Document:

Exhibit 10.1

 

STOCK PURCHASE
AGREEMENT

 

THIS STOCK
PURCHASE AGREEMENT (this “Agreement”)
is made and entered into this 21st day of August, 2008, by and between Billie J. Eustice and the Gary L.
Little Trust  (each a “Seller” and collectively “Sellers”),
and Arkanova Acquisition Corporation (“Buyer”).

 

Background

 

A.                                   Sellers
together, in equal proportions, are the sole record and beneficial owners of
100% of the issued and outstanding shares of the common stock (the “Stock”) of Prism Corporation,
an Oklahoma corporation  (“Prism”);

 

B.                                     Prism
is the sole record and beneficial owner of 100% of the membership interests of Provident Energy Associates of Montana, LLC, a Montana
limited liability company (“Provident”);

 

C.                                     Sellers
desire to sell to Buyer, and Buyer desires to purchase from Sellers, all of the
Stock, upon the terms and subject to the conditions set forth herein.

 

Terms
and Conditions

 

In
consideration of the mutual benefits to be derived from this Agreement, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the parties
hereto hereby agree as follows:

 

1.                                       Sale
and Purchase of the Stock.  Upon the
terms and subject to the conditions stated in this Agreement, at the Closing
(as defined in Section 3(a) hereof), Sellers will sell, transfer,
convey, assign, and deliver to Buyer, free and clear of all liens, claims,
mortgages, charges, security interests, pledges or other encumbrances or
adverse claims or interests of any nature (collectively, “Liens”),
and Buyer thereupon will purchase and acquire from Sellers, all of the right,
title, and interest of Sellers in and to the Stock (the “Transaction”).

 

2.                                       Purchase
Price and Payment.

 

(a)                                  Purchase
Price.  The total purchase price (“Purchase Price”) for the Stock will be an
amount equal to the sum of:

 

(i)                                     Six
Million and No/100 Dollars ($6,000,000.00) plus the amount of the expenditures
by Provident to be paid as provided in Section 2(c) of this Agreement
(including the Earnest Money Deposit, as such term is described in Section 2(b) hereof),
payable by Buyer to Sellers at the Closing by certified check or by wire
transfer of immediately available funds pursuant to wire transfer instructions
which will be provided by Sellers to Buyer (the “Cash Payment”),
and

 

(ii)                                  A
deferred payment payable pursuant to Section 2(d) of this Agreement
(the “Deferred Payment”).

 

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Each Seller
will receive one-half of the Cash Payment (the entire purchase price in the
aggregate) at Closing, and the Deferred Payment, when paid.

 

(b)                                 Earnest
Money Deposit.  Upon execution of
this Agreement by Sellers, Buyer shall pay to Sellers in equal portions, the
amount of One Hundred Thousand and No/100 Dollars ($100,000.00) as a
non-refundable deposit towards the Cash Payment (the “Earnest Money Deposit”).   In the event that the Sellers have satisfied
the conditions to consummate the Transaction set forth in Sections 3(c)(i) and
3(c)(ii), as of the Closing Date (as such term is defined in Section 3(a) hereof),
and the Closing does not occur, through no fault of the Sellers,  then the Earnest Money Deposit will be
forfeited and, without further action, consent or notice, fully released to the
Sellers (in equal proportions).   The
Earnest Money Deposit will be returned to Buyer by Sellers in the event that
the Sellers fail or refuse to consummate the Transaction on the Closing Date
for any reason other than actions or any failure of Buyer to be ready, willing
and able to consummate the Transaction on the Closing Date, including but not
limited to Buyer’s having satisfied the conditions to consummate the
Transaction set forth in Section 3(b)(i) and 3(b)(ii).

 

(c)                                  Well
Expenditure Payment.  As part of the
Purchase Price, Buyer shall pay Sellers, at the Closing as provided in Section 2(a) of
this Agreement, the amount of the expenditures that Provident has made pursuant
to its agreement with the Blackfoot Tribal Council with respect to the wells in
the Two Medicine Cut Bank Sand Unit in Pondera and Glacier Counties, Montana
(the “Unit”), from August 1,
2008, to the Closing Date (the “Well
Expenditure Payment”).

 

(d)                                 Deferred
Inventory Payment

 

(i)                                     At
the Closing, Sellers will provide a written report to Buyer of all gas, oil and
other mineral inventory of Provident or Prism, produced by the Unit and held in
storage tanks or in transit, as of the Closing Date (collectively the “Inventory”).

 

(ii)                                  (ii) 
Buyer will use its best efforts to sell the Inventory at the then current fair
market value, and within a reasonable time not to exceed thirty (30) days
following the Closing.   The Inventory
will be sold on a first-in-first-out basis.  
Within forty-five (45) days following the date Buyer sells the
Inventory, Buyer will deliver to Sellers, in equal portions, the gross proceeds
received from such sale (the “Deferred Payment”),
along with written evidence of the sales price for the Inventory.

 

3.                                       Closing
Matters.

 

(a)                                  The
Closing.   The consummation of the
Transaction (the “Closing”) will
take place at the offices of Munsch, Hardt, Kopf & Harr, P.C., 3800
Lincoln Plaza, 500 N. Akard, Dallas, TX 75201, at 11:00 a.m. CST, on September 4,
2008 (the date of the Closing being herein referred to as the “Closing Date”).   The Closing shall be deemed to be effective
at 12:01 a.m. on the Closing Date.

 

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(b)                                 Conditions
to Sellers’ Obligation to Close.   The obligations of the Sellers to consummate
the Transaction are subject to the satisfaction or waiver by the Sellers (any
such waiver to be evidenced in writing), at or prior to the Closing, of the
following conditions:

 

(i)                                     the
representations and warranties of the Buyer contained in Section 6 of this
Agreement being true and correct in all material respects as of the Closing
Date;

 

(ii)                                  Buyer
having performed the obligations under this Agreement required to be performed
by it at or prior to the Closing pursuant to the terms hereof, including but
not limited to delivery of each document and item, and taking of such actions,
listed in Section 3(d)(ii) of this Agreement; and

 

(iii)                               all
actions to be taken by the Buyer in connection with consummation of the
Transaction and all certificates, opinions, instruments, and other documents
required to effect the Transaction being reasonably satisfactory in form and
substance to the Sellers.

 

(c)                                  Conditions
to the Buyer’s Obligation to Close. 
The obligation of the Buyer to consummate the Transaction is subject to
the satisfaction or waiver by the Buyer (any such waiver to be evidenced in
writing), at or prior to the Closing, of the following conditions:

 

(i)                               the
representations and warranties of the Sellers contained in Section 5 of
this Agreement (subject to any qualifications stated therein), will be true and
correct in all material respects as of the Closing Date;

 

(ii)                            Sellers
shall have performed in all material respects each of Sellers’ obligations
under this Agreement required to be performed by them at or prior to the
Closing pursuant to the terms hereof, including but not limited to delivery of
each document and item, and taking of such actions, listed in Section 3(d)(i) of
this Agreement;

 

(iii)                               there
having been no event or circumstance, which has or will likely have, a material
adverse effect on Prism, Provident or the Transaction;

 

(iv)                              the
results of Buyer’s due diligence review of the assets and liabilities of Prism
and Provident being to its reasonable satisfaction, and

 

(v)                                 all
actions to be taken by the Sellers in connection with consummation of the
transactions contemplated hereby and all certificates, opinions, instruments,
and other documents required to effect the transactions contemplated hereby
will be reasonably satisfactory in form and substance to the Buyer.

 

(d)                                 Deliveries
at the Closing.

 

(i)                                     Deliveries
by Sellers.  Sellers shall deliver,
or cause to be delivered, to Buyer at Closing (a) the original stock
certificates of Prism representing the Stock, together with a stock power or
endorsement duly executed by Sellers for transfer to Buyer on the records of
Prism, (b) a certificate executed by each of Sellers and dated the Closing
Date certifying that the 

 

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conditions set forth in Sections 3(c)(i),
3(c)(ii) and 3(c)(iii) have been fulfilled and, (b) such other
documents as Buyer may reasonably request to consummate the Transaction.

 

(ii)                                  Deliveries
by Buyer.  Buyer shall deliver, or
cause to be delivered, to Sellers at Closing (a) the Cash Payment (less
the Earnest Money Deposit) in accordance with Section 2 hereof, (b) the
Well Expenditure Payment, (c) a certificate executed by an officer of the
Buyer and dated the Closing Date certifying, with respect to the Buyer, as to
its Articles of Organization (or equivalent charter document), the incumbency
and the resolutions adopted by the board of directors of Buyer with respect to
this Agreement and the Transaction, and that the conditions set forth in
Sections 3(b)(i) and 3(b)(ii) have been fulfilled; (d) the
Releases (as such term is defined  in Section 4
of this Agreement), (e) full and complete releases of Sellers and their
respective affiliates and representatives of all liabilities executed by Great
Bear Consulting and Joe Loftis, and (f) such other documents as Sellers
may reasonably request to consummate the Transaction

 

4.                                       Release.   In consideration of the sale of the Stock by
each Seller, and other good and valuable consideration, the sufficiency of
which is hereby acknowledged, effective on the Closing,  Buyer 
shall cause each of Prism and Provident 
to fully and unconditionally release and forever discharge and holds
harmless each Seller and each Seller’s respective heirs, assigns and estates,
from any and all claims, demands, losses, costs, expenses (including reasonable
attorneys’ fees and expenses), obligations, liabilities and or damages of every
kind and nature whatsoever, whether now existing or known, arising out of the
management or operation of the respective businesses and any transaction or
circumstance occurring or existing or related to the period of time prior to
the Closing, relating in any way, directly or indirectly, to the respective
businesses, that Prism or Provident may now have or may hereafter claim to have
against any Seller; provided, however, that, the foregoing release will not
affect any obligations of any Seller to Buyer under this Agreement
(collectively the “Releases”).

 

5.                                       Representations
and Warranties of Sellers.  Except as
disclosed on the Schedules to this Agreement (each of which corresponds to the
appropriate numbered section of this Agreement to which each such disclosure
relates), Sellers individually and separately (not jointly and severally)
represent and warrant to Buyer as of the date of this Agreement and the Closing
Date the matters set forth below.

 

(a)                                  Authorization
of the Transaction.

 

(i)                                     Each
Seller has the necessary legal capacity (in the case of an individual person),
or has the power and authority (if other than an individual person) to execute
and deliver this Agreement and to perform that Seller’s obligations hereunder
and to consummate all of the transactions contemplated hereby, including but
not limited to the transfer, assignment and sale of the Stock.

 

(ii)                                  This
Agreement has been duly executed and delivered by each Seller and constitutes
the legal, valid and binding obligation of each Seller, enforceable against
each Seller in accordance with its terms, except as such enforceability may be
limited by the effect of applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors’ rights generally.

 

(iii)                               The
execution, delivery and performance by the Sellers of this Agreement and the
consummation of the transactions contemplated hereby do not breach 

 

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or constitute
a default under any loan or purchase agreement, indenture, mortgage, deed of
trust, lease, instrument, contract or other agreement binding on or affecting
either Seller or any of his property or assets, the breach of which, either
individually or in the aggregate, could reasonably be expected to have a
material adverse effect on a Seller.

 

(iv)                              No
governmental authorization, and no consent, approval or authorization of, or
notice to, or other action by, any other person, is required for the due
execution, delivery, recordation, filing or performance by either Seller of
this Agreement, or for the Transaction, except for any such authorization or
consent which has been or will be obtained prior to the time at which it is
required to be obtained.

 

(b)                                 Capitalization.   There are 15,000 shares of authorized stock
of Prism, of which 1,000 is issued and outstanding.  500 shares of the Stock are held legally and
beneficially by Billie J. Eustice and 500 shares of the Stock are held legally
and beneficially by the Gary L. Little Trust.  
There are no outstanding rights, options, warrants, conversion rights or
agreements for the purchase, issuance, grant, sale, redemption, assignment,
transfer or acquisition of any shares of Prism’s capital stock, or any profits
interests granted or outstanding.  The
Stock represents all of the issued and outstanding shares of capital stock of
Prism.  All of the shares of Stock are
duly authorized, validly issued, fully paid and nonassessable.  Prism is the sole owner of 100% of the
membership interests of Provident.

 

(c)                                  Title
to the Stock.  Sellers have good and
marketable title to the Stock, free and clear of all Liens.  At the Closing and subject to delivery by
Buyer of those items set forth in Section 3(d)(ii) of this Agreement,
Buyer will receive good and marketable title to the Stock, free and clear of
all Liens.

 

(d)                                 Financial
Statements.  Sellers will deliver to
Buyer as soon as reasonably practical following the execution of this
Agreement, Prism’s unaudited financial statements (including balance sheets,
statements of operations and statements of cash flows) for the one year period
ended June 30, 2008 (the “Financial
Statements”).    The Financial
Statements (a) fairly present the assets, liabilities and financial
condition and results of operations indicated thereby for the period indicated
thereon, and (b) contain and reflect all necessary adjustments for a fair
representation of the Financial Statements as of the date and for the periods
covered thereby.

 

(e)                                  Ownership
of Assets.    The principal asset of
Prism is its ownership of 100% of the membership interests of Provident, and
the sole assets of Provident are (i) all of the leasehold interests
comprising the Two Medicine Cut Bank Sand Unit in Pondera and Glacier Counties,
Montana (the “Leasehold Interests”),
and (ii) all of Provident’s equipment, parts, machinery, fixtures and
improvements located on the Leasehold (collectively the “Unit”).    All furniture fixture and equipment of
Prism will be delivered to or made accessible to Buyer at Closing.

 

(f)                                    Title to Leasehold Interests.  
Provident has good and marketable title to the Leasehold Interests, free
of all Liens, except (i) inchoate operators’ liens attributable to
unbilled joint account expenditures, and (ii) imperfections of title which
do not materially interfere with the use, operation and possession or
materially reduce the value of any particular Leasehold Interests or the
production and sale of hydrocarbons for the account of Provident therefrom.

 

(g)                                 Environmental
and Safety Requirements.   To Sellers’
knowledge, Provident is in material compliance with all applicable
Environmental and Safety Requirements (as defined below) relating to the
Unit.   To Sellers’ knowledge, there are
no outstanding or unaddressed and resolved written communications from any
party with respect to Provident’s failure to comply 

 

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with
Environmental and Safety Requirements relating to any of the Provident’s owned
or leased facilities used in the conduct of its business in connection with the
Unit.  For purposes of this Agreement, “Environmental and Safety Requirements”
means all federal, state, foreign and local laws, rules, regulations,
ordinances, orders, statutes, and requirements relating to public health and
safety, worker health and safety, pollution and protection of the environment
(including without limitation the handling of any polluted, toxic or hazardous
materials), all as amended through the date of this Agreement.    For purposes of this Agreement, “Knowledge” whether capitalized or not,
means the actual awareness of such fact or matter of a Seller.    On or before Closing, Sellers will cause to
be delivered to Buyer any and all written correspondence received by Prism from
BLM / BIA, for Buyer’s review.

 

(h)                                 No
Broker’s Fee.   Buyer will not incur
any liability for any financial advisory fees, brokerage fees, commissions or
finders’ fees due or claimed to be due to any broker, finder, agent,
representative, consultant, or similar person retained by or whose claims arise
from contact with any Seller, Prism or Provident, or any affiliates of a
Seller, as a result of the Closing of the Transaction.

 

(i)                                     Litigation.  Except as listed in Schedule 5(h), there is
no suit, action, claim, investigation, litigation or proceeding pending, or to
any Seller’s knowledge threatened, against or with respect to Prism or
Provident (separately, a “Company”
and collectively, the “Companies’)
or any of their respective businesses or assets.   Neither Company is operating under, subject
to or bound by, and none of their respective assets is subject to or bound by,
any judgment, decree, injunction, writ, prohibition or order of any court or
federal, state, municipal or other governmental body or agency or arbitrator.

 

(j)                                           Disclaimers.  THE EXPRESS REPRESENTATIONS AND WARRANTIES OF
SELLERS CONTAINED HEREIN ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER
REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND
SELLERS EXPRESSLY DISCLAIM ANY AND ALL SUCH OTHER REPRESENTATIONS AND
WARRANTIES.  WITHOUT LIMITATION OF THE
FOREGOING, THE STOCK AND CONSEQUENTLY THE UNIT SHALL BE CONVEYED PURSUANT
HERETO WITHOUT ANY OTHER WARRANTY OR REPRESENTATION WHETHER EXPRESS, IMPLIED,
STATUTORY OR OTHERWISE RELATING TO THE CONDITION, QUANTITY, QUALITY, FITNESS
FOR A PARTICULAR PURPOSE, OR MERCHANTABILITY OF ANY EQUIPMENT OR ITS FITNESS
FOR ANY PURPOSE, AND, EXCEPT AS PROVIDED OTHERWISE HEREIN, WITHOUT ANY OTHER
EXPRESS, IMPLIED, STATUTORY OR OTHER WARRANTY OR REPRESENTATION
WHATSOEVER.  BUYER SHALL HAVE INSPECTED,
OR WAIVED (AND UPON CLOSING SHALL BE DEEMED TO HAVE WAIVED) ITS RIGHT TO
INSPECT, THE UNIT FOR ALL PURPOSES AND SATISFIED ITSELF AS TO ITS PHYSICAL
CONDITION, BOTH SURFACE AND SUBSURFACE. 
BUYER IS RELYING SOLELY UPON ITS OWN INSPECTION OF THE UNIT, AND BUYER
SHALL ACCEPT ALL OF THE SAME IN ITS “AS IS”, “WHERE IS” CONDITION.  ALSO WITHOUT LIMITATION OF THE FOREGOING, BUT
SUBJECT TO THE EXPRESS REPRESENTATIONS MADE IN THIS AGREEMENT ONLY, SELLERS
MAKE NO ADDITIONAL WARRANTY OR REPRESENTATION, EXPRESS, IMPLIED, STATUTORY OR
OTHERWISE, AS TO THE ACCURACY OR COMPLETENESS OF ANY DATA, REPORTS, RECORDS,
PROJECTIONS, INFORMATION OR MATERIALS NOW, HERETOFORE OR HEREAFTER FURNISHED OR
MADE AVAILABLE TO BUYER IN CONNECTION WITH THIS AGREEMENT INCLUDING, WITHOUT
LIMITATION, RELATIVE TO PRICING ASSUMPTIONS, OR QUALITY OR QUANTITY OF 

 

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HYDROCARBON
RESERVES (IF ANY) ATTRIBUTABLE TO THE UNIT OR THE ABILITY OR POTENTIAL OF THE
UNIT TO PRODUCE HYDROCARBONS OR ANY OTHER MATTERS CONTAINED IN ANY MATERIALS
FURNISHED OR MADE AVAILABLE TO BUYER BY SELLERS OR BY SELLERS’ AGENTS OR
REPRESENTATIVES. ANY AND ALL SUCH DATA, RECORDS, REPORTS, PROJECTIONS,
INFORMATION AND OTHER MATERIALS (WRITTEN OR ORAL) FURNISHED BY SELLERS OR
OTHERWISE MADE AVAILABLE OR DISCLOSED TO BUYER ARE PROVIDED BUYER AS A
CONVENIENCE AND SHALL NOT CREATE OR GIVE RISE TO ANY LIABILITY OF OR AGAINST
SELLERS AND ANY RELIANCE ON OR USE OF THE SAME SHALL BE AT BUYER’S SOLE RISK TO
THE MAXIMUM EXTENT PERMITTED BY LAW.

 

6.                                       Representations
and Warranties of Buyer.  Buyer
hereby represents and warrants to Sellers that each of the following statements
is true and correct as of the date of this Agreement and the Closing Date,
unless as otherwise expressly stated herein:

 

(a)                                  Organization
and Good Standing.  Buyer is a
corporation duly formed, validly existing and in good standing under the laws
of the state of Delaware with the corporate power and authority to own its
properties and assets and to carry on its business as it is now being
conducted, and is duly qualified to do business and is in good standing in each
jurisdiction in which its ownership of property or the conduct of its business
requires such qualification.

