PERSON AT ANY TIME AND FROM TIME TO TIME, WHENEVER
IMPOSED, ASSERTED, OR INCURRED, BECAUSE OF, RESULTING FROM, IN CONNECTION WITH,
OR ARISING OUT OF ANY TRANSACTION, ACT, OMISSION, EVENT, OR CIRCUMSTANCE IN ANY
WAY CONNECTED WITH THIS NOTE OR ANY OTHER LOAN DOCUMENT, INCLUDING DISBURSEMENT
OF PROCEEDS AND ANY CIRCUMSTANCE ARISING FROM OR IN CONNECTION WITH LENDER’S
OBLIGATIONS HEREUNDER. THE TERM “RELEASE DATE” AS USED HEREIN MEANS THE DATE ON
WHICH THE OBLIGATIONS HAVE BEEN PAID AND PERFORMED IN FULL AND THE LOAN
DOCUMENTS HAVE BEEN RELEASED; PROVIDED, THAT IF SUCH PAYMENT,
PERFORMANCE, OR RELEASE IS CHALLENGED, IN BANKRUPTCY PROCEEDINGS OR OTHERWISE,
THE RELEASE DATE SHALL BE DEEMED NOT TO HAVE OCCURRED UNTIL SUCH CHALLENGE IS
REJECTED, DISMISSED, OR WITHDRAWN WITH PREJUDICE. THE INDEMNITIES IN THIS
SECTION SHALL BE SOLELY FOR EVENTS OCCURRING PRIOR TO THE RELEASE DATE,
SHALL NOT TERMINATE UPON THE RELEASE DATE OR UPON THE RELEASE, FORECLOSURE, OR
OTHER TERMINATION OF ANY LOAN DOCUMENT, AND SHALL SURVIVE THE RELEASE DATE, THE
PAYMENT AND PERFORMANCE OF THE OBLIGATIONS, THE DISCHARGE AND RELEASE OF THE
LOAN DOCUMENTS, ANY BANKRUPTCY OR OTHER DEBTOR RELIEF PROCEEDING, AND ANY OTHER
EVENT WHATSOEVER. THE TERMS OF THIS SECTION ARE CUMULATIVE WITH, AND NOT
LIMITED BY, THE TERMS AND PROVISIONS OF ANY SECURITY INSTRUMENT.

 

BORROWER
HEREBY AGREES THAT THE FOREGOING INDEMNITIES SET FORTH ABOVE IN THIS
SECTION 8(n) SHALL BENEFIT LENDER AND LENDER’S ASSIGNEES AND THEIR
RESPECTIVE SECURED CREDITORS, INCLUDING WITHOUT LIMITATION SOLUNET AGENT.

 

9.            Negative Covenants.
Until payment in full of this Note and performance of all other Obligations of
Borrower hereunder, Borrower covenants and agrees that Borrower will not,
either directly or indirectly, itself or through any of its Subsidiaries:

 

(a)          Permitted Debt.
Incur, create, assume, or permit to exist any Debt, on a consolidated basis,
except for Permitted Debt;

 

24

 

(b)          Permitted
Investments. Make or permit to remain outstanding any loans or advances to
or investments in any Person, including, without limitation to any Affiliate,
except that the foregoing restrictions shall not apply to (i) investments
existing on the date hereof, as set forth on Schedule 9(b) hereto,
but not any increase in the amount thereof as set forth in such
Schedule or any other modification of the terms thereof, (ii) temporary
loans and advances in cash among the Borrower and the Guarantors, made in the
ordinary course of business, (iii) agreements with franchisees entered into in
the ordinary course of business permitting such franchisees to pay any
applicable Up Front Franchise Fee to Borrower or the applicable Guarantor over
time in a manner that is consistent with historical practices, and
(iv) Permitted Investments;

 

(c)          No Mergers,
Consolidations or Acquisitions. Consolidate with or merge with or into any
other Person or acquire all or substantially all of the assets or capital stock
of any Person; provided, however, that any Guarantor (other than Parent) may be
(i) merged with and into any other Guarantor (other than Parent) or with and
into the Borrower, or (ii) liquidated or dissolved, in each case, so long as
(A) no other provision of this Note would be violated thereby, (B) such Person
gives Lender at least 30 days prior written notice of such merger, liquidation
or dissolution, (C) no Default or Event of Default shall have occurred and be
continuing either before or after giving effect to such transaction, (D)
Lender’s rights in any Collateral, including, without limitation, the
existence, perfection and priority of any Lien thereon, are not adversely
affected by such merger, liquidation, or dissolution, and (E) the surviving
Person in any merger or consolidation with the Borrower shall be the Borrower
and (F) the surviving Person in any merger or consolidation is joined as a
party to a Guaranty and a Security Agreement and the Capital Stock of such
Person is the subject of a Pledge Agreement, in each case, which is in full
force and effect on the date of and immediately after giving effect to such
merger or consolidation;

 

(d)          No Liens. Create,
incur, assume or suffer to exist, or permit any of its Subsidiaries to create,
incur, assume or suffer to exist, any Lien upon or with respect to any of its
properties, whether now owned or hereafter acquired; file or suffer to exist
under the UCC or any similar law or statute of any jurisdiction, a financing
statement (or the equivalent thereof) that names it or any of its Subsidiaries
as debtor; sign or suffer to exist any security agreement authorizing any
secured party thereunder to file such financing statement (or the equivalent
thereof); sell any of its property or assets (except Inventory sold in the
ordinary course of business subject to customary return and refund rights)
subject to an understanding or agreement, contingent or otherwise, to
repurchase such property or assets (including sales of accounts receivable)
with recourse to it or any of its Subsidiaries or assign or otherwise transfer,
or permit any of its Subsidiaries to assign or otherwise transfer, any account
or other right to receive income; other than, as to all of the above, Permitted
Liens;

 

(e)          No Change of Control.  Permit any Change of Control of Borrower;

 

(f)           No Transfer of
Assets. Sell, lease, sublease, transfer, convey, or otherwise dispose of,
whether in one transaction or a series of related transactions, all or any part
of its business, property or assets (including without limitation granting a
new franchise, approving the opening of a new store by a franchisee of Borrower
or a Guarantor, or selling, closing or otherwise disposing of one or more store
locations), whether now owned or hereafter acquired (or agree to do any of the
foregoing), other than Permitted Dispositions and transactions permitted under Section 9(c);

 

(g)          No Change in
Business. Change the general character of business as conducted as of the
date hereof or engage in any type of business not reasonably related to its
business as presently and normally conducted;

 

(h)          No Change in
Accounting Practices. Materially change accounting practices, methods, or
standards or the reporting format for any information furnished to Lender under
the terms and provisions of this Note, which accounting practices shall conform
with GAAP throughout the term of this Note;

 

(i)            Restricted Payments.  (i) 
Declare or pay any dividend or other Distribution, direct or indirect,
on account of any Capital Stock of Borrower or any Guarantor or any of their
respective Subsidiaries, now or hereafter outstanding, (ii) make any
repurchase, redemption, retirement, defeasance, sinking fund or similar
payment, purchase or other acquisition for value, direct or indirect, of any
Capital Stock of Borrower or any Guarantor or any direct or indirect parent of
Borrower or any Guarantor, now or hereafter outstanding, (iii) make any payment
to retire, or to obtain the surrender of, any outstanding warrants, options or
other rights for the

 

25

 

purchase or acquisition of shares of any class of Capital Stock of
Borrower or any Guarantor, now or hereafter outstanding, or (iv) pay any
management fees or any other fees or expenses (including the reimbursement
thereof by Borrower or any Guarantor or any of their respective Subsidiaries)
pursuant to any management, consulting or other services agreement to any of
the shareholders or other equityholders of Borrower or any Guarantor or any of
their respective Subsidiaries or other Affiliates, or to any other Subsidiaries
or Affiliates of Borrower or any Guarantor; provided, however,
that (x) so long as no Event of Default has occurred or would result therefrom
and (y) (I) with respect to clauses (A), (B), (C), (D), and (E) below, so long
as after giving effect thereto the Borrower has Excess Availability of at least
$3,000,000 after giving effect thereto, and (II) with respect to clause (F)
below, so long as after giving effect thereto the Borrower has Excess
Availability of at least $2,000,000 after giving effect thereto, (A) Borrower and
its Subsidiaries may pay dividends or make advances to the Parent (1) in
amounts necessary to pay the customary expenses of the Parent in the ordinary
course of its business solely as a result of its ownership and operation of the
Borrower and its Subsidiaries (including salaries and related reasonable and
customary expenses incurred by employees of the Parent) and (2) in amounts
necessary to enable the Parent to pay taxes when due and owing solely as a
result of its ownership of the Borrower and its Subsidiaries, (B) any
Subsidiary of the Borrower may pay dividends to or make distributions to
Borrower, (C) the Parent may pay dividends in the form of common Capital Stock,
(D) Parent and its Subsidiaries may pay amounts necessary to repurchase any
equity securities of Parent from its employees, officers or directors, in an
aggregate amount not in excess of $200,000 in an any Fiscal Year, (E) Parent
and its Subsidiaries may pay expenses incurred by Borrower and the Guarantors
on or before the date hereof in connection with this Note and the other Loan
Documents and the transaction contemplated thereby, and (F) Borrower may pay
any fees payable to Sun (or its Affiliates) pursuant to the terms and
conditions of the Sun Management Agreement, in an aggregate amount during any
Fiscal Year not greater than $1,000,000, and (G) Borrower may pay any fees
payable to MFOL pursuant to the terms and conditions of the MFOL Management
Agreement, in an aggregate amount during any Fiscal Year not greater than
$1,000,000.

 

(j)           Margin Stock.
Own, purchase, or acquire (or enter into any contract to purchase or acquire)
any “margin security” as defined by any regulation of the Federal Reserve Board
as now in effect or as the same may hereafter be in effect unless, prior to any
such purchase or acquisition or entering into any such contract, Lender shall have received an opinion of counsel
satisfactory to the effect that such  purchase or acquisition will not cause this Note to violate
Regulations U or X or any other regulation of the Federal Reserve Board then in
effect;

 

(k)          No Change in Fiscal
Year. Change its fiscal year without first notifying Lender; and

 

(l)            Tax Returns.
File or consent to the filing of any consolidated income tax return with any
Person other than Parent and its Subsidiaries.

 

10.         Cancellation.
After all principal and accrued interest at any time owed on this Note have
been paid in full, this Note will be surrendered to Borrower for cancellation; provided
that this Note shall be reinstated in accordance with its terms if any amounts
paid to the Registered Holder are rescinded, returned, reduced or restored.

 

11.         Descriptive Headings;
Governing Law. The descriptive headings of the several Sections of this
Note are inserted for convenience only and do not constitute a part of this
Note. This Note will be governed by the internal law of the State of New York,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of New York or any other jurisdiction) that would cause
the application of law of any jurisdiction other than the State of New York.

 

12.         Business Days. If
any payment is due, or any time period for giving notice or taking action
expires, on a day which is not a Business Day, then the payment will be due and
payable on, and the time period will automatically be extended to, the next
Business Day immediately following such day which is not a Business Day.

