Document:

exv10w16

Exhibit 10.16

SECOND AMENDED AND RESTATED

PLEDGE AND SECURITY AGREEMENT

     THIS SECOND AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT (as it may be amended or
modified from time to time, the “Security Agreement”) is entered into as of August 20, 2010 by and
between Bluestem Brands, Inc. (f/k/a Fingerhut Direct Marketing, Inc.), a Delaware corporation (the
“Grantor”), and JPMorgan Chase Bank, N.A., in its capacity as administrative agent (the
“Administrative Agent”) for the Lenders party to the Credit Agreement referred to below.

PRELIMINARY STATEMENT

     The Grantor, the Administrative Agent and the Lenders party thereto are entering into that
certain Second Amended and Restated Credit Agreement dated as of August 20, 2010 (as it may be
amended or modified from time to time, the “Credit Agreement”). The Grantor is entering into this
Security Agreement in order to induce the Lenders to enter into and extend credit to the Grantor
under the Credit Agreement and to secure the Secured Obligations.

     ACCORDINGLY, the Grantor and the Administrative Agent, on behalf of the Lenders, hereby agree
as follows:

ARTICLE I.

DEFINITIONS

          1.1 Terms Defined in Credit Agreement. All capitalized terms used herein and not
otherwise defined shall have the meanings assigned to such terms in the Credit Agreement.

     1.2 Terms Defined in UCC. Terms defined in the UCC which are not otherwise defined in
this

     Security Agreement are used herein as defined in the UCC.

     1.3 Definitions of Certain Terms Used Herein. As used in this Security Agreement, in
addition to the terms defined in the Preliminary Statement, the following terms shall have the
following meanings:

     “Accounts” shall have the meaning set forth in Article 9 of the UCC.

     “Article” means a numbered article of this Security Agreement, unless another document
is specifically referenced.

     “Chattel Paper” shall have the meaning set forth in Article 9 of the UCC. “Closing
Date” means the date of the Credit Agreement.

     “Collateral” shall have the meaning set forth in Article II.

 

 

     “Collateral Access Agreement” means any landlord waiver or other agreement, in form
and substance satisfactory to the Administrative Agent, between the Administrative Agent and any
third party (including any bailee, consignee, customs broker, or other similar Person) in
possession of any Collateral or any landlord of any Loan Party for any real property where any
Collateral is located, as such landlord waiver or other agreement may be amended, restated, or
otherwise modified from time to time.

     “Collateral Deposit Account” shall have the meaning set forth in Section 7.1(a).

     “Collateral Report” means any certificate (including any Borrowing Base Certificate),
report or other document delivered by the Grantor to the Administrative Agent or any Lender with
respect to the Collateral pursuant to any Loan Document.

     “Control” shall have the meaning set forth in Article 8 or, if applicable, in Section
9-104, 9-105, 9-106 or 9-107 of Article 9 of the UCC.

     “Credit Agreement” has the meaning ascribed thereto in the Preamble.

     “Default” means any event or condition which constitutes an Event of Default or which
upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

     “Deposit Account Control Agreement” means an agreement, in form and substance
satisfactory to the Administrative Agent, among any Loan Party, a banking institution holding such
Loan Party’s funds, and the Administrative Agent with respect to collection and control of all
deposits and balances held in a deposit account maintained by any Loan Party with such banking
institution.

     “Deposit Accounts” shall have the meaning set forth in Article 9 of the UCC.
“Documents” shall have the meaning set forth in Article 9 of the UCC. “Event of
Default” means an event described in Section 5.1.

     “Excluded Payments” has the meaning ascribed thereto in Section 4.6(d)(iii).

     “Exhibit” refers to a specific exhibit to this Security Agreement, unless another
document is specifically referenced.

     “Existing Pledge and Security Agreement” has the meaning ascribed thereto in Section
8.22. “Fingerhut SPV” means Fingerhut Receivables I, LLC.

     “Fingerhut SPV Stock” has the meaning ascribed thereto in Section 11.1.

     “General Intangibles” shall have the meaning set forth in Article 9 of the UCC.
“Grantor” has the meaning ascribed thereto in the Preamble.

     “Instruments” shall have the meaning set forth in Article 9 of the UCC.

 

 

     “Intercreditor Agreement” means the Amended and Restated Intercreditor Agreement (as
may be further amended, restated, supplemented or otherwise modified from time to time in
accordance with the terms thereof) dated as of August 20, 2010, by and among SPV Collateral
Agent, Administrative Agent, Fingerhut SPV and Grantor.

     “Inventory” shall have the meaning set forth in Article 9 of the UCC.

     “Investment Property.” shall have the meaning set forth in Article 9 of the
UCC.

     “Lenders” means the lenders party to the Credit Agreement and their successors and
assigns.

     “Letter-of-Credit Rights” shall have the meaning set forth in Article 9 of the UCC.
“Loan Documents” shall have the meaning set forth in the Credit Agreement. “Lock Box
Agreement(s)” shall have the meaning set forth in Section 7.1(a). “Lock Boxes” shall
have the meaning set forth in Section 7.1(a).

     “Merchant Deposit Account” has the meaning ascribed thereto in Section 7.1(a)
“Payment Intangibles” shall have the meaning set forth in Article 9 of the UCC.

     “Pledged Collateral” means all Securities consisting of Equity Interests of
Subsidiaries of the Grantor, whether or not physically delivered to the Administrative Agent
pursuant to this Security Agreement.

     “Purchased Assets” means (i) Underlying Receivables and (ii) other “Purchased Assets”
(as such term is defined in Section 2.1(a) of the Receivables Purchase Agreement as in effect on
the date hereof or in any other Receivables Purchase Agreement or similar agreement entered into
after the date hereof which is substantially in the form of the Receivables Purchase Agreement as
in effect on the date hereof, mutatis mutandis, or otherwise reasonably acceptable to
Administrative Agent).

     “Receivables Account” shall mean each consumer revolving credit account established
pursuant to a Receivables Account Agreement (as defined in the Servicing Agreement) between
Receivables Account Owner and any Receivables Obligor (as defined in the Servicing Agreement).

     “Receivables Account Owner Documents” means (i) with respect to WebBank, the Amended
and Restated Receivables Sale Agreement dated as of August 20, 2010, by and between WebBank and the
Grantor (as it may be amended or modified from time to time) and the Amended and Restated Revolving
Loan Product Program Agreement, dated as of August 20, 2010, by and between WebBank and the Grantor
(as it may be amended or modified from time to time) (ii) with respect to MetaBank, the Amended and
Restated Program Agreement, dated as of August 20, 2010, by and between MetaBank and the Grantor
(as it may be amended or modified from time to time) and the Amended and Restated Receivables Sale
Agreement, dated as of August 20, 2010, by and between MetaBank and the Grantor (as it may be
amended or modified from time to time) and (iii) with respect to any other Receivables Account
Owner, each receivables sales agreement, product program agreement and any other similar agreements

 

 

between such Receivables Account Owner and the Grantor (as such agreements may be amended or
modified from time to time).

     “Receivables Purchase Agreement” means that certain Receivables Purchase Agreement
dated as of the date hereof among Bluestem Brands, Inc. and Fingerhut SPV, as the same may be
amended, modified or supplemented from time to time, in accordance with the terms thereof

     “Receivables Property” means Receivables Accounts and Purchased Assets and all books,
records (including electronic records), documents, instruments, ledger cards, files,
correspondence, computer programs, tapes, disks and related data that evidence or contain
information relating to the Receivables Account and Purchased Assets, and all proceeds and products
thereof

     “Required Secured Parties” means (a) prior to an acceleration of the Obligations under
the Credit Agreement, the Required Lenders, (b) after an acceleration of the Obligations under the
Credit Agreement but prior to the date upon which the Credit Agreement has terminated by its terms
and all of the obligations thereunder have been paid in full, Lenders holding in the aggregate at
least a majority of the total of the Aggregate Credit Exposure, and (c) after the Credit Agreement
has terminated by its terms and all of the Obligations thereunder have been paid in full (whether
or not the Obligations under the Credit Agreement were ever accelerated), Lenders holding in the
aggregate at least a majority of the aggregate net early termination payments and all other amounts
then due and unpaid from the Grantor to the Lenders under the Swap Agreement, as determined by the
Administrative Agent in its reasonable discretion.

     “Retained Receivables” means all rights to payment of any kind arising from the sale
or other disposition of Inventory (including (i) all Accounts, Chattel Paper, Instruments and
General Intangibles constituting the foregoing and (ii) all Letter of Credit Rights and all other
Supporting Obligations supporting the payment and performance of the foregoing) but excluding any
such rights to payment that are effectively transferred (whether by sale or pledge) pursuant to the
Receivables Purchase Agreement.

     “Sales Receivables” means all rights under the Receivables Purchase Agreement,
including without limitation all the Payment Intangibles owing to Grantor and arising from sales of
Underlying Receivables and other Purchased Assets to Fingerhut SPV pursuant to the Receivables
Purchase Agreement.

     “Section” means a numbered section of this Security Agreement, unless another document
is specifically referenced.

     “Security” has the meaning set forth in Article 8 of the UCC.

     “Senior Subordinated Agent” means Prudential Capital Partners II, L.P.

     “Servicing Accounts” means all rights under the Servicing Agreement, including without
limitation, all Accounts owing to Grantor and arising for services rendered or to be rendered by it
under the Servicing Agreement.

 

 

     “Servicing Agreement” means the Servicing Agreement dated as of August 20, 2010 by and
among Fingerhut SPV, Grantor, as Servicer, and Goldman Sachs Bank USA, as the same
may be amended, restated, supplemented or otherwise modified from time to time in accordance
with the terms thereof.

     “Special Flood Hazard Area” has the meaning ascribed thereto in Section 4.8(a).

     “Springing Account Agreement” means the Blocked Account Agreement among Grantor, the
Administrative Agent and U.S. Bank National Association pertaining to Account No. 104757791017.

     “SPV Collateral Agent” means Goldman Sachs Bank USA, together with any successors or
assigns, as collateral agent under the SPV Security Agreement.

     “SPV Credit Documents” means the SPV Credit Agreement, the Receivables Purchase
Agreement, the Servicing Agreement, the SPV Security Agreement, the Holdings Bad Acts Guaranty, the
Holdings Letter Agreement and each additional Credit Document (as defined in the SPV Credit
Agreement).

     “SPV Share Pledge” means that certain Equity Pledge Agreement dated as of August 20,
2010, by and between Borrower and the SPV Collateral Agent, as may be further amended, modified and
supplemented in accordance with the terms thereof

     “Supporting Obligations” shall have the meaning set forth in Article 9 of the UCC.
“UCC” means the Uniform Commercial Code, as in effect from time to time, of the State of Minnesota
or of any other state the laws of which are required as a result thereof to be applied in
connection with the attachment, perfection or priority of, or remedies with respect to, the
Administrative Agent’s or any Lender’s Lien on any Collateral.

     “Underlying Receivables” means all amount payable by a Receivables Obligor (as defined
in the Servicing Agreement) on the related Receivables Account from time to time, and purchased by
or contributed to Fingerhut SPV from Grantor under the Receivables Purchase Agreement.

     The foregoing definitions shall be equally applicable to both the singular and plural forms of
the defined terms.

ARTICLE II.

GRANT OF SECURITY INTEREST

     To secure payment and performance of the Secured Obligations, the Grantor hereby pledges,
assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the
Lenders, a security interest in all of its right, title and interest in, to and under certain
personal property and other assets, whether now owned by or owing to, or hereafter acquired by or
arising in favor of the Grantor (including under any trade name or derivations thereof), and
whether owned or consigned by or to, or leased from or to, the Grantor, and regardless of where
located (all of which will be collectively referred to as the “Collateral”), consisting of:

 

 

	 	(i)	 	Retained Receivables;
	 
	 	(ii)	 	the Servicing Accounts;
	 
	 	(iii)	 	Sales Receivables;
	 
	 	(iv)	 	all Inventory and all Documents;
	 
	 	(v)	 	the Collateral Deposit Account and the Merchant Deposit Account;
	 
	 	(vi)	 	all Equity Interests in Fingerhut SPV;
	 
	 	(vii)	 	all books, records, ledger cards, files, correspondence, computer programs,
tapes, disks, and related data processing software (owned by the Grantor or in which it
has an assignable interest) that at any time evidence or contain information relating
to any Collateral or are otherwise necessary or helpful in the collection thereof or
realization thereupon; and
	 
	 	(viii)	 	all proceeds and products of any and all of the foregoing;

excluding, however, in each case, the Receivables Property now existing or hereafter arising. To
the extent that any security interest arises in any Receivables Account or in any asset under this
Security Agreement prior to its becoming Receivables Property, such security interest is deemed to
have terminated automatically on the date it becomes a Receivables Account or Receivables Property
(and the Administrative Agent agrees to release automatically, without further action, its lien in
such Receivables Account or Receivables Property); provided that such security interest shall be
automatically reinstated on the date when any such Receivables Property is reconveyed to the
Grantor and ceases to be Receivables Property pursuant to the terms of the SPV Credit Documents.

ARTICLE III.

REPRESENTATIONS AND WARRANTIES

     The Grantor represents and warrants to the Administrative Agent and the Lenders that:

     3.1 Title, Perfection and Priority. The Grantor has good and valid rights in or the
power to transfer the Collateral and title to the Collateral with respect to which it has purported
to grant a security interest hereunder, free and clear of all Liens except for Liens permitted
under Section 4.1(e), and has full power and authority to grant to the Administrative Agent the
security interest in such Collateral pursuant hereto. When financing statements have been filed in
the appropriate offices against the Grantor in the locations listed on Exhibit E, as such exhibit
may be amended with Administrative Agent’s consent, not to be unreasonably withheld or delayed, the
Administrative Agent will have a fully perfected first priority security interest in that
Collateral in which a security interest may be perfected by filing, subject only to Liens permitted
under Section 4.1(e).