 

(b)                                 Power.  The Buyer has the requisite corporate power
and authority to execute, deliver and perform this Agreement and to consummate
the transactions contemplated hereby. 
The execution, delivery and performance by the Buyer of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by the manager of Buyer, and no other proceedings, consent
or actions on the part of the Buyer are necessary to authorize the execution,
delivery and performance of this Agreement by the Buyer and the consummation of
the transactions contemplated hereby.

 

(c)                                  Enforcement.  This Agreement has been duly executed and
delivered by Buyer and constitutes the legal, valid and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms, except as such
enforceability may be limited by the effect of applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the enforcement
of creditors’ rights generally.

 

(d)                                 Authorization.  The execution, delivery and performance by
Buyer of this Agreement and the consummation of the transactions contemplated
hereby do not breach or constitute a default under any loan or purchase agreement,
indenture, mortgage, deed of trust, lease, instrument, contract or other
agreement binding on or affecting Buyer or any of his property or assets, the
breach of which, either individually or in the aggregate, could reasonably be
expected to have a material adverse effect on Buyer.

 

(e)                                  Consents
and Approvals.  No governmental
authorization, and no consent, approval or authorization of, or notice to, or
other action by, any other person, is required for the due execution, delivery,
recordation, filing or performance by Buyer of this Agreement, or for any of
the other transactions contemplated hereby, except for any such authorization
or consent which has been or will be obtained prior to the time at which it is
required to be obtained

 

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(f)                                    Litigation.  There is no action, suit, or proceeding
pending or, to the knowledge of Buyer, threatened, which in any way involves or
affects the Buyer, by or before any court, governmental entity or arbitration
panel or any other Person.

 

(g)                                 Available
Financing.  Buyer has readily
available to it adequate financing necessary to consummate the Transaction.

 

(h)                                 Investment
Representations.  Buyer understands
and acknowledges that:

 

(i)                                     Buyer
is acquiring the Stock for its own account for the purpose of investment and
not with a view to the resale or other distribution thereof.  By taking the Stock, it is prepared to
continue to bear the economic risk of such investment for an indefinite period
of time because the Stock has not been registered under the Securities Act of
1933, as amended (the “Act”) or
applicable state securities laws.   As a
result, the Stock must be held until they are registered under the Act and
applicable state securities laws or an exemption from such registration is
available.

 

(ii)                                  Sellers
intend to, and Buyer agrees that Sellers may, place or cause to be placed a
legend on the Stock, stating that they have not been registered under the Act
or any applicable state securities laws and setting forth or referring to the
restrictions on transferability and sale thereof.

 

(iii)                               As
of the Closing Date, Buyer has had an opportunity to discuss Prism’s and
Provident’s business, management and financial affairs with Sellers, has
received all information he has requested from Prism or Provident, as
applicable, and Sellers and believes such information is sufficient to make an
informed decision with respect to his purchase of the Stock.

 

(iv)                              Buyer
possesses the financial resources to bear the risk of economic loss with
respect to his purchase of the Stock. 
Buyer is aware that no guarantees have been or can be made by Sellers or
any of their representatives respecting the future value, if any, of the Stock
or the profitability or success of the business of Prism.

 

(v)                                 Buyer
has such knowledge and experience in financial and business matters that it is
able to evaluate the merits and make an informed investment decision with
respect to his purchase of the Stock.

 

(vi)                              The
offering of the Stock to Buyer was made only through direct, personal
communication between Buyer and Sellers and not through public solicitation or
advertising.

 

(vii)                           At the
time Buyer was offered the Stock to be acquired hereunder, Buyer was and, at
the Closing Date, Buyer is an “accredited investor” as defined in Rule 501(a) under
the Act.

 

(i)                                     Existing
Lawsuit.   Buyer has been informed of
the material facts in connection with the lawsuit referenced as item 2 on
Schedule 5(h) and has had the opportunity to ask to questions and obtain
responses from the management of the Companies regarding such lawsuit.

 

(j)                                     No
Broker’s Fee.   No Seller will not
incur any liability for any financial advisory fees, brokerage fees,
commissions or finders’ fees due or claimed to be due to any broker, finder, 

 

8

 

agent, representative,
consultant, or similar person retained by or whose claims arise from contact
with Buyer, or any affiliates of Buyer, as a result of the Closing of the
Transaction.

 

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7.                                       Other
Covenants and Agreements.

 

(a)                                  Access
to Information.   Immediately
following the execution  and deliver of
this Agreement by the parties, Sellers will cause each Company to provide to
the Buyer and its representatives reasonable access, upon notice and request,
to all offices and other facilities of the applicable Company, and to all books
and records of each Company, and to cause each Company to permit the Buyer to
make such inspections and to make copies of such books and records as it may
reasonably require and shall cause the officers of each Company to furnish the
Buyer with such financial and operating data and other information as the Buyer
may from time to time reasonably request.  
Buyer and Sellers agree and acknowledge that the conditions of closing,
set forth in Sections 3(b) and 3(c) are the sole and exclusive
closing conditions.

 

(b)                                 Conduct of the Business of the Companies
prior to the Closing Date. 
Except as contemplated by this Agreement or as expressly agreed to in writing
by Buyer during the period following the date of this Agreement and until the
earlier of the Closing Date or termination of this Agreement (the “Pre-Closing Period”), Sellers shall
cause the Companies to conduct their respective operations in the ordinary and
usual course of business consistent with past practice, subject to the
following conditions:

 

(i)                                     Ordinary
Course of Business.  The business of the Companies shall be conducted
diligently and only in the ordinary course of business in substantially the
same manner as the Companies have heretofore conducted their businesses and the
Companies shall not make any material change in personnel, operations, finance,
accounting policies, or real or personal property.  Neither Sellers nor the
Companies shall adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization.  The Companies
shall not acquire, or enter into any agreement or commitment to acquire (by
merger, consolidation or acquisition of stock or assets or otherwise) any
corporation, partnership or other business organization, or any interest
therein or division thereof.

 

(ii)                                  Maintenance of Assets.  The Companies shall maintain the
Leasehold Interests in effect and keep their equipment in as good working order
and condition as at present, ordinary wear and tear excepted, consistent with
past practices and shall not sell, lease or otherwise dispose of any of the
Leasehold Interests or their equipment other than in the ordinary course of
business for full value consistent with past practice or as permitted by this
Agreement.  The Companies shall not make any capital expenditures or
capital additions or betterments except pursuant to the agreement
between Provident and  the Blackfoot
Tribal Council with respect to the wells in Unit and except as may be involved in ordinary repairs,
maintenance and replacement of equipment.

 

(iii)                               Insurance of Assets.  The Companies shall keep in full
force and effect present insurance policies or other comparable insurance
coverage with respect to the Leasehold Interests, their equipment and potential
liabilities.

 

(iv)                              Contracts and Commitments.  The Companies shall not make or
renew, extend, amend, modify, or waive any material provisions of any lease,
contract or commitment or relinquish or waive any material contract rights or
agree to the termination of any lease or material contract except in the
ordinary course of business.  The Companies shall use their commercially
reasonable efforts to perform all obligations under agreements relating to or
affecting their assets or their respective businesses.  The 

 

10

 

Companies shall not sell,
transfer, or otherwise dispose of any material part of their assets.

 

(v)                                 Debts and Liabilities.  The Companies shall not (i) create
or incur any liabilities other than current liabilities incurred in the
ordinary course of business; (ii) discharge or satisfy any lien, charge,
encumbrance, nor pay any obligation or liability, absolute or contingent,
except liabilities incurred in the ordinary course of business; (iii) assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person; (iv) make
any loans, advances or capital contributions to, or investments in, any other
person; (v) enter into or modify any contract to do any of the foregoing; (vi) pledge
or otherwise encumber the Stock; or (vii) mortgage or pledge any of their
assets, tangible or intangible.

 

(vi)                              Corporate Documents.  The Companies shall not amend their
respective Certificates of Organization or other governing documents.

 

(vii)                           Maintenance of Business Organization.  The Companies shall use their
respective commercially reasonable efforts to maintain and preserve their
respective business organizations intact and retain in their employ their
current employees.

 

(viii)                        Goodwill.  The Companies shall use their respective commercially
reasonable efforts to preserve the goodwill of their respective surface owners,
suppliers, customers, and those having business relations with the Companies
and shall use their respective best efforts to retain their relationship with
all of such persons or entities.

 

(ix)                                Litigation.  The Companies shall not institute, settle, or agree to settle
any action or proceeding pending before any court or governmental body or take
any other action with respect to existing litigation without prior consultation
with Buyer and its legal counsel.

 

(x)                                   Conflicts.  The Companies shall not enter into any transactions or take any
acts that if perfected or performed prior to the Closing Date, would constitute
a breach of the representations, warranties and agreements of Sellers contained
herein.

 

(xi)                                Capital Stock.  Except as consistent with this
Agreement, the Companies shall not: (i) declare or pay any dividend
(whether in cash, stock or property or any combination thereof) on or make any
other distribution upon, or purchase, retire, or redeem any shares of their
common stock, or set aside any funds for any such purpose; (ii) split,
combine or reclassify any shares of their capital stock, or (iii) purchase
or redeem or otherwise acquire any outstanding shares of capital stock or
securities convertible into any such shares, or any rights, warrants or options
to acquire any such shares or convertible securities.  In addition, the
Companies shall not issue or sell or obligate themselves to issue or sell any
additional shares of their capital stock, whether or not such shares have been
previously authorized or issued, or issue or sell any warrants, rights, or
options to acquire any such shares, or to acquire any stock of any corporation
or any interest in any business enterprise.

 

(xii)                             Tax Returns.  The Companies shall not amend any Tax Return or make any Tax
election or settle or compromise any federal, state, local or foreign Tax
liability material to the Companies.

 

11

 

(xiii)         Acquisition Proposals.  From and after the date of this
Agreement until the earlier of the Closing or the termination of this
Agreement, none of the Companies, Sellers or any affiliate, director, officer,
manager, employee, or representative of either of them shall, directly or
indirectly, (i) solicit, initiate, or knowingly encourage any Acquisition
Proposal (as hereinafter defined) or (ii) engage in discussions or
negotiations with, or disclose any nonpublic information relating to the
Companies or the their businesses to, any person that is considering making or
has made an Acquisition Proposal.  Sellers and the Companies shall
immediately cease and cause to be terminated any existing activities,
discussions, or negotiations with any persons conducted heretofore with respect
to any Acquisition Proposal and shall promptly request each such person who has
heretofore entered into a confidentiality agreement in connection with an
Acquisition Proposal to return to Sellers and the Companies all confidential
information heretofore furnished to such person by or on behalf of Sellers or
the Companies.  If Sellers shall hereafter receive any Acquisition
Proposal, Sellers shall immediately communicate the terms of such proposal to
Buyer.  The term “Acquisition Proposal,”
as used in this Paragraph 7(b)(xiii), means any offer or proposal for, or any
indication of interest in, a merger or other business combination involving the
Companies or the acquisition of any equity interest in the Companies, or any of
their assets other than the Transaction.

 

(c)           Confidentiality.  Prior to the Closing and after any
termination of this Agreement, Buyer will hold, and will cause its officers,
directors, employees, accountants, counsel, consultants, advisors and agents to
hold, in confidence, unless compelled to disclose by judicial or administrative
process or by other laws, all confidential documents and information concerning
the Companies and the Sellers furnished to the Buyer in connection with the
Transaction, except to the extent that the information can be shown to have
been (a) previously known on a nonconfidential basis by the party, (b) in
the public domain through no fault of the party or (c) later lawfully
acquired by such party from sources other than the Companies or the Sellers;
provided, however, that the Buyer may disclose information (i) to its
officers, directors, employees, accountants, counsel, consultants, advisors and
agents with a need to know such information in connection with the transactions
contemplated by this Agreement, so long as those persons are informed by the
Buyer of the confidential nature of the information and are directed by the
Buyer to treat such information confidentially, and (ii)  Buyer and its
parent may disclose certain matters and information regarding the Transaction
to the U.S. Securities and Exchange Commission (the “SEC”), as is necessary to comply with the reporting
requirements of the U.S. Securities and Exchange Act of 1934, as amended (the “34 Act”), or the rules and regulations
promulgated thereunder by the SEC; provided, however that Buyer first provide
written notice to Seller of the information to be disclosed.   If this Agreement is terminated, the Buyer
will, and will cause its officers, directors, employees, accountants, counsel,
consultants, advisors and agents to, destroy or deliver to the Sellers, upon
request, all documents and other materials, and all copies thereof, obtained
from the Companies and the Sellers in connection with this Agreement that are
subject to this confidentiality requirement.  
The terms of this Section 7(c) will survive termination of the
Agreement.

 

(d)           Public Announcements.  No party hereto shall issue, make or cause
the publication of any press release or other announcement with respect to this
Agreement or the transactions contemplated hereby, or otherwise make and
disclosures relating thereto, without the prior written consent of the other
party, such consent not to be unreasonably withheld or delayed; provided,
however, that such consent shall not be required where such release or
announcement is required by applicable law or the rules and regulations
promulgated by the SEC, in which event 

 

12

 

the party so
required to issue such release or announcement shall endeavor, wherever
possible, to furnish an advance copy of the proposed release to the other
party.

 

(e)           Other Actions.  Each of the parties hereto will use their
respective collective reasonable efforts to (i) take, or cause to be taken,
all actions, (ii) do, or cause to be done, all things, and (iii) execute
and deliver all such documents; instruments and other papers, as in each case
may be necessary, proper or advisable under applicable laws, or reasonably
required to in order to carry out the terms and provisions of this Agreement,
to satisfy each of the conditions to the parties obligations under Section 3
of this Agreement and to consummate and make effective the Transaction.

 

(f)            Dividends.  Sellers agree to waive any right to receive
any accrued but unpaid dividends on the Stock as of the Closing Date.

 

(g)           Pre-Closing
Distributions.  Buyer acknowledges
and agrees that Sellers may cause each Company to distribute substantially all
of their cash and accounts receivable to Sellers and that such distribution has
been contemplated by Buyer in connection with its determination of the Purchase
Price; provided, however, that at Closing, the Companies will retain an amount
of current accounts receivable equal to, at minimum, the amount of accounts
payable of the Companies as of the Closing Date.

 

(h)           Defense of Claims.  After the Closing, if Prism or Provident
becomes a defendant or counter-defendant in connection with a lawsuit with
respect to the matter described in item 1 of Schedule 5(h) and for which
Buyer is seeking indemnification pursuant to Section 8, then Buyer agrees
to cause Prism or Provident, as applicable, to vigorously defend against the
claims made in such lawsuit with its commercially reasonable best efforts.

 

8.             Indemnification.

 

(a)           Survival; Right to
Indemnification.  All
representations, warranties, covenants and obligations of the parties contained
in this Agreement and in any document or instrument executed and delivered in
connection herewith shall survive the Closing, regardless of any investigation
made by the parties hereto.  This Section 8
shall have no effect upon any other obligation of the parties hereto, whether
to be performed before or after the Closing. 
No party to this Agreement shall have liability for indemnification to
any other party with respect to any representation or warranty unless, on or
before the date eighteen (18) months following of the Closing Date, the party
seeking indemnification notifies the other parties of a claim in writing
specifying the basis thereof in reasonable detail to the extent then known by
the party seeking indemnification.

 

(b)           Sellers’
Indemnification.   Sellers,
individually and separately (not jointly and severally), hereby indemnify and
hold harmless Buyer, and each of its representatives, employees, officers,
directors; stockholders, controlling persons and affiliates (collectively, the “Buyer Indemnified Persons”) from, and will pay to Buyer
Indemnified Persons, the amount of, any loss, liability, claim, damage (including,
without limitation, incidental and consequential damages), cost, expense
(including; without limitation, interest, penalties, costs of investigation and
defense and the reasonable fees and expenses of attorneys and other
professional experts) or diminution of value, whether or not involving a
third-party claim (collectively, “Damages”),
directly or indirectly arising from, attributable to or in connection with:

 

13

 

(i)            any material
representation or warranty made by a Seller in this Agreement or any of the
Sellers’ deliveries at the Closing, that is, or was at the time made,
materially false or inaccurate, or any breach of, or misrepresentation with
respect to, any such representation or warranty;

 

(ii)           any breach by a Seller
of any material covenant, agreement or obligation of the Sellers contained in
this Agreement;

 

(iii)          the claim by Production
and Maintenance, Inc. (“PMI”) for a
bonus equal to 5% of the net profit of the Unit under that certain Management
and Operations Agreement dated October 1, 1997 between PMI and Provident
and more particularly described in Exhibit A attached hereto.

 

Notwithstanding anything to the contrary
contained in this Agreement, Buyer acknowledges and agrees that no Seller will
be responsible as an indemnifying party in an amount in excess of the lesser of
(i) the product of (x) the Damages sought and (y) such Seller’s
proportionate ownership of the Shares immediately prior to Closing, or (ii) the
amount of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00).   Further, no Seller will be responsible for
any amount in connection with Damages arising from the other Seller’s breach of
his representation at Section 5(a) of this Agreement.  Notwithstanding the foregoing, or anything
else to the contrary, no Seller will have any liability for indemnification
with respect to the matters described in this Section 8(b) until the
total of all damages with respect to such matters exceeds Fifty Thousand and
No/100 Dollars ($50,000.00) (the “Deductible Amount”),
and then only to the extent such indemnified Damages exceed the applicable
Deductible Amount.   Anything to the
contrary notwithstanding, the Sellers aggregate liability with respect to
Damages and their indemnification may not exceed Five Hundred Thousand and
No/100 Dollars ($500,000.00) (the “Maximum Amount”).

 

(c)           Buyer’s
Indemnification.  Buyer agrees to
indemnify and hold each Seller and each Seller’s respective nominees,
successors, heirs, assigns, trustees, agents, employees and beneficiaries
harmless from any and all third-party liabilities, claims, causes of action,
penalties, demands, and expenses of any kind or nature whatsoever (including
without limitation court costs and attorneys’ fees) arising out of, resulting from,
relating or incident to (i) any material representation or warranty made
by Buyer in this Agreement, that is, or was at the time made, materially false
or inaccurate, or any breach of, or misrepresentation with respect to, any such
representation or warranty; (ii) any breach by Buyer  of any material covenant, agreement or
obligation of the Buyer contained in this Agreement, (iii)  the use,
ownership or operation of Prism, Provident and the Unit;  (iv) the business of either Company, (v) 
the development, maintenance or operation of the Unit during Buyer’s ownership
thereof, and (vi) the Companies’ lawsuit with the Bullington Group,
including, but not limited to, any past, present or future cost, expense or
damages related to such dispute and the Listing Broker Services Agreement that
is a part thereof and claims arising therefrom. 
Buyer shall have no liability for indemnification with respect to any
representation or warranty unless, on or before the date eighteen (18) months
following of the Closing Date, Sellers notify Buyer of a claim specifying the
basis thereof in reasonable detail to the extent then known by Sellers.

 

(d)           Procedure for
Indemnification; Third Party Claims.

 

(i)            Promptly after receipt
by an indemnified party under Section 8(b) or (c) of a written
notice (the “Notice of Claim”) of
the commencement of any action, suit or proceeding against it, or written
threat thereof, such indemnified party will, if a claim is 

 

14

 

to be made
against an indemnifying party under either of said sections, as applicable,
give notice to the indemnifying party of the commencement of such action, suit
or proceeding.  The indemnified party
shall furnish to the indemnifying party in reasonable detail such information
as the indemnified party may have with respect to such indemnification claims
(including copies of any summons, complaint or other pleading which may have
been served on it and any written claim, demand, invoice, billing or other
document evidencing or assenting the same). 
Subject to the limitations set forth in this Section 8, no failure
or delay by the indemnified party in the performance of the foregoing shall
reduce or otherwise affect the obligation of the indemnifying party to
indemnify and hold the indemnified party harmless except to the extent that
such failure or delay shall have materially and adversely affected the
indemnifying party’s ability to defend against, settle or satisfy any action,
suit or proceeding the claim for which the indemnified party is entitled to
indemnification hereunder.