 

13.         General. This Note
constitutes the entire agreement among Borrower and the Registered Holder of
this Note with respect to the subject matter hereof; supersedes any and all
prior understandings relating to such subject matter; and will be binding upon
and inure to the benefit of Borrower, the Registered Holder of this Note and
their respective successors and permitted assigns. The provisions of
Section 5 of this Note also shall inure

 

26

 

to the benefit of the holders of Senior Indebtedness.  This Note amends and restates the Amended
Promissory Note in its entirety.

 

14.         Assignment. The
rights and obligations of Borrower hereunder shall not be assigned without the
prior written consent of Lender.  Any
assignment by Borrower in violation of the terms of this Section 14 shall
be null and void and of no force or effect.  Lender may assign its rights and obligations
hereunder (collaterally or otherwise) without Borrower’s consent, and promptly
after Lender gives Borrower written notice of each such assignment, Borrower
shall record the same in the registry required to be maintained by Borrower
under this Note.

 

15.         No Waiver; Remedies,
etc.  No failure on the part of
Lender to exercise, and no delay in exercising, any right hereunder or under
any other Loan Document shall operate as a waiver thereof; nor shall any single
or partial exercise of any right under any Loan Document preclude any other or
further exercise thereof or the exercise of any other right.  The rights and remedies of Lender provided
herein and in the other Loan Documents are cumulative and are in addition to,
and not exclusive of, any rights or remedies provided by law.  The rights of Lender under any Loan Document
against any party thereto are not conditional or contingent on any attempt by
Lender to exercise any of their rights under any other Loan Document against
such party or against any other Person.

 

16.         Counterparts. This
Note may be executed in separate counterparts each of which shall be an
original and all of which taken together shall constitute one and the same
agreement.

 

17.         Amendments. This Note
may be amended or waived only by a written instrument signed by Borrower and
the Registered Holder, with the written consent of the Solunet Agent (as the
collateral assignee of Lender) and Senior Agent (on behalf of the holders of
the Senior Indebtedness).

 

18.         Payments Net of
Withholding Taxes. Any and all payments by Borrower hereunder shall be made
free and clear of and without deduction for any and all present or future
taxes. If Borrower shall be required by law to deduct any federal, state or
local taxes from or in respect of any sum payable hereunder or under this Note,
(i) the sum payable shall be increased as much as shall be necessary so that
after making all required deductions (including deductions applicable to
additional sums payable under this Section 17) the Registered Holder
receive an amount equal to the sum they would have received had no such
deductions been made, (ii) Borrower shall make such deductions, and (iii)
Borrower shall pay the full amount deducted to the relevant taxing or other
authority in accordance with applicable law. Within 30 days after the date of
any payment of federal, state or local taxes, Borrower shall furnish to the
Registered Holder the original or a certified copy of a receipt evidencing
payment thereof. The Registered Holder (or any previous Registered Holder)
shall not be obligated to return or refund any amounts received pursuant to
this Section 17.

 

* * * *

 

27

 

IN
WITNESS WHEREOF, Borrower has executed and delivered this
Note on the date specified above.

 

	
   

  	
  MATTRESS
  FIRM, INC.,

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
     /s/
  Jim R. Black

  	
   

  
	
   

  	
   

  	
  Name:  James R. Black

  
	
   

  	
   

  	
  Title:  CFO, Secretary and Treasurer

  
					

 

Accepted and Agreed to:

 

	
  SLN
  FINANCE, LLC,

  
	
  a Delaware limited
  liability company

  
	
   

  
	
   

  
	
  By:

  	
    /s/ C.
  Deryl Couch

  	
   

  
	
   

  	
  Name: C. Deryl Couch

  
	
   

  	
  Title: Assistant
  Secretary

  
				

 

 

ENDORSEMENT

 

PAY TO THE ORDER
OF
                                            

 

	
  Dated:

  	
  SLN
  FINANCE, LLC,

  
	
   

  	
  a Delaware limited
  liability company

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:   

  	
   

  
				

 

 

[SIGNATURE PAGE TO
SECOND AMENDED AND RESTATED

SENIOR SUBORDINATED PROMISSORY NOTE]Exhibit 10.3

 

AMENDED AND RESTATED GENERAL SECURITY
AGREEMENT

 

This AMENDED AND RESTATED GENERAL SECURITY
AGREEMENT, dated as of March 31, 2004 (this “Agreement”), among Mattress
Firm, Inc., a Delaware corporation (“Borrower”), Mattress Holding Corp.,
a Delaware corporation (“MHC”), each of MHC’s undersigned Subsidiaries
(such Subsidiaries, together with Borrower and MHC, each a “Grantor” and
collectively, jointly and severally, the “Grantors”), and SLN Finance,
LLC, a Delaware limited liability company (together with its successors and
assigns, “Lender”), with reference to the following:

 

WHEREAS, Borrower is party to that certain
Second Amended and Restated Secured Senior Subordinated Promissory Note, dated
as of the date hereof, made by Borrower in favor of Lender (the “Note”).  The Note further amends and restates that
certain Amended and Restated Secured Senior Subordinated Promissory Note, dated
as of October 18, 2002 (the “Existing Note”), made by Borrower in favor
of Mattress Holdings International, LLC (“MHI”);

 

WHEREAS, certain Grantors and MHI entered
into that certain General Security Agreement, dated as of October 18, 2002 (the
“Existing Security Agreement”);

 

WHEREAS, contemporaneously herewith, Lender
acquired from MHI all of the indebtedness evidenced by the Existing Note (the “Debt
Acquisition”);

 

WHEREAS, the terms and provisions of this
Agreement and all security interests granted in connection herewith are subject
in all respects, to the subordination provisions set forth in the Note;

 

WHEREAS, each of the Grantors acknowledge
that a portion of the proceeds of the Note have been incurred for, and inured
to the benefit of, such Grantor;

 

WHEREAS, each Grantor other than Borrower is
a party to that certain Amended and Restated Guaranty, dated the date hereof
(the “Guaranty”), pursuant to which each such Person has guarantied to Lender
the Obligations of Borrower under the Note; and

 

WHEREAS, it is a condition to the
consummation of Debt Acquisition that the Grantors amend and restate the
Existing Pledge Agreement in the manner set forth herein.

 

NOW THEREFORE, based upon the foregoing and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and in order to induce Lender consummate the Debt
Acquisition and to accept the Note, Grantors hereby agree as follows:

 

1.                                       DEFINITIONS.

 

(a)                                  Capitalized terms
used in this Agreement but not defined herein shall have the meanings given to
such terms in the Note.  As used herein,
the following terms shall have the following meanings:

 

 

“Accounts”
means “accounts” (as that term is defined in the UCC).

 

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

 

“Additional
Documents” shall have the meaning specified therefore in Section 4.2.

 

“Agreement”
shall have the meaning specified therefor in the preamble hereto.

 

“Bankruptcy
Code” means the United States Bankruptcy Code (11 U.S.C. § 101 et
seq.), as amended, and any successor statute.

 

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

 

“Borrower”
shall have the meaning specified thereof in the preamble hereto.

 

“Chattel
Paper” has the meaning set forth in the UCC (whether tangible or
electronic).

 

“Collateral”
means all of each Grantor’s right, title and interest in, to and under the
following personal property and assets, whether now owned by or owing to, or
hereafter acquired by or arising in favor of such Grantor, and whether owned or
consigned by or to, or leased from or to, such Grantor and regardless of where
located: all of each Grantor’s Accounts, all of each Grantor’s Books, all of
each Grantor’s commercial tort claims, all of each Grantor’s Deposit Accounts,
all of each Grantor’s Equipment, all of each Grantor’s General Intangibles, all
of each Grantor’s Inventory, all of each Grantor’s Investment Property
(including all of each Grantor’s securities and securities accounts), all of
each Grantor’s Negotiable Collateral, money or other assets that now or
hereafter come into the possession, custody, or control of any member of the
Lender Group, and the proceeds and products, whether tangible or intangible, of
any of the foregoing, including proceeds of insurance covering any or all of
the foregoing, and any and all Accounts, Books, Deposit Accounts, Equipment,
General Intangibles, Inventory, Investment Property, Negotiable Collateral,
real property, money, or other tangible or intangible property resulting from
the sale, exchange, collection, or other disposition of any of the foregoing,
or any portion thereof or interest therein, and the proceeds thereof.  Without limiting the generality of the
foregoing, the term “Collateral” includes any and all Supporting Obligations in
respect of any other Collateral. 
Anything contained in this Agreement or the other Loan Documents to the
contrary notwithstanding, the term Collateral shall not include General
Intangibles constituting Capital Stock issued by MFA.

 

“Commercial
Tort Claim” has the meaning set forth in the UCC.

 

“Contracts”
means all contracts, agreements and other similar consensual obligations, as
the same may from time to time be amended, supplemented or otherwise

 

2

 

modified, including
(a) all rights to receive moneys due and to become due thereunder or in
connection therewith, (b) all rights to damages arising out of any breach
or default in respect thereof and (c) all rights to perform and to
exercise remedies thereunder.

 

“Copyrights”
shall have the meaning ascribed to such term in Copyright Act, and includes
unregistered copyrights.

 

“Copyright
Licenses” means any written agreement naming Grantor as licensor or
licensee, granting any right under any Copyright, including the grant of rights
to manufacture, distribute, exploit and sell materials derived from any
Copyright.

 

“Debt
Acquisition” shall have the meaning specified thereof in the recitals
hereto.

 

“Default
Period” means any period during which one or more Events of Default are
continuing.

 

“Deposit
Accounts” means any “deposit account” (as that term is defined in the UCC).

 

“Documents”
means all “documents” (as defined in the UCC) or other receipts covering,
evidencing or representing Goods, now owned or hereafter acquired, by any
Grantor.

 

“Equipment”
means “equipment” (as that term is defined in the UCC) and includes machinery,
machine tools, motors, furniture, furnishings, fixtures, vehicles (including
motor vehicles), computer hardware, tools, parts, and goods (other than
consumer goods, farm products, or Inventory), wherever located, including all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing.

 

“Event of
Default” means an “Event of Default” as set forth in the Term Loan Facility
Letter.

 

“Existing
Note” shall have the meaning specified thereof in the recitals hereto.

 

“Existing
Security Agreement” shall have the meaning specified thereof in the
recitals hereto.

 

“Farm
Products” has the meaning set forth in the UCC.

 

“Fixtures”
means all “fixtures” (as defined in the UCC) and all goods which are or are to
be attached to real property in such a manner that their removal would cause
damage to the real property and which have therefore taken on the character of
the property.

 

“General
Intangibles” means “general intangibles” (as that term is defined in the
UCC), including payment intangibles, contract rights, rights to payment, rights
arising under common law, statutes, or regulations, choses or things in action,
goodwill, patents, trade names, trademarks, servicemarks, copyrights, other
Intellectual Property, blueprints, drawings, purchase orders, customer lists,
monies due or recoverable from pension funds, route lists, rights to payment
and other rights under any royalty or licensing agreements, infringement
claims,

 

3

 

computer programs, information
contained on computer disks or tapes, software, literature, reports, catalogs,
money, deposit accounts, insurance premium rebates, tax refunds, and tax refund
claims, and any other personal property other than goods, Accounts, Investment
Property, and Negotiable Collateral.

 

“Goods”
has the meaning set forth in the UCC, including, without limitation, embedded
Software to the extent included in such Goods.

 

“Guaranty”
shall have the meaning specified thereof in the recitals hereto.