 

 

     3.2 Type and Jurisdiction of Organization, Organizational and Identification Numbers.
The type of entity of the Grantor, its state of organization, the organizational number issued to it by
its state of organization and its federal employer identification number are set forth on Exhibit
A, as such exhibit may be amended with Administrative Agent’s consent, not to be unreasonably
withheld or delayed.

     3.3 Principal Location. The Grantor’s mailing address and the location of its place of
business (if it has only one) or its chief executive office (if it has more than one place of
business), are disclosed in Exhibit A, as such exhibit may be amended with Administrative Agent’s
consent, not to be unreasonably withheld or delayed; the Grantor has no other places of business
except those set forth in Exhibit A.

     3.4 Collateral Locations. All of Grantor’s locations where Collateral is located are
listed on Exhibit A, as such exhibit may be amended with Administrative Agent’s consent, not to be
unreasonably withheld or delayed. All of said locations are owned by the Grantor except for
locations (i) which are leased by the Grantor as lessee and designated in Part VII(b) of Exhibit A
and (ii) at which Inventory is held in a public warehouse or is otherwise held by a bailee or on
consignment as designated in Part VII(c) of Exhibit A.

     3.5 Deposit Accounts. All of the Grantor’s Deposit Accounts are listed on Exhibit B,
as such exhibit may be amended with Administrative Agent’s consent, not to be unreasonably withheld
or delayed.

     3.6 Exact Names. The Grantor’s name in which it has executed this Security Agreement
is, as of the date hereof, the exact name as it appears in the Grantor’s organizational documents,
as amended, as filed with the Grantor’s jurisdiction of organization. Except for its former name
“Fingerhut Direct Marketing, Inc.”, the Grantor has not, during the past five years, been known by
or used any other corporate or fictitious name, or been a party to any merger or consolidation, or
been a party to any acquisition.

     3.7 Letter of Credit Rights and Chattel Paper. Exhibit C lists all Collateral
consisting of Letter of Credit Rights and Chattel Paper of the Grantor, as such exhibit may be
amended with Administrative Agent’s consent, not to be unreasonably withheld or delayed. All action
by the Grantor necessary or desirable to protect and perfect the Administrative Agent’s Lien on
each item listed on Exhibit C (including the delivery of all originals and the placement of a
legend on all Chattel Paper as required hereunder) has been duly taken. The Administrative Agent
will have a fully perfected first priority security interest in the Collateral listed on Exhibit C,
subject only to Liens permitted under Section 4.1(e).

     3.8 [Intentionally Omitted]

     3.9 Inventory. With respect to any Inventory scheduled or listed on the most recent
Collateral Report, (a) such Inventory (other than Inventory in transit) is located at one of the
Grantor’s locations set forth on Exhibit A, (b) no Inventory (other than Inventory in transit) is
now, or shall at any time or times hereafter be stored at any other location except as permitted by

 

 

Section 4.10, (c) the Grantor has good, indefeasible and merchantable title to such Inventory and
such Inventory is not subject to any Lien or security interest or document whatsoever except for
the Lien granted to the Administrative Agent, for the benefit of the Administrative Agent and
Lenders, and except as permitted under the Credit Agreement, (d) except as specifically
disclosed in the most recent Collateral Report, such Inventory is Eligible Inventory of good and
merchantable quality, free from any defects, (e) such Inventory is not subject to any licensing,
patent, royalty, trademark, trade name or copyright agreements with any third parties which would
require any consent of any third party upon sale or other disposition of that Inventory or the
payment of any monies to any third party upon such sale or other disposition, and (f) sale or other
disposition of such Inventory by the Administrative Agent following an Event of Default shall not
require the consent of any Person and shall not constitute a breach or default under any contract
or agreement to which the Grantor is a party or to which such property is subject.

     3.10 Filing Requirements. None of the Collateral is of a type for which security
interests or liens may be perfected by filing under any federal statute.

     3.11 No Financing Statements, Security Agreements. No financing statement or security
agreement describing all or any portion of the Collateral which has not lapsed or been terminated
naming the Grantor as debtor has been filed or is of record in any jurisdiction except (a) for
financing statements or security agreements naming the Administrative Agent on behalf of the
Lenders as the secured party and (b) as permitted by Section 4.1(e).

     3.12 Pledged Collateral.

          (a) Exhibit D sets forth a complete and accurate list of all of the Pledged Collateral, as
such exhibit may be amended with Administrative Agent’s consent, not to be unreasonably withheld or
delayed. The Grantor is the direct, sole beneficial owner and sole holder of record of the Pledged
Collateral listed on Exhibit D as being owned by it, free and clear of any Liens, except for (i)
the first priority security interest of the SPV Collateral Agent in the Pledged Collateral; (ii)
the second priority security interest granted to the Administrative Agent for the benefit of the
Lenders hereunder; and (iii) the third priority security interests of the Senior Subordinated
Agent. The Grantor further represents and warrants that (i) all Pledged Collateral constituting an
Equity Interest has been (to the extent such concepts are relevant with respect to such Pledged
Collateral) duly authorized, validly issued, are fully paid and non-assessable, (ii) with respect
to any certificates delivered to the Administrative Agent representing an Equity Interest, either
such certificates are Securities as defined in Article 8 of the UCC as a result of actions by the
issuer or otherwise, or, if such certificates are not Securities, the Grantor has so informed the
Administrative Agent so that the Administrative Agent may take steps to perfect its security
interest therein as a General Intangible, and (iii) all Pledged Collateral held by a securities
intermediary is covered by a control agreement among the Grantor, the securities intermediary and
the Administrative Agent pursuant to which the Administrative Agent has Control.

          (b) In addition, (i) none of the Pledged Collateral has been issued or transferred in
violation of the securities registration, securities disclosure or similar laws of any jurisdiction
to which such issuance or transfer may be subject, (ii) there are existing no options, warrants,
calls or commitments of any character whatsoever relating to the Pledged Collateral or

 

 

which obligate the issuer of any Equity Interest included in the Pledged Collateral to issue additional
Equity Interests, and (iii) no consent, approval, authorization, or other action by, and no giving
of notice to or, filing with, any governmental authority or any other Person is required
for the pledge by the Grantor of the Pledged Collateral pursuant to this Security Agreement or
for the execution, delivery and performance of this Security Agreement by the Grantor, or for the
exercise by the Administrative Agent of the voting or other rights provided for in this Security
Agreement or for the remedies in respect of the Pledged Collateral pursuant to this Security
Agreement, except as may be required in connection with such disposition by laws affecting the
offering and sale of securities generally.

          (c) Except as set forth in Exhibit D, as such exhibit may be amended with Administrative
Agent’s consent, not to be unreasonably withheld or delayed, the Grantor owns 100% of the issued
and outstanding Equity Interests which constitute Pledged Collateral.

ARTICLE IV.

COVENANTS

     From the date of this Security Agreement, and thereafter until this Security Agreement is
terminated, the Grantor agrees that:

     4.1 General.

          (a) Collateral Records. The Grantor will maintain complete and accurate books and
records with respect to the Collateral, and furnish to the Administrative Agent, with sufficient
copies for each of the Lenders, such reports relating to the Collateral as the Administrative Agent
shall from time to time request.

          (b) Authorization to File Financing Statements; Ratification. The Grantor hereby
authorizes the Administrative Agent to file, and if requested will deliver to the Administrative
Agent, all financing statements and other documents and take such other actions as may from time to
time be requested by the Administrative Agent in order to maintain a first perfected security
interest in and, if applicable, Control of, the Collateral. Any financing statement filed by the
Administrative Agent may be filed in any filing office in any UCC jurisdiction and may (i) indicate
the Collateral by any description which reasonably approximates the description contained in this
Security Agreement or may contain an indication or description of collateral that describes such
property in any other manner as the Administrative Agent may determine, including describing such
property as “all assets” or “all personal property” and may add thereto “whether now owned or
hereafter acquired” or words of similar import and (ii) contain any other information required by
part 5 of Article 9 of the UCC for the sufficiency or filing office acceptance of any financing
statement or amendment, including whether the Grantor is an organization, the type of organization
and any organization identification number issued to the Grantor. The Grantor also agrees to
furnish any such information to the Administrative Agent promptly upon request. The Grantor also
ratifies its authorization for the Administrative Agent to have filed in any UCC jurisdiction any
initial financing statements or amendments thereto if filed prior to the date hereof.

 

 

          (c) Further Assurances. The Grantor will, if so requested by the Administrative Agent,
furnish to the Administrative Agent, as often as the Administrative Agent requests, statements and
schedules further identifying and describing the Collateral and such other reports and information
in connection with the Collateral as the Administrative Agent may
reasonably request, all in such detail as the Administrative Agent may specify. The Grantor
also agrees to take any and all actions necessary to defend title to the Collateral against all
persons and to defend the security interest of the Administrative Agent in the Collateral and the
priority thereof against any Lien not expressly permitted hereunder.

          (d) Disposition of Collateral. The Grantor will not sell, lease or otherwise dispose
of the Collateral except for dispositions specifically permitted pursuant to Section 6.05 of the
Credit Agreement.

          (e) Liens. The Grantor will not create, incur, or suffer to exist any Lien on the
Collateral except (i) the security interest created by this Security Agreement, and (ii) other
Liens permitted under the terms of the Credit Agreement.

          (f) Other Financing Statements. The Grantor will not authorize the filing of any
financing statement naming it as debtor covering all or any portion of the Collateral, except as
permitted by Section 4.1(e). The Grantor acknowledges that it is not authorized to file any
financing statement or amendment or termination statement with respect to any financing statement
without the prior written consent of the Administrative Agent, subject to the Grantor’s rights
under Section 9-509(d)(2) of the UCC.

          (g) Compliance with Terms. The Grantor will perform and comply with all obligations in
respect of the Collateral and all agreements to which it is a party or by which it is bound
relating to the Collateral.

     4.2 Retained Receivables.

          (a) Certain Agreements on Retained Receivables. The Grantor will not make or agree to
make any discount, credit, rebate or other reduction in the original amount owing on a Retained
Receivable or accept in satisfaction of a Retained Receivable less than the original amount
thereof, except that, prior to the occurrence of an Event of Default, the Grantor may reduce the
amount of Retained Receivables in accordance with its present policies and in the ordinary course
of business.

          (b) Collection of Retained Receivables. Except as otherwise provided in this Security
Agreement, the Grantor will collect and enforce, at the Grantor’s sole expense, all amounts due or
hereafter due to the Grantor under the Retained Receivables.

          (c) Electronic Chattel Paper. The Grantor shall take all steps necessary to grant the
Administrative Agent Control of all electronic Chattel Paper in accordance with the UCC and all
“transferable records” as defined in each of the Uniform Electronic Transactions Act and the
Electronic Signatures in Global and National Commerce Act.

          4.3 Inventory.

 

 

          (a) Maintenance of Inventory. The Grantor will do all things necessary to maintain,
preserve, protect and keep the Inventory in saleable condition, except for damaged or defective
goods arising in the ordinary course of the Grantor’s business.

          (b) Returned Inventory. If an Account Debtor returns any Inventory to the Grantor when
no Event of Default exists, then the Grantor shall promptly determine the reason for such return
and shall issue a credit memorandum to the Account Debtor in the appropriate amount. All returned
Inventory shall be subject to the Administrative Agent’s Liens thereon. All returned Inventory
shall not be Eligible Inventory.

          (c) Perpetual Inventory System. The Grantor will maintain a perpetual inventory
reporting system at all times.

     4.4 Delivery of Instruments, Securities, Chattel Paper and Documents. As to all
Chattel Paper and Instruments constituting part of the Collateral, the Grantor will (a) deliver to
the Administrative Agent immediately upon execution of this Security Agreement the originals of all
Chattel Paper, Securities (other than the Fingerhut SPV Stock, while the Intercreditor Agreement
and the SPV Credit Documents are in effect) and Instruments constituting Collateral (if any then
exist), (b) hold in trust for the Administrative Agent upon receipt and immediately thereafter
deliver to the Administrative Agent any Chattel Paper, Securities (other than the Fingerhut SPV
Stock, while the Intercreditor Agreement and the SPV Credit Documents are in effect) and
Instruments constituting Collateral, and (c) upon the Administrative Agent’s request, deliver to
the Administrative Agent (and thereafter hold in trust for the Administrative Agent upon receipt
and immediately deliver to the Administrative Agent) any Document evidencing or constituting
Collateral. The Grantor hereby authorizes the Administrative Agent to attach each Amendment to this
Security Agreement and agrees that all additional Collateral set forth in such Amendments shall be
considered to be part of the Collateral.

     4.5 Uncertificated Pledged Collateral. The Grantor will permit the Administrative
Agent from time to time to cause the appropriate issuers (and, if held with a securities
intermediary, such securities intermediary) of uncertificated securities or other types of Pledged
Collateral not represented by certificates to mark their books and records with the numbers and
face amounts of all such uncertificated securities or other types of Pledged Collateral not
represented by certificates and all rollovers and replacements therefor to reflect the Lien of the
Administrative Agent granted pursuant to this Security Agreement. The Grantor will take any actions
necessary to cause (a) the issuers of uncertificated securities which are Pledged Collateral and
(b) any securities intermediary which is the holder of any Pledged Collateral, to cause the
Administrative Agent to have and retain Control over such Pledged Collateral. Without limiting the
foregoing, the Grantor will, with respect to Pledged Collateral held with a securities
intermediary, cause such securities intermediary to enter into a control agreement with the
Administrative Agent, in form and substance satisfactory to the Administrative Agent, giving the
Administrative Agent Control.

     4.6 Pledged Collateral.

 

 

          (a) Changes in Capital Structure of Issuers. The Grantor will not (i) permit or suffer
any issuer of an Equity Interest constituting Pledged Collateral to dissolve, merge, liquidate or
retire any of its Equity Interests, or (ii) vote any Pledged Collateral in favor of any of the
foregoing.

          (b) Issuance of Additional Securities. The Grantor will not permit or suffer the
issuer of an Equity Interest constituting Pledged Collateral to issue additional Equity Interests,
any right to receive the same or any right to receive earnings, except to the Grantor.