 

(ii)           If the claim or demand
set forth in the Notice of Claim given by the indemnified party is a claim or
demand asserted by a third party, the indemnifying party shall have 30 days
after the Date of Notice of Claim to notify the indemnified party in writing of
its election to defend such third party claim or demand on behalf of the
indemnified party (the “Notice Period”);
provided, however, that the indemnified party is authorized to file any motion,
answer or other pleading which it deems necessary or appropriate to protect its
interests during the Notice Period.  If
the indemnifying party elects to defend such third party claim or demand, the
indemnified party shall make available to the indemnifying party and its agents
and representatives all records and other materials which are reasonably
required in the defense of such third party claim or demand and shall otherwise
cooperate (at the sole cost and expense of the indemnifying party) with, and assist
(at the sole cost and expense of the indemnifying party) the indemnifying party
in the defense of, such third party claim or demand, and so long as the
indemnifying party is diligently defending such third party claim in good
faith, the indemnified party shall not pay, settle or compromise such third
party claim or demand.  The indemnified
party has the right to employ counsel separate from counsel employed by the
indemnifying party in any such action and to participate therein, but the fees
and expenses of such counsel will be at the indemnified party’s own expense,
unless (a) the employment thereof has been specifically authorized by the
indemnifying party, (b) such indemnified party will have been advised by
counsel reasonably satisfactory to the indemnifying party that there may be one
or more legal defenses available to it that are different from or additional to
those available to the indemnifying party and in the reasonable judgment of
such counsel it is advisable for such Indemnified Party to employ separate
counsel, or (c) the indemnifying party has failed to assume the defense of
such action and employ counsel reasonably satisfactory to the indemnified
party, in which case the fees will be paid by the indemnifying party.  If the indemnifying party assumed the defense
of any claim or proceeding in accordance with this Section 8(d)(ii), the
indemnifying party will be authorized to consent to a settlement of, or the
entry of any judgment arising from, any such claim or proceeding, with the
prior written consent of such indemnified party, not to be unreasonably
withheld; provided, however, that the indemnifying party is not authorized to
encumber any of the assets of any indemnified party or to agree to any
restriction that would apply to any indemnified party or to its conduct of
business; and provided further, that a condition to any such settlement is a
complete release of such indemnified party and its affiliates, directors,
officers, employees and agents with respect to such claim, including any reasonably
foreseeable collateral consequences thereof.

 

15

 

(iii)          If the indemnifying
party does not elect to defend such third party claim or demand or does not
defend such third party claim or demand in good faith, the indemnified party
shall have the right, in addition to any other right or remedy it may have
hereunder at the indemnifying party’s expense, to defend such third party claim
or demand.  The failure of the
indemnified party to notify the indemnifying party as provided herein will not
relieve the indemnifying party of its obligations hereunder except to the
extent that the indemnifying party is actually prejudiced by such failure to
notify.

 

(iv)          The term “Date of Notice of Claim” shall mean the date
the Notice of Claim is effective pursuant to this Agreement.

 

(e)           Exclusive Remedies;
Limitations.  Notwithstanding
anything to the contrary contained herein, the remedies provided in this Section 8
are the exclusive remedies of the parties to this Agreement for breach of any
representations, warranties, covenants or agreement in this Agreement and limit
any other remedies that may be available to any indemnified party.  No Seller shall be jointly and severally liable
for any Damages pursuant to this Section 8.

 

(f)            No Further
Adjustments.  Following the
adjustments under subsection (c) above, no further adjustments shall be
made under this section, unless agreed to in writing between Buyer and Sellers.

 

9.             Miscellaneous
Provisions.

 

(a)           No Third Party Beneficiaries.  Nothing in this Agreement shall confer any
rights upon any person or entity other than the parties hereto and their
respective heirs, successors and permitted assigns.

 

(b)           Costs and Expenses.  Buyer shall bear all of Buyer and Sellers’
costs and expenses (including, but not limited to, attorney’s fees) incurred in
connection with the negotiation, preparation, execution, and Closing of this
Agreement, regardless of whether this Agreement is subsequently terminated.

 

(c)           Notices.  Any notice provided or
permitted to be given under this Agreement shall be in writing, and may be
served by personal delivery, by telecopy or similar facsimile means, by express
courier or delivery service, or by depositing same in the mail, addressed to
the party to be notified, postage prepaid, and registered or certified with a
return receipt requested.  Notice
deposited in the mail in the manner hereinabove described shall be deemed to
have been given and received on the date of the delivery (or earliest attempted
delivery) as shown on the return receipt or returned envelope, whichever is
applicable.  Notice served in any other
manner shall be deemed to have been given and received only if and when
actually received by the addressee (except that notice given by telecopy or
similar facsimile means shall be deemed given and received upon receipt only if
received during, normal business hours and if received other than during normal
business hours shall be deemed received as of the opening of business on the
next Business Day).

 

For purposes of any notice
provided or permitted to be given under this Agreement, the addresses of the
parties shall be as follows:

 

If to Sellers:

 

16

 

Billie J. Eustice

2526 I East 71st Street

Tulsa, OK 
74136

Facsimile No.:

 

17

 

and

                

The Gary L. Little Trust

2526 I East 71st Street

Tulsa, OK 
74136

Attn: Glen Stoner, Trustee

Facsimile No.:

 

with a copy to:

 

Munsch, Hardt, Kopf & Harr, P.C.

3800 Lincoln Plaza

500 N. Akard Street

Dallas, TX  75201

Attn:  Mark L. Nastri

Facsimile No.:  214-978-5311

 

If to Buyer:

 

Arkanova Acquisition Corporation

21 Waterway Avenue

Suite 300

The Woodlands, TX

Attention: Pierre Mulacek

Facsimile No.:  281-362-2788

 

With a copy to:

 

Snell Wylie & Tibbals, P.C.

8150 North Central Expressway

Suite 1800

Dallas, TX 75206

Attention:  Phillip A. Wylie

Facsimile No.:  214-691-2501

 

Each
party shall have the right, upon giving 10 days prior notice to the other in
the manner hereinabove provided, to change its address for purposes of notice.

 

(d)           Binding Effect;
Assignability.  This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, representatives, successors, and assigns; provided that no
party may assign its rights and obligations under this Agreement without the
prior written consent of the other parties hereto.

 

(e)           Amendments and
Waivers.  The provisions of this
Agreement may not be amended, modified, supplemented or terminated, and waivers
or consents to departures from the provisions hereof may not be given, without
the written consent of each of the parties hereto.

 

(f)            Severability.  All agreements and covenants contained herein
are severable and, in the event any of them shall be held to be invalid by any
competent court, this Agreement shall be interpreted as if such invalid
agreements or covenants were not contained herein.  Should any court or other legally constituted
authority determine that for any such agreement or covenant to 

 

18

 

be effective
that it must be modified to limit its duration or scope, the parties hereto
shall consider such agreement or covenant to be amended or modified with
respect to duration and scope so as to comply with the orders of any such court
or other legally constituted authority, and as to all other portions of such
agreement or covenant they shall remain in full force and effect as originally
written.

 

(g)           Further Assurances.  After the date hereof, each party hereto
shall, at the request of any other party hereto, furnish, execute, and deliver
such additional documents and instruments and further assurances as may be
reasonably necessary to carry out the purposes and intent of this Agreement.

 

(h)           No Sales Taxes.  No sales, transfer or similar tax will be
collected at the Closing from Buyer in connection with this transaction.  If, however, this transaction is later deemed
to be subject to sales, transfer or similar tax, for any reason, Buyer agrees
to be solely responsible, and shall indemnify and hold Sellers (and their
affiliates and any directors, officers, employees, attorneys, contractors,
agents, and attorneys) harmless, for any and all sales, transfer or other
similar taxes (including related penalty, interest or legal costs) due by
virtue of this transaction on the Stock transferred pursuant hereto and the
Buyer shall remit such taxes at that time. 
Sellers and Buyer agree to cooperate with each other in demonstrating
that the requirements for exemptions from such taxes have been met.

 

(i)            Entire Agreement.  This Agreement and the exhibits hereto
constitute the entire agreement between the parties with respect to the subject
matter hereof, and supersede all prior agreements and understandings between
such parties with respect to such subject matter.

 

(j)            Governing Law;
Venue.  This Agreement must be
construed and enforced in accordance with, and all questions concerning the
construction, validity, interpretation and performance of this Agreement are
governed by, the laws of the State of Oklahoma, without giving effect to
provisions thereof regarding conflicts of law.

 

(k)         Survival of
Representations and Warranties.  The
representations and warranties set forth in Section 5 and Section 6
shall survive for a period of 18 months after Closing.   The covenants set forth in Sections
7(c),  8 and this Section 9 will
survive termination of this Agreement until the end of the applicable statute
of limitations period.

 

(l)            Multiple
Counterpart.  This Agreement may be
executed in multiple counterparts, each of which shall constitute an original
and all of which shall constitute one document; and furthermore, a facsimile
signature shall be deemed an original.

 

(m)          Termination.

 

(i)            This Agreement may, by
written notice given at or prior to the Closing in the manner provided in Section 9(c) hereof,
be terminated or abandoned:

 

(a)           at any time at or prior
to the Closing by mutual consent of Seller and Buyer;

 

(b)           at any time at or after
September 4, 2008, by Seller or Buyer if the Closing shall not have
occurred by such date;

 

19

 

(c)           at any time by Buyer if
a material default or breach shall be made by Seller with respect to the due
and timely performance of the covenants and agreements, or with respect to the
correctness of or due compliance with any of its representations and
warranties, contained herein and such default or breach cannot be cured and has
not been waived; or

 

(d)           at any time by Sellers
if a material default or breach shall be made by Buyer with respect to the due
and timely performance of the covenants and agreements, or with respect to the
correctness of or due compliance with any of its representations and
warranties, contained herein and such default or breach cannot be cured and has
not been waived;

 

provided, however, no such
party may exercise any right of termination pursuant to this Section 9(m)(i) if
the event giving rise to such termination right shall be due to the willful
failure of such party to perform or observe in any material respect any of the
covenants or agreements set forth herein to be performed or observed by such
party.

 

(ii)           In the event of
termination of this Agreement pursuant to Section 9(m)(i) (a),
9(m)(i)(b) or 9(m)(i)(d), the Earnest Money Deposit will be forfeited to
Sellers (in equal proportions) by Buyer, and this Agreement will forthwith
become void and there will be no liability or obligation on the part of Buyer,
Sellers, or their respective officers, directors or shareholders, except that
Sections 7(c), 8, 9(b), 9(c) and this Section 9(m) will survive
any termination or expiration of this Agreement.

 

(n)           As used in this
Agreement, the term “Business Day”
means a day which is not a Saturday, Sunday or legal holiday.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

20

 

Signatures

 

To evidence
the binding effect of the foregoing terms and conditions, the parties hereto
have caused this Agreement to be executed and delivered as of, but not
necessarily on, the date first above written.

 

 

	
   

  	
  Sellers:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Billie J. Eustice

  
	
   

  	
  Billie J. Eustice, Individually

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  THE GARY L. LITTLE TRUST

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Glen Stoner

  
	
   

  	
   

  	
  Glen Stoner, Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Buyer:

  
	
   

  	
   

  
	
   

  	
  ARKANOVA ACQUISITION CORPORTION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Pierre Mulacek

  
	
   

  	
   

  	
  Pierre Mulacek, President

  

 

21

 

Schedule
5(h)

 

1.             There have been
contractual agreements in the past between Provident and Production and Manufacturing, Inc.,
an independent contractor, concerning operational activities related to the
Unit, which include a Management and Operations Agreement dated October 1,
1997., as amended.  It is Sellers’,
Provident’s and Prism’s position that they are not subject to the 5% net
profits terms of said Management and Operations Agreement.

 

2.             The Companies
are  the Plaintiffs in a lawsuit  filed in the United States District Court for
the District of Montana, Great Falls Division, against Murphy Phillips,
individually, as Executor of the Estate of Floyd Fullingim and as Trustee of
the Ford  and Myrtle Fullingim Trust,
Wallace Bullington, O.O “Red” Thompson and Montex Energy Technologies, Inc.
involving a Listing Agreement relating to the sale of Provident’s oil and gas
properties.  It is Sellers’, Prism’s and
Provident’s position that this Listing Agreement has expired and is
unenforceable.  It is the position of the
Defendants that the Listing Agreement has not expired.

 

22Exhibit 10.1

 

AGENCY AGREEMENT

 

This
Agency Agreement (this “Agreement”) is made as of August 13, 2008,
by and between Linens Holding Co., a Delaware corporation, with a principal
place of business at 6 Brighton Road, Clifton, NJ, and its affiliated debtors
and debtors-in-possession (collectively, the “Merchant”) and a joint
venture comprised of Gordon Brothers Retail Partners, LLC, a Delaware limited
liability company and Hilco Merchant Resources, LLC, a Delaware joint venture
(the “Agent”).

 

R E C I T A L S

 

WHEREAS, on May 2, 2008
(the “Petition Date”), each entity comprising Merchant filed a voluntary
petition for relief under Chapter 11 of Title 11, United States Code, 11 U.S.C.
§§ 101-1330 (the “Bankruptcy Code”) in the United States Bankruptcy
Court for the District of Delaware (the “Bankruptcy Court”), Case No. 08-10832
(CSS) (the “Bankruptcy Case”);

 

WHEREAS, the Merchant operates retail stores
in the United States and desires that the Agent act as the Merchant’s exclusive
agent for the limited purposes of: (a) selling all of the Merchandise (as
hereinafter defined) located in Merchant’s retail store location(s) identified
on Exhibit 1A attached hereto (each individually a “Store,”
and collectively the “Stores”), and certain of the Merchandise located
at Merchant’s distribution centers that has been or will be transferred by
Merchant to the Stores, “), and subject to Merchant’s exercise of the
Additional Stores Inclusion Option, one or more of the Additional Stores
identified in Exhibit 5.5 hereof by means of a promotional, store closing, or similar sale (as further
described below, the “Sale”); and (b) disposing of the Owned
FF&E in the Stores; and

 

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

 

Section 1.                                            Defined Terms.  The
terms set forth below are defined in the referenced sections of this Agreement:

 

	
  Defined Term

  	
   

  	
  Section Reference

  
	
   

  	
   

  	
   

  
	
  Ad Hoc Noteholder Committee

  	
   

  	
  Section 2.4(b)

  
	
  Adjustment Amount

  	
   

  	
  Section 3.3(a)

  
	
  Agency Accounts

  	
   

  	
  Section 7.2(a)

  
	
  Agency Documents

  	
   

  	
  Section 11.1(b)

  
	
  Agent

  	
   

  	
  Preamble

  
	
  Agent Indemnified Parties

  	
   

  	
  Section 13.1

  
	
  Agent’s Fee

  	
   

  	
  Section 3.1(b)

  
	
  Applicable Cost Value

  	
   

  	
  Section 5.3(a)

  
	
  Applicable General Laws

  	
   

  	
  Section 2(c)

  
	
  Approval Order

  	
   

  	
  Section 2(b)

  

 

 

	
  Auction Order

  	
   

  	
  Recitals

  
	
  Bankruptcy Case

  	
   

  	
  Recitals

  
	
  Bankruptcy Court

  	
   

  	
  Recitals

  
	
  Bankruptcy Code

  	
   

  	
  Recitals, Section 2(c)

  
	
  Beneficiaries

  	
   

  	
  Section 3.4

  
	
  Benefits Cap

  	
   

  	
  Section 4.1(b)

  
	
  Bidding Procedures

  	
   

  	
  Section 15.11

  
	
  Break-Up Fee

  	
   

  	
  Section 15.12

  
	
  Central Service Expenses

  	
   

  	
  Section 4.1(i)

  
	
  Cost File

  	
   

  	
  Section 5.3(a)

  
	
  Cost Factor

  	
   

  	
  Section 11.1(m)

  
	
  Cost Factor Threshold

  	
   

  	
  Section 11.1(m)

  
	
  Cost Value

  	
   

  	
  Section 5.3(a)

  
	
  Court

  	
   

  	
  Section 2(b)

  
	
  Defective Merchandise

  	
   

  	
  Section 5.2(b)

  
	
  Designated Deposit Accounts

  	
   

  	
  Sections 7.2(b)

  
	
  DIP Orders

  	
   

  	
  Section 2.4(b)

  
	
  Display Merchandise

  	
   

  	
  Section 5.2(b)

  
	
  Distribution Center Merchandise

  	
   

  	
  Section 5.2(b)

  
	
  Domestic Merchandise

  	
   

  	
  Section 5.2(b)

  
	
  Estimated Guaranteed Amount

  	
   

  	
  Section 3.3(a)

  
	
  Events of Default

  	
   

  	
  Section 14

  
	
  Excluded Benefits

  	
   

  	
  Section 4.1(ii)

  
	
  Excluded Defective Merchandise

  	
   

  	
  Section 5.2(b)

  
	
  Excluded Price Adjustments

  	
   

  	
  Section 11.1(m)

  
	
  Expenses

  	
   

  	
  Section 4.1

  
	
  FF&E

  	
   

  	
  Section 5.2(a)

  
	
  Final Inventory Report

  	
   

  	
  Section 3.3(a)

  
	
  GECC

  	
   

  	
  Section 2(b)

  
	
  Global Inventory Adjustment

  	
   

  	
  Section 5.3(b)

  
	
  Gross Rings

  	
   

  	
  Section 6.3

  
	
  Guaranteed Amount

  	
   

  	
  Section 3.1(a)

  
	
  Guaranty Percentage

  	
   

  	
  Section 3.1(a)

  
	
  Imported Merchandise

  	
   

  	
  Section 5.2(b)

  
	
  Indenture Trustee

  	
   

  	
  Section 2.4(b)

  
	
  Intercreditor Agreement

  	
   

  	
  Section 2.4(b)

  
	
  Interim DIP Order

  	
   

  	
  Section 2.4(b)

  
	
  Initial Guaranty Payment

  	
   

  	
  Section 3.3(a)

  
	
  Insurance Proceeds Threshold

  	
   

  	
  Section 7.1

  
	
  Interim Receipt Deadline

  	
   

  	
  Section 5.3(a)

  
	
  Inventory Location

  	
   

  	
  Section 5.1

  
	
  Inventory Taking

  	
   

  	
  Section 5.1(a)

  
	
  Inventory-Taking Service

  	
   

  	
  Section 5.1(a)

  
	
  Inventory-Taking Instructions

  	
   

  	
  Section 5.1(a)

  
	
  Lenders

  	
   

  	
  Section 2(b)

  

 

2

 

	
  Lenders’ Designated Account

  	
   

  	
  Section 3.3(a)

  
	
  Letter of Credit

  	
   

  	
  Section 3.4

  
	
  Liquidation Sale Laws

  	
   

  	
  Section 2(c)

  
	
  Lowest Location Price

  	
   

  	
  Section 11.1(m)

  
	
  Merchandise

  	
   

  	
  Section 5.2(a)

  
	
  Merchandise Threshold

  	
   

  	
  Section 3.1(c)

  
	
  Merchant

  	
   

  	
  Preamble

  
	
  Merchant Consignment Goods

  	
   

  	
  Sections 5.4

  
	
  Minimum Overbid

  	
   

  	
  Section 15.12

  
	
  Noteholders

  	
   

  	
  Section 2.4(b)

  
	
  Notes

  	
   

  	
  Section 2.4(b)

  
	
  Occupancy Expenses

  	
   

  	
  Section 4.1(iii)

  
	
  On-Order Merchandise

  	
   

  	
  Section 5.2

  
	
  Owned FF&E

  	
   

  	
  Section 15.9

  
	
  Payment Date

  	
   

  	
  Section 3.3(a)

  
	
  Petition Date

  	
   

  	
  Recitals, Section 2(b)

  
	
  Proceeds

  	
   

  	
  Section 7.1

  
	
  Recovery Amount

  	
   

  	
  Section 3.1(b)

  
	
  Remaining DC Merchandise

  	
   

  	
  Section 5.1(c)

  
	
  Remaining DC Merchandise Count

  	
   

  	
  Section 5.1(c)

  
	
  Remaining Merchandise

  	
   

  	
  Section 3.2(b)

  
	
  Retail Price

  	
   

  	
  Section 11.1(m)

  
	
  Retained Employee

  	
   

  	
  Section 9.1

  
	
  Retention Bonuses

  	
   

  	
  Section 9.4

  
	
  Returned Defective Merchandise

  	
   

  	
  Section 8.5

  
	
  Returned Merchandise

  	
   

  	
  Section 8.5

  
	
  Returned Merchandise Log

  	
   

  	
  Section 8.5

  
	
  Sale

  	
   

  	
  Recitals

  
	
  Sale Commencement Date

  	
   

  	
  Section 6.1

  
	
  Sale Guidelines

  	
   

  	
  Section 8.1

  
	
  Sale Term

  	
   

  	
  Section 6.1

  
	
  Sale Termination Date

  	
   

  	
  Section 6.1

  
	
  Sales Taxes

  	
   

  	
  Section 8.3

  
	
  Sales Taxes Account

  	
   

  	
  Section 8.3

  
	
  Sharing Threshold

  	
   

  	
  Section 3.1(b)

  
	
  Shipping Variance

  	
   

  	
  Section 5.1(c)

  
	
  Shipping Variance Response

  	
   

  	
  Section 5.1(c)

  
	
  Store(s)

  	
   

  	
  Recitals

  
	
  Supplies

  	
   

  	
  Section 8.4

  
	
  WARN Act

  	
   

  	
  Section 9.1

  

 

Section 2.
Appointment of Agent/Liquidation Sale Laws/Approval Order.  (a) Effective upon the entry of the
Approval Order, the Merchant hereby appoints the Agent, and the Agent hereby
agrees to serve, as the Merchant’s exclusive agent for the limited purpose of
conducting 

 

3

 

the Sale at the Stores and
disposing of the Owned FF&E in the Stores in accordance with the terms and
conditions of this Agreement.