 

“Instruments”
means all “instruments,” “chattel paper” (whether tangible or electronic) or
“letters of credit” (each as defined in the UCC), including those evidencing,
representing, arising from or existing in respect of, relating to, securing or
otherwise supporting the payment of, any of the Accounts, including (but not
limited to) promissory notes, drafts, bills of exchange, trade acceptances and
Letter-of-Credit Rights, now owned or hereafter acquired by any Grantor.

 

“Intellectual
Property” means all rights, priorities and privileges relating to
intellectual property, whether arising under United States, multinational or
foreign law or otherwise, including: all patents, patent applications, patent
disclosures and inventions (whether or not patentable and whether or not
reduced to practice); all trademarks, service marks, trade dress, trade names
and corporate names and all the goodwill associated therewith; all registered
and unregistered statutory and common law copyrights; all registrations,
applications and renewals for any of the foregoing; all mask works; all trade
secrets, confidential information, ideas, formulae, compositions, know-how,
manufacturing and production processes and techniques, research and development
information, drawings, specifications, designs, plans, improvements, proposals,
technical and computer data, financial, business and marketing plans, and
customer and supplier lists and related information; all other proprietary
rights (including all computer software and documentation and all license
agreements and sublicense agreements to and from third parties relating to any
of the foregoing); all copies and tangible embodiments of the foregoing (in
whatever form or medium); all damages and payments for past, present and future
infringements of the foregoing; all royalties and income due with respect to the
foregoing; and the right to sue (whether at law or in equity) and recover for
past, present and future infringements of the foregoing, and for the avoidance
of doubt, to the extent not included in the foregoing, all Copyrights,
Copyright Licenses, Patents, Patent Licenses, Trademarks and Trademark
Licenses.

 

“Intellectual
Property Collateral” means any Intellectual Properly constituting a part of
the Collateral.

 

“Inventory”
means “inventory” (as that term is defined in the UCC).

 

“Investment
Property” means “investment property” (as that term is defined in the UCC).

 

“Lender”
shall have the meaning specified therefor in the preamble hereto.

 

4

 

“Letter-of-Credit
Rights” has the meaning set forth in the UCC (whether or not the letter of
credit is evidenced by a writing).

 

“Lien”
means, with respect to any asset, any mortgage, lien, pledge, charge, security
interest or similar encumbrance, whether voluntary or involuntary or arising by
operation of law, in respect of such asset, including the Security
Interests.  For purposes of this
Agreement, a Person shall be deemed to own subject to a Lien any asset which it
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such asset.

 

“Loan
Document” means the Note, together with this Agreement or any other
financing statement, agreement, document or instrument entered into or
delivered pursuant thereto or hereto.

 

“MHC”
shall have the meaning specified thereof in the preamble hereto.

 

“MHI”
shall have the meaning specified thereof in the recitals hereto.

 

“Negotiable
Collateral” means letters of credit, letter of credit rights, notes,
drafts, instruments, promissory notes, documents, chattel paper (including
electronic chattel paper and tangible chattel paper), each Grantor’s Books
relating to any of the foregoing.

 

“Note”
shall have the meaning specified thereof in the recitals hereto.

 

“Patents”
means (i) all letters patent of the United States, any other country or
any political subdivision thereof, all reissues and extensions thereof and all
goodwill associated therewith, (ii) all applications for letters patent of
the United States or any other country or any political subdivision thereof and
all divisions, continuations and continuations-in-part thereof, and
(iii) all rights to obtain any reissues or extensions of the foregoing.

 

“Patent
License” means all agreements, whether written or oral, providing for the
grant by or to any Grantor of any right to manufacture, use or sell any
invention covered in whole or in part by a Patent.

 

“Payment
Intangibles” has the meaning set forth in the UCC.

 

“Permitted
Protest” means the right of any Grantor to protest any Lien other than any
such Lien that secures the Secured Obligations, any taxes (other than payroll
taxes or taxes that are the subject of a United States federal tax lien), or
any rental payment, provided that (a) a reserve with respect to such obligation
is established on the books of such Grantor in an amount that is reasonably
satisfactory to Lender, (b) any such protest is instituted and diligently
prosecuted by such Grantor in good faith, and (c) Lender is satisfied
that, while any such protest is pending, there will be no impairment of the
enforceability, validity, or priority of any of the Liens of Lender in and to
the Collateral for the benefit of the Lender.

 

“Person”
shall mean any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof, or any other form of
entity.

 

5

 

“Pledged
Account” has the meaning set forth in Section 7.1.

 

“Pledged
Deposits” means all deposits of money, whether or not evidenced by
certificates, with any bank (including all rights to receive interest on such
deposits and all other sums credited by or due from third parties with respect
thereto), which originate from Collateral or Proceeds and which are deposited
with any bank or other financial institution following an Event of Default.

 

“Proceeds”
means all proceeds of, and all other profits, products, rentals or receipts, in
whatever form, arising from the collection, sale, lease, exchange, assignment,
licensing or other disposition of, or other realization upon, collateral,
including all claims of any Grantor against third parties for loss of, damage
to or destruction of, or for proceeds payable under, or unearned premiums with
respect to, policies of insurance in respect of, any Collateral, and any
condemnation or requisition payments with respect to any Collateral, in each
case whether now existing or hereafter arising.

 

“Receivables”
means the Accounts, Chattel Paper, Pledged Deposits, Documents, General
Intangibles, Intellectual Property representing rights to the payment of money
(however arising), and any related Instruments.

 

“Secured
Obligations” shall mean all liabilities, obligations, or undertakings
(including the Obligations) owing by any Grantor of any kind or description
arising out of or outstanding under, advanced or issued pursuant to, or
evidenced by the Note, the Guaranty, this Agreement, or any of the other Loan
Documents, irrespective of whether for the payment of money, whether direct or
indirect, absolute or contingent, due or to become due, voluntary or
involuntary, whether now existing or hereafter arising, and including all
interest, costs, fees (including attorneys fees), and expenses and any and all
other amounts (including any portion thereof that accrues after the
commencement of an Insolvency Proceeding, whether or not allowed or allowable
in whole or in part as a claim in any such Insolvency Proceeding) which any
Grantor is required to pay pursuant to any of the foregoing, by law, or
otherwise.

 

“Security
Interests” means the security interests in the Collateral granted hereunder
securing the Secured Obligations.

 

“Software”
has the meaning set forth in the UCC.

 

“Supporting
Obligation” means a letter-of-credit right or secondary obligation that
supports the payment or performance of an Account, chattel paper, document,
General Intangible, instrument, or Investment Property.

 

“Trademarks”
means (i) all trademarks, trade names, corporate names, company names, business
names, fictitious business names, trade styles, service marks, logos and other
source or business identifiers, and all goodwill associated therewith, now
existing or hereafter adopted or acquired, all registrations and recordings
thereof, and all applications in connection therewith, whether in the United
States Patent and Trademark Office or in any similar office or agency of the
United States, any State thereof or any other country or any political
subdivision thereof, or otherwise, and all common-law rights related thereto,
and (ii) the right to obtain all renewals thereof.

 

6

 

“Trademark
License” means any agreement, whether written or oral, providing for the
grant by or to any Grantor of any right to use any Trademark.

 

“UCC”
means the Uniform Commercial Code as from time to time in effect in the State
of New York; provided that if by reason of mandatory provisions of law,
the perfection or the effect of perfection or non-perfection of a security
interest in any Collateral is governed by the Uniform Commercial Code as in
effect in a jurisdiction other than New York, “UCC” means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or
non-perfection; and provided  further that to the extent that the
UCC is used to define any term herein or in any Loan Document and such term is
defined differently in different Articles or Divisions of the UCC, the
definition of such term contained in Article or Division 9 shall govern.

 

“Vehicles”
means all cars, trucks, trailers, construction and earth-moving equipment and
other vehicles covered by a certificate of title of any State and all tires and
other appurtenances to any of the foregoing.

 

(b)                                 Construction.

 

(i)                                     The definitions of
terms herein shall apply equally to the singular and plural forms of the terms
defined.  Whenever the context may
require, any pronoun shall include the corresponding masculine, feminine and
neuter forms.  The words “include”,
“includes” and “including” shall be deemed to be followed by the phrase
“without limitation”.  The word “will”
shall be construed to have the same meaning and effect as the word “shall”.  The term “or” has, except where otherwise
indicated, the inclusive meaning represented by the phrase “and/or”.  Unless the context requires otherwise, (a)
any definition of or reference to any agreement, instrument or other document
herein shall be construed as referring to such agreement, instrument or other
document as from time to time amended, supplemented or otherwise modified
(subject to any restrictions on such amendments, supplements or modifications
set forth herein), (b) any reference herein to any Person shall be construed to
include such Person’s successors and assigns, (c) the words “herein”,
“hereof” and “hereunder”, and words of similar import, shall be construed to
refer to this Agreement in its entirety and not to any particular provision
hereof, (d) all references herein to Articles, Sections, Exhibits and
Schedules shall be construed to refer to Articles and Sections of, and Exhibits
and Schedules to, this Agreement, (e) the words “asset” and “property”
shall be construed to have the same meaning and effect and to refer to any and
all tangible and intangible assets and properties, including cash, securities,
accounts and contract rights, and (f) any reference herein to the
repayment in full of the Secured Obligations shall mean the repayment in full
in cash of all Secured Obligations other than contingent indemnification
Secured Obligations.  References in this
Agreement to “determination” by the Lender include estimates honestly made by
the Lender (in the case of quantitative determinations) and beliefs honestly
held by Lender (in the case of qualitative determinations).  In the event of a direct conflict between the
terms and provisions of this Agreement and the Note, it is the intention of the
parties hereto that such documents shall be read together and construed, to the
fullest extent possible, to be in concert with each other.  In the event of any actual, irreconcilable
conflict that cannot be resolved as aforesaid, the terms and

 

7

 

provisions of the Note shall
control and govern; provided, however, that the inclusion herein of additional
obligations on the part of any Grantor and supplemental rights and remedies in
favor of Lender, in each case in respect of the Collateral, shall not be deemed
a conflict with the Note.  Any
requirement of a writing contained herein or in the other Loan Documents shall
be satisfied by the transmission of a record and any record transmitted shall
constitute a representation and warranty, as the accuracy and completeness of
the information contained therein.

 

2.                                       GRANT.

 

To secure payment, performance and observance
of the Secured Obligations, each Grantor hereby:  (i) pledges, and grants to the Lender a
continuing security interest in, and a right of set-off against, such Grantor’s
Collateral (including the Intellectual Property Collateral) and all present and
future right, title and interest of such Grantor therein; and (ii) upon
demand by the Lender, upon the occurrence of an Event of Default and after giving
effect to the notice requirements (if any) contained in Section 4(b)(i) of the
Note and all other applicable notice and cure periods, assigns, transfers and
conveys the Intellectual Property Collateral to the Lender.

 

The security interests and assignments
granted herein shall not relieve any Grantor from the performance of any term,
covenant, condition or agreement on such Grantor’s part to be performed or
observed under or in respect of any of the Collateral or impose any obligation
on the Lender to perform or observe any such term, covenant, condition or
agreement on such Grantor’s part to be so performed or observed or impose any
liability on the Lender for any act or omission on the part of such Grantor
relative thereto or for any breach of any representation or warranty on the
part of such Grantor contained in this Agreement or any of the Loan Documents
or in respect of the Collateral or made in connection herewith or therewith.