          (c) Registration of Pledged Collateral. The Grantor will permit any registerable
Pledged Collateral to be registered in the name of the Administrative Agent or its nominee at any
time at the option of the Required Secured Parties.

          (d) Exercise of Rights in Pledged Collateral.

          (i) Without in any way limiting the foregoing and subject to clause (ii) below, the
Grantor shall have the right to exercise all voting rights or other rights relating to the
Pledged Collateral for all purposes not inconsistent with this Security Agreement, the
Credit Agreement or any other Loan Document; provided however, that no vote or other right
shall be exercised or action taken which would have the effect of impairing the rights of
the Administrative Agent in respect of the Pledged Collateral.

          (ii) The Grantor will permit the Administrative Agent or its nominee at any time after
the occurrence of an Event of Default, without notice, to exercise all voting rights or
other rights relating to Pledged Collateral, including, without limitation, exchange,
subscription or any other rights, privileges, or options pertaining to any Equity Interest
or Investment Property constituting Pledged Collateral as if it were the absolute owner
thereof.

          (iii) The Grantor shall be entitled to collect and receive for its own use all cash
dividends and interest paid in respect of the Pledged Collateral to the extent not in
violation of the Credit Agreement other than any of the following distributions and payments
(collectively referred to as the “Excluded Payments”): (A) dividends and interest paid or
payable other than in cash in respect of any Pledged Collateral, and instruments and other
property received, receivable or otherwise distributed in respect of, or in exchange for,
any Pledged Collateral; (B) dividends and other distributions paid or payable in cash in
respect of any Pledged Collateral in connection with a partial or total liquidation or
dissolution or in connection with a reduction of capital, capital surplus or paid-in capital
of an issuer; and (C) cash paid, payable or otherwise distributed, in respect of principal
of, or in redemption of, or in exchange for, any Pledged Collateral; provided however, that
until actually paid, all rights to such distributions shall remain subject to the Lien
created by this Security Agreement; and

          (iv) All Excluded Payments and all other distributions in respect of any of the Pledged
Collateral, whenever paid or made, shall be delivered to the Administrative Agent to hold as
Pledged Collateral and shall, if received by the Grantor, be received in trust for the
benefit of the Administrative Agent, be segregated from the

 

 

other property or funds of the Grantor, and be forthwith delivered to the
Administrative Agent as Pledged Collateral in the same form as so received (with any
necessary endorsement).

     4.7 No Interference. The Grantor agrees that it will not interfere with any right,
power and remedy of the Administrative Agent provided for in this Security Agreement or now or
hereafter existing at law or in equity or by statute or otherwise, or the exercise or beginning of
the exercise by the Administrative Agent of any one or more of such rights, powers or remedies.

     4.8 Insurance.

          (a) In the event any Collateral is located in any area that has been designated by the Federal
Emergency Management Agency as a “Special Flood Hazard Area”, the Grantor shall purchase and
maintain flood insurance on such Collateral (including any personal property which is located on
any real property leased by such Loan Party within a “Special Flood Hazard Area”). The amount of
flood insurance required by this Section shall be in an amount equal to the lesser of the total
commitment or the total replacement cost value of the Inventory at such location.

          (b) All insurance policies required hereunder and under Section 5.09 of the Credit Agreement
shall name the Administrative Agent (for the benefit of the Administrative Agent and the Lenders)
as an additional insured or as loss payee, as applicable, and shall contain loss payable clauses or
mortgagee clauses, through endorsements in form and substance satisfactory to the Administrative
Agent, which provide that: (i) all proceeds thereunder with respect to any Collateral shall be
payable to the Administrative Agent; (ii) no such insurance shall be affected by any act or neglect
of the insured or owner of the property described in such policy; and (iii) such policy and loss
payable or mortgagee clauses may be canceled, amended, or terminated only upon at least thirty days
prior written notice given to the Administrative Agent.

          (c) All premiums on such insurance shall be paid when due by the Grantor, and copies of the
policies delivered to the Administrative Agent upon request. If the Grantor fails to obtain any
insurance as required by this Section, the Administrative Agent may obtain such insurance at the
Grantor’s expense. By purchasing such insurance, the Administrative Agent shall not be deemed to
have waived any Default arising from the Grantor’s failure to maintain such insurance or pay any
premiums therefor.

     4.9 Collateral Access Agreements. The Grantor shall use commercially reasonable
efforts to obtain a Collateral Access Agreement, from the lessor of each leased property, mortgagee
of owned property or bailee or consignee with respect to any warehouse, processor or converter
facility or other location where Collateral is stored or located, which agreement or letter shall
provide access rights, contain a waiver or subordination of all Liens or claims that the landlord,
mortgagee, bailee or consignee may assert against the Collateral at that location, and shall
otherwise be reasonably satisfactory in form and substance to the Administrative Agent. With
respect to such locations or warehouse space leased as of the Closing Date and thereafter, if the
Administrative Agent has not received a Collateral Access Agreement as of the Effective Date (or,
if later, as of the date such location is acquired or leased), the Grantor’s Eligible Inventory at
that location shall be subject to such Reserves as may be established by the

 

 

Administrative Agent. After the Closing Date, no real property or warehouse space shall be
leased by the Grantor and no Inventory shall be shipped to a processor or converter under
arrangements established after the Closing Date, unless and until a satisfactory Collateral Access
Agreement shall first have been obtained with respect to such location and if it has not been
obtained, the Grantor’s Eligible Inventory at that location shall be subject to the establishment
of Reserves acceptable to the Administrative Agent. The Grantor shall timely and fully pay and
perform its obligations under all leases and other agreements with respect to each leased location
or third party warehouse where any Collateral is or may be located.

     4.10 Change of Name or Location; Change of Fiscal Year. The Grantor shall not (a)
change (i) its name as it appears in official filings in the state of its incorporation or
organization, (ii) the type of entity that it is, or (iii) its organization identification number,
if any, issued by its state of incorporation or other organization, in each case, which would make
any financing statement or continuation statement filed in connection herewith seriously misleading
within the meaning of Section 9-506 of the UCC as in effect in the State of Delaware, unless the
Administrative Agent shall have received notice of any such change and file such financing
statements or amendments as may be necessary to continue the perfection of any Liens in favor of
the Administrative Agent, on behalf of Lenders, in any Collateral within thirty days after any such
change, or (b) change its (i) chief executive office, principal place of business, mailing address,
corporate offices or warehouses or locations at which Collateral is held or stored, or the location
of its records concerning the Collateral as set forth in this Security Agreement or (ii) state of
incorporation or organization, in each case, without giving Administrative Agent prompt written
notice of any such change and whether, as a result of such relocation, the applicable provisions of
the UCC would require the filing of any amendment of any previously filed financing or continuation
statement or of any new financing statement and shall file such financing statements or amendments
as may be necessary to continue the perfection of any Liens in favor of the Administrative Agent,
on behalf of Lenders, in any Collateral and will execute any documents necessary to perfect or
preserve the validity, perfection or priority of such security interest, provided that, any new
location shall be in the continental U.S.

ARTICLE V.

EVENTS OF DEFAULT AND REMEDIES

     5.1 Events of Default. The occurrence of any one or more of the following events shall
constitute an Event of Default hereunder:

          (a) Any representation or warranty made by or on behalf of the Grantor under or in connection
with this Security Agreement shall be materially false as of the date on which made.

          (b) The breach by the Grantor of any of the terms or provisions of Article IV or Article VII.

          (c) The breach by the Grantor (other than a breach which constitutes an Event of Default under
any other Section of this Article V) of any of the terms or provisions of this Security Agreement
which is not remedied within ten days after such breach.

 

 

          (d) The occurrence of any “Event of Default” under, and as defined in, the Credit Agreement.

          (e) Subject to the provisions of the Intercreditor Agreement, any Equity Interest which is
included within the Collateral shall at any time constitute a Security or the issuer of any such
Equity Interest shall take any action to have such interests treated as a Security unless (i) all
certificates or other documents constituting such Security have been delivered to the
Administrative Agent and such Security is properly defined as such under Article 8 of the UCC of
the applicable jurisdiction, whether as a result of actions by the issuer thereof or otherwise, or
(ii) the Administrative Agent has entered into a control agreement with the issuer of such Security
or with a securities intermediary relating to such Security and such Security is defined as such
under Article 8 of the UCC of the applicable jurisdiction, whether as a result of actions by the
issuer thereof or otherwise.

     5.2 Remedies.

          (a) Upon the occurrence of an Event of Default, the Administrative Agent may, with the
concurrence or at the direction of the Required Secured Parties exercise any or all of the
following rights and remedies:

          (i) those rights and remedies provided in this Security Agreement, the
Credit Agreement, or any other Loan Document; provided that, this Section 5.2(a) shall not
be understood to limit any rights or remedies available to the Administrative Agent and the
Lenders prior to an Event of Default;

          (ii) those rights and remedies available to a secured party under the UCC
(whether or not the UCC applies to the affected Collateral) or under any other applicable
law (including, without limitation, any law governing the exercise of a bank’s right of
setoff or bankers’ lien) when a debtor is in default under a security agreement;

          (iii) give notice of sole control or any other instruction under any
Deposit Account Control Agreement or and other control agreement with any securities
intermediary and take any action therein with respect to such Collateral;

          (iv) without notice (except as specifically provided in Section 8.1 or
elsewhere herein), demand or advertisement of any kind to the Grantor or any other Person,
enter the premises of the Grantor where any Collateral is located (through self-help and
without judicial process) to collect, receive, assemble, process, appropriate, sell, lease,
assign, grant an option or options to purchase or otherwise dispose of, deliver, or realize
upon, the Collateral or any part thereof in one or more parcels at public or private sale or
sales (which sales may be adjourned or continued from time to time with or without notice
and may take place at the Grantor’s premises or elsewhere), for cash, on credit or for
future delivery without assumption of any credit risk, and upon such other terms as the
Administrative Agent may deem commercially reasonable; and

          (v) except as limited by Section 11.1, concurrently with written notice to
the Grantor, transfer and register in its name or in the name of its nominee the whole or

 

 

any part of the Pledged Collateral, to exchange certificates or instruments
representing or evidencing Pledged Collateral for certificates or instruments of smaller or
larger denominations, to exercise the voting and all other rights as a holder with respect
thereto, to collect and receive all cash dividends, interest, principal and other
distributions made thereon and to otherwise act with respect to the Pledged Collateral as
though the Administrative Agent was the outright owner thereof.

          (b) The Administrative Agent, on behalf of the Lenders, may comply with any applicable state
or federal law requirements in connection with a disposition of the Collateral and compliance will
not be considered to adversely affect the commercial reasonableness of any sale of the Collateral.

          (c) The Administrative Agent shall have the right upon any such public sale or sales and, to
the extent permitted by law, upon any such private sale or sales, to purchase for the benefit of
the Administrative Agent and the Lenders, the whole or any part of the Collateral so sold, free of
any right of equity redemption, which equity redemption the Grantor hereby expressly releases.

          (d) Until the Administrative Agent is able to effect a sale, lease, or other disposition of
Collateral, the Administrative Agent shall have the right to hold or use Collateral, or any part
thereof, to the extent that it deems appropriate for the purpose of preserving Collateral or its
value or for any other purpose deemed appropriate by the Administrative Agent. The Administrative
Agent may, if it so elects, seek the appointment of a receiver or keeper to take possession of
Collateral and to enforce any of the Administrative Agent’s remedies (for the benefit of the
Administrative Agent and Lenders), with respect to such appointment without prior notice or hearing
as to such appointment.

          (e) If, after the Credit Agreement has terminated by its terms and all of the Obligations have
been paid in full, there remain Swap Obligations outstanding, the Required Secured Parties may
exercise the remedies provided in this Section 5.2 upon the occurrence of any event which would
allow or require the termination or acceleration of any Swap Obligations pursuant to the terms of
the Swap Agreement.

          (f) Notwithstanding the foregoing, neither the Administrative Agent nor the Lenders shall be
required to (i) make any demand upon, or pursue or exhaust any of their rights or remedies against,
the Grantor, any other obligor, guarantor, pledgor or any other Person with respect to the payment
of the Secured Obligations or to pursue or exhaust any of their rights or remedies with respect to
any Collateral therefor or any direct or indirect guarantee thereof, (ii) marshal the Collateral or
any guarantee of the Secured Obligations or to resort to the Collateral or any such guarantee in
any particular order, or (iii) effect a public sale of any Collateral.

          (g) The Grantor recognizes that the Administrative Agent may be unable to effect a public sale
of any or all the Pledged Collateral and may be compelled to resort to one or more private sales
thereof in accordance with clause (a) above. The Grantor also acknowledges that any private sale
may result in prices and other terms less favorable to the seller than if such sale were a public
sale and, notwithstanding such circumstances, agrees that any such private sale shall not be deemed
to have been made in a commercially unreasonable manner solely by

 

 

virtue of such sale being private. The Administrative Agent shall be under no obligation to
delay a sale of any of the Pledged Collateral for the period of time necessary to permit the
Grantor or the issuer of the Pledged Collateral to register such securities for public sale under
the Securities Act of 1933, as amended, or under applicable state securities laws, even if the
Grantor and the issuer would agree to do so.