 

(b)                                 On July 3, 2008 Merchant filed an expedited
motion with the Bankruptcy Court, for entry of an order approving this
Agreement and authorizing Merchant and Agent to conduct the Sale in accordance
with the terms hereof (the “Approval Order”).  The Approval Order shall provide, in a form
reasonably satisfactory to the Merchant and Agent, inter alia,
that (i) this Agreement (and each of the transactions contemplated hereby)
is approved in its entirety; (ii) Merchant and Agent shall be authorized
to continue to take any and all actions as may be necessary or desirable to
implement this Agreement and each of the transactions contemplated hereby; (iii) Agent
shall be entitled to sell all Merchandise hereunder free and clear of all
liens, claims or encumbrances thereon, with any presently existing liens encumbering
all or any portion of the Merchandise or the Proceeds attaching only to the
Guaranteed Amount and other amounts to be received by Merchant under this
Agreement; (iv) Agent shall have the right to use the Stores and all
related Store services, furniture, fixtures, equipment and other assets of
Merchant as designated hereunder for the purpose of conducting the Sale, free
of any interference from any entity or person subject to compliance with the
Sale Guidelines and Approval Order with respect to the Assets; (v) Agent,
as agent for Merchant, is authorized to conduct, advertise, post signs and
otherwise promote the Sale as a “store closing,” “sale on everything,” “everything
must go,” or similar themed sale, in accordance with the Sale Guidelines (as the
same may be modified and approved by the Bankruptcy Court) and without
compliance with the Liquidation Sale Laws, subject to compliance with the Sale
Guidelines and Approval Order; provided, however, Agent shall not
advertise the Sale as a “going-out-of-business sale”; (vi) Agent shall be
granted a limited license and right to use until the Sale Termination Date the
trade names, logos and customer lists relating to and used in connection with
the operation of the Stores, solely for the purpose of advertising the Sale in
accordance with the terms of this Agreement; (vii) all newspapers and
other advertising media in which the Sale is advertised shall be directed to
accept the Approval Order as binding and to allow Merchant and Agent to
consummate the transactions provided for in this Agreement, including, without
limitation, the conducting and advertising of the Sale in the manner
contemplated by this Agreement; (viii) all utilities, landlords, creditors
and all persons acting for or on their behalf shall not interfere with or
otherwise impede the conduct of the Sale, institute any action in any court
(other than in the Bankruptcy Court) or before any administrative body which in
any way directly or indirectly interferes with or obstructs or otherwise impedes
the conduct of the Sale; (ix) the Bankruptcy Court shall retain
jurisdiction over the parties to enforce this Agreement; (x) Agent shall
not be liable for any claims against the Merchant other than as expressly
provided for in this Agreement; (xi) to the extent the Agent is owed the
Adjustment Amount, and the Lenders received the Adjustment Amount, then the
Lenders shall promptly, upon the written request of the Agent, disgorge and
remit the Adjustment Amount to the Agent; and (xii) Agent shall be granted a
valid, binding, enforceable and perfected security interest in the Merchandise
and the Proceeds as provided for in Section 16 hereof.  Subject to the rights and limitations set
forth in that certain Intercreditor Agreement, dated February 14, 2006 (as
amended by that certain Joinder and Acknowledgement Agreement dated October 24,
2007, the “Intercreditor Agreement”), and the interim order, dated May 2,
2008, authorizing Merchant to, inter alia, obtain postpetition secured
financing and use cash collateral (the “Interim DIP Order”, and 

 

4

 

together
with any subsequent or final order approving same, the “DIP Order”), any
Approval Order shall be in form and substance reasonably acceptable to General
Electric Capital Corporation (“GECC”), as agent for itself and Merchant’s
other secured lenders (collectively, the “Lenders”), the Ad Hoc
Committee (the “Ad Hoc Noteholder Committee”) of Holders (the “Noteholders”)
of Senior Floating Rate Notes due 2014 issued by Linens ‘n Things, Inc.
and Linens ‘n Things Center, Inc. (the “Notes”) and The Bank of New
York (the “Indenture Trustee”), as collateral agent and trustee under
the indenture, dated as of February 14, 2006, relating to the Notes.

 

(c)          Subject to entry of the Approval Order, Agent
shall be authorized to advertise the Sale as a “store closing,” “sale on
everything,” “everything must go,” or similar-themed sale, and the Approval
Order shall provide that Agent shall be required to comply with applicable
federal, state and local laws, regulations and ordinances, including, without
limitation, all laws and regulations relating to advertising, permitting,
privacy, consumer protection, occupational health and safety and the
environment, together with all applicable statutes, rules, regulations and
orders of, and applicable restrictions imposed by, governmental authorities
(collectively, the “Applicable General Laws”), other than all applicable
laws, rules and regulations in respect of “going out of business,” “store
closing” or similar-themed sales (collectively, the “Liquidation Sale Laws”),
provided that such Sale is conducted in accordance with the terms of
this Agreement, the Sale Guidelines and Approval Order.

 

Section 3.                                            Consideration to Merchant and Agent.

 

3.1                                                         Payments to
Merchant.

 

(a)                                  As a guaranty of Agent’s performance hereunder, Agent guarantees that
Merchant shall receive one hundred two and six tenths of one percent (102.6%)
(the “Guaranty Percentage”) of the aggregate Cost Value of the
Merchandise included in the Sale (the “Guaranteed Amount”), which
Guaranteed Amount shall be paid at such time and in such manner as shall
hereinafter be provided

 

(b)                                 To
the extent that Proceeds exceed the sum
of (x) the Guaranteed Amount, (y) Expenses of the Sale and (z) five
percent (5%) of the aggregate Cost Value of the Merchandise included in the
Sale (the “Agent’s Fee”) (the sum of (x), (y) and (z), the “Sharing
Threshold”), then all remaining Proceeds of the Sale above the Sharing
Threshold shall be shared fifty percent (50%) to Merchant and fifty percent
(50%) to Agent.  All amounts, if any, to
be received by Merchant from Proceeds in excess of the Sharing Threshold shall
be referred to as the “Recovery Amount.” 
Agent shall pay to Merchant the Guaranteed Amount and the Recovery
Amount, if any, in the manner and at the times specified in Section 3.3
below.  The Guaranteed Amount and the
Recovery Amount will be calculated based upon the aggregate Cost Value of the
Merchandise as determined by (A) the final certified report of the
Inventory Taking Service after verification and reconciliation thereof by Agent
and Merchant, (B) the aggregate Cost Value of the Distribution Center
Merchandise and On-Order Merchandise included in the Sale, and (C) the
aggregate Cost Value of the Merchandise subject to Gross Rings, as adjusted for
shrinkage per this Agreement.   To the
extent that Merchant is entitled to receive a Recovery 

 

5

 

Amount from Proceeds, Agent shall pay such Recovery Amount as
part of the Final Reconciliation under Section 8.7, as soon as
commercially reasonable after the Sale Termination Date.

 

(c)                                  The Guaranty Percentage has been fixed based
upon the aggregate Cost Value of the Merchandise, excluding Additional Nate Berkus
Merchandise, Excess On-Going Store Merchandise, and Additional Wamsutta
Merchandise (collectively the “Additional Transfer Merchandise”), and
without taking into account the Global Inventory Adjustment, being not less
than $55,000,000 (the “Merchandise Threshold”).  To the extent that the aggregate Cost Value
of the Merchandise included in the Sale, without taking into account the Global
Inventory Adjustment, is less than the Merchandise Threshold, the Guaranty
Percentage shall be adjusted in accordance with Exhibit 3.1(c) annexed
hereto (in addition to any adjustment applicable pursuant to section 11.1(m) hereof),
as and where applicable.  In lieu
of the foregoing adjustment to the Guaranty Percentage, Merchant may, at its
election, transfer into the Stores additional goods acceptable to Agent with
respect to mix, balance, quality, pricing and margin, at Merchant’s expense, to
meet the minimum threshold (the “Transferred Goods”) which Transferred
Goods shall be included as Merchandise; provided  however, within
48 hours of the completion of the Inventory Taking in the Stores and the
selection of the Transferred Goods, Agent shall provide Merchant with  written notice designating the Store
locations to which Merchant shall ship such Transferred Goods.  Irrespective of the achievement of the
Merchandise Threshold, the Merchant may also transfer such other finished goods
inventory to the Stores as Agent shall agree, and such inventory shall be
deemed to be Transferred Goods for all purposes of this Agreement.

 

3.2                                 Compensation to
Agent.  Subject to entry of the
Approval Order:

 

(a)                                  Agent shall
receive, as its compensation for services rendered to Merchant, the Agent’s
Fee, plus all remaining Proceeds of the Sale after payment of the Guaranteed
Amount, Expenses of the Sale, and the Recovery Amount, if any, and all other
amounts payable to Merchant from Proceeds hereunder.  Pursuant to Section 15.9, the Agent
shall also be entitled to receive a commission based on the net proceeds of the
sale of FF&E.

 

(b)                                 All Merchandise
remaining at the Sale Termination Date (the “Remaining Merchandise”)
shall become the property of Agent, free and clear of all liens, claims and
encumbrances of any kind or nature, subject to Merchant’s right to payment of
the Recovery Amount, if any, and any other amount owing hereunder, and the
proceeds received by Agent from the disposition, in a commercially reasonable
manner, of such unsold Merchandise shall constitute Proceeds hereunder.  Notwithstanding the foregoing, Agent shall
exercise commercially reasonable efforts to dispose of all of the Merchandise
during the Sale Term.

 

3.3                                 Time of Payments.

 

(a)                                  On the first business day following issuance
of the Approval Order (the “Payment Date”), Agent shall pay to Merchant
an amount (the “Initial Guaranty Payment”) equal to ninety percent (90%)
of the product of (i) the Guaranty Percentage and the estimated aggregate
Cost Value of the Merchandise to be included in the Sale as reflected on
Merchant’s 

 

6

 

books and records on the last
business day immediately preceding the Sale Commencement Date (the “Estimated
Guaranteed Amount”) by wire transfer to the account designated by GECC
prior to the Payment Date (the “Lenders’ Designated Account).  The balance of the Guaranteed Amount, if any,
shall be paid by Agent by wire transfer to the account designated by GECC on
the earlier of (i) the second business day following the issuance
of the final report of the aggregate Cost Value of the Merchandise included in
the Sale by the Inventory Taking Service, after review, reconciliation and
verification thereof by Agent and Merchant in consultation with Lenders, (the “Final
Inventory Report”); provided, however, that Merchant and
Agent shall exercise reasonable best efforts to reconcile the Inventory Taking
within ten (10) days after its completion and (ii) the date that is
thirty (30) days after the Sale Commencement Date, in which case the payment
shall be of the undisputed balance of the Guaranteed Amount.  In the event that the Final Inventory Report
is issued after payment of the undisputed portion of the Guaranteed Amount, or
in the event that the Initial Guaranty Payment exceeds the Guaranteed Amount,
the Agent or Merchant, as the case may be, shall pay to the Merchant or Agent,
as the case may be, the amount (the “Adjustment Amount”) by which the
actual Guaranteed Amount exceeds or is less than the sum of the Initial
Guaranty Payment and the undisputed balance of the Guaranteed Amount actually
paid as set forth above, within three (3) business days after the Final
Inventory Report has been issued.   To
the extent that Merchant is entitled to receive a Recovery Amount from
Proceeds, Agent shall pay such Recovery Amount as part of the Final
Reconciliation under Section 8.7, as soon as commercially reasonable after
the Sale Termination Date.  To the extent that the Agent is owed the
Adjustment Amount, and the Lenders received the Adjustment Amount, then the
Lenders shall promptly, upon the written request of Agent, disgorge and remit
the Adjustment Amount to Agent.

 

 (b)                              All amounts required to be paid by Agent or Merchant under any provision
of this Agreement shall be made by wire transfer of immediately available funds
which shall be wired by Agent or Merchant, as applicable, no later as 2:00 p.m.
(Eastern Time) on the date that such payment is due; provided, however,
that all of the information necessary to complete the wire transfer has been
received by Agent or Merchant, as applicable, by 10:00 a.m. (Eastern Time)
on the date that such payment is due.  In
the event that the date on which any such payment is due is not a business day,
then such payment shall be made by wire transfer on the next business day.

 

                                                3.4                                 Security.  In order to secure the Agent’s
obligations under this Agreement, in respect of (x) the payment of the
unpaid portion of the Guaranteed Amount and (y) Expenses of the Sale, on
the Payment Date, Agent shall furnish Merchant an irrevocable standby Letter(s) of
Credit naming GECC and Merchant as co-beneficiaries (the “Beneficiaries”)
in the aggregate original face amount equal to the difference between the
Estimated Guaranteed Amount and the Initial Guaranty Payment, plus three (3) weeks’
estimated Expenses that Merchant pays in the ordinary course, which shall be
substantially in the form of Exhibit 3.4 hereof (collectively, the “Letter
of Credit”).  The Letter of Credit
shall have an expiration date of no earlier than sixty days after the Sale
Termination Date.  Unless the parties
shall have mutually agreed that they have completed the final reconciliation
and verification of the Final Inventory Report under this Agreement, then, at
least thirty (30) days prior to the initial or any subsequent expiration date,
the Beneficiaries shall receive an amendment to the Letter of Credit solely
extending (or further 

 

7

 

extending, as the case may be) the expiration date by at least sixty
(60) days.  If the Beneficiaries fail to
receive such amendment to the Letter of Credit no later than thirty (30) days
before the expiration date, then all amounts hereunder shall become immediately
due and payable and the Beneficiaries shall be permitted to draw under the
Letter of Credit in payment of amounts owed and the Beneficiaries shall hold
the balance of the amount drawn under the Letter of Credit as security for
amounts that may become due and payable to Merchant.  At Agent’s request, the Beneficiaries shall
take all actions reasonably required to reduce the amount available to be drawn
under the Letter of Credit by amounts credited against the Guaranteed Amount; provided,
however, that the Letter of Credit shall not be reduced below three (3) weeks
of estimated Expenses of the Sale.  In
the event that Agent, after receipt of five (5) days’ notice (which notice
shall not be required if Agent or any member of Agent shall be a debtor under
title 11, United States Code), fails to pay the Guaranteed Amount, or portion
thereof, or any Expenses of the Sale when due, GECC, individually, or the
Beneficiaries, collectively, may draw on the Letter of Credit in an amount
equal to the unpaid, past due amount of the Guaranteed Amount or Expenses that
is not the subject of a reasonable dispute.

 

Section 4.                                            Expenses of the Sale.

 

4.1                                 Expenses.  Agent shall be unconditionally
responsible for all Expenses incurred in conducting the Sale during the Sale
Term, which expenses shall be paid by Agent in accordance with Section 4.2
below.  As used herein, “Expenses”
shall mean the Store-level operating expenses of the Sale which arise during
the Sale Term set forth below:

 

(a)                                  all payroll and commissions, if applicable,
for all Retained Employees used in conducting the Sale for actual days/hours
worked during the Sale Term;

 

(b)                                 any
amounts payable by Merchant for benefits for Retained Employees (including
FICA, unemployment taxes, workers’ compensation and healthcare insurance, and
vacation benefits that accrue during the Sale Term, but excluding Excluded
Benefits) for Retained Employees used in the Sale, in an amount equal to 21.6%
of the aggregate base payroll for all Retained Employees in the Stores (the “Benefits
Cap”);

 

(c)                                  costs of all security in the Stores (to the
extent customarily provided in the Stores) including, without limitation, security
systems, courier and guard service, building alarm service and alarm service
maintenance;

 

(d)                                 50% of the fees
and costs of the Inventory Taking Service to conduct the Inventory Taking at
the Stores; provided that Merchant shall be responsible for the actual
payroll and related costs for the Retained Employees who work at a Store during
the Inventory Taking at such Inventoried Location;

 

(e)                                  Retention
Bonuses for Retained Employees, as provided for in Section 9.4 below;

 

(f)                                    [intentionally
omitted]

 

8

 

(g)                                 advertising and
direct mailings relating to the Sale, and Store interior and exterior signage
and banners relating to the Sale;

 

(h)                                 local and
long-distance telephone expenses incurred at the Stores;

 

 

(i)                                     credit card
fees, chargebacks and discounts with respect to Merchandise sold in the Sale;

 

(j)                                     bank service
charges (for Store and corporate accounts), check guarantee fees, and bad check
expenses to the extent attributable to the Sale;

 

(k)                                  costs for
additional Supplies used at the Stores;

 

(l)                                     all fees and
charges required to comply with Applicable General Laws in connection with the
Sale;

 

(m)                               Store cash theft
and other store cash shortfalls in the registers;

 

(n)                                 any and all
costs relating to the processing, transfer and consolidation of Merchandise
between and among the Stores, including delivery and freight costs, it being
understood that Agent shall be responsible for coordinating such transfer of
Merchandise;

 

(o)                                 housekeeping and
cleaning expenses related to the Stores;

 

(p)                                 Store trash and
snow removal;

 

(q)                                 on-site supervision of the Stores, including
base fees and bonuses of Agent’s field personnel, travel to and from the Stores
and incidental out-of-pocket and commercially reasonable travel expenses
relating thereto;

 

(r)                                    postage, courier and overnight mail charges to
and from or among the Stores and central office to the extent relating to the
Sale;

 

(s)                                  actual
Occupancy Expenses for the Stores on a per location and per diem basis in an amount
equal to the per Store per diem amount
set forth on Exhibit 4.1(s) hereto;

 

(t)                                    Central
Service Expenses equal to $10,000 per week;

 

(u)                                 Agent’s actual cost of capital (including
Letter of Credit fees); and

 

(v)                                 Agent’s reasonable out-of-pocket costs and
expenses, including but not limited to, legal fees and expenses, incurred in
connection with the review of data, preparation, negotiation and execution of
this Agreement, the Approval Order and any ancillary documents, in an amount
not to exceed $125,000.

 

9

 

Notwithstanding
anything herein to the contrary, to the extent that any Expense listed in Section 4.1
is also included on Exhibit 4.1(s), then Exhibit 4.1(s) shall
control, and such Expenses shall not be double counted.

 

As used herein, the following
terms have the following respective meanings:

 

(i)                                     “Central Service Expenses” means costs
and expenses for Merchant’s central administrative services necessary for the
Sale, including, but not limited to, MIS services, payroll processing, cash
reconciliation, inventory processing and handling and data processing and
reporting.

 

(ii)                                  “Excluded Benefits” means benefits in
excess of the Benefits Cap.