 

Lender’s security interests in the Collateral
shall attach to all Collateral without further act on the part of the Lender or
any Grantor.  Except as expressly set
forth in this Agreement or any other Loan Document, no Grantor has any
authority, express or implied, to dispose of any item or portion of the
Collateral.

 

3.                                       REPRESENTATIONS
AND WARRANTIES.

 

Each Grantor
hereby represents and warrants to the Lender, as of the date hereof (which
representations and warranties are in addition to, and not in lieu of or in
limitation of any representations and warranties made in any of the other Loan
Documents) that:

 

Section 3.1                                      [Intentionally
Omitted]

 

Section 3.2                                      Inventory
Records.  Such Grantor now keeps, and
hereafter at all times shall keep, correct and accurate records itemizing and
describing the kind, type, quality, and quantity of the Inventory, and such
Grantor’s cost therefor.

 

Section 3.3                                      Principal
Location, etc.  Such Grantor’s true
legal name as registered in the jurisdiction in which such Grantor is organized
or incorporated, jurisdiction of organization or incorporation, federal
employer identification number, organizational identification number, if any,
as designated by the state of its organization or incorporation, principal
place of business,

 

8

 

mailing address, and the
location of its chief executive office and each location of any books and
records (including all computer data and related software including source
codes) relating to the Accounts is disclosed in Annex I hereto; such
Grantor has no other places of business except those set forth in Annex I
hereto.

 

Section 3.4                                      Property
Locations.  Except as permitted
hereby, the Inventory, Equipment and Fixtures are located solely at the
locations described in Annex I hereto. 
Except as permitted hereby, none of such locations are leased by such
Grantor as lessee except those so designated in Annex I hereto.

 

Section 3.5                                      No Other Names.  Except as listed on Annex II hereto,
Grantor does not conduct or has not conducted any trade or business under any
name in the last five years except the name in which it has executed this
Agreement.  Such Grantor has not been a
party to any merger or consolidation in the last five years except as disclosed
on Annex II.

 

Section 3.6                                      Filing
Requirements.  None of the Equipment
is covered by any certificate of title, except for the Vehicles.  None of the Collateral consists of property
subject to a statute or treaty referred to in Section 9-311 of the UCC (other
than Intellectual Property Collateral). 
None of the Collateral is of a type with respect to which any Lien may
be filed under any federal statute except for Patents, Copyrights and
Trademarks held by such Grantor and described in Annex III hereto.

 

Section 3.7                                      No Financing
Statements.  Except for financing
statements filed with respect to the Equipment set forth on Annex IV, no
financing statement describing all or any portion of the Collateral which has
not lapsed or been terminated has been filed in any jurisdiction except
financing statements naming the Lender.

 

Section 3.8                                      Title to
Properties.  Such Grantor has good
and marketable title to and ownership of the Collateral held by it, free and
clear of all Liens except Permitted Liens. 
Such Grantor has taken all actions necessary under the UCC to perfect
its interest in any Accounts purchased or otherwise acquired by it, as against
its assignors and creditors of its assignors. 
Except for the Equipment set forth on Annex IV, no Collateral is
in the possession of any Person (other than such Grantor) asserting any claim
thereto or Security Interest therein, except that the Lender may have
possession of Collateral as contemplated hereby.

 

Section 3.9                                      Intellectual
Property.  Annex III hereto
contains a complete and accurate list as of the date hereof of all patented and
registered Intellectual Property owned by such Grantor and all pending patent
applications and applications for the registration of other intellectual
Property owned or filed by such Grantor. 
Annex III also contains a complete and accurate list of all
licenses and other rights granted by such Grantor to any third party with
respect to the Intellectual Property and licenses and other rights granted by
any third party to such Grantor.  Except
as set forth on Annex III such Grantor has made all necessary filings
and recordations and has paid all required fees and taxes to record and
maintain its ownership of the patented or registered intellectual property
rights in the United States Patent and Trademark Office and the United States
Copyright Office and in each other applicable filing office (whether in the
United States or otherwise) and no consents are required under any licenses
listed in

 

9

 

Annex III
to the grant of the security interest to, and exercise of any rights and remedies
of, the Lender.

 

Section 3.10                                Contracts.  No consent of any party to any Contract is
required in connection with the execution, delivery and performance of this
Agreement, other than consents which if not obtained would not, individually or
in the aggregate, be materially adverse to Grantor and those consents referred
to in paragraph (a) of the proviso to Section 2.

 

Section 3.11                                Farm
Products.  None of the Collateral
constitutes, or is the Proceeds of, Farm Products.

 

Section 3.12                                Security
Interest.  The Security Interests
constitute valid security interests under the UCC and other applicable law
securing the Secured Obligations.  The
Security Interests constitute perfected security interests in the Collateral to
the extent that a security interest therein may be perfected (a) by filing
pursuant to the UCC, (b) with respect to registered intellectual Property
Collateral, by filing with the United States Patent and Trademark Office or the
United States Copyright Office, or (c) with respect to money, letters of
credit, instruments and certificated securities, by possession of the
Collateral if maintained by the Lender. 
Such perfected Security Interests are and at all times shall be prior to
all Liens and rights of others therein except for (a) unrecorded Permitted
Liens which are (i) not for borrowed money, (ii) are not securing
obligations which are past due and (iii) have priority over the Security
Interests by operation of law, (b) Permitted Liens on Equipment existing
on the date hereof and identified on Annex IV, and (c) Liens described in
clause (a) of the definition of Permitted Liens.

 

Section 3.13                                Receivables.  No amount payable to such Grantor under or in
connection with any Receivable is evidenced by any Instrument or Chattel Paper
which has not been delivered to the Lender; none of the obligors on any
Receivable is a governmental authority (including the United States, any state
thereof, or any other United States or foreign federal, state or local
governmental agency, authority, instrumentality, regulatory body or
subdivision); and the amounts represented by each Grantor to the Lender from
time to time as owing to such Grantor in respect of the Receivables will at all
such times be accurate in all material respects.

 

Section 3.14                                No
Commercial Tort Claims.  Such Grantor
does not have any Commercial Tort Claims.

 

4.                                       COVENANTS.

 

From the date
of this Agreement, and thereafter until this Agreement is terminated:

 

Section 4.1                                      Records and
Reports.  Each Grantor will maintain
complete and accurate books and records with respect to the Collateral, and
furnish to the Lender such reports relating to the Collateral as the Lender
shall from time to time reasonably request.

 

Section 4.2                                      Financing
Statements and Other Documents.  At
any time upon the request of Lender each Grantor shall execute and deliver to
Lender, any and all financing statements, original financing statements in lieu
of continuation statements, fixture filings, security agreements, pledges,
assignments, assignments of Commercial Tort Claims, endorsements of
certificates of title, and all other documents (collectively, the “Additional
Documents”) that

 

10

 

Lender may request, in form and
substance satisfactory to Lender, to create, perfect, and continue perfected or
to better perfect the Lender’s Security Interest in the assets of such Grantor
(whether now owned or hereafter arising or acquired, tangible or intangible,
real or personal), to create and perfect the Security Interest in favor of Lender
in any real property acquired by any Grantor after the date hereof, and in
order to fully consummate all of the transactions contemplated hereby and under
the other Loan Documents.  To the maximum
extent permitted by applicable law, if any Grantor has not executed any
Additional Document Lender is entitled to obtain hereunder after Lender has
made an appropriate request therefor, each Grantor authorizes Lender to execute
any such Additional Documents in such Grantor’s name and authorizes Lender to
file such executed Additional Documents in any appropriate filing office.  In addition, on such periodic basis as Lender
shall require, each Grantor shall (i) provide Lender with a report of all
new patents, trademarks, or copyrights (or applications therefor) acquired or
generated by such Grantor during the prior period, (ii) cause all material
patents, copyrights and trademarks acquired or generated by such Grantor that
are not already the subject of a registration with the appropriate filing
office (or an application therefor diligently prosecuted) to be registered with
such appropriate filing office in a manner sufficient to impart constructive
notice of such Grantor’s ownership thereof, and (iii) cause to be
prepared, executed, and delivered to Lender supplemental schedules to the
applicable Loan Documents to identify such patents, copyrights, and trademarks
as being subject to the security interests created thereunder.

 

Section 4.3                                      Change in
Location or Name; Change in Jurisdiction of Organization.  Each Grantor will not (i) have any
Inventory or Equipment or products thereof (other than inventory sold in the
ordinary course of its business) at a location other than a location specified
in Annex I hereto, except for Inventory and Equipment in transit between
such locations, (ii) maintain records relating to the Receivables at a
location other than those locations specified on Annex I hereto as a
location where such records are kept, (iii) maintain a place of business at a
location other than a location specified on Annex I hereto, (iv) change
its name or jurisdiction of organization, or (v) change its mailing address,
unless in each such case such Grantor shall have given the Lender at least 30
days’ prior written notice thereof and delivered any financing statements or
other documents requested by the Lender.

 

Section 4.4                                      Taxes.  Each Grantor shall cause all assessments and
taxes, whether real, personal, or otherwise, due or payable by, or imposed,
levied, or assessed against such Grantor or any of such Grantor’s property to
be paid in full, before delinquency or before the expiration of any extension
period, except to the extent that the validity of such assessment or tax shall
be the subject of a Permitted Protest. 
Such Grantor shall make due and timely payment or deposit of all taxes,
assessments, or contributions required of it by law, and will execute and
deliver to Lender, on demand, appropriate certificates attesting to the payment
or deposit thereof.  Such Grantor will
make timely payment or deposit of all tax payments and withholding taxes
required of it by applicable laws, and will, upon request, furnish Lender with
proof satisfactory to Lender indicating that such Grantor has made such
payments or deposits, other than assessments or taxes that are the subject of a
Permitted Protest.  Such Grantor shall
deliver satisfactory evidence of payment of applicable excise taxes in each
jurisdictions in which (a) it conducts business or is required to pay any
such excise tax, (b) where its failure to pay any such applicable excise
tax would result in a Lien on the properties or assets of such Grantor, or
(c) where its failure to pay any such applicable excise tax would
constitute a Material Adverse Effect.

 

11

 

Section 4.5                                      Negotiable
Collateral.  In the event that any
Collateral of any Grantor, including proceeds thereof, is evidenced by or
consists of Negotiable Collateral, such Grantor shall, immediately upon the
request of Lender, endorse and assign such Negotiable Collateral to Lender and
deliver physical possession of such Negotiable Collateral to Lender.

 

Section 4.6                                      Collection
of Accounts, General Intangibles, Negotiable Collateral.  At any time that an Event of Default has
occurred or is continuing, Lender or Lender’s designee may:  (a) notify customers or Account Debtors
of any Grantor that the Accounts, General Intangibles, or Negotiable Collateral
that constitute Collateral have been assigned to Lender; and (b) collect
the Accounts, General Intangibles, and Negotiable Collateral that constitute
Collateral directly and add the collection costs and expenses incurred by
Lender in connection with any such collection of the Accounts to the principal
balance of the Obligations.  Each Grantor
agrees that at any time that an Event of Default has occurred or is continuing
it will hold in trust for Lender, as Lender’s trustee, any cash receipts,
checks, and other items of payment (including, insurance proceeds, proceeds of
cash sales, rental proceeds, and tax refunds) that such Grantor receives and
immediately will deliver said cash receipts, checks, and other items of payment
to Lender in their original form as received by such Grantor.