     5.3 Grantor’s Obligations Upon Default. Upon the request of the Administrative Agent
after the occurrence and during the continuance of an Event of Default, the Grantor will:

          (a) assemble and make available to the Administrative Agent the Collateral and all books and
records relating thereto at any place or places specified by the Administrative Agent, whether at
the Grantor’s premises or elsewhere;

          (b) permit the Administrative Agent, by the Administrative Agent’s representatives and agents,
to enter, occupy and use any premises where all or any part of the Collateral, or the books and
records relating thereto, or both, are located, to take possession of all or any part of the
Collateral or the books and records relating thereto, or both, to remove all or any part of the
Collateral or the books and records relating thereto, or both, and to conduct sales of the
Collateral, without any obligation to pay the Grantor for such use and occupancy;

          (c) prepare and file, or cause an issuer of Pledged Collateral to prepare and file, with the
Securities and Exchange Commission or any other applicable government agency, registration
statements, a prospectus and such other documentation in connection with the Pledged Collateral as
the Administrative Agent may request, all in form and substance satisfactory to the Administrative
Agent, and furnish to the Administrative Agent, or cause an issuer of Pledged Collateral to furnish
to the Administrative Agent, any information regarding the Pledged Collateral in such detail as the
Administrative Agent may specify;

          (d) take, or cause an issuer of Pledged Collateral to take, any and all actions necessary to
register or qualify the Pledged Collateral to enable the Administrative Agent to consummate a
public sale or other disposition of the Pledged Collateral; and

          (e) at its own expense, cause the independent certified public accountants then engaged by the
Grantor to prepare and deliver to the Administrative Agent and each Lender, at any time, and from
time to time, promptly upon the Administrative Agent’s request, the following reports with respect
to the Grantor: (i) a reconciliation of all Accounts; (ii) an aging of all Accounts; (iii) trial
balances; and (iv) a test verification of such Accounts.

     5.4 Grant of Intellectual Property License. For the purpose of enabling the
Administrative Agent to exercise the rights and remedies under this Article V at such time as the
Administrative Agent shall be lawfully entitled to exercise such rights and remedies, the Grantor
hereby (a) grants to the Administrative Agent, for the benefit of the Administrative Agent and the
Lenders, an irrevocable, nonexclusive license (exercisable without payment of royalty or other
compensation to the Grantor) to use, license or sublicense any intellectual property rights now
owned or hereafter acquired by the Grantor, and wherever the same may be located, and including in
such license access to all media in which any of the licensed items may be recorded or stored and
to all computer software and programs used for the compilation or printout thereof

 

 

and (b) irrevocably agrees that the Administrative Agent may sell any of the Grantor’s
Inventory directly to any person, including without limitation persons who have previously
purchased the Grantor’s Inventory from the Grantor and in connection with any such sale or other
enforcement of the Administrative Agent’s rights under this Security Agreement, may sell Inventory
which bears any trademark owned by or licensed to the Grantor and any Inventory that is covered by
any copyright owned by or licensed to the Grantor and the Administrative Agent may finish any work
in process and affix any trademark owned by or licensed to the Grantor and sell such Inventory as
provided herein.

ARTICLE VI.

ACCOUNT VERIFICATION; ATTORNEY IN FACT; PROXY

     6.1 Account Verification. The Administrative Agent may at any time, in the
Administrative Agent’s own name, in the name of a nominee of the Administrative Agent, or in the
name of the Grantor communicate (by mail, telephone, facsimile or otherwise) with the Account
Debtors of such Grantor, parties to contracts with the Grantor and obligors in respect of
Instruments of the Grantor to verify with such Persons, to the Administrative Agent’s satisfaction,
the existence, amount, terms of, and any other matter relating to, Retained Receivables subject to
applicable laws.

     6.2 Authorization for Secured Party to Take Certain Action.

          (a) The Grantor irrevocably authorizes the Administrative Agent at any time and from time to
time in the sole discretion of the Administrative Agent and appoints the Administrative Agent as
its attorney in fact (i) to execute on behalf of the Grantor as debtor and to file financing
statements necessary or desirable in the Administrative Agent’s sole discretion to perfect and to
maintain the perfection and priority of the Administrative Agent’s security interest in the
Collateral, (ii) to endorse and collect any cash proceeds of the Collateral, (iii) to file a
carbon, photographic or other reproduction of this Security Agreement or any financing statement
with respect to the Collateral as a financing statement and to file any other financing statement
or amendment of a financing statement (which does not add new collateral or add a debtor) in such
offices as the Administrative Agent in its sole discretion deems necessary or desirable to perfect
and to maintain the perfection and priority of the Administrative Agent’s security interest in the
Collateral, (iv) to contact and enter into one or more agreements with the issuers of
uncertificated securities which are Pledged Collateral or with securities intermediaries holding
Pledged Collateral as may be necessary or advisable to give the Administrative Agent Control over
such Pledged Collateral, (v) to apply the proceeds of any Collateral received by the Administrative
Agent to the Secured Obligations as provided in Section 7.2, (vi) to discharge past due taxes,
assessments, charges, fees or Liens on the Collateral (except for such Liens as are specifically
permitted hereunder), (vii) to contact Account Debtors for any reason, (viii) to demand payment or
enforce payment of the Retained Receivables in the name of the Administrative Agent or the. Grantor
and to endorse any and all checks, drafts, and other instruments for the payment of money relating
to the Retained Receivables, (ix) to sign the Grantor’s name on any invoice or bill of lading
relating to the Retained Receivables, drafts against any Account Debtor of the Grantor, assignments
and verifications of Retained Receivables, (x) to exercise all of the Grantor’s rights and remedies
with respect to the collection

 

 

of the Retained Receivables and any other Collateral, (xi) to settle, adjust, compromise,
extend or renew the Retained Receivables, (xii) to settle, adjust or compromise any legal
proceedings brought to collect Retained Receivables, (xiii) to prepare, file and sign the Grantor’s
name on a proof of claim in bankruptcy or similar document against any Account Debtor of the
Grantor, (xiv) to prepare, file and sign the Grantor’s name on any notice of Lien, assignment or
satisfaction of Lien or similar document in connection with the Retained Receivables, (xv) to
change the address for delivery of mail addressed to the Grantor to such address as the
Administrative Agent may designate and to receive, open and dispose of all mail addressed to the
Grantor, and (xvi) to do all other acts and things necessary to carry out this Security Agreement;
and the Grantor agrees to reimburse the Administrative Agent on demand for any payment made or any
expense incurred by the Administrative Agent in connection with any of the foregoing; provided
that, this authorization shall not relieve the Grantor of any of its obligations under this
Security Agreement or under the Credit Agreement.

          (b) All acts of said attorney or designee are hereby ratified and approved. The powers
conferred on the Administrative Agent, for the benefit of the Administrative Agent and Lenders,
under this Section 6.2 are solely to protect the Administrative Agent’s interests in the Collateral
and shall not impose any duty upon the Administrative Agent or any Lender to exercise any such
powers. The Administrative Agent agrees that, except for the powers granted in Section
6.2(a)(i)-(vi) and Section 6.2(a)(xvi), it shall not exercise any power or authority granted to it
uness an Event of Default has occurred and is continuing.

     6.3 Proxy. THE GRANTOR HEREBY IRREVOCABLY CONSTITUTES AND APPOINTS THE ADMINISTRATIVE
AGENT AS THE PROXY AND ATTORNEY-IN-FACT (AS SET FORTH IN SECTION 6.2 ABOVE) OF THE GRANTOR WITH
RESPECT TO THE PLEDGED COLLATERAL, INCLUDING THE RIGHT TO VOTE SUCH PLEDGED COLLATERAL, WITH FULL
POWER OF SUBSTITUTION TO DO SO. IN ADDITION TO THE RIGHT TO VOTE ANY SUCH PLEDGED COLLATERAL, THE
APPOINTMENT OF THE ADMINISTRATIVE AGENT AS PROXY AND ATTORNEY-IN-FACT SHALL INCLUDE THE RIGHT TO
EXERCISE ALL OTHER RIGHTS, POWERS, PRIVILEGES AND REMEDIES TO WHICH A HOLDER OF SUCH PLEDGED
COLLATERAL WOULD BE ENTITLED (INCLUDING GIVING OR WITHHOLDING WRITTEN CONSENTS OF SHAREHOLDERS,
CALLING SPECIAL MEETINGS OF SHAREHOLDERS AND VOTING AT SUCH MEETINGS). SUCH PROXY SHALL BE
EFFECTIVE, AUTOMATICALLY AND WITHOUT THE NECESSITY OF ANY ACTION (INCLUDING ANY TRANSFER OF ANY
SUCH PLEDGED COLLATERAL ON THE RECORD BOOKS OF THE ISSUER THEREOF) BY ANY PERSON (INCLUDING THE
ISSUER OF SUCH PLEDGED COLLATERAL OR ANY OFFICER OR AGENT THEREOF), UPON THE OCCURRENCE OF A
DEFAULT, SUBJECT TO THE INTERCREDITOR AGREEMENT.

     6.4 Nature of Appointment; Limitation of Duty. THE APPOINTMENT OF THE ADMINISTRATIVE
AGENT AS PROXY AND ATTORNEY-IN-FACT IN THIS ARTICLE VI IS COUPLED WITH AN INTEREST AND SHALL BE
IRREVOCABLE UNTIL THE DATE ON WHICH THIS SECURITY AGREEMENT IS TERMINATED IN ACCORDANCE WITH
SECTION 8.14. NOTWITHSTANDING ANYTHING CONTAINED HEREIN, NEITHER THE ADMINISTRATIVE AGENT, NOR ANY
LENDER, NOR ANY OF THEIR

 

 

RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES SHALL HAVE
ANY DUTY TO EXERCISE ANY RIGHT OR POWER GRANTED HEREUNDER OR OTHERWISE OR TO PRESERVE THE SAME AND
SHALL NOT BE LIABLE FOR ANY FAILURE TO DO SO OR FOR ANY DELAY IN DOING SO, EXCEPT IN RESPECT OF
DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS FINALLY
DETERMINED BY A COURT OF COMPETENT JURISDICTION; PROVIDED THAT, IN NO EVENT SHALL THEY BE LIABLE
FOR ANY PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES.

ARTICLE VII.

COLLECTION AND APPLICATION OF COLLATERAL PROCEEDS;

DEPOSIT ACCOUNTS

     7.1 Collection of Retained Receivables.

          (a) On or before the Closing Date, the Grantor shall execute and deliver to the
Administrative Agent a Deposit Account Control Agreement for account number 104774082853, in the
name of the Grantor maintained by the Grantor at U.S. Bank National Association (such account, or
such other accounts as are reasonably acceptable to the Administrative Agent, the “Merchant Deposit
Account”), which Merchant Deposit Account is identified as such on Exhibit B. The Grantor shall
cause to be deposited in that Merchant Deposit Account on each Business Day all proceeds of
Collateral other than proceeds of Sales Receivables, Servicing Accounts and Retained Receivables.
On or before the Closing Date, the Grantor shall execute and deliver to the Administrative Agent a
Deposit Control Account Agreement for a deposit account with account number 758660021 in the name
of the Grantor maintained with JPMorgan Chase Bank, N.A. (such account, or such other accounts as
are reasonably acceptable to the Administrative Agent, the “Collateral Deposit Account”). The
Grantor shall cause to be deposited in the Collateral Deposit Account on each Business Day all
proceeds of Servicing Accounts, Sales Receivables and settlement payments from Receivables Account
Owners under the Receivables Account Owner Documents and Retained Receivables. On each Business
Day, all funds on deposit in the Merchant Deposit Account shall be transferred to the Collateral
Deposit Account.

          (b) The Administrative Agent shall hold and apply funds received into the
Collateral Deposit Account as provided by the terms of Section 7.2.

     7.2 Application of Proceeds; Deficiency. All amounts deposited in the Collateral
Deposit Account shall be deemed received by the Administrative Agent in accordance with Section
2.18 of the Credit Agreement and shall, after having been credited in immediately available funds,
be applied (and allocated) by the Administrative Agent in accordance with Section 2.10(b) of the
Credit Agreement. If a Full Cash Dominion Condition is in effect, at the election of Administrative
Agent or the direction of Required Lenders, any such proceeds of the Collateral shall be applied in
the order set forth in Section 2.18(b) of the Credit Agreement unless a court of competent
jurisdiction shall otherwise direct. The balance, if any, after all of the Secured Obligations have
been satisfied, shall be deposited by the Administrative Agent into the Grantor’s general operating
account. The Grantor shall remain liable for any deficiency if the proceeds of any sale or other
disposition of the Collateral are insufficient to pay all Secured

 

 

Obligations, including any attorneys’ fees and other expenses incurred by the Administrative
Agent or any Lender to collect such deficiency.

ARTICLE VIII.

GENERAL PROVISIONS

     8.1 Waivers. The Grantor hereby waives notice of the time and place of any public sale
or the time after which any private sale or other disposition of all or any part of the Collateral
may be made. To the extent such notice may not be waived under applicable law, any notice made
shall be deemed reasonable if sent to the Grantor, addressed as set forth in Article IX, at least
ten days prior to (i) the date of any such public sale or (ii) the time after which any such
private sale or other disposition may be made. To the maximum extent permitted by applicable law,
the Grantor waives all claims, damages, and demands against the Administrative Agent or any Lender
arising out of the repossession, retention or sale of the Collateral, except such as arise solely
out of the gross negligence or willful misconduct of the Administrative Agent or such Lender as
finally determined by a court of competent jurisdiction. To the extent it may lawfully do so, the
Grantor absolutely and irrevocably waives and relinquishes the benefit and advantage of, and
covenants not to assert against the Administrative Agent or any Lender, any valuation, stay,
appraisal, extension, moratorium, redemption or similar laws and any and all rights or defenses it
may have as a surety now or hereafter existing which, but for this provision, might be applicable
to the sale of any Collateral made under the judgment, order or decree of any court, or privately
under the power of sale conferred by this Security Agreement, or otherwise. Except as otherwise
specifically provided herein, the Grantor hereby waives presentment, demand, protest or any notice
(to the maximum extent permitted by applicable law) of any kind in connection with this Security
Agreement or any Collateral.