 

(iii)                               “Occupancy Expenses” means base rent,
percentage rent, HVAC, utilities, CAM, storage costs, real estate and use
taxes, merchant’s association dues and expenses, , a pro rata portion of
property insurance attributable to the Merchandise subject to the Sale and a
pro rata portion of comprehensive public liability insurance attributable to
the Stores personal property leases (including, without limitation, point of
sale equipment), cash register maintenance, building maintenance and rental for
furniture, fixtures and equipment, all of the foregoing as categorized and
reflected on Exhibit 4.1(s) hereto.

 

“Expenses” shall not include:
(i) Excluded Benefits; (ii) Central Service Expenses, except as
provided in Section 4.1(t); (iii) Distribution Center Expenses; (iv) Occupancy
Expenses (including any portion of the percentage rent obligations allocable to
the sale of Merchandise during the Sale under applicable leases or occupancy
agreements, except as provided in Section 4.1(s); (v) expenses of the
type set forth in 4.1(a) – (u) above to the extent the same shall not
have been approved in advance by Agent; and (vi) any other costs, expenses
or liabilities payable by Merchant not provided for herein.

 

4.2                                 Payment of Expenses. 
Effective from and after entry of the Approval Order:

 

(a)                                  Agent shall be responsible for the payment of
all Expenses, whether or not there are sufficient Proceeds collected to pay
such Expenses after the payment of the Guaranteed Amount.  All Expenses incurred during each week of the
Sale (i.e. Sunday through Saturday) shall be paid by Agent to or on behalf of
Merchant, or paid by Merchant and thereafter reimbursed by Agent as provided
for herein, immediately following the weekly Sale reconciliation by Merchant
and Agent pursuant to Section 8.7 below; provided, however,
in the event that the actual amount of an expense is unavailable on the date of
the reconciliation (such as payroll), Merchant and Agent shall agree to an
estimate of such amounts, which amounts will be reconciled once the actual
amount of such Expense becomes available. 
Agent and/or Merchant may review or audit the Expenses at any time.

 

10

 

(b)                                 Notwithstanding anything herein to the
contrary, (i) to the extent that Proceeds are insufficient, Merchant shall
not be required to fund or otherwise pay any Expenses of Sale and (ii) without
limitation on Expenses that may be funded in advance by Agent at Merchant’s
reasonable request, to the extent that Proceeds are insufficient, Agent shall
fund, in advance, all payroll and related expenses for Retained Employees at
least two (2) business days prior to the date that such payments are due
by Merchant.

 

Section 5.                                            Inventory Valuation; Merchandise.

 

5.1                                 Inventory
Taking.

 

(a)                                  Subject to the provisions of this paragraph,
the parties have agreed to use the current book value of inventory as of the
Sale Commencement Date, to determine the aggregate Cost Value of the
Merchandise located in the Stores on the Sale Commencement Date in accordance
with this Agreement.  In order to test
the validity of the aggregate Cost Value of the Merchandise as reflected on
Merchant’s current books and records, on or within five (5) days after the
Sale Commencement Date (the “Inventory Completion Date”), Merchant and
Agent shall cause to be taken an SKU physical inventory (the “Inventory
Taking”) of the Merchandise located in fifty percent (50%) of the Stores
(and 50% of the Additional Stores, to the extent Merchant exercises the
Additional Stores Inclusion Option, each with a representative sampling of
stores located in each district (each a “Test Store” and collectively,
the “Test Stores”), which Test Stores shall be jointly selected by
Merchant and Agent. (The date of the Inventory Taking at each Test Store shall
be referred to as the “Inventory Date” for such Test Store).  Merchant and Agent shall jointly employ RGIS
or another mutually acceptable inventory taking service to conduct the
Inventory Taking (and, if applicable, the Additional Inventory Taking, as
defined below) in accordance with procedures set forth on Exhibit 5.1
annexed hereto.

 

(b)                                 The results of the Inventory Taking at the
Test Stores and the Additional Test Stores, if any (the “Test Store Results”)
shall be used to determine any adjustment as may be required to the calculation
of the aggregate Cost Value of the Merchandise located in the Stores on the
Sale Commencement Date, as follows:

 

(i)                                     for purposes of calculating the aggregate Cost
Value of the Merchandise at the Test Stores and Additional Test Stores, if any
(collectively, the “Inventoried Stores”), the actual Test Store Results
for the Inventoried Stores, as adjusted by Gross Rings for the period between
the Sale Commencement Date and the applicable Inventory Date (the “Gross
Rings Period”);

 

(ii)                                  for purposes of calculating the aggregate Cost
Value of the Merchandise at the Stores that do not constitute Inventoried
Stores (the “Non-Inventoried Stores”), the actual Test Store Results at
the Inventoried Stores, shall be compared to the “roll-forward” book value of
the Merchandise at the Inventoried Stores, as of the Sale Commencement Date
(i.e Gross Rings and receipts at each of the Stores during the Gross Rings
Period) (the “Adjusted Book Inventory”), and an average variance shall be
calculated (the “Variance”), and the Variance shall be applied to adjust
Adjusted Book Inventory of the 
Merchandise located at the Non-Inventoried Stores; provided  however;
for the purposes of calculating the Variance, the 

 

11

 

Inventoried Stores having the
results from the three Stores with highest and three Stores with the lowest
variance percentage shall be excluded. 
In the event that the initial Variance at the Inventoried Stores is
greater than  six percent (6%) of the
current book value of the Merchandise in the Inventoried Stores, then either
Merchant or Agent shall have the right to request an Inventory Taking at
additional Stores (the “Additional Test Stores”, to be mutually and
reasonably agreed upon by the parties (the “Additional Inventory Taking”),
to establish whether an adjustment to the Variance is required, with the costs
and fees associated with the Additional Inventory Taking, to be paid by the
party requesting such Additional Inventory Taking

 

(c)                                  The Agent and Merchant agree that they
will, and agree to cause their respective representatives to, cooperate and
assist in the preparation and the calculation of the Aggregate Cost Value of
the Merchandise included in the Sale, including, without limitation, the making
available to the extent necessary of books, records, work papers and personnel.

 

(d)                                 Distribution
Center Merchandise and On-Order Merchandise, if any delivered to the Stores
after the Sale Commencement Date, shall be counted and reconciled within five
Store business days after receipt of such goods in the Stores, in accordance
with the procedures set forth herein; failure to report any variance between
the received shipment and the applicable shipping documents (each a “Shipping
Variance”) within such five Store business day period shall, absent
manifest error, result in such receipts being automatically confirmed as
received, consistent with the applicable shipping documents.  Merchant shall have two Distribution Center
business days to verify a timely reported Shipping Variance (each a “Shipping
Variance Response”);  failure to
respond to an asserted Shipping Variance within such two Distribution Center
business day period shall result in such Shipping Variance being deemed
valid.  If Merchant timely issues a
Shipping Variance Response that disputes the asserted Shipping Variance,
Merchant and Agent shall cooperate with each other to verify and resolve such
dispute.  Following the Sale Commencement
Date, Merchant will ship all Distribution Center Merchandise and On-Order
Merchandise to the Stores in accordance with the Store allocation set forth on Exhibit 5.1(c) annexed
hereto.  For the avoidance of doubt,
Merchant will ship all Distribution Center Merchandise and On-Order Merchandise
to the Stores, at Merchant’s cost.

 

5.2                                 Merchandise
Subject to This Agreement.

 

(a)                                  For purposes of this
Agreement, “Merchandise” shall mean:  (i) all
finished goods inventory (including Domestic Merchandise and Imported
Merchandise) that is owned by Merchant and (x) located at the Stores as of
the Sale Commencement Date, including (A) Defective Merchandise; (B) Distribution
Center Merchandise received in the Stores prior to the Sale Commencement
Date;  (C) Aged Merchandise; (D) the
Display Merchandise, and (E) Merchandise subject to Gross Rings; (ii) Distribution
Center Merchandise received in the Stores on or prior to the date that is
thirty-five (35) days after the Sale Commencement Date (the “Store Receipt
Deadline”); (iii) On-Order Merchandise and addition, Additional Nate
Berkus Merchandise, any Additional Transfer Merchandise received in the Stores
on or prior to the Store Receipt Deadline; and (iv) to the extent Merchant
so elects in accordance with the terms hereof, Transferred Goods received prior
to the Store Receipt Deadline. 
Notwithstanding the foregoing, “Merchandise” shall not include: (1) goods
which belong to sublessees, licensees, department 

 

12

 

lessees, or
concessionaires of Merchant; (2) goods held by Merchant on memo, on
consignment, or as bailee; (3) furnishings, trade fixtures, equipment
and/or improvements to real property which are located in the Stores
(collectively, “FF&E”); provided that, Agent shall be
permitted to sell Owned FF&E as set forth in Section 15.9; and (4) Excluded
Defective Merchandise;.

 

(b)                                 As used in this
Agreement, the following terms have the respective meanings set forth below:

 

“Additional Nate Berkus Merchandise” means those items of Nate
Berkus merchandise identified on Exhibit 5.2(b)(i) having an
aggregate cost value of no more than $750,000, that is being transferred from
Merchant’s on-going retail store locations to the Stores prior to the Store
Receipt Deadline; provided  however items of Nate Berkus inventory
previously located in the Stores shall constitute Merchandise but shall not be
considered Additional Nate Berkus Merchandise.

 

“Additional
Wamsutta Merchandise” means those items of Wamsutta merchandise identified
on Exhibit 5.2(b)(ii) having an aggregate cost value of no more than
$3,750,000 that  may be transferred by
Merchant from its Distribution Centers to the Stores, or shipped directly to
the Stores by the vendor; provided however, to the extent that Merchant
seeks to substitute other Wamsutta goods not identified on Exhbit 5.2(b)(ii) for
other goods identified on such Exhibt, such substitution shall be subject to
Agent’s approval; provided  further  however items of
Wamsutta inventory previously located in the Stores shall constitute
Merchandise but shall not be considered Additional Wamsutta Merchandise.

 

“Aged Merchandise” means items of merchandise which have been
discontinued by Merchant and have been offered at a point of sale discount for
more than thirteen (13) consecutive months.

 

“Defective Merchandise” means any item
of Merchandise that is defective or otherwise not saleable in the ordinary
course because it is worn, scratched, broken, faded, torn, mismatched, tailored
or affected by other similar defenses rendering it not first quality.  Display Merchandise shall not per se be
deemed to be Defective Merchandise.

 

“Display Merchandise” means those
items of inventory used in the ordinary course of business as displays or floor
models, including inventory that has been removed from its original packaging
where such items of inventory have been removed from its original packaging for
the purpose of putting such item on display but not customarily sold or
saleable by Merchant, which goods are not otherwise damaged or defective.  For the avoidance of doubt, Merchandise
created for display and not saleable in the ordinary course of business shall
not constitute Display Merchandise.

 

“Distribution Center Merchandise”
means those items of inventory identified by SKU on Exhibit 5.2(b)(iii) annexed
hereto, that was located in Merchant’s Distribution Centers and was
specifically earmarked for transfer to the Stores both prior to and after the
Sale Commencement Date for purposes of inclusion in the Sale, which goods, to
the extent not delivered to the Stores prior to the Sale Commencement Date,
shall be delivered by Merchant to 

 

13

 

the Stores in
accordance with Schedule 5.1(c) annexed hereto on or before the
date that is thirty (30) days after the Sale Commencement Date.

 

“Domestic Merchandise” means those
items of inventory that are being delivered by a manufacturer/vendor located
within the United States.

 

“Excess On-Going Store Merchandise” means those items of excess
inventory identified on Exhibit 5.2(b)(iv)  having an
aggregate cost value of no more than $2,885,000, that is being transferred by
Merchant from its Distribution Centers to the Stores.

 

“Excluded Defective
Merchandise” means those items of Defective Merchandise that are not
saleable in the ordinary course because they are so damaged or defective that
such inventory cannot reasonably be used for their intended purpose.  For the avoidance
of doubt, electronic Display Merchandise without power cords shall constitute
Excluded Defective Merchandise.

 

“Imported Merchandise”
means items of inventory that are purchased by Merchant from a
manufacturer/vendor located outside the United States and imported into the
United States by Merchant.

 

                                                                                                “On-Order
Merchandise” mean items of inventory that were ordered by Merchant in the
ordinary course of business and earmark for the Stores, which inventory was not
received in the Stores as of the Sale Commencement Date, but which may be
received in the Store prior to the Store Receipt Deadline.

 

5.3                                 Valuation.

 

(a)                                  For purposes of this
Agreement, “Cost Value” shall mean (i) with respect to each item of
Domestic Merchandise, the last cost for the SKU for such item of Domestic
Merchandise as reflected on Merchant’s inventory item master cost file (the “Cost
File”), which amount does not include freight or any additional vendor credits;
and (ii) with respect to Imported Merchandise, the landed cost for such
item of Imported Merchandise as reflected in the Cost File, which amount
reflects last cost for the SKU for such item of Imported Merchandise plus a
damage allowance, duty rate, freight, and brokerage fee, harbor maintenance
fees, drayage, brokers’ fees, insurance, commissions, processing costs and
other costs directly associated with landing the product in the Distribution
Centers; provided, that in no event shall the Cost Value of any
Merchandise exceed the Retail Price for such item of Merchandise; provided
however, any adjustment to the Cost Value as a result of the immediately
preceding provisio shall not be factored into the calculation for purposes of
determining whether the aggregate Cost Value of the Merchandise has satisfied
the Merchandise Threshold provided for in Section 3.1(c) hereof
and/or the Cost Factor providing for in Section 11.1(m) hereof.  Items of Distribution Center Merchandise,
On-Order Merchandise, and Additional Transfer Merchandise  received in the Stores on or prior to the
date that is fifteen (15) days after the Sale Commencement Date (excluding the
Sale Commencement Date for purposes of such calculation) (the “Interim
Receipt Deadline”), will be included in Merchandise at the applicable Cost
Value for Domestic 

 

14

 

Merchandise or Imported Merchandise, as
applicable (the “Applicable Cost Value”), for each such item; provided,
however, that items of Distribution Center Merchandise, Transferred
Goods and/or On-Order Merchandise received at the Stores after the Interim
Receipt Deadline but prior to the Store Receipt Deadline shall be included in
Merchandise at the Applicable Cost Value for each such item multiplied by the
inverse of the prevailing discount on similar items of Merchandise as of the
date of receipt in the Stores; provided  further, that items of
Distribution Center Merchandise, Transferred Goods and/or On-Order Merchandise
received in the Stores after the Store Receipt Deadline shall not constitute
Merchandise, shall be given no Cost Value, and shall be excluded from
Merchandise, and shall, at Merchant’s option either be sold by Agent as
Merchant Consignment Goods pursuant to Section 5.4 hereof, or excluded
from the Sale and removed by Merchant from the Stores.  The Cost File does not account for any
advertising co-op allowances or discounts associated with expedited payment
terms offered by any vendor, and, further, the Applicable Cost Value of any
item of Merchandise shall not be adjusted for any such amounts.

 

(b)                                 Other
than Excluded Defective Merchandise, in lieu of any other adjustments to the
Cost Value of Merchandise under this Agreement (e.g.,
adjustments for Defective Merchandise, clearance merchandise, mis-mates and
near-mates, sample merchandise and/or Excluded Price Adjustments), the
aggregate Cost Value of the Merchandise shall be adjusted (i.e.,
reduced) by means of a single global downward adjustment equal to one percent
(1%)of the aggregate Cost Value of the Merchandise (the “Global Inventory
Adjustment”).

 

(c)                                  Excluded
Defective Merchandise located in the Stores shall be identified and counted
during the Inventory Taking and thereafter removed from the sales floor and
segregated.  Excluded Defective
Merchandise included in Distribution Center Merchandise and/or On-Order
Merchandise must be identified jointly by Merchant and Agent (with written
notice provided to Barry Gold of Asset Disposition Advisors, LLC at
barrygold@aol.com), within five (5) business days of such Distribution
Center Merchandise and/or On-Order Merchandise receipt in the Stores.  Other than as identified during the Inventory
Taking at a Store, or as provided for in this Section 5.3(c) with
respect to Distribution Center Merchandise and/or On-Order Merchandise, no
other goods can be categorized as Excluded Defective Merchandise, regardless of
their condition.

 

5.4                                 Excluded
Goods.  Merchant shall retain all
responsibility for any goods not included as “Merchandise” hereunder.  If Merchant elects at the beginning of the
Sale Term, Agent shall accept goods not included as “Merchandise” hereunder for
sale as “Merchant Consignment Goods” at prices established by the Agent.  The Agent shall retain 20% of the sale price
for all sales of Merchant Consignment Goods, and Merchant shall receive 80% of
the receipts in respect of such sales. 
Merchant shall receive its share of the receipts of sales of Merchant
Consignment Goods on a weekly basis, immediately following the weekly Sale
reconciliation by Merchant and Agent pursuant to Section 8.7 below.  If Merchant does not elect to have Agent sell
defective or display goods merchandise not included as Merchandise, then all
such items will be removed by Merchant from the Stores at its expense as soon
as practicable after the Sale Commencement Date.  Except as expressly provided in this Section 5.4,
Agent shall have no cost, expense or responsibility in connection with any
goods not included in Merchandise.

 

15

 

5.5           Additional Stores
Inclusion Option.  On August 28,
2008 (the “Additional Stores Inclusion Option Deadline”) Merchant shall
have the absolute right, in its discretion, to include in this Agreement and
the Sale (the “Additional Stores Inclusion Option”) one or more of the
Merchant’s store locations identified in Exhibit 5.5(a) hereto,
subject to the restrictions set forth below (to the extent included in Merchant’s
exercise of the option, the “Additional Stores”); provided  however,
the Merchandise located at the Additional Store(s) (the “Additional
Stores Merchandise”) shall constitute Merchandise under this Agreement
effective as of the Additional Stores Sale Commencement Date (but shall not be
included in the calculation of the Merchandise Threshold under pursuant to Section 3.1(c) hereof,
or for purposes of calculating the Cost Factor provided for in Section 11.1(m) hereof)
and the disposition of the Owned FF&E in the Additional Stores that are
included in the Sale shall be governed by Seciton 15.9 of this Agreement.  Merchant shall exercise the Additional Stores
Inclusion Option by delivering written notice to Agent advising of Merchant’s
exercise of the option and identifying the Additional Stores that are the
subject of such exercise.  Within two (2) business
days after Merchant’s exercise of the Additional Stores Inclusion Option (the “Additional
Stores Sale Commencement Date”) as to any particular Additional Store,
Agent shall commence the Sale at the Additional Store(s) that are the
subject of such election notice.  Upon
Merchant’s exercise of the Additional Stores Inclusion Option, (a) the
Guaranteed Amount and the Letter of Credit shall each be adjusted to account
for the Additional Stores and the Additional Store Merchandise to be included
in the Sale and (b) the per Store per diem Occupancy Expenses for each of
the Additional Stores included in the Sale shall be as set forth on Exhibit 5.4(b);
(c) effective as of the Additional Stores Sale Commencement Date, Agent
shall responsible for all  Expenses (as
enumerated herein, as such relate to the Additional Stores and the Additional
Stores Merchandise that are the subject of Merchant’s exercise of the
Additional Stores Inclusion Option.  The
Sale Termination Date for the Additional Stores shall be no later than November 30,
2008; subject to Agent’s rights and obligations under Sections 6.1 and 6.2
hereof; provided  however, Agent shall exercise reasonable best
efforts to vacate the Additional Stores on or before November 26,
2008.  Merchant and Agent further agree
that the levels, mix, and cost factor of the Additional Store Merchandise in
the Additional Stores as at the applicable Sale Commencement Date shall be
substantially similar to the levels and mix as existed in the Stores as at the
Sale Commencement Date.

 

Section 6.               Sale
Term.

 

6.1           Term.  Subject to satisfaction of the conditions
precedent set forth in Section 10 hereof, the Sale shall commence at each
Store on the first business day following the entry of the Approval Order, but
in no event later than August 15, 2008 (the “Sale Commencement Date”).  Subject to the prior expiration of the term
of any Store Lease (as reflected on Exhibit 4.1(s)), the Agent
shall complete the Sale at each Store and vacate such Store in broom-clean
condition by no later than November 26, 2008, unless the Sale is extended
by mutual written agreement of Agent, Merchant and the affected landlord (the “Sale
Termination Date”; the period from the Sale Commencement Date to the Sale
Termination Date as to each Store being the “Sale Term”).  The Agent may, in its discretion, terminate
the Sale at any Store upon not less than ten (10) days’ prior written
notice (a “Vacate Notice”) to Merchant. 
In the event the Agent fails to provide 

 

16

 

Merchant with such timely notice, Agent shall
be liable for and pay the actual amounts payable to landlords for the days by
which notice of a Store closing was less than ten (10) days.