 

Section 4.7                                      Right
to Inspect.  Lender (through any of
its officers, employees, or agents) shall have the right, from time to time
hereafter to inspect any Grantor’s Books and make copies or abstracts thereof
and to check, test, and appraise the Collateral, or any portion thereof, in
order to verify any Grantor’s financial condition or the amount, quality,
value, condition of, or any other matter relating to, the Collateral.

 

Section 4.8                                      Other
Financing Statements; Other Liens. 
No Grantor will sign, authorize the signing on its behalf or authorize
the filing of any financing statement naming it as debtor which covers all or
any portion of the Collateral, except financing statements naming the Lender as
secured party and those filed in respect of Permitted Liens.  No Grantor shall create, permit or suffer to
exist any Liens on or with respect to any of the Collateral except Permitted
Liens.  Each Grantor acknowledges that it
is not authorized to file any amendment or termination statement with respect
to any financing statement without the prior written consent of the Lender and
agrees that it will not do so without the prior written consent of the Lender
(other than such filings that are made with respect to Permitted Liens),
subject to such Grantor’s rights under Section 9-509(d)(2) of the UCC.

 

Section 4.9                                      Accounts.

 

(a)                                  Except as otherwise
provided in this Agreement, each Grantor will collect and enforce in accordance
with its past collection practices and procedures, at such Grantor’s sole
expense, all amounts due or hereafter due to such Grantor under the Accounts.

 

(b)                                 Except in the ordinary
course of business, no Grantor will, unless Lender otherwise consents in
writing, grant any extension of the time of payment of any of the Accounts,
compromise, compound or settle the same for less than the full amount thereof,
release, wholly or partly, any Person liable for the payment thereof, or allow
any credit or discount whatsoever thereon.

 

12

 

Section 4.10                                Maintenance
of Inventory and Equipment.  Each
Grantor will do all things necessary to maintain, preserve, protect and keep
the Inventory in saleable condition and the Equipment in as good a state of
repair and condition as at the date hereof except for ordinary wear and tear.

 

Section 4.11                                Insurance.  Grantor hereby irrevocably makes, constitutes,
and appoints the Lender (and all officers, employees, or agents designated by
the Lender) as such Grantor’s true and lawful attorney (and agent-in-fact) for
the purpose of making, settling, and adjusting claims under policies of
insurance, endorsing the name of such Grantor on any check, draft, instrument,
or other item of payment for the proceeds of such policies of insurance and for
making all determinations and decisions with respect thereto.  In the event that a Grantor at any time or
times shall fail to obtain or maintain any of the policies of insurance
required by Section 6(i) of the Note or to pay any premium in whole or part
relating thereto, the Lender may, without waiving or releasing any obligation
or liability of such Grantor hereunder or any Event of Default, in its sole
discretion, obtain and maintain such policies of insurance and pay such premium
and take any other action with respect thereto as the Lender deems
advisable.  All such sums so disbursed by
the Lender, including reasonable attorneys’ fees and expenses, court costs,
expenses and other charges relating thereto, shall be payable, upon demand, by
such Grantor to the Lender and shall be additional Secured Obligations secured
hereby.

 

Section 4.12                                Titled
Vehicles.  Upon request of the
Lender, each Grantor shall promptly execute and deliver any instruments and
documents that may be necessary or that the Lender may request in order to
perfect the Security Interests in all property of such Grantor subject to a
certificate of title.

 

Section 4.13                                Bailees.  If any Collateral of a Grantor is in the
possession or control of any warehouseman, processor or other bailee, such
Grantor shall notify such warehousemen, processors and other bailees in writing
(with a copy to the Lender) of the Lender’s security interest therein and, upon
the occurrence and continuation of an Event of Default and upon the Lender’s
request, instruct such Persons to hold all such Collateral for the Lender’s
account and subject to the Lender’s instructions.  Each Grantor will use its best efforts to
obtain from any warehouseman, processor or other bailee written acknowledgment,
in form and substance satisfactory to Lender, that such warehouseman, processor
or other bailee holds possession of the Collateral for the Lender’s
benefit.  If any Grantor is unable to
obtain a written acknowledgment of the type required by the previous sentence
from any warehouseman, processor or other bailee, then such Grantor shall, upon
request of the Lender, move such Collateral to a warehouseman, processor or
bailee who will provide the required acknowledgment.  If more than $100,000 of Collateral of a
Grantor is held by a bailee, such Grantor will file a financing statement in
the appropriate jurisdiction against such bailee in a form appropriate for the
underlying transaction.  In addition,
such Grantor agrees that if any warehouse receipt or receipt in the nature of a
warehouse receipt is issued with respect to any of its Inventory, such
warehouse receipt or receipt in the nature of a warehouse receipt shall not be
“negotiable” (as such term is defined in Section 7-104 of the Uniform
Commercial Code as in effect in any relevant jurisdiction or under other
relevant law), or, if any warehouse receipt or receipt in the nature thereof is
“negotiable” (as such term is so used), such Grantor shall promptly take all
action as may be required under the relevant jurisdiction to grant a perfected
security interest in such Collateral to the Lender.

 

13

 

Section 4.14                                Delivery
of Pledged Collateral, Control of Collateral.  To the extent not required to be delivered to
the Lender pursuant to another provision of this Agreement or pursuant to
another Loan Document, each Grantor will hold in trust for the Lender upon
receipt and, upon the occurrence of an Event of Default and the continuation
thereof or if otherwise requested by the Lender, promptly deliver to the Lender
the originals of all Instruments, Documents, Chattel Paper, letters of credit,
certificated securities and certificates issued in respect of Pledged Deposits,
which shall be endorsed in blank, marked with such legends and accompanied by
such stock powers and assignments as the Lender shall specify.  To the extent Pledged Deposits constitute
Deposit Accounts, each Grantor shall, upon request of the Lender, take all
steps that may be required (including the obtaining and furnishing to the
Lender appropriate account control agreements as required under Section 9-104
of the UCC) to grant “control” (as defined in Section 9-104 of the UCC) to the
Lender.  Each Grantor further agrees to
take such steps as Lender may reasonably request for the Lender to obtain
“control” (as set forth in corresponding provisions in Sections 9-104, 9-105,
9-106 and 9-107 relating to what constitutes “control” for such items of
Collateral) of any Investment Property, other Deposit Accounts,
Letter-of-Credit Rights or electronic Chattel Paper, with any agreements
establishing control to be in form and substance satisfactory to the Lender.

 

Section 4.15                                Investment
Property.  If a Grantor acquires any
Investment Property (whether or not a certificated security), such Grantor
(i) shall take and cause all other relevant parties to take all such
actions as may be requested by the Lender (including obtaining for the Lender
the agreement of any securities intermediary to comply with instructions and
entitlement orders originated by the Lender without further consent of such
Grantor or other registered owner or entitlement holder) in order to cause the
Security Interests in such Collateral to be perfected by “control” (as such
term is used in Articles 8 and 9 of the UCC) and (ii) will take and will
cause such other relevant parties to take all other action necessary or
appropriate to create and maintain a perfected first priority Lien in such
Investment Property in favor of the Lender.

 

Section 4.16                                Intellectual
Property Covenant.  Each Grantor
shall make all necessary filings and recordings and pay all required fees and
taxes to record and maintain its registration and ownership of, and do all
other things and take all other actions necessary to preserve, protect and
maintain, each item of Intellectual Property owned by it, other than such items
the loss or forfeiture of which would not individually or in the aggregate be
materially adverse to any Grantor. 
Without limiting the foregoing:

 

(a)                                  Each Grantor (either
itself or through licensees) will (i) continue to use each material Trademark
on each and every trademark class of goods applicable to its current line as
reflected in its current catalogs, brochures and price lists in order to
maintain such trademark in full force free from any claim of abandonment for
non-use, (ii) maintain as in the past the quality of products and services offered
under such Trademark, (iii) use such Trademark with the appropriate notice of
registration and all other notices and legends required by applicable
requirements of law, (iv) not adopt or use any mark which is confusingly
similar or a colorable imitation of such Trademark unless the Lender shall
obtain a perfected Security Interest in such mark pursuant to this Agreement,
and (v) not (and not permit any licensee or sublicensee thereof to) do any act
or knowingly omit to do any act whereby such Trademark may become invalidated
or impaired in any way.

 

14

 

(b)                                 Each Grantor (either
itself or through licensees) will not do any act, or omit to do any act,
whereby any material Patent may become forfeited, abandoned or dedicated to the
public.

 

(c)                                  Each Grantor (either
itself or through licensees) (i) will employ each material Copyright and (ii)
will not (and will not permit any licensee or sublicensee thereof to) do any
act or knowingly omit to do any act whereby any material portion of the
Copyrights may become invalidated or otherwise impaired.  Such Grantor will not (either itself or
through licensees) do any act whereby any material portion of the Copyrights
may fall into the public domain.

 

(d)                                 Each Grantor (either
itself or through licensees) will not do any act that knowingly uses any
material Intellectual Property to infringe the intellectual property rights of
any other Person.

 

(e)                                  Each Grantor will
notify the Lender immediately if it knows, or has reason to know, that any
application or registration relating to any material Intellectual Property may
become forfeited, abandoned or dedicated to the public, or of any adverse
determination or development (including the institution of, or any such
determination or development in, any proceeding in the United States Patent and
Trademark Office, the United States Copyright Office or any court or tribunal
in any country) regarding such Grantor’s ownership of, or the validity of, any
material Intellectual Property or such Grantor’s right to register the same or
to own and maintain the same.

 

(f)                                    Whenever a Grantor,
either by itself or through any agent, employee, licensee or designee, shall
file an application for the registration of Intellectual Property with the United
States Patent and Trademark Office, the United States Copyright Office or any
similar office or agency in any other country or any political subdivision
thereof, such Grantor shall report such filing to the Lender within five
business days after the last day of the fiscal quarter in which such filing
occurs.  Upon request of the Lender, such
Grantor shall execute and deliver, and have recorded, any and all agreements,
instruments, documents and papers as the Lender may request to evidence the
Security Interest in any Copyright, Patent or Trademark and the goodwill and
general intangibles of such Grantor relating thereto or represented thereby.

 

(g)                                 Each Grantor shall
take all reasonable and necessary steps, including in any proceeding before the
United States Patent and Trademark Office, the United States Copyright Office
or any similar office or agency in any other country or any political
subdivision thereof, to maintain and pursue each application (and to obtain the
relevant registration) and to maintain each registration of the material
Intellectual Property, including filing of applications for renewal, affidavits
of use and affidavits of incontestability.

 

(h)                                 In the event that any
material Intellectual Property is infringed, misappropriated or diluted by a
third party, each Grantor shall (i) take such actions as such Grantor shall
reasonably deem appropriate under the circumstances to protect such
Intellectual Property and (ii) if such Intellectual Property is of material
economic value, promptly notify the Lender after it learns thereof and sue for
infringement, misappropriation or dilution, to seek

 

15

 

injunctive relief where
appropriate and to recover any and all damages for such infringement, misappropriation
or dilution.

 

Section 4.17                                Federal
Claims.  Each Grantor will notify the
Lender of any material Receivable which constitutes a claim against the United
States government or any instrumentality or agency thereof, the assignment of
which claim is restricted by federal law. 
Upon the request of the Lender, each Grantor will take all reasonable
actions required to comply, to the Lender’s satisfaction, with the Assignment
of Claims Act of 1940, as amended, or any similar applicable law, with respect
to any such material Receivable.