     8.2 Limitation on Administrative Agent’s and Lenders’ Duty with Respect to the
Collateral. The Administrative Agent shall have no obligation to clean-up or otherwise prepare
the Collateral for sale. The Administrative Agent and each Lender shall use reasonable care with
respect to the Collateral in its possession or under its control. Neither the Administrative Agent
nor any Lender shall have any other duty as to any Collateral in its possession or control or in
the possession or control of any agent or nominee of the Administrative Agent or such Lender, or
any income thereon or as to the preservation of rights against prior parties or any other rights
pertaining thereto. To the extent that applicable law imposes duties on the Administrative Agent to
exercise remedies in a commercially reasonable manner, the Grantor acknowledges and agrees that it
is commercially reasonable for the Administrative Agent (i) to fail to incur expenses deemed
significant by the Administrative Agent to prepare Collateral for disposition or otherwise to
transform raw material or work in process into finished goods or other finished products for
disposition, (ii) to fail to obtain third party consents for access to Collateral to be disposed
of, or to obtain or, if not required by other law, to fail to obtain governmental or third party
consents for the collection or disposition of Collateral to be collected or disposed of, (iii) to
fail to exercise collection remedies against Account Debtors or other Persons obligated on
Collateral or to remove Liens on or any adverse claims against Collateral, (iv) to exercise
collection remedies against Account Debtors and other Persons obligated on. Collateral directly or
through the use of collection agencies and other collection specialists, (v) to advertise
dispositions of Collateral through publications or media of general circulation, whether or not the
Collateral is of a

 

 

specialized nature, (vi) to contact other Persons, whether or not in the same business as the
Grantor, for expressions of interest in acquiring all or any portion of such Collateral, (vii) to
hire one or more professional auctioneers to assist in the disposition of Collateral, whether or
not the Collateral is of a specialized nature, (viii) to dispose of Collateral by utilizing
internet sites that provide for the auction of assets of the types included in the Collateral or
that have the reasonable capacity of doing so, or that match buyers and sellers of assets, (ix) to
dispose of assets in wholesale rather than retail markets, (x) to disclaim disposition warranties,
such as title, possession or quiet enjoyment, (xi) to purchase insurance or credit enhancements to
insure the Administrative Agent against risks of loss, collection or disposition of Collateral or
to provide to the Administrative Agent a guaranteed return from the collection or disposition of
Collateral, or (xii) to the extent deemed appropriate by the Administrative Agent, to obtain the
services of other brokers, investment bankers, consultants and other professionals to assist the
Administrative Agent in the collection or disposition of any of the Collateral. The Grantor
acknowledges that the purpose of this Section 8.2 is to provide non-exhaustive indications of what
actions or omissions by the Administrative Agent would be commercially reasonable in the
Administrative Agent’s exercise of remedies against the Collateral and that other actions or
omissions by the Administrative Agent shall not be deemed commercially unreasonable solely on
account of not being indicated in this Section 8.2. Without limitation upon the foregoing, nothing
contained in this Section 8.2 shall be construed to grant any rights to the Grantor or to

 

 

     impose any duties on the Administrative Agent that would not have been granted or imposed by
this Security Agreement or by applicable law in the absence of this Section 8.2.

     8.3 Compromises and Collection of Collateral. The Grantor and the Administrative Agent
recognize that setoffs, counterclaims, defenses and other claims may be asserted by obligors with
respect to certain of the Retained Receivables, that certain of the Retained Receivables may be or
become uncollectible in whole or in part and that the expense and probability of success in
litigating a disputed Retained Receivable may exceed the amount that reasonably may be expected to
be recovered with respect to a Retained Receivable. In view of the foregoing, the Grantor agrees
that the Administrative Agent may at any time and from time to time, if an Event of Default has
occurred and is continuing, compromise with the obligor on any Retained Receivable, accept in full
payment of any Retained Receivable such amount as the Administrative Agent in its sole discretion
shall determine or abandon any Retained Receivable, and any such action by the Administrative Agent
shall be commercially reasonable so long as the Administrative Agent acts in good faith based on
information known to it at the time it takes any such action.

     8.4 Secured Party Performance of Debtor Obligations. Without having any obligation to
do so, the Administrative Agent may perform or pay any obligation which the Grantor has agreed to
perform or pay in this Security Agreement and the Grantor shall reimburse the Administrative Agent
for any amounts paid by the Administrative Agent pursuant to this Section 8.4. The Grantor’s
obligation to reimburse the Administrative Agent pursuant to the preceding sentence shall be a
Secured Obligation payable on demand.

     8.5 Specific Performance of Certain Covenants. The Grantor acknowledges and agrees
that a breach of any of the covenants contained in Sections 4.1(d), 4.1(e), 4.4, 4.5, 4.6, 4.7,
4.8, 4.9, 4.10, 5.3, or 8.7 or in Article VII will cause irreparable injury to the Administrative
Agent and the Lenders, that the Administrative Agent and Lenders have no adequate remedy at law in
respect of such breaches and therefore agrees, without limiting the right of the Administrative
Agent or the Lenders to seek and obtain specific performance of other obligations of the Grantor
contained in this Security Agreement, that the covenants of the Grantor contained in the Sections
referred to in this Section 8.5 shall be specifically enforceable against the Grantor.

     8.6 Dispositions Not Authorized. The Grantor is not authorized to sell or otherwise
dispose of the Collateral except as set forth in Section 4.1(d) and notwithstanding any course of
dealing between the Grantor and the Administrative Agent or other conduct of the Administrative
Agent, no authorization to sell or otherwise dispose of the Collateral (except as set forth in
Section 4.1(d)) shall be binding upon the Administrative Agent or the Lenders unless such
authorization is in writing signed by the Administrative Agent with the consent or at the direction
of the Required Secured Parties.

     8.7 No Waiver; Amendments; Cumulative Remedies. No delay or omission of the
Administrative Agent or any Lender to exercise any right or remedy granted under this Security
Agreement shall impair such right or remedy or be construed to be a waiver of any Default or an
acquiescence therein, and any single or partial exercise of any such right or remedy shall not

 

 

preclude any other or further exercise thereof or the exercise of any other right or remedy.
No waiver, amendment or other variation of the terms, conditions or provisions of this Security
Agreement whatsoever shall be valid unless in writing signed by the Administrative Agent with the
concurrence or at the direction of the Lenders required under Section 9.02 of the Credit Agreement
and then only to the extent in such writing specifically set forth. All rights and remedies
contained in this Security Agreement or by law afforded shall be cumulative and all shall be
available to the Administrative Agent and the Lenders until the Secured Obligations have been paid
in full.

     8.8 Limitation by Law; Severability of Provisions. All rights, remedies and powers
provided in this Security Agreement may be exercised only to the extent that the exercise thereof
does not violate any applicable provision of law, and all the provisions of this Security Agreement
are intended to be subject to all applicable mandatory provisions of law that may be controlling
and to be limited to the extent necessary so that they shall not render this Security Agreement
invalid, unenforceable or not entitled to be recorded or registered, in whole or in part. Any
provision in this Security Agreement that is held to be inoperative, unenforceable, or invalid in
any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without
affecting the remaining provisions in that jurisdiction or the operation, enforceability, or
validity of that provision in any other jurisdiction, and to this end the provisions of this
Security Agreement are declared to be severable.

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

     8.10 Benefit of Agreement. The terms and provisions of this Security Agreement shall
be binding upon and inure to the benefit of the Grantor, the Administrative Agent and the Lenders
and their respective successors and assigns (including all persons who become bound as a debtor to
this Security Agreement), except that the Grantor shall not have the right to assign its rights or
delegate its obligations under this Security Agreement or any interest herein, without the prior
written consent of the Administrative Agent. No sales of participations, assignments, transfers, or
other dispositions of any agreement governing the Secured Obligations or any portion thereof or
interest therein shall in any manner impair the Lien granted to the Administrative Agent, for the
benefit of the Administrative Agent and the Lenders, hereunder.

 

 

     8.11 Survival of Representations. All representations and warranties of the Grantor
contained in this Security Agreement shall survive the execution and delivery of this Security
Agreement.

     8.12 Taxes and Expenses. Any taxes (including income taxes) payable or ruled payable
by Federal or State authority in respect of this Security Agreement shall be paid by the Grantor,
together with interest and penalties, if any. The Grantor shall reimburse the Administrative Agent
for any and all out-of-pocket expenses and internal charges (including reasonable attorneys’,
auditors’ and accountants’ fees and reasonable time charges of attorneys, paralegals, auditors and
accountants who may be employees of the Administrative Agent) paid or incurred by the
Administrative Agent in connection with the preparation, execution, delivery, administration,
collection and enforcement of this Security Agreement and in the audit, analysis, administration,
collection, preservation or sale of the Collateral (including the expenses and charges associated
with any periodic or special audit of the Collateral). Any and all costs and expenses incurred by
the Grantor in the performance of actions required pursuant to the terms hereof shall be borne
solely by the Grantor.

     8.13 Headings. The title of and section headings in this Security Agreement are for
convenience of reference only, and shall not govern the interpretation of any of the terms and
provisions of this Security Agreement.

     8.14 Termination. This Security Agreement shall continue in effect (notwithstanding
the fact that from time to time there may be no Secured Obligations outstanding) until (i) the
Credit Agreement has terminated pursuant to its express terms and (ii) all of the Secured
Obligations have been indefeasibly paid and performed in full (or with respect to any outstanding
Letters of Credit, a cash deposit or supporting letter of credit has been delivered to the
Administrative Agent as required by the Credit Agreement) and no commitments of the Administrative
Agent or the Lenders which would give rise to any Secured Obligations are outstanding.

     8.15 Entire Agreement. This Security Agreement embodies the entire agreement and
understanding between the Grantor and the Administrative Agent relating to the Collateral and
supersedes all prior agreements and understandings between the Grantor and the Administrative Agent
relating to the Collateral.

     8.16 CHOICE OF LAW. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

     8.17 CONSENT TO JURISDICTION. THE GRANTOR HEREBY IRREVOCABLY SUBMITS TO THE
NON-EXCLUSIVE JURISDICTION OF ANY U.S. FEDERAL OR NEW YORK STATE COURT SITTING IN NEW YORK, NEW
YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER
LOAN DOCUMENT AND THE GRANTOR HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION
OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES

 

 

ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN
SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE
GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE GRANTOR AGAINST THE
ADMINISTRATIVE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE ADMINISTRATIVE AGENT OR ANY LENDER
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED
WITH THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN NEW
YORK, NEW YORK.

     8.18 WAIVER OF JURY TRIAL. THE GRANTOR, THE ADMINISTRATIVE AGENT AND EACH LENDER
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER
(WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED
THEREUNDER.

     8.19 Indemnity The Grantor hereby agrees to indemnify the Administrative Agent and the
Lenders, and their respective successors, assigns, agents and employees, from and against any and
all liabilities, damages, penalties, suits, costs, and expenses of any kind and nature (including,
without limitation, all expenses of litigation or preparation therefor whether or not the
Administrative Agent or any Lender is a party thereto) imposed on, incurred by or asserted against
the Administrative Agent or the Lenders, or their respective successors, assigns, agents and
employees, in any way relating to or arising out of this Security Agreement, or the manufacture,
purchase, acceptance, rejection, ownership, delivery, lease, possession, use, operation, condition,
sale, return or other disposition of any Collateral (including, without limitation, latent and
other defects, whether or not discoverable by the Administrative Agent or the Lenders or the
Grantor, and any claim for trademark infringement).

     8.20 Counterparts. This Security Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and any of the parties
hereto may execute this Security Agreement by signing any such counterpart.

     8.21 Effect of Changes in SPV Credit Documents. The SPV Credit Documents may be
amended, modified, supplemented, restated, refinanced or extended from time to time (each a
“change”); provided that, for purposes of this Agreement, no such change shall affect the defined
terms in the SPV Credit Documents as such terms have been incorporated herein by reference in a
manner which impairs or diminishes the Collateral in any material respect. Notwithstanding anything
herein to the contrary, and for the avoidance of doubt, the parties hereto expressly agree that any
conveyance, assignment, reconveyance or reassignment executed in accordance with the provisions of
any such SPV Credit Document shall not be considered to be a change to such SPV Credit Document.

 

 

     8.22 Effect on Existing Pledge and Security Agreement. This Agreement is intended to
amend and restate the provisions of the Pledge and Security Agreement dated as of June 21, 2007, as
amended and restated on May 15, 2008, and as amended on July 31, 2009, among the parties hereto
(the “Existing Pledge and Security Agreement”) and, except as expressly modified herein,
(x) all of the terms and provisions of the Existing Pledge and Security Agreement shall continue to
apply for the period prior to the Closing Date and (y) the Liens under the Existing Pledge and
Security Agreement shall be continuing in all respects.

     8.23 Springing Account Agreement. The Administrative Agent will not deliver a written
notice pursuant to Section 4(b) of the Springing Account Agreement to U.S. Bank National
Association terminating Grantor’s access to, and granting the Administrative Agent exclusive
control over, Account No. 104757791017 (or such other account as is reasonably acceptable to the
Administrative Agent) until the occurrence and continuance of an Event Default.

ARTICLE IX.

NOTICES

     9.1 Sending Notices. Any notice required or permitted to be given under this Security
Agreement shall be sent by United States mail, telecopier, personal delivery or nationally
established overnight courier service, and shall be deemed received (a) when received, if sent by
hand or overnight courier service, or mailed by certified or registered mail or (b) when sent, if
sent by telecopier (except that, if not given during normal business hours for the recipient, shall
be deemed to have been given at the opening of business on the next Business Day for the
recipient), in each case addressed to the Grantor at the address set forth on Exhibit A as its
principal place of business, and to the Administrative Agent and the Lenders at the addresses set
forth in accordance with Section 9.01 of the Credit Agreement.

     9.2 Change in Address for Notices. Each of the Grantor, the Administrative Agent and
the Lenders may change the address for service of notice upon it by a notice in writing to the
other parties.

ARTICLE X.

THE ADMINISTRATIVE AGENT

     JPMorgan Chase Bank, N.A. has been appointed Administrative Agent for the Lenders hereunder
pursuant to Article VIII of the Credit Agreement. It is expressly understood and agreed by the
parties to this Security Agreement that any authority conferred upon the Administrative Agent
hereunder is subject to the terms of the delegation of authority made by the Lenders to the
Administrative Agent pursuant to the Credit Agreement, and that the Administrative Agent has agreed
to act (and any successor Administrative Agent shall act) as such hereunder only on the express
conditions contained in such Article VIII. Any successor Administrative Agent appointed pursuant to
Article VIII of the Credit Agreement shall be entitled to all the rights, interests and benefits of
the Administrative Agent hereunder.

 

 

ARTICLE XI.