 

6.2           Vacating
the Stores.  At the conclusion of the
Sale, Agent agrees to leave the Stores in “broom clean” condition, ordinary
wear and tear excepted, except for unsold items of FF&E (except as provided
for in Section 15.9 below). Agent shall vacate the Stores on or before the
Sale Termination Date, as provided for herein, at which time Agent shall
surrender and deliver the Store premises and Store keys to Merchant. Agent’s obligations to pay
all Expenses, including Occupancy Expenses, for each Store subject to Vacate
Notice shall continue until the later of (a) the applicable vacate date
for such Store, or (b) the 15th day of the calendar month in
which the vacate date for such Store occurs. 
All assets of Merchant used by Agent in the conduct of the Sale
(e.g. FF&E, etc.) shall be returned by Agent to Merchant at the end of the
Sale Term to the extent the same have not been consumed in the conduct of the
Sale or sold (e.g., Supplies); provided, however, that Agent
shall be responsible for removing all remaining Supplies at the end of the Sale
Term.  Agent shall be responsible for all
Occupancy Expenses (irrespective of any per diem cap on Occupancy Expenses) for
a Store for which Merchant is or becomes obligated resulting from Agent’s
failure to vacate such Store in a timely manner.

 

6.3           Gross Rings.  In the event that the Sale commences at any
Store subject to Inventory Taking prior to the completion of the Inventory
Taking at such Store, then, for the period from the Sale Commencement Date for
such Store until the Inventory Date for such Store, Agent and Merchant shall
jointly keep (i) a strict count of gross register receipts less applicable
Sales Taxes but excluding any prevailing discounts (“Gross Rings”), and (ii) cash
reports of sales within such Store. Agent and Merchant shall keep a strict
count of register receipts and reports to determine the actual Cost Value and
Retail Price of the Merchandise sold by SKU. 
All such records and reports shall be made available to Agent and
Merchant during regular business hours upon reasonable notice.  Any Merchandise included in the Sale using
the Gross Rings shall be included in Merchandise using the Gross Rings method
and, as soon as determinable, Agent shall pay that portion of the Guaranteed
Amount calculated on the Gross Rings basis, to account for shrinkage, on the
basis of 103% of the aggregate Cost Value of the Merchandise (without taking
into account any of Agent’s point of sale discounts or point of sale markdowns)
sold during the Gross Rings period.

 

Section 7.               Sale Proceeds.

 

7.1           Proceeds.  For purposes of this Agreement, “Proceeds”
shall mean the aggregate of (a) the total amount (in dollars) of all sales
of Merchandise made under this Agreement, exclusive of Sales Taxes; and (b) all
proceeds of Merchant’s insurance for loss or damage to Merchandise or loss of
cash arising from events occurring during the Sale Term.  Proceeds shall also include any and all
proceeds received by Agent from the disposition, in a commercially reasonable
manner, of unsold Merchandise at the end of the Sale, whether through salvage,
bulk sale or otherwise.

 

17

 

7.2           Deposit
of Proceeds.

 

(a)           Agent
may establish its own accounts, dedicated solely for the deposit of the
Proceeds and the disbursement of amounts payable to Agent hereunder (the “Agency
Accounts”), and Merchant shall promptly upon Agent’s request execute and
deliver all necessary documents to open and maintain the Agency Accounts; provided,
however, the Agent may elect to continue to use the Merchant’s
Designated Deposit Accounts (as defined below) as the Agency Accounts (as
defined below).  The Agency Accounts
shall be dedicated solely to the deposit of Proceeds and the disbursement of
amounts payable hereunder, and Agent shall exercise sole signatory authority
and control with respect to the Agency Accounts.  Upon request, Agent shall deliver to Merchant
copies of all bank statements and other information relating to such
accounts.  Merchant shall not be
responsible for, and Agent shall pay as an Expense hereunder, all bank fees and
charges, including wire transfer charges, related to the Agency Accounts,
whether received during or after the Sale Term (except, in the case of the
period following the Sale Term, to the extent the Agency Accounts consist of
Designated Depository Accounts).  Upon
Agent’s designation of the Agency Accounts, all Proceeds of the Sale (including
credit card proceeds) shall be deposited into the Agency Accounts.

 

(b)           During
the period between the Sale Commencement Date and the date Agent establishes
the Agency Accounts, all Proceeds of the Sale (including credit card proceeds)
shall be collected by Agent and deposited on a daily basis into depository
accounts designated by Merchant for the Stores, which accounts shall be
designated solely for the deposit of Proceeds of the Sale (including credit
card proceeds), and the disbursement of amounts payable by Agent hereunder (the
“Designated Deposit Accounts”). 
Following the payment of the Initial Guaranty Payment and the posting of
the Letter of Credit and on each business day thereafter (or as soon thereafter
as is practicable, but in no event less than weekly), Merchant shall promptly
pay to Agent by wire funds transfer all collected funds constituting Proceeds
deposited into the Designated Deposit Accounts (but not any other funds,
including, without limitation, any proceeds of Merchant’s inventory sold prior
to the Sale Commencement Date).

 

7.3           Credit
Card Proceeds.  To the extent
available from credit card processors, Agent shall have the right to use Merchant’s
credit card facilities (including Merchant’s credit card terminals and
processor(s), credit card processor coding, Merchant identification number(s) and
existing bank accounts) for credit card Proceeds relating solely to the
Sale.  So long as Merchant’s credit card
facilities are available to the Agent, in the event that Agent elects to use
Merchant’s credit card facilities, Merchant shall process credit card
transactions on behalf of Agent and for Agent’s account, applying customary
practices and procedures.  Agent shall
not accept Merchant’s proprietary card. 
Without limiting the foregoing, Merchant shall cooperate with Agent to
down-load data from all credit card terminals each day during the Sale Term and
to effect settlement with Merchant’s credit card processor(s) and shall
take such other actions necessary to process credit card transactions on behalf
of Agent under Merchant’s identification number(s).  At Agent’s request following the Payment Date
and the payment of all amounts then due to Merchant by Agent, Merchant shall
cooperate with Agent to establish Merchant identification numbers under Agent’s
name to enable Agent to process all such credit card Proceeds for Agent’s
account.  Merchant shall not be
responsible for and Agent shall pay as an 

 

18

 

Expense hereunder, all credit card fees,
charges and chargebacks related to the Sale, whether received during or after
the Sale Term.  Merchant makes no
representation that the credit card processors shall permit the use of Merchant’s
credit card facilities on the same terms and conditions as they did prior to
the date hereof, and Merchant shall not be obligated to assure the availability
of such credit card facilities. 
Notwithstanding anything herein to the contrary, if Agent elects to use
Merchant’s credit card facilities during the Sale, Agent shall be required to
make all arrangements necessary with Merchant’s credit card processors
regarding the establishment of reserves for credit card sales during the Sale
Term, and no funds of Merchant shall be used to establish any such reserves.

 

7.4           Petty
Cash.  In addition to the Guaranteed
Amount, Agent shall purchase all cash in the Stores on and as of the start of
business on the Sale Commencement Date and shall reimburse Merchant on a dollar
for dollar basis therefor.  Agent also
shall purchase, on a dollar for dollar basis, all cash located in Merchant’s
bank accounts which are used by Agent hereunder, which shall be determined, and
paid for, as of the Sale Commencement Date.

 

Section 8.               Conduct of the Sale.  From and after the entry of the Approval
Order:

 

8.1           Rights
of Agent.  Subject to the provisions
of Section 2 hereof and except as may otherwise be provided for in the
Approval Order, the Agent shall be permitted to conduct the Sale as a “store
closing,” “sale on everything,” “everything must go,” or similar themed sale
throughout the Sale Term.  Agent shall
not advertise the Sale as a “going-out-of-business sale.” The Agent shall
conduct the Sale in the name of and on behalf of the Merchant in a commercially
reasonable manner and in compliance with the terms of this Agreement and,
except as modified by the Approval Order, all governing laws and applicable
agreements to which Merchant is a party. 
The Agent shall conduct the Sale in accordance with the sale guidelines
attached hereto as Exhibit 8.1 (the “Sale Guidelines”).  In addition to any other rights granted to
Agent hereunder in conducting the Sale, but subject to any applicable
agreements to which Merchant is a party (including the leases for the Stores)
except as modified by the Approval Order, the Agent, in the exercise of its
reasonable discretion, shall have the right:

 

(a)           to establish Sale prices and Store
hours which are consistent with the terms of applicable leases and local laws
or regulations, including without limitation Sunday closing laws; provided
however, to the extent that Agent extends the hours of operation at one
or more of the Stores beyond the hours historically operated by Merchant, which
results in additional utilities and increased Occupancy Expenses in excess of
the amounts set forth on Exhibit 4.1(s), Agent shall be obligated to
reimburse Merchant the amounts, if any, of such additional costs and such
additional costs shall constitute Expenses of the Sale.

 

(b)           except as otherwise
expressly included as an Expense, to use without charge during the Sale Term
all FF&E, Store-level customer lists and mailing lists (but not email list)
for the Stores (provided, however, such access shall be provided
solely through Merchant’s outside advertisement mailer services, and the Agent
shall not have direct access to any personally identifiable information
contained therein), computer hardware and software, existing supplies located
at the Stores, intangible assets (including Merchant’s name, logo and tax 

 

19

 

identification numbers), Store keys, case
keys, security codes and safe and lock combinations required to gain access to
and operate the Stores, and any other assets of Merchant located at the Stores
(whether owned, leased, or licensed) consistent with applicable terms of leases
or licenses (except as modified by the Approval Order);

 

(c)           so long as such access does not
unreasonably disrupt the business operations of Merchant, to use (i) Merchant’s
central office facilities, central administrative services and personnel to
process payroll, perform MIS and provide other central office services
necessary for the Sale to the extent that such services are normally provided
by Merchant in house, at no additional cost to Agent; provided, however,
that, in the event that Agent expressly requests Merchant to provide services
other than those normally provided to the Stores and relating to the sale of
merchandise by Merchant, Agent shall be responsible for the actual incremental
cost of such services as an Expense; and (ii) one office located at
Merchant’s central office facility.

 

(d)           to establish and implement
advertising, signage and promotion programs consistent with the “store closing”
or similar theme (including, without limitation, by means of media advertising,
A-frame and similar interior and exterior signs and banners) in a manner
consistent with the Sale Guidelines and applicable law; provided, however,
the content of all such advertising and signage shall be approved in advance by
Dave Coder at dcoder@lnt.com (or such other person as may be designated by
Merchant), upon two business days’ prior notice of such advertising, which
shall be sent by email to Merchant, which approval shall not be unreasonably
withheld or delayed, and which approval shall be deemed to be granted unless
denied in writing prior to the expiration of such time period.  Merchant agrees that any advertisement,
signage or promotional programs substantially similar to a previously approved
advertisement, signage or promotional program will not require further approval
of Merchant;

 

(e)           to transfer Merchandise between and
among the Stores; provided, however, the Agent shall not transfer
Merchandise between Stores unless the Inventory Taking at the transferring
Store has been completed; and

 

(f)            upon entry of the Approval Order,
Agent shall be authorized to conduct the Sale in accordance with the provisions
of the Sale Guidelines and Approval Order.

 

8.2           Terms of Sales to
Customers.

 

(a)           All sales of Merchandise will be “final
sales” and “as is,” and all advertisements and sales receipts will reflect the
same.  Agent shall not warrant the
Merchandise in any manner, but will, to the extent legally permissible, pass on
all manufacturers’ warranties to customers. 
All sales will be made only for cash, nationally recognized bank credit
cards and, in Agent’s discretion, personal checks, provided, however,
if Agent determines to accept personal checks, Agent shall bear the risk of
nonpayment or loss with respect thereto. 
Agent shall not accept or honor any coupons issued by Merchant or
Merchant’s competitors; provided  however, with respect to
Merchant’s coupons to be honored at Merchant’s on-going stores during the Sale
Term, to the extent not yet issued by Merchant, Merchant shall make
commercially reasonable efforts to imprint a notation on such coupons that that
they are not valid in the closing Stores. 

 

20

 

Agent shall post signs in reasonable
locations in the Stores indicating that coupons shall not be honored but may,
in its discretion, and at is sole expense, not as an Expense of the sale, honor
coupons which are not by their terms ineligible for use at the Stores or with
respect to the Merchandise.  Agent shall
clearly mark all tickets and receipts for the Merchandise sold at the Stores
during the Sale Term, so as to distinguish such Merchandise from the
merchandise sold prior to the Sale Commencement Date.

 

(b)           Gift Certificates.  During the Sale Term, Agent shall accept
Merchant’s gift certificates, gift cards and Merchandise credits issued by
Merchant prior to the Sale Commencement Date. 
Merchant shall reimburse Agent in cash for such amounts during the
weekly sale reconciliation provided for in Section 8.7.

 

8.3           Sales
Taxes.

 

(a)           During
the Sale Term, all sales, excise, gross receipts and other taxes attributable
to sales of Merchandise, as indicated on Merchant’s point of sale equipment
(other than taxes on income) payable to any taxing authority having
jurisdiction (collectively, “Sales Taxes”) shall be added to the sales
price of Merchandise and collected by Agent, on Merchant’s behalf, at the time
of sale.  All Sales Taxes shall be
deposited into a segregated account designated by Merchant and Agent solely for
the deposit of such Sales Taxes (the “Sales Taxes Account”).   Merchant shall prepare and file all
applicable reports and documents required by the applicable taxing authorities,
and Merchant shall promptly pay all Sales Taxes from the Sales Taxes
Account.  Merchant will be given access
to the computation of gross receipts for verification of all such tax
collections.  Provided that Agent
performs its responsibilities in accordance with this Section 8.3,
Merchant shall indemnify and hold harmless Agent from and against any and all
costs, including, but not limited to, reasonable attorneys’ fees, assessments,
fines or penalties which Agent sustains or incurs as a result or consequence of
the failure by Merchant to promptly pay such taxes to the proper taxing
authorities and/or the failure by Merchant to promptly file with such taxing
authorities all reports and other documents required, by applicable law, to be
filed with or delivered to such taxing authorities.  If Agent fails to perform its
responsibilities in accordance with this Section 8.3, and provided
Merchant complies with its obligations hereunder, Agent shall indemnify and
hold harmless Merchant from and against any and all costs, including, but not
limited to, reasonable attorneys’ fees, assessments, fines or penalties which
Merchant sustains or incurs as a result or consequence of the failure by Agent
to collect Sales Taxes and/or the failure by Agent to promptly deliver any and
all reports and other documents required to enable Merchant to file any
requisite returns with such taxing authorities.

 

(b)           Without
limiting the generality of Section 8.3(a) hereof, it is hereby agreed
that, as Agent is conducting the Sale solely as agent for Merchant, various
payments that this Agreement contemplates that one party may make to the other
party (including the payment by Agent of the Guaranteed Amount) do not
represent the sale of tangible personal property and, accordingly, are not
subject to Sales Taxes.

 

8.4           Supplies.  Agent shall have the right to use, without
charge, all existing supplies located at the Stores, including, without
limitation, boxes, bags, paper, twine and similar sales materials
(collectively, “Supplies”).  In
the event that additional Supplies are required in any of 

 

21

 

the Stores during the Sale, Merchant agrees
to promptly provide the same to Agent, if available, for which Agent shall
reimburse Merchant at Merchant’s cost therefor. 
Merchant does not warrant that the existing Supplies as of the Sale
Commencement Date are adequate for the purposes of the Sale.

 

8.5           Returns
of Merchandise.  During the Sale
Term, Agent shall accept returns of merchandise sold by Merchant prior to the
Sale Commencement Date (“Returned Merchandise”), provided that
such return is accompanied by the original Store register receipt and is
otherwise in compliance with Merchant’s return and price adjustment policy in
effect as of the date such item was purchased. 
Subject to Merchant’s right to return such defective goods to Merchant’s
vendors, if such Returned Merchandise is saleable as first-quality Merchandise,
it shall be included in Merchandise and valued at the Cost Value (less the
prevailing sale discount) applicable to such item as of the Sale Commencement
Date.  In the event that Returned
Merchandise constitutes Defective Merchandise (“Returned Defective
Merchandise”), Merchant and Agent shall mutually agree upon the Cost Value
for such item of Returned Defective Merchandise; provided, however,
in the event that Merchant and Agent cannot mutually agree upon the Cost Value
for such Returned Defective Merchandise, or such Returned Defective Merchandise
constitutes Excluded Defective Merchandise, then such Returned Defective
Merchandise shall constitute Merchant Consignment Goods or Excluded Defective
Merchandise and excluded from the Sale. 
The aggregate Cost Value of the Merchandise shall be increased by the
Cost Value of any Returned Merchandise included in Merchandise (determined in
accordance with this Section 8.5), and the Guaranteed Amount shall be
adjusted accordingly.  Merchant shall
promptly reimburse Agent in cash for any refunds Agent is required to issue to
customers in respect of any Returned Merchandise; provided, however,
to the extent that the Guaranteed Amount has been paid in full, unless and
until Merchant and Agent agree to a mutually acceptable escrow or reserve
sufficient to insure that Merchant will have sufficient funds to reimburse
Agent pursuant to this Section 8.5, Agent shall have no further
obligations pursuant to this Section 8.5.  
Returned Merchandise not included in Merchandise shall be disposed of by
Agent in accordance with instructions received from Merchant or, in the absence
of such instructions, returned to Merchant at the end of the Sale Term.  Any increases in the Guaranteed Amount in
connection with returned Merchandise shall be accounted for on a weekly
basis.  Except to the extent that Merchant
and Agent agree that Merchant’s POS or other applicable systems can account for
returns of Merchandise, all returns must be noted and described in a detailed
log and shall identify the receipt number for the original receipt and the date
the item was purchased (the “Returned Merchandise Log”), to be
maintained by Agent in a form acceptable to Merchant.  Agent shall provide Merchant with a copy of
any Returned Merchandise Log on a weekly basis during the Sale.  Agent shall not be entitled to any adjustment,
credit or payment for Returned Merchandise which is not properly noted and
described in the Returned Merchandise Log (or otherwise reflected in Merchant’s
POS systems).

 

8.6.          [Intentionally Omitted]

 

8.7           Sale
Reconciliation.  On each Wednesday
during the Sale Term, commencing on the second Wednesday after the Sale
Commencement Date, Agent and Merchant shall cooperate to reconcile Expenses of
the Sale, receipts of Distribution Center Merchandise and/or On-Order 

 

22

 

Merchandise in the Stores, and such other
Sale-related items as either party shall reasonably request, in each case for
the prior week or partial week (i.e. Sunday through Saturday), all
pursuant to procedures agreed upon by Merchant and Agent.  Within thirty (30) days after the end of the
Sale Term, Agent and Merchant shall complete a final reconciliation of the
Sale, the written results of which shall be certified by representatives of
each of Merchant and Agent as a final settlement of accounts between Merchant
and Agent.

 

8.8           Force
Majeure.  If any casualty, act of
terrorism, or act of God prevents or substantially inhibits the conduct of
business in the ordinary course at any Store, such Store and the Merchandise
located at such Store shall, in Agent’s discretion, be eliminated from the Sale
and considered to be deleted from this Agreement as of the date of such event,
and Agent and Merchant shall have no further rights or obligations hereunder
with respect thereto; provided, however, that (i) subject to
the terms of Section 7.1 above, the proceeds of any insurance attributable
to such Merchandise shall constitute Proceeds hereunder, and (ii) the
Guaranteed Amount shall be reduced to account for any Merchandise eliminated
from the Sale which is not the subject of insurance proceeds, and Merchant
shall reimburse Agent for the amount the Guaranteed Amount is so reduced prior
to the end of the Sale Term.