 

Section 4.18                                Commercial
Tort Claims.  If any Grantor shall at
any time acquire a Commercial Tort Claim, then Grantor shall immediately notify
the Lender in a writing signed by such Grantor of the brief details thereof and
grant to the Lender in such writing a security interest therein and in the
proceeds thereof, all upon the terms of this Agreement, with such writing to be
in form and substance satisfactory to the Lender.

 

5.                                       REMEDIES
UPON DEFAULT.

 

Upon the occurrence and during the
continuance of an Event of Default and after giving effect to the notice
requirements (if any) contained in Section 4(b)(i) of the Note and all other
applicable notice and cure periods, whether or not all of the Secured
Obligations shall have become due and payable, the Lender may, in addition to
its rights under any of the Loan Documents:

 

Section 5.1                                      General.  Exercise any or all of the rights and
remedies provided (i) in this Agreement, (ii) to a secured party when a debtor
is in default under a security agreement governed by the UCC or (iii) to a
secured party when a debtor is in default by any other applicable law including
any law governing the exercise of a bank’s right of setoff or bankers’
lien.  Without precluding any other
methods of sale, the sale of Collateral shall be deemed to have been made in a
commercially reasonable manner if conducted in conformity with reasonable
commercial practices of commercial lenders disposing of similar property, but
in any event the Lender may sell Collateral on such terms as the Lender may
choose without assuming any credit risk and without any obligation to advertise
or give notice of any kind not expressly required under this Agreement or
required by applicable law (to the extent such notice may not be waived under
applicable law);

 

Section 5.2                                      Settlement
of Claims.  Settle or adjust disputes
and claims directly with Account Debtors for amounts and upon terms which
Lender considers advisable, and in such cases, Lender shall credit the Grantors
with only the net amounts received by Lender in payment of such disputed
Accounts after deducting all expenses incurred or expended in connection
therewith;

 

Section 5.3                                      Returned
Inventory.  Cause any Grantor to hold
all returned Inventory in trust for Lender, segregate all returned Inventory
from all other property of any Grantor or in such Grantor’s possession and
conspicuously label said returned Inventory as the property of Lender;

 

16

 

Section 5.4                                      Accounts,
General Intangibles and Negotiable Collateral.  Collect any Grantor’s Accounts, General
Intangibles, and Negotiable Collateral that constitute Collateral directly, and
add the collection costs and expenses to the principal balance of the
Obligations; but, unless and until the Lender does so or gives such Grantor
other written instructions, such Grantor shall collect all of its Accounts,
General Intangibles, and Negotiable Collateral that constitute Collateral for
the Lender, receive in trust all payments thereon as the Lender’s trustee, and
immediately deliver said payments to Lender in their original form as received
from such Account Debtor;

 

Section 5.5                                      Deficiencies.  Any deficiency which exists after disposition
of the Collateral as provided above will be paid immediately by Grantors up to
the maximum amount, if any, of Grantors’ aggregate liability under the Note or
any other Loan Document.  Any excess will
be returned to Grantors, without interest and subject to the rights of third
parties, by Lender as provided in the Loan Documents

 

Section 5.6                                      Sale
or Disposition of Collateral. 
Collect, receive, appropriate and realize upon the Collateral, and sell,
resell, assign, lease, give option or options to purchase, or otherwise dispose
of, transfer and deliver all or any part of the Collateral (or contract to do
any of the foregoing), in one or more parcels at public or private sale or
sales, at any exchange, broker’s board or office of the Lender or elsewhere
upon such terms and conditions as it may deem advisable and at such prices as
it may deem best, for cash or on credit or for future delivery without
assumption of any credit risk.  The
Lender shall have the right upon any such public sale or sales, and, to the
extent permitted by law, upon any such private sale or sales, to purchase the
whole or any part of the Collateral so sold, free of any right or equity of
redemption in any Grantor, which right or equity is hereby waived and released
to the fullest extent permitted by applicable law.  To the fullest extent permitted by applicable
law, each Grantor waives all claims, damages and demands it may acquire against
the Lender arising out of the exercise by them of any rights hereunder.

 

Section 5.7                                      Access
to Leased Premises.  Immediately
enter upon any premises leased by any Grantor for the storage, warehousing or
maintenance of Inventory and remove, take possession and dispose of, or store
at another site, such Inventory in the Lender’s sole discretion.

 

Section 5.8                                      Pledged
Deposits.  Without any necessity on the
Lender’s part to resort to other security or sources of reimbursement for the
Secured Obligations, at any time during the continuance of an Event of Default
and without notice to any Person, exercise rights of set-off against any of the
Pledged Deposits (general or special, time or demand, provisional or final) or
other sums of any Grantor in the possession of or in transit to the Lender for
application to the Secured Obligations, which rights shall be cumulative with
the Lender’s other rights and remedies including other rights of set-off.

 

Section 5.9                                      Grant
of License to Use General Intangibles. 
For the purpose of enabling the Lender to exercise rights and remedies
thereunder during the continuation of an Event of Default, each Grantor hereby
grants to the Lender an irrevocable, nonexclusive license (to the extent
permitted by applicable law, exercisable without payment of royalty or other
compensation to such Grantor) to use, assign, license or sublicense any of the
General Intangibles to the extent permitted by the terms of such General
Intangibles, wherever the same

 

17

 

may be located, including in
such license reasonable access to all media in which any of the General
Intangibles may be recorded or stored and to all computer programs used for the
compilation or printout thereof. 
Notwithstanding the foregoing, the Lender shall have no obligations or
liabilities regarding any or all or the General Intangibles by reason of, or
arising out of, this Agreement.

 

Section 5.10                                Cash
Collateral.  Hold or cause to be
held, as cash collateral, any and all balances and deposits of any Grantor held
by the Lender, and any amounts received in any blocked accounts or any lockbox
accounts, to secure the full and final repayment in cash of all of the Secured
Obligations.

 

Section 5.11                                Specific
Performance.  Each Grantor agrees
that, in addition to all other rights and remedies granted to the Lender in
this Agreement and any other Loan Document, upon the occurrence and during the
continuance of an Event of Default and after giving effect to the notice
requirements (if any) contained in Section 4(b)(i) of the Note and all other
applicable notice and cure periods, the Lender shall be entitled to specific
performance and injunctive and other equitable relief, and each Grantor further
agrees to waive any requirement for the securing or posting of any bond or
other security in connection with the obtaining of any such specific
performance and injunctive or other equitable relief.

 

Section 5.12                                Additional
Liabilities Upon Default.  Upon the
request of the Lender after the occurrence and during the continuance of an
Event of Default, Grantor will promptly:

 

(a)                                  Assembly of
Collateral.  Assemble and make
available to the Lender the Collateral and all records relating thereto at any
place or places specified by the Lender within the continental United States of
America.

 

(b)                                 Secured Party
Access.  Permit the Lender, or the
Lender’s representatives and agents, to enter any premises where all or any
part of the Collateral, or the books and records relating thereto, or both, are
located, to take possession of all or any part of the Collateral and to remove
all or any part of the Collateral.

 

6.                                       WAIVERS,
AMENDMENTS AND REMEDIES.

 

No failure on the part of the Lender to
exercise, and no delay in exercising, any right, power or remedy hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right, power or remedy by the Lender preclude any other or further
exercise thereof or the exercise of any other right, power or remedy.  All remedies hereunder are cumulative and are
not exclusive of any other remedies provided by law.  The Lender shall not be deemed to have waived
any rights hereunder or under any other agreement or instrument unless such
waiver shall be in writing and signed by such parties.

 

7.                                       PROCEEDS;
COLLECTION OF RECEIVABLES.

 

Section 7.1                                      Collection
of Receivables.  The Lender may at
any time, upon the occurrence and during the continuation of an Event of
Default, without notice to any Grantor, elect to enforce collection of any
Receivable, require that the Proceeds of Receivables or other Collateral be
paid directly to the Lender or to any account specified by the Lender and/or
require

 

18

 

that Proceeds of Receivables or
other Collateral received by such Grantor be deposited into any account
specified by the Lender (any account referred to in this sentence being a “Pledged
Account”).  Upon the occurrence and
during the continuation of an Event of Default, each Grantor shall (if
requested to do so by Lender), and/or Lender may, promptly notify the account
debtors or obligors of the Receivables of the Lender’s interest therein and
direct such account debtors or obligors to make payment of all amounts then or
thereafter due under the Receivables directly to the Lender or to any account
specified by the Lender.  Upon the
occurrence and during the continuation of an Event of Default, each Grantor
shall hold in trust for the Lender all amounts and Proceeds received by it with
respect to the Receivables and other Collateral, shall segregate all such
amounts and Proceeds from other funds of such Grantor, and shall at all times
thereafter promptly deliver to the Lender (or into any Pledged Account as the
Lender may specify) all such amounts and Proceeds in the same form as so
received, whether by cash, check, draft or otherwise, with any necessary
endorsements.  Each Grantor will execute
and deliver to the Lender, for delivery by the Lender to each bank or other
financial institution with which it maintains any bank or deposit account (or
if so instructed by the Lender will execute and deliver directly to each such
bank or other financial institution) such notices as the Lender may from time
to time request advising each such bank or other financial institution that
Proceeds deposited to an account during the continuation of an Event of
Default, constitute Pledged Deposits hereunder, subject to the Security Interest
granted hereby, and instructing each such bank or other financial institution
that during the continuation of an Event of Default, each Pledged Account and
all Pledged Deposits are to be maintained by such bank or other financial
institution subject to the absolute dominion and control of the Lender and are
to be delivered, disbursed or otherwise distributed solely in accordance with
the instructions of the Lender, and such Grantor shall take all such other
actions as may otherwise be required under applicable law to perfect the
Security Interest in the Pledged Accounts and Pledged Deposits.

 

Section 7.2                                      Application
of Proceeds.

 

(a)                                  During the
continuance of an Event of Default, the Lender shall have the continuing and
exclusive right to apply or reverse and re-apply any and all payments to any
portion of the Secured Obligations.  To
the extent that a Grantor makes a payment or payments to the Lender or the
Lender receives any payment or proceeds of the Collateral, which payment or
proceeds or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside or required to be repaid to a trustee,
receiver or any other party under any bankruptcy law, state or federal law,
common law or equitable cause, then, to the extent of such payment or proceeds,
the Secured Obligations or part thereof intended to be satisfied and this
Agreement shall be revived and continue in full force and effect, as if such
payment or proceeds had not been received by such party.

 

(b)                                 The proceeds of any
sale of or collection of Collateral, as well as any Collateral consisting of
cash, shall be applied by the Lender first, to the payment of the costs and
expenses of any such sale or collection, including reasonable fees and
disbursements of the Lender’s agents and counsel, and of any judicial
proceeding wherein the same may be made, and of all expenses, liabilities and
advances (to the extent such advances are reasonably made for the protection of
the Collateral or the enforcement of the Lender’s security interest in the
Collateral) made or incurred by the Lender, together with interest thereon,
second, in satisfaction of the Secured Obligations in the order set forth in
the Note, and third, to whomsoever may be lawfully

 

19

 

entitled to receive any
surplus.  Each Grantor shall remain
liable for any deficiency if the proceeds of sale or other disposition of the
Collateral are insufficient to pay the Secured Obligations and the fees and disbursements
of any attorneys employed by the Lender to collect such deficiency.  Upon any sale of the Collateral by the Lender
(including pursuant to a power of sale granted by statute or under a judicial
proceeding), the receipt of the Lender or of the officer making the sale shall
be a sufficient discharge to the purchaser or purchasers of the Collateral so
sold and such purchaser or purchasers shall not be obligated to see to the
application of any part of the purchase money paid over to the Lender or such
officer or be answerable in any way for the misapplication thereof.