STOCK OF FINGERHUT SPV; LIMITATION ON ACTIONS.

     11.1 The parties hereto acknowledge that the pledge hereunder of the membership interests (the
“Fingerhut SPV Stock”) of Grantor in the Fingerhut SPV is (i) junior in priority to the pledge of
the Fingerhut SPV Stock to the SPV Secured Parties under the SPV Share Pledge and (ii) prohibited
by the terms of the Receivables Purchase Agreement, unless certain limitations with respect to the
pledge of the Fingerhut SPV Stock as set forth herein are observed. Accordingly, in order to induce
the SPV Collateral Agent to permit the pledge of the Fingerhut SPV Stock, the parties hereto agree
to the following limitations relating only to the pledge of the Fingerhut SPV Stock and not to any
other Pledged Collateral.

     To induce the SPV Collateral Agent to permit the pledge of the Fingerhut SPV Stock, the
parties hereto agree to the following limitations:

          (a) Notwithstanding anything to the contrary contained herein:

          (i) Prior to the date that is one year and one day after all Obligations under (and as
defined in) the SPV Credit Agreement have been paid in full, the Administrative Agent, for
itself and for the Lenders, agrees that, with respect to the Fingerhut SPV Stock, it will
not, without the prior written consent of the SPV Collateral Agent, take any action adverse
to the SPV Collateral Agent or the SPV Secured Parties, including, without limitation, (A)
causing the Fingerhut SPV to violate or breach any term or provision in any SPV Credit
Document, (B) amending or altering any of the Fingerhut SPV’s organizational documents, (C)
causing the Fingerhut SPV to incur any debt, other than, in each case, as may be allowed in
the SPV Credit Documents or (D) otherwise take any action which would compromise or call
into question the intended bankruptcy remote structure of the transactions contemplated by
the Receivables Purchase Agreement and the other SPV Credit Documents; provided, that any
termination of the Receivables Purchase Agreement in accordance with the terms thereof shall
not be deemed to be adverse to the interests of the SPV Collateral Agent or the SPV Secured
Parties;

          (ii) Prior to the date on which the Obligations under (and as defined in) the SPV
Credit Documents have been paid in full, in the event that the Administrative Agent receives
any payments or funds constituting Receivables Property, the Administrative Agent shall hold
such payments or funds in trust for the benefit of the SPV Collateral Agent, and shall
promptly transfer such payments or funds to the SPV Collateral Agent;

          (iii) Prior to the date on which the Obligations under (and as defined in) the SPV
Credit Documents have been paid in full, (A) this Article XI shall not be amended, restated,
supplemented or otherwise modified without the prior written consent of the SPV Collateral
Agent and the provisions of this Article XI shall be contained in any agreement that amends
and restates this Security Agreement and (B) the Administrative Agent for itself and for the
Lenders agrees that no such party shall enter

 

 

into any additional agreement that would adversely affect the rights of any SPV Secured
Party under the SPV Credit Agreement set forth in Article XI hereof;

          (iv) Prior to the date that is one year and one day after all Obligations under (and as
defined in) the SPV Credit Documents have been paid in full, neither the Administrative
Agent nor any Lender shall object to or contest in any administrative, legal or equitable
action or proceeding (including, without limitation, any insolvency, bankruptcy,
receivership, liquidation, reorganization, winding up, readjustment, composition or other
similar proceeding relating to the Grantor or the Fingerhut SPV or their respective
property) or object to or contest in any other manner (1) the interests of the Fingerhut SPV
and its successors and assigns in any of the assets transferred (or purported to be
transferred) by Grantor to the Fingerhut SPV pursuant to the Receivables Purchase Agreement
and/or (2) the interests of the SPV Collateral Agent, and/or any SPV Secured Party in the
Receivables Property or otherwise take any action which would compromise or call into
question the intended bankruptcy remote structure of the transactions contemplated by the
SPV Credit Documents. Neither the Administrative Agent nor any Lender shall object to or
contest in any manner the receipt of any payment by the SPV Collateral Agent with respect to
the Receivables Property in accordance with the terms of the SPV Credit Documents; and

          (v) Prior to the date that is ninety-five (95) days after all Obligations under (and as
defined in) the SPV Credit Documents have been paid in full, neither the Administrative
Agent nor any Lender shall exercise or seek to exercise any rights or remedies, including
any action of foreclosure, with respect to the Fingerhut SPV Stock or institute any action
or proceeding with respect to such rights or remedies, including any action of foreclosure.

     The provisions of this Article XI shall continue to be effective or be reinstated, as the case
may be, if at any time any payment made pursuant to the Receivables Purchase Agreement is rescinded
or must otherwise be returned by the SPV Collateral Agent or any of the Lenders upon the
insolvency, bankruptcy or reorganization of the Grantor or the Fingerhut SPV or otherwise, all as
though such payment had not been made.

     (b) The SPV Collateral Agent shall be a third-party beneficiary with respect to this
Article XI.

     (c) The provisions of this Article XI provide for relative rights of the Administrative

Agent and the SPV Collateral Agent, respectively, and are not intended for the benefit
of the Grantor or the Fingerhut SPV, nor shall such provisions limit or modify the
obligations of the Grantor under the Loan Documents or the SPV Credit Documents,
respectively.

     11.2 Intercreditor Agreement Governs. Notwithstanding anything herein to the contrary, the
lien and security interest in the Fingerhut SPV Stock granted to the Administrative Agent, for the
benefit of the Lenders, pursuant to this Security Agreement and the exercise of

 

 

any right or remedy in respect of the Fingerhut SPV Stock by the Administrative Agent and the
Lenders hereunder are subject to the provisions of the Intercreditor Agreement. In the event of any
conflict or inconsistency between a provision of the Intercreditor Agreement and this Security
Agreement that relates solely to the rights or obligations of, or relationships between, the SPV
Secured Parties and the Administrative Agent, the provisions of the Intercreditor Agreement shall
control.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their
respective authorized officers as of the day and year first above written.

	 	 	 	 	 
	 	BLUESTEMBRANDS, INC.

 	 
	 	By:  	/s/ Mark Wagener
 	 
	 	 	Name:  	Mark Wagener 	 
	 	 	Title:  	Executive Vice President and 

Chief Financial Officer 	 
	 
	 	JPMORGAN CHASE BANK, N.A.,

  as Administrative Agent

 	 
	 	By:  	/s/ Bradford R. Kuhn
 	 
	 	 	Name:  	Brandford R. Kuhn 	 
	 	 	Title:  	Duly Authorized Signatoryexv10w17

Exhibit 10.17

 

FINGERHUT DIRECT MARKETING, INC.

$30,000,000

13.00% SENIOR SUBORDINATED SECURED NOTES DUE MARCH 24, 2013

AND

WARRANTS

 

SECURITIES PURCHASE AGREEMENT

 

Dated as of March 23, 2006

 

 

 

TABLE OF CONTENTS

(Not Part of Agreement)

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page	 
	1.	 	AUTHORIZATION OF ISSUE OF SECURITIES	 	 	1	 
	 	 	1A Authorization of Subordinated Notes	 	 	1	 
	 	 	1B Authorization of Preferred Stock Warrants	 	 	1	 
	 
	 	 	 	 	 	 	 	 
	2.	 	PURCHASE AND SALE OF SECURITIES	 	 	1	 
	 
	 	 	 	 	 	 	 	 
	3.	 	CONDITIONS OF CLOSING	 	 	2	 
	 
	 	3A.	 	Documents	 	 	2	 
	 
	 	3B.	 	Opinion of Purchasers’ Special Counsel	 	 	5	 
	 
	 	3C.	 	Opinion of Company’s Counsel	 	 	5	 
	 
	 	3D.	 	Representations and Warranties; No Default; Satisfaction of Conditions	 	 	5	 
	 
	 	3E.	 	Purchase Permitted By Applicable Laws; Approvals	 	 	5	 
	 
	 	3F.	 	Certificates of Insurance	 	 	6	 
	 
	 	3G.	 	UCC Searches	 	 	6	 
	 
	 	3H.	 	Material Adverse Effect	 	 	6	 
	 
	 	31.	 	Amended and Restated Credit Agreement	 	 	6	 
	 
	 	3J.	 	Third Amended and Restated Certificate of Incorporation	 	 	6	 
	 
	 	3K.	 	Termination of Certain Existing Indebtedness	 	 	7	 
	 
	 	3L.	 	Fees and Expenses	 	 	7	 
	 
	 	3M.	 	Structuring Fee	 	 	7	 
	 
	 	3N.	 	Proceedings	 	 	7	 
	 
	 	 	 	 	 	 	 	 
	4.	 	PREPAYMENTS	 	 	7	 
	 
	 	4A	 	Maturity	 	 	7	 
	 
	 	4B	 	Optional Prepayment	 	 	7	 
	 
	 	4C	 	Notice of Optional Prepayment	 	 	8	 
	 
	 	4D.	 	Partial Payments Pro Rata	 	 	8	 
	 
	 	4E.	 	No Acquisition of Subordinated Notes	 	 	8	 
	 
	 	 	 	 	 	 	 	 
	5.	 	AFFIRMATIVE COVENANTS	 	 	9	 
	 
	 	5A.	 	Financial Statements	 	 	9	 
	 
	 	5B.	 	Information Required by Rule 144A	 	 	10	 
	 
	 	5C.	 	Inspection of Property	 	 	11	 
	 
	 	5D.	 	Covenant to Secure Subordinated Notes Equally	 	 	11	 
	 
	 	5E.	 	Compliance with Law	 	 	11	 
	 
	 	5F.	 	Insurance	 	 	11	 
	 
	 	5G.	 	Maintenance of Properties	 	 	12	 
	 
	 	51-1.	 	Payment of Taxes	 	 	12	 
	 
	 	51.	 	Corporate Existence	 	 	12	 
	 
	 	5J.	 	Lines of Business	 	 	12	 
	 
	 	5K.	 	Agreement Assuming Liability on Subordinated Notes	 	 	12	 

 

 

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page	 
	 
	 	5L	 	Pay Obligations	 	 	13	 
	 
	 	5M	 	Further Assurances	 	 	13	 
	 
	 	5N	 	Future Subsidiaries	 	 	13	 
	 
	 	5O.	 	Amendments to Credit Agreement	 	 	14	 
	 
	 	5P	 	Delivery of Landlord Lien Waivers	 	 	14	 
	 
	 	5Q	 	Further Actions with Respect to Domain Names	 	 	14	 
	 
	 	5R	 	Further Assurances with Respect to Deposit Accounts	 	 	15	 
	 
	 	5S	 	Applicable Projected Cash Bum Rate	 	 	15	 
	 
	 	 	 	 	 	 	 	 
	6.	 	NEGATIVE COVENANTS	 	 	15	 
	 
	 	6A	 	Liens and Other Interests	 	 	15	 
	 
	 	6B	 	Indebtedness; Guarantees	 	 	15	 
	 
	 	6C	 	Investments	 	 	16	 
	 
	 	6D	 	Merger or Consolidation	 	 	17	 
	 
	 	6E	 	Asset Dispositions	 	 	17	 
	 
	 	6F	 	Restricted Payments	 	 	17	 
	 
	 	6G	 	Negative Pledge	 	 	18	 
	 
	 	6H	 	Amendments to Organizational Documents	 	 	18	 
	 
	 	61.	 	Changes in Name, Location of Inventory, Etc	 	 	18	 
	 
	 	6J	 	Financial Covenants	 	 	19	 
	 
	 	6K	 	Related Party Transactions	 	 	20	 
	 
	 	6L	 	Issuance of Stock by Subsidiaries	 	 	20	 
	 
	 	6M	 	Limitation on Issuance of Other Subordinated Indebtedness Senior to the Subordinated Notes	 	 	20	 
	 
	 	6N	 	Payment Limitations	 	 	21	 
	 
	 	60.	 	Credit Agreement	 	 	21	 
	 
	 	6P.	 	Terrorism Sanctions Regulations	 	 	21	 
	 
	 	 	 	 	 	 	 	 
	7.	 	EVENTS OF DEFAULT	 	 	21	 
	 
	 	7A	 	Acceleration	 	 	21	 
	 
	 	7B	 	Rescission of Acceleration	 	 	24	 
	 
	 	7C	 	Notice of Acceleration or Rescission	 	 	25	 
	 
	 	7D	 	Other Remedies	 	 	25	 
	 
	 	 	 	 	 	 	 	 
	8.	 	REPRESENTATIONS, COVENANTS AND WARRANTIES	 	 	25	 
	 
	 	8A(1).	 	Organization; Subsidiary Preferred Stock	 	 	25	 
	 
	 	8A(2).	 	Equity Interests	 	 	25	 
	 
	 	8A(3).	 	Power and Authority	 	 	26	 
	 
	 	8A(4).	 	Execution and Delivery of Transaction Documents	 	 	 	 
	 
	 	8B	 	Financial Statements	 	 	27	 
	 
	 	8C	 	Actions Pending	 	 	27	 

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page	 
	 
	 	8D.	 	Outstanding Indebtedness	 	 	27	 
	 
	 	8E.	 	Title to Properties	 	 	27	 
	 
	 	8F.	 	Taxes	 	 	28	 
	 
	 	8G.	 	Conflicting Agreements and Other Matters	 	 	28	 
	 
	 	8H.	 	Offering of Subordinated Notes and Warrants	 	 	28	 
	 
	 	81.	 	Use of Proceeds	 	 	28	 
	 
	 	8J.	 	ERISA	 	 	29	 
	 
	 	8K.	 	Governmental Consent	 	 	29	 
	 
	 	8L.	 	Compliance with Environmental and Other Laws	 	 	30	 
	 
	 	8M.	 	Regulatory Status	 	 	30	 
	 
	 	8N.	 	Permits and Other Operating Rights	 	 	30	 
	 
	 	80.	 	Rule 144A	 	 	30	 
	 
	 	8P.	 	Absence of Financing Statements, etc.	 	 	30	 
	 
	 	8Q.	 	Establishment of Security Interest	 	 	30	 
	 
	 	8R.	 	Foreign Assets Control Regulations, Etc.	 	 	31	 
	 
	 	8S.	 	Disclosure	 	 	32	 
	 
	 	8T.	 	Inventory Locations; Etc.	 	 	32	 
	 
	 	 	 	 	 	 	 	 
	9.	 	REPRESENTATIONS OF EACH PURCHASER	 	 	32	 
	 
	 	9A	 	Nature of Purchase	 	 	32	 
	 
	 	9B	 	Source of Funds	 	 	32	 
	 
	 	 	 	 	 	 	 	 
	10.	 	[INTENTIONALLY OMITTED]	 	 	34	 
	 
	 	 	 	 	 	 	 	 
	11.	 	DEFINITIONS; ACCOUNTING MATTERS	 	 	34	 
	 
	 	11A	 	Yield-Maintenance Amount and Related Terms	 	 	34	 
	 
	 	11B	 	Other Terms	 	 	37	 
	 
	 	11C	 	Accounting and Legal Principles, Terms and Determinations	 	 	50	 
	 
	 	 	 	 	 	 	 	 
	12.	 	MISCELLANEOUS	 	 	50	 
	 
	 	12A.	 	Subordinated Note Payments	 	 	50	 
	 
	 	12B.	 	Expenses	 	 	50	 
	 
	 	12C.	 	Consent to Amendments	 	 	51	 
	 
	 	12D.	 	Form, Registration, Transfer and
Exchange of Subordinated Notes; Lost Subordinated Notes	 	 	52	 
	 