 

8.9           Merchant’s
Right to Monitor.  Merchant shall
have the right to monitor the Sale and activities attendant thereto and to be
present in the Stores during the hours when the Stores are open for business; provided
that Merchant’s presence does not unreasonably disrupt the conduct of the
Sale.  Merchant shall also have a right
of access to the Stores at any time in the event of an emergency situation and
shall promptly notify Agent of such emergency.

 

Section 9.               Employee Matters.

 

9.1           Merchant’s
Employees.  Agent may use Merchant’s
employees in the conduct of the Sale to the extent Agent deems expedient, and
Agent may select and schedule the number and type of Merchant’s employees
required for the Sale.  Agent shall
identify any such employees to be used in connection with the Sale (each such
employee, a “Retained Employee”) prior to the Sale Commencement
Date.  Notwithstanding the foregoing,
Merchant’s employees shall at all times remain employees of Merchant.  Agent’s selection and scheduling of Merchant’s
employees shall at all times comply with all applicable laws and regulations.
Merchant and Agent agree that, except to the extent that wages and benefits of
Retained Employees constitute Expenses hereunder, nothing contained in this
Agreement and none of Agent’s actions taken in respect of the Sale shall be
deemed to constitute an assumption by Agent of any of Merchant’s obligations
relating to any of Merchant’s employees including, without limitation, Excluded
Benefits, Worker Adjustment Retraining Notification Act (“WARN Act”)
claims and other termination type claims and obligations, or any other amounts
required to be paid by statute or law; nor shall Agent become liable under any
employment agreement or be deemed a joint or successor employer with respect to
such employees.  Agent shall comply in
the conduct of the Sale with all of Merchant’s employee rules, regulations,
guidelines and policies which have been provided to Agent in writing.  Merchant shall not, without the prior consent
of Agent, raise the salary or wages or increase the benefits for, or pay any
bonuses or other extraordinary payments to, any Store employees prior to the
Sale Termination Date.  Merchant 

 

23

 

shall not transfer any Retained Employee
during the Sale Term without Agent’s prior consent, which consent shall not be
unreasonably withheld.

 

9.2           Termination
of Employees.  Agent may in its
discretion stop using any Retained Employee at any time during the Sale,
subject to the conditions provided for herein. 
In the event that Agent desires to cease using any Retained Employee, Agent
shall notify Merchant at least seven (7) days prior thereto, so that
Merchant may coordinate the termination of such employee; provided, however,
that, in the event that Agent determines to cease using an employee “for cause”
(which shall consist of dishonesty, fraud or breach of employee duties), the
seven (7) day notice period shall not apply, provided  further,
however, that Agent shall immediately notify Merchant of the basis for
such “cause” so that Merchant can arrange for termination of such employee.  From and after the date of this Agreement and
until the Sale Termination Date, Merchant shall not transfer or dismiss
employees of the Stores except “for cause” without Agent’s prior consent.  Notwithstanding the foregoing, Agent shall
not have the right to terminate the actual employment of any employee, but
rather may only cease using such employee in the Sale and paying any Expenses
with respect to such employee.

 

9.3           Payroll
Matters.  During the Sale Term,
Merchant shall process the base payroll for all Retained Employees.  Each Wednesday (or such other date as may be
reasonably requested by Merchant to permit the funding of the payroll accounts
before such payroll is due and payable) during the Sale Term, Merchant shall
transfer, or, to the extent that the Payment Date has passed, Agent shall
transfer, to Merchant’s payroll accounts an amount equal to the base payroll
for Retained Employees plus related payroll taxes, workers’ compensation and
benefits for such week which constitute Expenses hereunder.

 

9.4           Employee
Retention Bonuses.  Agent may pay, as
an Expense, retention bonuses (“Retention Bonuses”) (which bonuses shall
be inclusive of payroll taxes, but as to which no benefits shall be payable),
up to a maximum of ten percent (10%) of base payroll for all Retained
Employees, to such Retained Employees who do not voluntarily leave employment
and are not terminated “for cause,” as it may determine in its discretion.  The amount of such Retention Bonuses shall be
in an amount to be determined by Agent, in its discretion, and shall be payable
within thirty (30) days after the Sale Termination Date, and shall be processed
through Merchant’s payroll system.  Agent
shall provide Merchant with a copy of Agent’s Retention Bonus plan within five (5) business
days after the Sale Commencement Date.

 

Section 10.             Conditions Precedent and Subsequent.  The willingness of Agent and Merchant to
enter into the transactions contemplated under this Agreement are directly
conditioned upon the satisfaction of the following conditions at the time or
during the time periods indicated, unless specifically waived in writing by the
applicable party:

 

(a)           All
representations and warranties of Merchant and Agent hereunder shall be true
and correct in all material respects and no Event of Default shall have
occurred at and as of the date hereof and as of the Sale Commencement Date.

 

24

 

(b)           Merchant
shall have obtained the Approval Order on or before August 14, 2008.

 

(c)           Subject
to the rights and limitations set forth in the Intercreditor Agreement and the
DIP Orders, Merchant shall have obtained the consent of GECC, as agent for the
Lenders, the Indenture Trustee, and the Ad Hoc Noteholder Committee to this
Agreement.

 

Section 11.             Representations,
Warranties and Covenants.

 

11.1         Merchant’s
Representations, Warranties and Covenants.  Merchant hereby represents,
warrants and covenants in favor of Agent as follows:

 

(a)         each
entity comprising Merchant (i) is a corporation duly organized, validly
existing and in good standing under the laws of the state or province of its
formation (except as may be a result of the commencement any Chapter 11 Cases
for Merchant); (ii) has all requisite corporate power and authority to
own, lease and operate its assets and properties and to carry on its business
as presently conducted; and (iii) is, and during the Sale Term will
continue to be, duly authorized and qualified to do business and in good
standing in each jurisdiction where the nature of its business or properties
requires such qualification, including all jurisdictions in which the Stores
are located, except, in each case, to the extent that the failure to be in good
standing or so qualified could not reasonably be expected to have a material
adverse effect on the ability of Merchant to execute and deliver this Agreement
and perform fully its obligations hereunder.

 

(b)         Except
as may be required in connection with the issuance of the Approval Order, and
subject to the consent of the Lenders, the Indenture Trustee, and the Ad Hoc
Noteholder Committee (subject to the rights and limitations set forth in the
Intercreditor Agreement and the DIP Orders ): (i) the Merchant has the
right, power and authority to execute and deliver this Agreement and each other
document and agreement contemplated hereby (collectively, together with this
Agreement, the “Agency Documents”) and to perform fully its obligations
thereunder; (ii) Merchant has taken all necessary actions required to
authorize the execution, delivery and performance of the Agency Documents, and
no further consent or approval is required for Merchant to enter into and
deliver the Agency Documents, to perform its obligations thereunder and to
consummate the Sale, except for any such consent the failure of which to be
obtained could not reasonably be expected to have a material adverse effect on
the ability of Merchant to execute and deliver this Agreement and perform fully
its obligations hereunder; and (iii) each of the Agency Documents has been
duly executed and delivered by Merchant and constitutes the legal, valid and
binding obligation of Merchant enforceable in accordance with its terms.

 

(c)         Merchant
owns, and will own at all times during the Sale Term, good and marketable title
to all of the Merchandise to be included in the Sale, free and clear of all
liens, claims and encumbrances of any nature, other than the liens listed on Exhibit 11.1(c) and
any applicable statutory liens.  Merchant
shall not create, incur, assume or suffer to exist any security interest, lien
or other charge or encumbrance upon or with respect to any of the Merchandise
or 

 

25

 

the Proceeds other than as provided for
herein (including those listed on Exhibit 11.1(c)).  Any Approval Order shall provide that all
such liens shall be transferred to and attach only to the Guaranteed Amount or
other amounts payable to Merchant hereunder.

 

(d)         Merchant
has maintained its pricing files in the ordinary course of business, and prices
charged to the public for goods are the same in all material respects as set
forth in such pricing files for the periods indicated therein (without
consideration of any point of sale markdowns, except with respect to Aged
Merchandise, where the point of sale markdown is reflected in the price files,
and all pricing files and records are true and accurate in all material
respects as to the actual cost to Merchant for purchasing the goods referred to
therein and as to the selling price to the public for such goods (without
consideration of any point of sale markdowns, other than with respect to Aged
Merchandise) as of the dates and for the periods indicated therein.  Merchant represents that (i) the ticketed
prices of all items of Merchandise do not and shall not include any Sales Taxes
and (ii) all registers located at the Stores are programmed to correctly
compute all Sales Taxes required to be paid by the customer under applicable
law, as such calculations have been identified to Merchant by its retained service
provider.

 

(e)         Except
with respect to Merchant’s termination of point of sale events prior to the
Sale Commencement Date in the manner previously disclosed to Agent, Merchant
has not marked up or raised, and shall not up to the Sale Commencement Date mark
up or raise, the price of any items of Merchandise, or removed or altered any
tickets or any indicia of clearance merchandise, except in the ordinary course
of business and except for the effects of the termination of promotional
events.

 

(f)          Through
the Sale Commencement Date, Merchant shall ticket or mark all items of
inventory received at the Stores prior to the Sale Commencement in a manner
consistent with similar Merchandise located at the Stores and in accordance
with Merchant’s ordinary course past practices and policies relative to pricing
and marking inventory.  To the extent
Merchandise is not pre-ticketed prior to its receipt in the Distribution
Centers, Agent shall be responsible for ticketing Distribution Center
Merchandise and/or On-Order Merchandise as same is received in the Stores after
the Sale Commencement Date.

 

(g)         Since
July 1, 2008 Merchant has not, and through the Sale Commencement Date
Merchant shall not purchase for or transfer to or from the Stores any
merchandise or goods outside the ordinary course, except  for the transfer of Distribution Center
Merchandise to the Stores prior to the Sale Commencement Date in a manner
consistent with Merchant’s disclosures.. 
Since July 1, 2008 Merchant has continued and will continue to replenish
goods in the Stores in a manner and at levels consistent with Merchant’s
replenishment of on-going stores, it being understood and agreed that such
replenishment has not and will not be consistent with historic and customary
levels or practices, as a result of, among other things, Merchant’s Chapter 11
filing and/or delays in procuring shipments from its vendors.  From and after August 4, 2008, Merchant
shall discontinue designating replenishment for the Stores; provided  however,
On-Order Merchandise earmarked for the Stores prior to August 8, 2008, to
the extent received, may 

 

26

 

continue to flow through to the Stores, with
some arriving after the Sale Commencement Date, but in any event prior to the Store
Receipt Deadline.

 

(h)         To
the best of Merchant’s knowledge, all Merchandise is in compliance with all
applicable federal, state or local product safety laws, rules and
standards.  Merchant shall provide Agent
with its historic policies and practices, if any, regarding product recalls
prior to the Sale Commencement Date.

 

(i)          Subject
to the provisions of the Approval Order, throughout the Sale Term, the Agent
shall have the right to the unencumbered use and occupancy of, and peaceful and
quiet possession of, each of the Stores, the assets currently located at the
Stores and the utilities and other services provided at the Stores.  Merchant shall, throughout the Sale Term,
maintain in good working order, condition and repair all cash registers,
heating systems, air conditioning systems, elevators, escalators and all other
mechanical devices necessary for the conduct of the Sale at the Stores.  Except any amounts owing as a result of the
commencement of any Chapter 11 Case, and absent a bona fide dispute, throughout
the Sale Term Merchant shall remain current on all expenses and payables
necessary for the conduct of the Sale (other than those relating to any period
prior to the commencement of any Chapter 11 Case), subject to any restrictions
that may be imposed under the Bankruptcy Code.

 

(j)          Except
any amounts owing as a result of the commencement of any Chapter 11 Cases,
Merchant had paid, and will continue to pay throughout the Sale Term, all
self-insured or Merchant funded employee benefit programs for Store employees,
including health and medical benefits and insurance and all proper claims made
or to be made in accordance with such programs (other than those relating to
any period prior to the commencement of any Chapter 11 Case).

 

(k)         Since
July 1, 2008, Merchant has not intentionally taken, and shall not
throughout the Sale Term intentionally take, any actions with the intent of
increasing the Expenses of Sale, including, without limitation, increasing
salaries or other amounts payable to employees, except (i) there may have
been instances that, in an effort to encourage one or more employees to remain
in Merchant’s employ, Merchant increased the salaries of such employees (such
action not being with any intent to increase any Expense of the Sale or in anticipation
thereof); and (ii) to the extent an employee was due an annual raise.

 

(l)          Except
as may be impacted by the filing for Chapter 11 protection, or otherwise
restricted by the Chapter 11 filing, Merchant covenants to continue to operate
the Stores in all material respects in the ordinary course of business from the
date of this Agreement to the Sale Commencement Date by: (i) selling
inventory during such period at customary prices consistent with the ordinary
course of business; (ii) not promoting or advertising any sales or
in-store promotions (including POS promotions) to the public (except for
Merchant’s pending advertisements as of the date of this Agreement and/or
Merchant’s promotions for the period through the Sale Commencement Date, as
reflected on Exhibit 11.1(l)); (iii) except as may occur in
the ordinary course of business, not returning inventory to vendors and not
transferring inventory or supplies between or among Stores; and (iv) except
as may occur in the ordinary 

 

27

 

course of business, not making any management
personnel moves or changes at the Stores without prior written notice to and
consultation with (but not approval of) Agent.

 

(m)          The
aggregate Cost Value of the Merchandise (excluding the Additional Transfer
Merchandise) as a percentage of the aggregate Retail Price of the Merchandise
(in each case as determined in accordance with the Inventory Taking) (the “Cost
Factor”) shall not be greater than 47% (the “Cost Factor Threshold”)
and to the extent that the actual Cost Factor for the  Merchandise (excluding the Additional
Transfer Merchandise) is greater than the Cost Factor Threshold, then the
Guaranty Percentage shall be adjusted (in addition to any adjustment applicable
pursuant to section 3.1(c) hereof) in accordance with Exhibit 11.1(m)(i).  To the extent that the Additional Wamsutta
Merchandise is included as Merchandise, then the Cost Factor for the Additional
Wamsutta Merchandise included in the Sale shall not be greater than 35.5% (the “Wamsutta
Cost Factor Threshold”) and to the extent that the actual Cost Factor for
the Additional Wamsutta Merchandise included as Merchandise  is greater than the Wamsutta Cost Factor
Threshold, then the Guaranty Percentage attributable to the Additional Wamsutta
Merchandise (only) shall be adjusted (in
addition to any adjustment applicable pursuant to section 3.1(c) hereof)
in accordance with Exhibit 11.1(m)(ii).  For the purposes of this Agreement,  “Retail
Price” means the current retail or aged price, as applicable, for each item
of Merchandise, as reflected in the Merchant’s Output SKU Master File, dated as
of July 25, 2008.  For the
purposes of this Agreement, “Excluded Price Adjustments” means the following discounts or price adjustments offered
by the Merchant: (i) point of sale discounts or similar adjustments
regardless of duration other than with respect to (A) Aged Merchandise,
for which the current selling price is reflective of point of sale discounts,
as reflected on the Output SKU Master File, dated as of July 25,
2008; (ii) employee discounts; (iii) member
or customer appreciation points or coupons; (iv) multi-unit purchase
discounts; (v) adjustments for damaged, defective or “as-is” items; (vi) coupons
(Merchant’s or competitors’), catalog, website, or circular prices, or “buy one
get one” type discounts; (vii) customer savings pass discounts or “bounce
back” coupons, or discounts for future purchases based on dollar value of past
purchases; (viii) obvious ticketing or marking errors; (x) instant
(in-store) or mail in rebates; or (ix) similar customer specific,
temporary, or employee non-product specific discounts or pricing
accommodations.  If an item of
Merchandise has more than one ticketed price, or if multiple items of the same
SKU are ticketed at different prices, or have a different PLU price, and such
pricing does not otherwise qualify as an Excluded Price Adjustment, the lowest
ticketed, marked or PLU price on any such item shall prevail for such item or
for all such items within the same SKU, as the case may be, that are located
within the same location (as the case may be, the “Lowest Location Price”),
unless it is reasonably determined by Merchant and Agent that the applicable
Lowest Location Price was mismarked or such item was priced because it was
damaged or marked as “as is,” in which case the higher price shall control; provided,
however, in determining the Lowest Location Price with respect to any
item of Merchandise at a Store, the Lowest Location Price shall be determined
based upon the lowest ticketed, marked or PLU price for such item on a per
Store basis.  No adjustment to Retail
Price shall be made with respect to different ticketed price, marked price, or
PLU prices for items located in different Stores.  For
purposes of this Agreement, the Cost Factor shall be calculated by diving the
aggregate Cost Value of the Merchandise by the aggregate Retail Price (as
defined herein) of the Merchandise.

 

28

 

(n)           All
documents, information and supplements provided by Merchant to Agent in
connection with Agent’s due diligence and the negotiation of this Agreement
were true and accurate in all material respects at the time provided.

 

(o)         To
the best of Merchant’s knowledge, Merchant has not since July 1, 2008
shipped any Excluded Defective Merchandise from the Distribution Centers to the
Stores.  Merchant will not ship any
Excluded Defective Merchandise from the date of this Agreement from the
Distribution Centers to the Stores.

 

(p)         Merchant
has not transferred any employees to or from any Store within the past 45 days,
except as detailed on Exhibit 11.1(p).

 

(q)           Merchant will not,
prior to the Sale Termination Date, offer any promotions or discounts at its
retail store locations that are not closing, except as detailed on Exhibit 11.1(q) and
other than in connection with further store closing sales approved by the
Bankruptcy Court.

 

(r)            Through the date
Merchant exercises the Additional Stores Inclusion Option, Merchant shall
continue to operate the Additional Stores in a manner consistent with its
operation of its other on-going retail store locations.

 

11.2       Agent’s
Representations, Warranties and Covenants. 
Each entity comprising Agent hereby represents, warrants and covenants
in favor of Merchant as follows:

 

(a)           Each
entity comprising Agent: (i) is a limited partnership, corporation or
limited liability company (as the case may be) duly and validly existing and in
good standing under the laws of the State of its organization; and (ii) has
all requisite power and authority to carry on its business as presently
conducted and to consummate the transactions contemplated hereby.

 

(b)           Agent
has the right, power and authority to execute and deliver each of the Agency
Documents to which it is a party and to perform fully its obligations
thereunder.  Agent has taken all
necessary actions required to authorize the execution, delivery and performance
of the Agency Documents, and no further consent or approval is required on the
part of Agent for Agent to enter into and deliver the Agency Documents, to
perform its obligations thereunder and to consummate the Sale.  Each of the Agency Documents has been duly
executed and delivered by the Agent and constitutes the legal, valid and
binding obligation of Agent enforceable in accordance with its terms.  No court order or decree of any federal,
state or local governmental authority or regulatory body is in effect that
would prevent or impair, or is required for, Agent’s consummation of the transactions
contemplated by this Agreement (other than the Approval Order), and no consent
of any third party which has not been obtained is required therefor, other than
as provided herein.  No contract or other
agreement to which Agent is a party or by which Agent is otherwise bound will
prevent or impair the consummation of the transactions contemplated by this
Agreement.

 

29

 

(c)           No
action, arbitration, suit, notice or legal administrative or other proceeding
before any court or governmental body has been instituted by or against Agent,
or has been settled or resolved or, to Agent’s knowledge, has been threatened
against or affects Agent, which questions the validity of this Agreement or any
action taken or to be taken by Agent in connection with this Agreement or
which, if adversely determined, would have a material adverse effect upon Agent’s
ability to perform its obligations under this Agreement.

 

(d)           The
Sale shall be conducted in compliance with all applicable state and local laws,
rules and regulations and Merchant’s leases and other agreements, except
as provided for in the Sale Guidelines and Approval Order.

 

Section 12.           Insurance.