 

8.                                       GENERAL
PROVISIONS.

 

Section 8.1                                      Notice
of Disposition of Collateral.  Any
notice of any public sale or the time after which any private sale or other
disposition of all or any part of the Collateral may be made shall be deemed
reasonable if given to each Grantor at least 10 days prior to the time of any
such public sale or the time after which any such private sale or other
disposition may be made.

 

Section 8.2                                      Compromises
and Collection of Collateral.  Each
Grantor recognizes that set-offs, counterclaims, defenses and other claims may
be asserted by obligors with respect to certain of the Receivables, that
certain of the Receivables may be or become uncollectible in whole or in part
and that the expense and probability of success in litigating a disputed
Receivable may exceed the amount that reasonably may be expected to be
recovered with respect to a Receivable. 
In view of the foregoing, each Grantor agrees that the Lender may at any
time and from time to time upon the occurrence and during the continuance of an
Event of Default, compromise with the obligor on any Receivable, accept in full
payment of any Receivable such amount as the Lender in its sole discretion
shall determine or abandon any Receivable, and any such action by the Lender
shall be commercially reasonable so long as the Lender acts in good faith based
on information known to it at the time it takes any such action.

 

Section 8.3                                      Secured
Party Performance of Grantor Secured Liabilities.  Without having any obligation to do so, the
Lender may perform or pay any obligation which any Grantor has agreed to
perform or pay in this Agreement but has not performed or paid on the due date
therefor and such Grantor shall reimburse the Lender for any amounts paid or
incurred pursuant to this Section 9.3. 
Each Grantor’s obligation to reimburse pursuant to the preceding
sentence shall be Secured Obligations payable on demand.

 

Section 8.4                                      Authorization
for Secured Party To Take Certain Action. 
Each Grantor irrevocably authorizes the Lender at any time and from time
to time in the sole discretion of the Lender, and appoints the Lender as its
attorney-in-fact to act on behalf of such Grantor, in the name of such Grantor
or otherwise, from time to time in the Lender’s discretion, to take any action
and to execute any instrument which the Lender may deem necessary or advisable
to accomplish the purposes of this Agreement, including (but as to the matters
described in the following clauses (ii), (iv), (vi), (vii), (viii), (x) and
(xi), only upon the occurrence and during the continuance of an Event of
Default: (i) to execute on behalf of such Grantor as debtor and to file
financing statements, continuation statements and amendments thereto necessary or
desirable in the Lender’s sole discretion to perfect and to maintain the
perfection and priority of the Lender’s

 

20

 

security interest in the
Collateral; (ii) to endorse, deposit and collect any cash, Instruments and
other proceeds of the Collateral; (iii) to file a carbon, photographic or other
reproduction of this Agreement or any financing statement with respect to the
Collateral as a financing statement in such offices as the Lender in its sole
discretion deems necessary or desirable to perfect and to maintain the
perfection and priority of the Lender’s security interest in the Collateral;
(iv) to enforce payment of the Receivables in the name of the Lender or such
Grantor; (v) to cause the proceeds of any Collateral received by the Lender to
be applied to the Secured Obligations as contemplated by the Loan Documents;
(vi) to sign such Grantor’s name on any invoice or bill of lading relating to
any Receivable, on drafts against customers, on schedules and assignments of
Receivables, on notices of assignment, financing statements and other public
records, on verifications of accounts and on notices to customers; (vii) to
notify the post office authorities to change the address for delivery of such
Grantor’s mail to an address designated by the Lender, and to receive, open and
dispose of all mail addressed to such Grantor; (viii) to send requests for
verification of Receivables to customers or account debtors (provided that this
clause shall not limit the Lender’s rights under Section 4.1); (ix) to do any
act or thing which the Lender ought to execute and do under the terms of this
Agreement or which may be required or deemed proper in the exercise of any
rights or powers conferred on the Lender for any of the purposes of this
Agreement; (x) to grant or issue any exclusive or nonexclusive license under
the Collateral to anyone; (xi) to assign, pledge, convey or otherwise transfer
title in or to or dispose of the Collateral to anyone, including assignments,
recordings, registrations and applications therefor in the United States Patent
and Trademark Office, the United States Copyright Office or any similar office
or agency of the United States, any State thereof or any other country or
political subdivision thereof, and to execute and deliver any and all
agreements, documents, instruments of assignment or other papers necessary or
advisable to effect any of the foregoing or the recordation, registration,
filing or perfection thereof; and (xii) to file financing statements,
continuation statements and amendments thereto that describe the Collateral (a)
as all assets of such Grantor or words of similar effect, regardless of whether
any particular asset comprised in the Collateral falls within the scope of
Article 9 of the UCC, or (b) as being of an equal or lesser scope or with
greater detail, and which contain any other information required by Part 5 of
Article 9 of the UCC for the sufficiency or filing office acceptance of any
financing statement, continuation statement or amendment, including (x) whether
such Grantor is an organization, the type of organization and any organization
identification number issued to the Grantor and (y) in the case of a financing
statement filed as a fixture filing or indicating Collateral as as-extracted
collateral or timber to be cut, a sufficient description of the real property
to which the Collateral relates.  Each
Grantor hereby ratifies all that such attorneys shall lawfully do or cause to be
done by virtue hereof and also ratifies its authorization for the Lender to
have filed in any UCC jurisdiction any like initial financing statements or
amendments thereto if filed prior to the date hereof.  All powers, authorizations and agencies
contained in this Agreement are coupled with an interest and are irrevocable
until this Agreement is terminated and the security interests created hereby
are released.  The powers conferred on
the Lender hereunder are solely to protect the Lender’s interests in the
Collateral and shall not impose any duty upon the Lender to exercise any such
powers.  The Lender shall be accountable
only for amounts that they actually receive as a result of the exercise of such
powers, and neither they nor any of their officers, directors, employees or
agents shall be responsible to any Grantor for any act or failure to act
hereunder, except for their own gross negligence or willful misconduct.

 

21

 

Section 8.5                                      Use
and Possession of Certain Premises. 
Upon the occurrence and during the continuance of an Event of Default,
the Lender or its agents or representatives shall be entitled to occupy and use
any premises owned or leased by any Grantor where any of the Collateral or any
records relating to the Collateral are located until the Secured Obligations
are paid in full or until the Collateral is removed therefrom, whichever occurs
first, without any obligation to pay Grantor for such use and occupancy.

 

Section 8.6                                      Standard
of Care.  The Lender’s sole duty with
respect to the custody, safekeeping and physical preservation of the Collateral
in its possession, under Section 9-207 of the UCC or otherwise, shall be to
deal with it in the same manner as the Lender deals with similar property for
its own account.  Neither the Lender nor
any of their respective officers, directors, employees or agents shall be
liable for failure to demand, collect or realize upon any of the Collateral or
for any delay in doing so or shall be under any obligation to sell or otherwise
dispose of any Collateral upon the request of any Grantor or any other person
or to take any other action whatsoever with regard to the Collateral or any
part thereof.

 

Section 8.7                                      Specific
Provisions Regarding Execution and Filing of Financing Statements.  Pursuant to the UCC and any other applicable
law, each Grantor authorizes the Lender to file or record financing statements
and other filing or recording documents or instruments with respect to the
Collateral or to use a generic description such as “all assets” or “all property”
(regardless of whether any particular asset of such Grantor falls within the
scope of Article 9 of the Code or whether any portion of the assets of such
Debtor constitute part of the Collateral) without the signature of such Grantor
in such form and in such offices as the Lender reasonably determines
appropriate to perfect the security interests granted hereunder.  To the extent permitted under the UCC, a
photographic or other reproduction of this Agreement shall be sufficient as a
financing statement or other filing or recording document or instrument for
filing or recording in any jurisdiction.

 

9.                                       MISCELLANEOUS

 

Section 9.1                                      Demand;
Protest; etc.  To the extent
permitted by law, each Grantor waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Lender on which such Grantor may in any way be liable.

 

Section 9.2                                      Security
Interest Absolute.  The obligations
of each Grantor under this Agreement are independent of the obligations under
any of the other Loan Documents, and a separate action or actions may he
brought and prosecuted against any single, or every, Grantor to enforce this
Agreement.  All rights of the Lender
hereunder, the security interests granted hereby, and all Secured Obligations
of each Grantor hereunder, shall be absolute and unconditional irrespective of
(a) any lack of validity or enforceability of any of the Loan Documents,
any agreement with respect to any of the Secured Obligations or any other
agreement or instrument relating to any of the foregoing, (b) any change
in the time, manner or place of payment of, or in any other term of, all or any
of the Secured Obligations, or any other amendment or waiver of or any consent
to any departure from any of the Loan Documents or any other agreement or
instrument, (c) any exchange, release or nonperfection of any other

 

22

 

Collateral, or any release,
amendment or waiver of, or consent to or departure from, any guaranty for all
or any of the Secured Obligations, or (d) any other circumstance which
might otherwise constitute a defense available to, or a discharge of, any
Grantor in respect of the Secured Obligations or in respect of this Agreement.

 

Section 9.3                                      Lender’s
Fees and Expenses; Indemnification.

 

(a)                                  Each Grantor agrees
to pay upon demand to the Lender the amount of any and all out-of-pocket
expenses, including the reasonable fees and expenses of its counsel and of any
experts or agents, which the Lender may reasonably incur in connection with (i)
the administration of this Agreement, (ii) the custody or preservation of, or
the sale of, collection from, or other realization upon, any of the Collateral,
(iii) the exercise or enforcement of any of the rights of the Lender hereunder,
or (iv) the failure by any Grantor to perform or observe any of the provisions
hereof.

 

(b)                                 Without limiting the
foregoing, each Grantor jointly and severally agrees to pay, and to hold the
Lender harmless from, and to indemnify them against, any and all liabilities
with respect to, or resulting from any delay in paying, any and all stamp,
excise, sales or other taxes which may be payable or determined to be payable
with respect to any of the Collateral or in connection with any of the
transactions contemplated by this Agreement, Any such amounts payable as
provided hereunder shall be additional Secured Obligations secured by this
Agreement and the other Loan Documents to which the Grantors are a party.  Each Grantor further jointly and severally
agrees to pay, and to hold the Lender harmless from, and to indemnify them
against, any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever with respect to the execution, delivery, enforcement,
performance and administration of this Agreement, or arising out of or relating
to the Lender’s relationship with any Grantor hereunder or under any other Loan
Document.

 

Section 9.4                                      Binding
Agreement; Assignments.  This
Agreement, and the terms, covenants and conditions hereof, shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.  The
rights and obligations of any Grantor hereunder shall not be assigned without
the prior written consent of Lender.

 

Section 9.5                                      Governing
Law.  This Agreement shall be
governed by and construed in accordance with the domestic laws of the State of
New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of New York.