	 	12E.	 	Persons Deemed Owners; Participations	 	 	53	 
	 
	 	12F.	 	Survival of Representations and Warranties; Entire Agreement	 	 	53	 
	 
	 	12G.	 	Successors and Assigns	 	 	53	 
	 
	 	12H.	 	Independence of Covenants	 	 	53	 
	 
	 	121.	 	Notices	 	 	53	 
	 
	 	12J.	 	Payments Due on Non-Business Days	 	 	54	 

 

 

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page	 
	 
	 	12K.	 	Satisfaction Requirement	 	 	54	 
	 
	 	12L.	 	GOVERNING LAW	 	 	54	 
	 
	 	12M.	 	SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL	 	 	54	 
	 
	 	12N.	 	Severability	 	 	55	 
	 
	 	120.	 	Descriptive Headings; Advice of Counsel; Interpretation	 	 	55	 
	 
	 	12P.	 	Counterparts; Facsimile Signatures	 	 	56	 
	 
	 	12Q.	 	Severalty of Obligations	 	 	56	 
	 
	 	12R	 	Independent Investigation	 	 	56	 
	 
	 	12S	 	Directly or Indirectly	 	 	56	 
	 
	 	12T	 	Confidential Information	 	 	56	 
	 
	 	12U	 	Original Issue Discount	 	 	57	 
	 
	 	12V.	 	Binding Agreement	 	 	58	 

 

 

PURCHASER SCHEDULE

	 	 	 	 	 

	SCHEDULE 6A 

SCHEDULE 6B 

SCHEDULE 6C 

SCHEDULE 6J(v) 

SCHEDULE 6J(vi) 

SCHEDULE 6K 

SCHEDULE 8A(1) 

SCHEDULE 8A(2) 

SCHEDULE 8G 

SCHEDULE 8K 

SCHEDULE 8Q 

SCHEDULE 8T

	 	-

-

-

-

-

-

-

-

-

-

-

-
	 	EXISTING LIENS

EXISTING INDEBTEDNESS

EXISTING INVESTMENTS

MAXIMUM SALES SHORTFALL

MAXIMUM NET INCOME SHORTFALL

RELATED PARTY TRANSACTIONS

SUBSIDIARIES

STOCKHOLDERS AND OUTSTANDING STOCK

LIST OF AGREEMENTS RESTRICTING INDEBTEDNESS

FILINGS

COLLATERAL MATTERS

INVENTORY LOCATIONS
	 
	EXHIBIT A 

EXHIBIT B 

EXHIBIT C

	 	-

-

-
	 	FORM OF SUBORDINATED NOTE

FORM OF WARRANT

FORM OF DISBURSEMENT DIRECTION LETTER
	EXHIBIT D

	 	-
	 	FORM OF AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
	EXHIBIT E 

EXHIBIT F 

EXHIBIT G 

EXHIBIT H 

EXHIBIT I 

EXHIBIT J 

EXHIBIT K 

EXHIBIT L 

EXHIBIT M 

EXHIBIT N 

EXHIBIT O

	 	-

-

-

-

-

-

-

-

-

-

-
	 	FORM OF AMENDED AND RESTATED STOCKHOLDERS AGREEMENT

FORM OF SUBSIDIARY GUARANTY

FORM OF SECURITY AGREEMENT

FORM OF SUBSIDIARY SECURITY AGREEMENT

FORM OF IP SECURITY AGREEMENT

FORM OF EQUITYHOLDER AGREEMENT

FORM OF VCOC LETTER

FORM OF AGREEMENT TO SUBORDINATE

FORM OF COLLATERAL AGENCY AGREEMENT

FORM OF OPINION OF COMPANY’S COUNSEL

FORM OF THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

 

 

FINGERHUT DIRECT MARKETING, INC.

4400 Baker Road

Minnetonka, Minnesota 55343

As of March 23, 2006

To Each of the Purchasers Named in the

Purchaser Schedule Attached Hereto

Ladies and Gentlemen:

     The undersigned, Fingerhut Direct Marketing, Inc., a Delaware corporation (herein called the
“Company”), hereby agrees with the purchasers named in the Purchaser Schedule attached hereto
(herein called the “Purchasers”) as set forth below. Reference is made to paragraph 11 hereof for
definitions of capitalized terms used herein and not otherwise defined herein.

     1. AUTHORIZATION OF ISSUE OF SECURITIES.

     IA. Authorization of Subordinated Notes. The Company will authorize the issue of its senior
subordinated secured promissory notes (the “Subordinated Notes”) in the aggregate principal amount
of $30,000,000, to be dated the date of issue thereof, to mature March 24, 2013, to bear interest
on the unpaid balance thereof from the date thereof until the principal thereof shall have become
due and payable at the rate of 13.00% per annum (provided that, during any period when an Event of
Default shall be in existence, at the election of the Required Holder(s) the outstanding principal
balance of the Subordinated Notes shall bear interest from and after the date of such Event of
Default and until the date such Event of Default ceases to be in existence at the rate per annum
from time to time equal to the Default Rate) and on overdue payments at the rate per annum from
time to time equal to the Default Rate, and to be substantially in the form of Exhibit A attached
hereto. The term “Subordinated Notes” as used herein shall include each such senior subordinated
secured promissory note delivered pursuant to any provision of this Agreement and each such senior
subordinated secured promissory note delivered in substitution or exchange for any other
Subordinated Note pursuant to any such provision.

     1B. Authorization of Preferred Stock Warrants. The Company will authorize the issue to the
Purchasers of its Series A Preferred Stock Warrants in the form of Exhibit B hereto (the
“Warrants”), initially exercisable for 41,742,458 shares of the Preferred Stock, representing 4.00%
of the equity of the Company (determined on a fully diluted basis). The term Warrant as used herein
shall include each Warrant delivered pursuant to any provision of this Agreement. The Warrants and
the Subordinated Notes are sometimes collectively referred to herein as the “Securities.”

     2. PURCHASE AND SALE OF SECURITIES. The Company hereby agrees to sell to each Purchaser and,
subject to the terms and conditions herein set forth, each Purchaser agrees to purchase from the
Company the aggregate principal amount of Subordinated Notes set

8

 

forth opposite such Purchaser’s name in the Purchaser Schedule attached hereto at 100% of such
aggregate principal amount and, in connection therewith, the Company agrees to issue to such
Purchaser Warrants to purchase the number of shares of Preferred Stock set forth opposite such
Purchaser’s name in the Purchaser Schedule attached hereto at the price set forth therein. The
Company will deliver to each Purchaser, at the offices of Schiff Hardin LLP at 6600 Sears Tower,
Chicago, Illinois 60606, one or more Subordinated Notes and one or more Warrants, in each case,
registered in such Purchaser’s name (or, if specified in the Purchaser Schedule, in the name of the
nominee(s) for such Purchaser specified in the Purchaser Schedule), evidencing the aggregate
principal amount of Subordinated Notes or Warrants representing the right to purchase the aggregate
number of shares of Preferred Stock, as applicable, to be purchased by or issued to such Purchaser
and in the denomination or denominations specified with respect to such Purchaser in the Purchaser
Schedule against payment of the purchase price thereof by transfer of immediately available funds
on the date of closing, which shall be March 24, 2006 or any other date on or before March 31, 2006
upon which the Company and the Purchasers may mutually agree (herein called the “closing” or the
“date of closing”), for credit to the account or accounts as shall be specified in a letter on the
Company’s letterhead, in substantially the form of Exhibit C attached hereto, from the Company to
the Purchasers delivered prior to the .date of closing.

3. CONDITIONS OF CLOSING. Each Purchaser’s obligation to purchase and pay for the Securities to be
purchased by such Purchaser hereunder is subject to the satisfaction, on or before the date of
closing, of the following conditions:

     3A. Documents. Such Purchaser shall have received original counterparts or, if satisfactory to
such Purchaser, certified or other copies of all of the following, each duly executed and delivered
by the party or parties thereto, in form and substance satisfactory to such Purchaser, dated the
date of closing unless otherwise indicated, and, on the date of closing, in full force and effect
with no event having occurred and being then continuing that would constitute a default thereunder
or constitute or provide the basis for the termination thereof:

     (i) the Subordinated Note or Subordinated Notes to be purchased by such Purchaser in
the form of Exhibit A attached hereto;

     (ii) the Warrant or Warrants to be issued to such Purchaser in the form of Exhibit B
attached hereto;

     (iii) an Amended and Restated Investor Rights Agreement among the Company, the
Purchasers and the other holders of the Equity Interests of the Company in the form of
Exhibit D hereto (herein, as the same may be amended, modified or supplemented from time to
time in accordance with the provisions thereof, called the “Investor Rights Agreement”) and
an Amended and Restated Stockholders Agreement among the Company, the Purchasers and the
other holders of the Equity Interests of the Company in the form of Exhibit E hereto
(herein, as the same may be amended, modified or supplemented from time to time in
accordance with the provisions thereof, called the “Stockholders Agreement”);

     (iv) a Guaranty Agreement made by the Subsidiary Guarantors in favor of the Purchasers
in the form of Exhibit F hereto (as the same may be amended, modified or

 

 

supplemented from time to time in accordance with the provisions thereof, called the
“Subsidiary Guaranty”);

     (v) a Security Agreement made by the Company in favor of Prudential Capital Partners
II, L.P. (the “Subordinated Collateral Agent”) for the benefit of the holders of the
Subordinated Notes in the form of Exhibit G hereto (as the same may be amended, modified, or
supplemented from time to time in accordance with the provisions thereof, the “Security
Agreement”);

     (vi) a Security Agreement made by each Subsidiary of the Company in favor of the
Subordinated Collateral Agent for the benefit of the holders of the Subordinated Notes in
the form of Exhibit H hereto (as the same may be amended, modified, or supplemented from
time to time in accordance with the provisions thereof, the “Subsidiary Security
Agreement”);

     (vii) an IP Security Agreement made by the Company and each Subsidiary Guarantor in
favor of the Subordinated Collateral Agent for the benefit of the holders of the
Subordinated Notes in the form of Exhibit I hereto (as the same may be amended, modified, or
supplemented from time to time in accordance with the provisions thereof, the “IP Security
Agreement”);

     (viii) a letter agreement among the Purchasers and the other holders of Equity
Interests of the Company in the form of Exhibit J hereto (as the same may be amended,
modified or supplemented from time to time in accordance with the provisions thereof, called
the “Equityholder Agreement”);

     (ix) a management rights letter agreement in the form of Exhibit K hereto (as the same
may be amended, modified or supplemented from time to time in accordance with the provisions
thereof, called the “VCOC Letter”);

     (x) (a) a landlord lien waiver with respect to the premises located at 6250 Ridgewood
Road, St. Cloud, Minnesota, duly executed by the Bank Agent and the Subordinated Collateral
Agent and acknowledged by. FAC, the Company and each Subsidiary Guarantor and (b) a landlord
lien waiver with respect to the premises located at 7777 Golden Triangle, Eden Prairie,
Minnesota, duly executed by the Company, Liberty Property Limited Partnership, the Bank
Agent and the Subordinated Collateral Agent;

     (xi) an Agreement to Subordinate made and delivered by Thomas J Petters, Petters
Company, Inc., FAC, Petters Group Worldwide, LLC and Theodore Deikel, in favor of the
Subordinated Collateral Agent and the holders of Subordinated Notes in the form of Exhibit L
hereto (as the same may be amended, modified or supplemented from time to time in accordance
with the provisions thereof, called the “Agreement to Subordinate”);

     (xii) a Collateral Agency Agreement between the Subordinated Collateral Agent and the
Purchasers and acknowledged by the Company in the form of Exhibit M

 

 

hereto (as the same may be amended, modified or supplemented from time to time in
accordance with the provisions thereof, called the “Collateral Agency Agreement”);

     (xiii) a Secretary’s Certificate signed by the Secretary or Assistant
Secretary and one other officer of the Company certifying, among other things (a) as to the
name, titles and true signatures of the officers of the Company authorized to sign this
Agreement, the Subordinated Notes, the other Transaction Documents and the other documents
to be delivered in connection with this Agreement, (b) that attached thereto is a true,
accurate and complete copy of the Restated Certificate of Incorporation, certified by the
Secretary of State of the state of Delaware as of a recent date, (c) that attached thereto
is a true, accurate and complete copy of the by-laws of the Company which were duly adopted
and are in effect as of the date of closing and have been in effect immediately prior to and
at all times since the adoption of the resolutions referred to in clause (d) below, (d) that
attached thereto is a true, accurate and complete copy of the resolutions of the board of
directors of the Company, duly adopted at a meeting or by unanimous written consent of such
board of directors, authorizing the execution, delivery and performance of this Agreement,
the Subordinated Notes, the other Transaction Documents and the other documents to be
delivered in connection with this Agreement, and that such resolutions have not been
amended, modified, revoked or rescinded, are in full force and effect and are the only
resolutions of the shareholders of the Company or of such board of directors or any
committee thereof relating to the subject matter thereof, (e) that this Agreement, the
Subordinated Notes, the other Transaction Documents and the other documents executed and
delivered to such Purchaser by the Company are in the form approved by its board of
directors in the resolutions referred to in clause (d), above, and (f) that no dissolution
or liquidation proceedings as to the Company or any Subsidiary have been commenced or are
contemplated;