 

12.1         Merchant’s
Liability Insurance.  Merchant shall
continue until the Sale Termination Date, in such amounts as it currently has
in effect, all of its liability insurance policies, including, but not limited
to, products liability, comprehensive public liability, auto liability and
umbrella liability insurance, covering injuries to persons and property in, or
in connection with, Merchant’s operation of the Stores and shall endeavor to
cause Agent to be named as an additional named insured (as its interest may
appear) with respect to all such policies. 
Merchant shall deliver to Agent certificates evidencing such insurance
setting forth the duration thereof and naming Agent as an additional named
insured, in form reasonably satisfactory to Agent.  All such policies shall require at least
thirty (30) days’ prior notice to Agent of cancellation, non-renewal or
material change during the Sale Term.  In
the event of a claim under any such policies, Merchant shall be responsible for
the payment of all deductibles, retentions or self-insured amounts thereunder,
unless it is determined that liability arose by reason of the wrongful acts or
omissions or negligence of Agent, or Agent’s employees, independent contractors
or agents (including Merchant’s employees being supervised by Agent).

 

12.2         Merchant’s
Casualty Insurance.  Merchant will
provide throughout the Sale Term, at Agent’s cost as an Occupancy Expense
hereunder, fire, flood, theft and extended coverage casualty insurance covering
the Merchandise in a total amount equal to no less than the retail value
thereof.  From and after the date of this
Agreement until the Sale Termination Date, all such policies will also name
Agent as loss payee (as its interest may appear).  In the event of a loss to the Merchandise on
or after the date of this Agreement, the Proceeds of such insurance attributable
to the Merchandise, plus any self insurance amounts and the amount of any
deductible or self-insured retention (which amounts shall be paid by Agent as
an Expense), shall constitute Proceeds hereunder.  Merchant shall deliver to Agent certificates
evidencing such insurance, setting forth the duration thereof and naming the
Agent as loss payee (as its interest may appear), in form and substance
reasonably satisfactory to Agent.  All
such policies shall require at least thirty (30) days’ prior notice to the
Agent of cancellation, non-renewal or material change during the Sale
Term.  Merchant shall not make any change
in the amount of any deductibles or self insurance amounts prior to the Sale
Termination Date without Agent’s prior written consent.

 

30

 

12.3         Agent’s Insurance.  Agent shall maintain at Agent’s cost and
expense throughout the Sale Term, in such amounts as it currently has in
effect, comprehensive public liability insurance policies covering injuries to
persons and property in or in connection with Agent’s agency at the Stores, and
shall cause Merchant to be named as additional insureds and loss payees with
respect to such policies.  Agent shall
deliver to Merchant certificates evidencing such insurance policies setting
forth the duration thereof and naming Merchant as additional insureds, in form
and substance reasonably satisfactory to Merchant.  In the event of a claim under any such
policies, Agent shall be responsible for the payment of all deductibles,
retentions or self-insured amounts thereunder, unless it is determined that
liability arose by reason of the wrongful acts or omissions or negligence of
Merchant or Merchant’s independent contractors or agents, other than Agent or
Agent’s employees, agents or independent contractors (including Merchant’s
employees under Agent’s supervision).

 

12.4         Worker’s
Compensation Insurance.  Merchant
shall at all times during the Sale Term maintain in full force and effect
workers’ compensation insurance (including employer liability insurance) covering
all Retained Employees in compliance with all statutory requirements.

 

Section 13.     Indemnification

 

13.1         Merchant
Indemnification.  Merchant shall
indemnify and hold Agent and its officers, directors, employees, agents and
independent contractors (collectively, “Agent Indemnified Parties”)
harmless from and against all claims, demands, penalties, losses, liability or
damage, including, without limitation, reasonable attorneys’ fees and expenses,
directly or indirectly asserted against, resulting from or related to: (i) Merchant’s
material breach of or failure to comply with any of its agreements, covenants,
representations or warranties contained in any Agency Document; or (ii) the
gross negligence (including omissions) or willful misconduct of Merchant, or
its officers, directors, employees, agents or representatives.

 

13.2         Agent
Indemnification.  Agent shall
indemnify and hold Merchant and its officers, directors, employees, agents and
representatives harmless from and against all claims, demands, penalties,
losses, liability or damage, including, without limitation, reasonable
attorneys’ fees and expenses, directly or indirectly asserted against,
resulting from, or related to: (i) Agent’s material breach of or failure
to comply with any of its agreements, covenants, representations or warranties
contained in any Agency Document; (ii) any claims by any party engaged by
Agent as an employee or independent contractor arising out of such employment;
and (iii) the gross negligence (including omissions) or willful misconduct
of Agent, its officers, directors, employees, agents or representatives.

 

Section 14.             Defaults.  The following shall constitute “Events of
Default” hereunder:

 

(a)           The Merchant or
Agent shall fail to perform any material obligation hereunder if such failure
remains uncured ten (10) days after receipt of written notice thereof; or

 

31

 

(b)           Any representation
or warranty made by Merchant or Agent proves untrue in any material respect as
of the date made and, to the extent curable, continues uncured ten (10) days
after written notice to the defaulting party.

 

(c )          The Sale is
terminated or materially interrupted or impaired for any reason other than (i) an
Event of Default by Agent; or (ii) any other material breach or action by
Agent not authorized under the Agency Agreement; provided  however,
it is expressly understood that Merchant’s conduct of “store closing”, “going
out of business” or similar themed sales pursuant to another order of the Bankruptcy
Court (the “Other Store Closings”) during a period that overlaps with
the Sale Term shall not be deemed an Event of Default, or a material
interruption of impairment of the Sale or this Agreement and Agent acknowledges
that it has not remedies under this Agreement in connection with, or a result
of, such Other Store Closings.

 

Any party’s damages or entitlement to equitable relief on account of an
Event of Default shall be determined by the Bankruptcy Court.

 

Section 15.             Miscellaneous.

 

15.1         Notices.  All notices and communications provided for
pursuant to this Agreement shall be in writing and sent by email, by hand, by
facsimile or by Federal Express or other recognized overnight delivery service,
as follows (with Merchant and Agent to receive all notices regardless of their
origin):

 

	
  If
  to the Agent:

  	
  GORDON BROTHERS RETAIL

  
	
   

  	
  PARTNERS, LLC

  
	
   

  	
  101 Huntington Avenue, 10th
  Floor

  
	
   

  	
  Boston, MA 02199

  
	
   

  	
  Attention: Michael Chartock

  
	
   

  	
  Tel: 617-210-7116

  
	
   

  	
  Fax: 617-531-7906

  
	
   

  	
  Email:
  mchartock@gordonbrothers.com

  
	
   

  	
   

  
	
   

  	
  HILCO MERCHANT RESOURCES, LLC

  
	
   

  	
  5 Revere Drive,
  Suite 206

  
	
   

  	
  Northbrook, IL 60062

  
	
   

  	
  Attn: Joseph Malfitano

  
	
   

  	
  Tel: 847-504-3257

  
	
   

  	
  Fax: 847-897-0868

  
	
   

  	
  Email: jmalfitano@hilcotrading.com

  
	
   

  	
   

  
	
  If
  to the Merchant:

  	
  LINENS
  HOLDING CO.

  
	
   

  	
  6
  Brighton Road

  
	
   

  	
  Clifton,
  NJ 07012

  
	
   

  	
  Attn:

  	
  Frank
  Rowan

  
	
   

  	
   

  	
  Dave
  Coder

  

 

32

 

	
   

  	
  Fax:

  	
  (973)
  836-0309

  
	
   

  	
   

  	
  Email:
  frowan@lnt.com

  
	
   

  	
   

  	
  dcoder@lnt.com

  
	
   

  	
   

  
	
  With
  a copy to:

  	
  ASSET
  DISPOSITION ADVISORS, LLC

  
	
   

  	
  499
  Park Avenue

  
	
   

  	
  New
  York, NY 10022

  
	
   

  	
  Attn:

  	
  Paul
  Traub

  
	
   

  	
   

  	
  Steven
  Fox

  
	
   

  	
  Tel:

  	
  (212)
  573-9084

  
	
   

  	
  Fax:

  	
  (212) 652-3863

  
	
   

  	
   

  	
   

  
	
   

  	
  RICHARDS,
  LAYTON, & FINGER, P.A.

  
	
   

  	
  920
  N. King Street

  
	
   

  	
  Wilmington,
  DE 19801

  
	
   

  	
  Attn:

  	
  Mark
  D. Collins

  
	
   

  	
   

  	
  Michael
  J. Merchant

  
	
   

  	
  Tel:

  	
  (302)
  651-7700

  
	
   

  	
  Fax:

  	
  (302)
  651-7701

  
	
   

  	
  Email:

  	
  Collins@rlf.com

  
	
   

  	
   

  	
  Merchant@rlf.com

  
	
   

  	
   

  
	
   

  	
  GARDERE
  WYNNE SEWELL LLP

  
	
   

  	
  1601
  Elm Street, Suite 3000

  
	
   

  	
  Dallas,
  TX 75201

  
	
   

  	
  Attn:

  	
  Stephen
  A. McCartin, Esq.

  
	
   

  	
   

  	
  Randy
  Ray, Esq.

  
	
   

  	
  Fax:

  	
  (214)
  999-3544

  
	
   

  	
  Email:

  	
  smccartin@gardere.com

  
	
   

  	
   

  	
  rray@gardere.com

  
	
   

  	
   

  
	
   

  	
  MORGAN,
  LEWIS & BOCKIUS LLP

  
	
   

  	
  101
  Park Avenue

  
	
   

  	
  New
  York, NY 10178

  
	
   

  	
  Attn:   Neil E. Herman, Esq.

  
	
   

  	
  Fax:
      (212) 309-6001

  
	
   

  	
  Email:
  nherman@morganlewis.com

  
	
   

  	
   

  
	
  If
  to Lenders:

  	
  GENERAL
  ELECTRIC CAPITAL

  
	
   

  	
  CORPORATION

  
	
   

  	
  401
  Merritt 7

  
	
   

  	
  125
  Summer Street, 12th Floor

  
	
   

  	
  Boston,
  MA 02110

  
	
   

  	
  Attention:
  Mark Forti

  

 

33

 

	
   

  	
  Tel:

  	
  (617)
  378-4779

  
	
   

  	
  Fax:

  	
  (617)
  261-1206

  
	
   

  	
   

  	
   

  
	
  With
  a copy to:

  	
  BINGHAM
  MCCUTCHEN LLP

  
	
   

  	
  150
  Federal Street

  
	
   

  	
  Boston,
  MA 02110

  
	
   

  	
  Attention:
  Robert A. J. Barry, Esq.

  
	
   

  	
  Tel:
  (617) 951-8624

  
	
   

  	
  Email:  raj.barry@bingham.com

  
	
   

  	
   

  
	
  If
  to Indenture Trustee:

  	
  ROPES &
  GRAY LLP

  
	
   

  	
  1211
  Avenue of the Americas

  
	
   

  	
  New
  York, NY 10036-8704

  
	
   

  	
  Attn:

  	
  Mark
  I. Bane, Esq.

  
	
   

  	
   

  	
  Anne
  H. Pak, Esq.

  
	
   

  	
  Tel:

  	
  (212)
  596-9000

  
	
   

  	
  Fax:

  	
  (212)
  596-9090

  
	
   

  	
  Email:

  	
  mark.bane@ropesgray.com

  
	
   

  	
   

  	
  anne.pak@ropesgray.com

  
	
   

  	
   

  
	
  If
  to Ad Hoc Noteholders

  	
   

  
	
  Committee:

  	
  KASOWITZ,
  BENSON, TORRES

  
	
   

  	
  &
  FRIEDMAN LLP

  
	
   

  	
  1633
  Broadway

  
	
   

  	
  New
  York, NY 10019

  
	
   

  	
  Attn:

  	
  David
  M. Friedman, Esq.

  
	
   

  	
   

  	
  Adam
  L. Shiff, Esq.

  
	
   

  	
  Tel:

  	
  (212)
  506-1700

  
	
   

  	
  Fax:

  	
  (212)
  506-1800

  
	
   

  	
  Email:

  	
  dfriedman@kasowitz.com

  
	
   

  	
   

  	
  ashiff@kasowitz.com

  
	
   

  	
   

  	
   

  
	
  If
  to the Official Committee

  	
   

  
	
  of
  Unsecured Creditors:

  	
  OTTERBOURG,
  STEINDLER, HOUSTON

  
	
   

  	
  &
  ROSEN, P.C.

  
	
   

  	
  230
  Park Avenue

  
	
   

  	
  New
  York, NY 10169-0075

  
	
   

  	
  Attn:

  	
  Glenn
  B. Rice, Esq.

  
	
   

  	
  Tel:

  	
  (212)
  661-9829

  
	
   

  	
  Fax:

  	
  (212)
  982-6104

  
	
   

  	
  Email:
  

  	
  grice@oshr.com

  

 

34

 

15.2         Governing Law.
This Agreement shall be governed and construed in accordance with the laws of
the Delaware without regard to conflicts of laws principles thereof, except
where governed by the Bankruptcy Code in the event of the commencement of the
Chapter 11 Cases.

 

15.3         Entire Agreement.  This Agreement contains the entire agreement
between the parties hereto with respect to the transactions contemplated hereby
and supersedes and cancels all prior agreements, including, but not limited to,
all proposals, letters of intent or representations, written or oral, with
respect thereto.

 

15.4         Amendments.  This Agreement may not be modified except in
a written instrument executed by each of the parties hereto (including the
Lenders); provided  however, Merchant shall consult with the
Indenture Trustee, the Ad Hoc Noteholder Committee and the Official Committee
prior to execution of any amendment of this Agreement and shall afford such
parties with a reasonable opportunity (as determined by the circumstances
associated with the amendment) to object to the amendment and seek an order of
the Bankruptcy Court preventing such amendment.

 

15.5         No Waiver.  No consent or waiver by any party, express or
implied, to or of any breach or default by the other in the performance of its
obligations hereunder shall be deemed or construed to be a consent or waiver to
or of any other breach or default in the performance by such other party of the
same or any other obligation of such party. 
Failure on the part of any party to complain of any act or failure to
act by the other party or to declare the other party in default, irrespective
of how long such failure continues, shall not constitute a waiver by such party
of its rights hereunder.

 

15.6         Successors and
Assigns.  This Agreement shall inure
to the benefit of and be binding upon Agent and Merchant and their respective
successors and assigns; provided, however, that this Agreement may not be
assigned by Merchant or Agent to any party without the prior written consent of
the other.

 

15.7         Execution in
Counterparts.  This Agreement may be
executed in two or more counterparts, each of which shall be deemed an original
but all of which together shall constitute but one agreement.  This Agreement may be executed by facsimile,
and such facsimile signature shall be treated as an original signature
hereunder.

 

15.8         Section Headings.  The headings of sections of this Agreement
are inserted for convenience only and shall not be considered for the purpose
of determining the meaning or legal effect of any provisions hereof.

 

15.9         FF&E.   With respect to the FF&E owned by
Merchant (the “Owned FF&E”) and located at the Stores, at Merchant’s
sole option, exercisable by Merchant in writing on an individual Store by Store
basis within thirty (30)  days after the
Sale Commencement Date, and on a Distribution Center by Distribution Center
basis within forty-five (45) after the Sale Commencement Date, Agent shall, at
Merchant’s election (“FF&E Election”), sell the FF&E in 

 

35

 

any such Store; provided  however, Merchant shall have the
right to (with the consent of the Indenture Trustee, the Ad Hoc Noteholder
Committee, and the Lenders)  designate
certain FF&E located at any of the Stores that Merchant does not elect to
have Agent sell.  In the event Merchant exercises
Owned FF&E Election with respect to the Owned FF&E in any Store(s),
Agent be entitled to receive a commission equal to twenty five percent (25%) of
the net proceeds from the sale of such FF&E (net of sales taxes and
expenses, including any expenses associated with the removal of such FF&E
incurred by Merchant as part of such sale); provided  however
Merchant shall be responsible for payment of expenses incurred in connection
with the disposition of the Owned FF&E in accordance with a budget to be
mutually agreed upon between Merchant and Agent;  provided  further  however,
Merchant may elect to receive, in lieu of proceeds net of expenses and Agent’s
commission, a lump sum payment, on a per Store basis, in an amount to be agreed
upon between Merchant, in consultation with Lenders, the Indenture Trustee and
the Ad Hoc Noteholders Committee (in accordance with their respective rights
under the Intercreditor Agreement and the DIP Orders), and Agent, in which case
all costs and expenses associated with the disposition thereof shall be borne
by Agent.   In either event, as of the
Sale Termination Date, Agent may abandon, in place, any unsold FF&E, at the
Stores.  In the event that Merchant
elects to have someone other than the Agent dispose of the Owned FF&E,
Agent agrees that it shall cooperate with such party, provided  however,
it is understood that such third party’s efforts shall not interfere with Agent’s
conduct of the Sale.  All net Proceeds
from the disposition of the Owned FF&E, net of sales taxes, Agent’s
commission, and the expenses associated with the disposition the Owned FF&E
(collectively, the “Net FF&E Proceeds”), shall be deposited in a
segregated account designated solely for the deposit of the Net FF&E
Proceeds.

 

15.10       Reporting.  If requested, Agent shall furnish Merchant
with weekly reports reflecting the progress of the Sale, which shall specify
the Proceeds received to date and shall furnish Merchant with such other
information regarding the Sale as Merchant reasonably requests.  The Agent will maintain and provide to
Merchant sales records to permit calculation of and compliance with any
percentage of rent obligations under Store leases.  During the course of the Sale, Merchant shall
have the right to have representatives continually act as observers of the Sale
in the Stores, so long as they do not interfere with the conduct of the Sale.

 

15.11       Agent.  All references to “Agent” hereunder shall
mean each of Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners,
LLC, jointly and severally.

 

Section 16.   Security
Interest.  Upon issuance of the
Letter of Credit, and payment of the Initial Guaranty Payment, and effective as
of the Payment Date, Merchant hereby grants to Agent a first priority security
interest in and lien upon the Merchandise and the Proceeds to secure all
obligations of Merchant to Agent hereunder; provided, however,
until the payment of the Guaranteed Amount, Expenses, and the Recovery Amount,
if any, in full, the security interest granted to Agent hereunder shall remain
junior and subordinate in all respects to the security interest of Lenders, the
Indenture Trustee, and the Noteholders, in each case to the extent of the
unpaid portion of the Guaranteed Amount, Expenses, and the Recovery Amount, if
any.  Upon entry of the Approval Order,
and payment of the Initial Guaranteed Payment pursuant to Section 3.3
hereof, and the issuance of the Letter of Credit, the security interest granted
to Agent 

 

36

 

hereunder shall be deemed properly perfected without the need for
further filings or documentation.

 

37

 

IN WITNESS WHEREOF, the Agent and Merchant hereby execute this
Agreement by their duly authorized representatives as a sealed instrument as of
the day and year first written above.

 

	
   

  	
  LINENS HOLDING CO.,

  
	
   

  	
  On Behalf of Itself and
  its Affiliated Debtors

  
	
   

  	
  and Debtors-in-Possession

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ M.F. GRIES

  
	
   

  	
  Name:

  	
  M.F. Gries

  
	
   

  	
  Its: 

  	
  Interim CEO

  
	
   

  	
   

  
	
   

  	
  HILCO MECHANT RESOURCES, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ JOSEPH MALFITANO

  
	
   

  	
  Name:

  	
  Joseph Malfitano

  
	
   

  	
  Title:

  	
  VP, Assistant General
  Counsel, Member

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  GORDON BROTHERS RETAIL

  
	
   

  	
  PARTNERS, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:  

  	
  /S/ MICHAEL CHARTOCK

  
	
   

  	
  Name:

  	
  Michael Chartock

  
	
   

  	
  Title:

  	
  Principal-Managing
  Director

  
	
   

  	
   

  
	
   

  	
   

  
	
  CONSENTED AND AGREED TO

  	
   

  
	
  AS IT RELATES TO SECTIONS
  3.3, 3.4

  	
   

  
	
  4.2, 15.9 AND 16 HEREOF,
  BY:

  	
   

  
	
   

  	
   

  
	
  GENERAL ELECTRIC CAPITAL
  CORPORATION

  	
   

  
	
   

  	
   

  
	
  By: 

  	
  /S/ MARK J. FORTI

  	
   

  
	
  Name 

  	
  Mark J. Forti

  	
   

  
	
  Title 

  	
  Duly Authorized Signatory

  	
   

  
												

 

38

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