 

Section 9.6                                      Severability.  In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect, no party hereto shall be required to comply with such provision for so
long as such provision is held to be invalid, illegal or unenforceable and the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired.  The parties shall endeavor in good-faith
negotiations to replace the invalid, illegal and unenforceable provisions with
valid

 

23

 

provisions, the economic effect
of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.

 

Section 9.7                                      Section
Headings; Interpretation.  Section
headings used herein are for convenience only and are not to affect the
construction of, or to be taken into consideration in interpreting, this
Agreement.  The use of the word
“including” or any variation or derivative thereof in this Agreement is by way
of example rather than by limitation. 
The language used in this Agreement will be deemed to be the language
chosen by the Lender and the Grantors to express their mutual intent.  In the event an ambiguity or question of
intent or interpretation arises, this Agreement will be construed as if drafted
jointly by the Grantors and the Lender, and no presumption or burden of proof will
arise favoring or disfavoring any Person by virtue of the authorship of any of
the provisions of this Agreement.

 

Section 9.8                                      Counteparts.  This Agreement may be authenticated in two or
more counterparts, each of which shall constitute an original, but all of
which, when taken together, shall constitute but one instrument, and any of the
parties hereto may authenticate this Agreement by signing any such
counterpart.  This Agreement may be
authenticated by manual signature, facsimile or, if approved in writing by the
Lender and the Grantor, electronic means, all of which shall be equally valid.

 

Section 9.9                                      Termination.

 

(a)                                  At such time as all
of the Secured Obligations (other than any indemnity and similar obligations
which expressly survive termination of this Agreement and are not then due and
payable) have been paid irrevocably and in full, this Agreement and all
obligations (other than those expressly stated to survive such termination) of
the Lender and the Grantors shall terminate, and the Collateral shall be
released from the Security Interests created hereby, all without delivery of
any instrument or performance of any act by any party, and all rights to the
Collateral shall revert to the Grantors. 
At the request and sole expense of any Grantor following any such
termination, the Lender shall deliver to such Grantor any Collateral of such
Grantor then held by the Lender hereunder and shall execute and deliver to such
Grantor or authorize the filing of, but without recourse to or warranty by the
Lender, such Uniform Commercial Code termination statements and similar
documents prepared by such Grantor which such Grantor shall reasonably request
to evidence the release of the Collateral from the security constituted hereby.

 

(b)                                 Notwithstanding anything
to the contrary contained in this Agreement, this Agreement shall remain in
full force and effect and continue to be effective should any petition be filed
by or against any Grantor for liquidation or reorganization, should any Grantor
become insolvent or make an assignment for any benefit of creditors or should a
receiver or trustee be appointed for all or any significant part of any
Grantor’s assets, and shall continue to be effective or be reinstated, as the
case may be, if at any time payment and performance of the Secured Obligations,
or any part thereof, is, pursuant to applicable law, rescinded or reduced in
amount, or must otherwise be restored or returned by any obligee of the Secured
Obligations, whether as a “voidable preference,” “fraudulent conveyance” or
otherwise, all as though such payment, or any part thereof, had not been made.

 

24

 

Section 9.10                                CONSENT TO JURISDICTION AND SERVICE OF PROCESS.  ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY
GRANTOR WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL
COURT OF COMPETENT JURISDICTION IN NEW YORK CITY, NEW YORK AND BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, EACH GRANTOR ACCEPTS FOR ITSELF AND IN CONNECTION
WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE
JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY
JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT TO THE EXTENT
PERMITTED BY LAW, EACH GRANTOR AND THE AGENT ON BEHALF OF ITSELF AND EACH OF
THE LENDERS HEREBY AGREES THAT SERVICE UPON IT BY CERTIFIED MAIL SHALL
CONSTITUTE SUFFICIENT NOTICE AND SERVICE OF PROCESS.  NOTHING HEREIN SHALL AFFECT THE RIGHT TO
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF
THE AGENT TO BRING PROCEEDINGS AGAINST ANY GRANTOR IN THE COURTS OF ANY OTHER
JURISDICTION.

 

Section 9.11                                WAIVER OF JURY TRIAL.  (i) EACH GRANTOR AND (ii) THE
AGENT, ON BEHALF OF ITSELF AND EACH OF THE LENDERS, EACH HEREBY IRREVOCABLY
WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY
LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF
THIS AGREEMENT, OR THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR
ENFORCEMENT HEREOF.  NOTWITHSTANDING ANYTHING
CONTAINED IN THIS AGREEMENT TO THE CONTRARY, NO CLAIM MAY BE MADE BY ANY
GRANTOR AGAINST THE LENDER FOR ANY LOST PROFITS OR ANY SPECIAL, INDIRECT OR
CONSEQUENTIAL DAMAGES IN RESPECT OF ANY BREACH OR WRONGFUL CONDUCT (OTHER THAN
WILLFUL MISCONDUCT OR ACTUAL FRAUD) IN CONNECTION WITH, ARISING OUT OF OR IN
ANY WAY RELATED TO THE TRANSACTIONS CONTEMPLATED HEREUNDER, OR ANY ACT,
OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH; AND EACH GRANTOR HEREBY
WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY SUCH CLAIM FOR ANY SUCH
DAMAGES.  EACH GRANTOR AGREES THAT THIS
SECTION IS A SPECIFIC AND MATERIAL ASPECT OF THIS AGREEMENT AND ACKNOWLEDGES
THAT THE LENDERS WOULD NOT EXTEND TO THE GRANTOR THE LOAN UNDER THE NOTE IF THIS
SECTION WERE NOT PART OF THIS AGREEMENT.

 

Section 9.12                                Notices.

 

All notices and other communications provided
for hereunder shall be in writing (including telegraphic or telecopier
communication) and mailed, telecopied or delivered to:

 

25

 

If to a Grantor:

 

c/o Mattress Holding Corp.

5815 Gulf Freeway

Houston, Texas 77023

Attention:                      Jim
R. Black, Chief Financial Officer

Telecopier:                  (713) 921-4053

 

With a copy to:

 

Jenkens & Gilchrist Parker
Chapin LLP

The Chrysler Building

405 Lexington Avenue

New York, NY 10174

Attention:  Mitchell P. Portnoy, Esq.

Telecopier:  (212) 704-6288

 

If to the Lender:

 

SLN Finance, LLC

1105 North Market Street

Suite 1300

P.O. Box 8985

Wilmington, DE 19899

Attention:                      Kevin
Calhoun and C. Deryl Couch, Esq.

Telecopier:                  (302) 651-8425

 

With a copy to:

 

Jenkens & Gilchrist Parker
Chapin LLP

The Chrysler Building

405 Lexington Avenue

New York, NY 10174

Attention:  Mitchell P. Portnoy, Esq.

Telecopier:  (212) 704-6288

 

or to such other address and/or with such
other copy or copies as the intended recipient may have specified by prior
notice to the notifying party.  All such
notices and other communications shall, when mailed or telecopied, be effective
when deposited in the mails or telecopied, respectively, addressed as aforesaid;
except that notices and other communications to the Lender shall not be
effective until received by the Lender. 
Delivery by telecopier of an executed counterpart of any amendment or
waiver of any provision of any Loan Document shall be effective as delivery of
an original executed counterpart thereof.

 

Section 9.13                                Amendments.  This Agreement can only be amended by a
writing signed by both Lender and each Grantor.

 

Section 9.14                                Acknowledgments.  Grantor acknowledges that:  (a) it has been advised by counsel in
the negotiation, execution and delivery of this Agreement and the other Loan
Documents; (b) the Lender has no fiduciary relationship with or duty to
any Grantor arising out

 

26

 

of or in connection with this
Agreement or any of the other Loan Documents, and the relationship between each
Grantor, on the one hand, and the Lender, on the other hand, in connection
herewith or therewith is solely that of debtor and creditor; and (c) no
joint venture is created hereby or by the Loan Documents or otherwise exists by
virtue of the transactions contemplated hereby among any Grantor and the
Lender.

 

Section 9.15                                Subordination
Agreement.  The terms and provisions
of this Agreement and all security interests granted in connection herewith are
subject in all respects, to the subordination provisions of the Note.

 

[Signature pages follow.]

 

27

 

IN WITNESS
WHEREOF, the parties hereto have executed this General
Security Agreement as of the date first above written.

 

	
   

  	
  GRANTORS:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  MATTRESS HOLDING CORP.,

  	
   

  
	
   

  	
  a Delaware corporation

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jim R.
  Black

  	
   

  	
   

  
	
   

  	
  Name: Jim R.
  Black

  	
   

  
	
   

  	
  Title:
  Secretary and Treasurer

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  MATTRESS FIRM, INC.,

  	
   

  
	
   

  	
  a Delaware corporation

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jim R.
  Black

  	
   

  	
   

  
	
   

  	
  Name: Jim R.
  Black

  	
   

  
	
   

  	
  Title:
  Secretary and Treasurer

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  MATTRESS FIRM INVESTMENT MANAGEMENT, INC.,

  	
   

  
	
   

  	
  an Arizona corporation

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Benjamin S. Emmons

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Benjamin S. Emmons

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  FESTRO INC.,

  	
   

  
	
   

  	
  a Texas corporation

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jim R.
  Black

  	
   

  	
   

  
	
   

  	
  Name: Jim R.
  Black

  	
   

  
	
   

  	
  Title:
  Secretary and Treasurer

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  TEAMEXCEL MANAGEMENT COMPANY,

  	
   

  
	
   

  	
  a Texas corporation

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jim R.
  Black

  	
   

  	
   

  
	
   

  	
  Name: Jim R.
  Black

  	
   

  
	
   

  	
  Title:
  Secretary and Treasurer

  	
   

  
							

 

[SIGNATURE PAGES TO AMENDED AND RESTATED GENERAL SECURITY AGREEMENT]

 

S-1

 

	
   

  	
  MATTRESS FIRM OPERATING, LTD.,

  	
   

  
	
   

  	
  a Texas limited partnership

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Festro, Inc., its general
  partner

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Jim R.
  Black

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
  Jim R. Black

  	
   

  
	
   

  	
   

  	
   

  	
  Title:

  	
  Secretary
  and Treasurer

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  MATTRESS VENTURE INVESTMENT MANAGEMENT,

  LLC,

  	
   

  
	
   

  	
  an Arizona limited liability company

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Benjamin
  S. Emmons

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Benjamin S. Emmons

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  FESTRO II, LLC,

  	
   

  
	
   

  	
  a Texas limited liability company

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jim R.
  Black

  	
   

  	
   

  
	
   

  	
  Name: Jim R.
  Black

  	
   

  
	
   

  	
  Title:
  Secretary and Treasurer

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  THE MATTRESS VENTURE, L.P.,

  	
   

  
	
   

  	
  a Texas limited partnership

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Festro II, LLC, its general
  partner

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Jim R.
  Black

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
  Jim R. Black

  	
   

  
	
   

  	
   

  	
   

  	
  Title:

  	
  Secretary
  and Treasurer

  	
   

  
											

 

S-2

 

	
   

  	
  LENDER:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SLN FINANCE, LLC,

  	
   

  
	
   

  	
  a Delaware limited liability company

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Rodger R. Krouse

  	
   

  	
   

  
	
   

  	
   

  	
  Name: Rodger R. Krouse

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
					

 

S-3

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