     (xiv) a Secretary’s Certificate signed by the Secretary or Assistant
Secretary and one other officer of each Subsidiary Guarantor.certifying, among
other things (a) as to the name, titles and true signatures of the officers of such
Subsidiary Guarantor authorized to sign the Transaction Documents to which such Subsidiary
Guarantor is a party and the other documents to be delivered in connection with this
Agreement, (b) that attached thereto is a true, accurate and complete copy of the
certificate of incorporation or other formation document of such Subsidiary Guarantor,
certified by the Secretary of State of the state of organization of such Subsidiary
Guarantor as of a recent date, (c) that attached thereto is a true, accurate and complete
copy of the by-laws, operating agreement or other organizational document of such Subsidiary
Guarantor which were duly adopted and are in effect as of the date of closing and have been
in effect immediately prior to and at all times since the adoption of the resolutions
referred to in clause (d) below, (d) that attached thereto is a true, accurate and complete
copy of the resolutions of the board of directors or other managing body of such Subsidiary
Guarantor, duly adopted at a meeting or by unanimous written consent of such board of
directors or other managing body, authorizing the execution, delivery and performance of the
Transaction Documents to which such Subsidiary Guarantor is a party and the other documents
to be delivered in connection with this Agreement, and that such resolutions have not been
amended, modified, revoked or rescinded, are in full force and effect and

 

 

are the only resolutions of the shareholders, partners or members of such Subsidiary Guarantor or of such board of directors or other managing body or any committee thereof
relating to the subject matter thereof, (e) that the Transaction Documents to which such
Subsidiary Guarantor is a party and the other documents executed and delivered to such
Purchaser by such Subsidiary Guarantor are in the form approved by its board of directors or
other managing body in the resolutions referred to in clause (d), above, and (f) that no
dissolution or liquidation proceedings as to the Company or any Subsidiary Guarantor have
been commenced or are contemplated;

     (xv) a certificate of corporate or other type of entity and tax good standing for the
Company and each of its Subsidiaries from the Secretary of State of the state of
organization of the Company and each such Subsidiary and of each state in which the Company
or any such Subsidiary is required to be qualified to transact business as a foreign
organization, in each case dated as of a recent date; and

     (xvi) such other certificates, documents and agreements as such Purchaser may
reasonably request.

     3B Opinion of Purchasers’ Special Counsel. Such Purchaser shall have received from Schiff
Hardin LLP, who are. acting as special counsel for the Purchasers in connection with this
transaction, a favorable opinion satisfactory to such Purchaser as to such matters incident to the
matters herein contemplated as it may reasonably request.

     3C Opinion of Company’s Counsel. Such Purchaser shall have received from Lindquist & Vennum
P.L.L.P., special counsel for the Company, a favorable opinion satisfactory to such Purchaser and
substantially in the form of Exhibit N attached hereto, and the Company, by its execution hereof,
hereby requests and authorizes such special counsel to render such opinion, and understands and
agrees that each Purchaser receiving such an opinion will and is hereby authorized to rely on such
opinion.

     3D Representations and Warranties; No Default; Satisfaction of Conditions. The representations
and warranties contained in paragraph 8 and in the other Transaction Documents shall be true on and
as of the date of closing, both before and immediately after giving effect to the issuance of the
Securities on the date of closing and the consummation of any other transactions contemplated
hereby and by the other Transaction Documents; there shall exist on the date of closing no Event of
Default or Default, both before and immediately after giving effect to the issuance of the
Securities on the date of closing and the consummation of any other transactions contemplated
hereby and by the other Transaction Documents; the Company shall have performed all agreements and
satisfied all conditions required under this Agreement or the other Transaction Documents to be
performed or satisfied on or before the date of closing; and the Company shall have delivered to
such Purchaser an Officer’s Certificate, dated the date of closing, to each such effect.

     3E Purchase Permitted By Applicable Laws; Approvals. The purchase of and payment for the
Subordinated Notes and the Warrants to be purchased by such Purchaser on the date of closing on the
terms and conditions herein provided (including the use of the proceeds of such Securities by the
Company) shall not violate any applicable law or governmental regulation

 

 

(including, without
limitation, section 5 of the Securities Act or Regulation T, U or X of the Board of Governors of the Federal Reserve System) and shall not subject such Purchaser to any
tax, penalty, liability or other onerous condition under or pursuant to any applicable law or
governmental regulation, and such Purchaser shall have received such certificates or other evidence
as it may request to establish compliance with this condition. All necessary authorizations,
consents, approvals, exceptions or other actions by or notices to or filings with any court or
administrative or governmental body or other Person required in connection with the execution,
delivery and performance of this Agreement, the Subordinated Notes and the other Transaction
Documents or the consummation of the transactions contemplated hereby or thereby shall have been
issued or made, shall be final and in full force and effect and shall be in form and substance
satisfactory to such Purchaser.

     Certificates of Insurance. The Company shall have delivered from insurance carriers acceptable
to the Subordinated Collateral Agent certificates of insurance in such forms and amounts acceptable
to such Purchaser evidencing insurance required to be maintained under paragraph 5F hereof or under
any of the Security Documents under insurance policies with loss payable clauses in favor of the
Bank Agent, and acceptable to the Subordinated Collateral Agent.

     3F UCC Searches. Such Purchaser shall have received certified copies of UCC search reports
listing all effective financing statements which name the Company or any Subsidiary (under its
present name and previous names) as debtor and which are filed in the office of the Secretary of
State in any state in which the Company or any Subsidiary is organized or maintains an office or in
which any assets of the Company or any Subsidiary are located, and lien and judgment search reports
from the county recorder of any county in which the Company or any Subsidiary maintains an office
or in which any assets of the Company or any Subsidiary are located.

     3G Material Adverse Effect. Since January 28, 2005, no event having a Material Adverse Effect
shall have occurred or be threatened, as determined by such Purchaser in its sole judgment.

     3I. Amended and Restated Credit Agreement. The Credit Agreement, providing for a $150,000,000
revolving credit facility to the Company and having other terms and conditions satisfactory to such
Purchaser, shall have been duly executed and delivered by the Company, the Bank Agent and the
Banks, and shall be in full force and effect. All conditions precedent to the amendment and
restatement of the existing credit agreement shall have been satisfied (other than the issuance and
sale of the Subordinated Notes hereunder) and such Purchaser shall have received satisfactory
evidence thereof. Such Purchaser shall have received a copy of the Credit Agreement and all
instruments, documents and agreements delivered at the closing of the amendment and restatement
thereof, certified by an Officer’s Certificate of the Company, dated the date of closing, as
correct and complete.

     3J. Third Amended and Restated Certificate of Incorporation. The Board of Directors and the
shareholders of the Company shall have duly adopted the Third Amended and Restated Certificate of
Incorporation of the Company, in the form attached hereto as Exhibit O (the “Restated Certificate
of Incorporation”), and the Restated Certificate of Incorporation shall have been duly filed with
the Secretary of State of Delaware and shall have become

 

 

effective under the laws of the State of
Delaware. Termination of Certain Existing Indebtedness. All obligations of the Company under (1) the Subordinated Loan Agreement, dated April 9, 2003,
among the Company, Stafford Towne, LTD., Bennington International Holdings, LTD. and Westford
Special Situations Fund, LTD., (2) the Financing Agreement, by and between CIT Group/ Business
Credit, the Company and the lenders party thereto, dated April 9, 2003 and The Assignment and
Transfer Agreement (Textron) by and between CIT Group/ Business Credit, Inc. and the Company, dated
September 9, 2003, and (3) the Supplemental Financing Agreement, by and between Petters Company,
Inc. and the Company, dated February 17, 2004, shall have been discharged, each such financing
arrangement shall have been terminated, all liens and security interests securing any of such
obligations, and all financing statements or other filings and recordings relating thereto, shall
have been terminated and released, and such Purchaser shall have received such evidence as it may
reasonably request to demonstrate the satisfaction of the foregoing.

     3K Fees and Expenses. Without limiting the provisions of paragraph 12B hereof, the Company
shall have paid the reasonable fees, charges and disbursements of special counsel to the Purchasers
referred to in paragraph 3B hereof.

     3L Structuring Fee. The Company shall have paid to Stetson Street Partners, L.P., by wire
transfer of immediately available funds to JPMorgan Chase, New York, New York, ABA #021-000-021,
for credit to the account of Stetson Street Partners, L.P., account
no. 304-244-325, a structuring
fee in the amount of $600,000 in immediately available funds.

     3M Proceedings. All corporate and other proceedings taken or to be taken in connection with
the transactions contemplated hereby and all documents incident thereto shall be satisfactory in
substance and form to such Purchaser, and such Purchaser shall have received all such counterpart
originals or certified or other copies of such documents as it may reasonably request.

     4. PREPAYMENTS. The Subordinated Notes shall be subject to prepayment with respect to the
optional prepayments permitted by paragraph 4B.

     4A Maturity. As provided therein, the entire outstanding principal amount of the Subordinated
Notes, together with any accrued and unpaid interest thereon, shall become due on March 24, 2013,
the maturity date of the Subordinated Notes.

     4B Optional Prepayment.

     4B(1). Optional Prepayments. The Subordinated Notes shall be subject to prepayment, in
whole at any time or from time to time in part (in aggregate integral multiples of
$1,000,000 and an aggregate minimum of $5,000,000 on any one occurrence), at the option of
the Company, at 100% of the principal amount so prepaid plus interest thereon to the
prepayment date and the Prepayment Amount, if any, with respect to each Subordinated Note.

     4B(2). Optional Prepayment in Connection with Specified Event. The Subordinated Notes
shall be subject to prepayment, in whole (but not in part),

 

 

concurrently with a Specified
Event, at the option of the Company, at 100% of the principal amount so prepaid plus interest thereon to the prepayment date and the
Specified Event Prepayment Amount with respect to each Subordinated Note.

     4C Notice of Optional Prepayment. The Company shall give the Subordinated Collateral Agent
irrevocable written notice of any prepayment pursuant to paragraph 4B not less than 10 Business
Days prior to the prepayment date. Each such notice shall state: (1) that such notice is being
given by the Company in accordance with this paragraph 4C and whether such prepayment is being
effected pursuant to paragraph 4B(1) or 4B(2), (2) the date fixed for prepayment, (3) the aggregate
principal amount of Subordinated Notes to be prepaid and the principal amount of Subordinated Notes
held by each Holder to be prepaid and the accrued and unpaid interest that will be paid in
connection with such prepayment, (4) the Prepayment Amount or Specified Event Prepayment Amount
payable with respect to each Subordinated Note, (5) in connection with a prepayment pursuant to
paragraph 4B(2), that such prepayment is in connection with a Specified Event and a description of
such Specified Event in reasonable detail, and (6) that the Company’s obligation to prepay the
Subordinated Notes is irrevocable, subject only, in connection with a prepayment pursuant to
paragraph 4B(2), to consummation of the applicable Specified Event. Notice of prepayment having
been given as aforesaid, the principal amount of the Subordinated Notes specified in such notice,
together with interest thereon to the prepayment date and together with the Prepayment Amount, if
any, or Specified Event Prepayment Amount, as applicable, with respect thereto, shall become due
and payable on such prepayment date. The Company shall, on or before the day on which it gives
written notice of any prepayment pursuant to paragraph 4B, give telephonic notice of the principal
amount of the Subordinated Notes to be prepaid and the prepayment date to each Significant Holder
which shall have designated a recipient of such notices in the Purchaser Schedule attached hereto
or by notice in writing to the Company.

     4D Partial Payments Pro Rata. In the case of each prepayment of less than the entire
outstanding principal amount of all Subordinated Notes pursuant to paragraph 4B(1), the principal
amount so prepaid shall be allocated pro rata to all Subordinated Notes at the time outstanding.

     4E No Acquisition of Subordinated Notes. The Company shall not, and shall not permit any of
its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in part prior to their
stated final maturity (other than by prepayment pursuant to paragraph 4B or upon acceleration of
such final maturity pursuant to paragraph 7A), or purchase or otherwise acquire, directly or
indirectly, Subordinated Notes held by any holder unless the Company or such Subsidiary or
Affiliate shall have offered to prepay or otherwise retire or purchase or otherwise acquire, as the
case may be, the same proportion of the aggregate principal amount of Subordinated Notes held by
each other holder of Subordinated Notes at the time outstanding upon the same terms and conditions.
Any Subordinated Notes so prepaid or otherwise retired or purchased or otherwise acquired by the
Company or any of its Subsidiaries or Affiliates shall not be deemed to be outstanding for any
purpose under this Agreement.

     4. AFFIRMATIVE COVENANTS. The Company covenants that so long as any Subordinated Note is outstanding:

 

 

     5A. Financial Statements. The Company covenants that it will deliver to the Subordinated
Collateral Agent (and, to the extent requested by the Subordinated Collateral Agent, to any
designee of the .Subordinated Collateral Agent):

     (i) within 120 days after the end of each fiscal year of the Company (but in any event
no later than 120 days following the last Friday of January), the audited consolidating and
consolidated balance sheets of the Company and its consolidated Subsidiaries as at the end
of such fiscal year and the related consolidating and consolidated statements of income,
retained earnings and cash flows for the Company and its consolidated Subsidiaries for such
year, setting forth in each case in comparative form the figures for the previous year,
accompanied by an unqualified report and opinion thereon of independent certified public
Accountants of recognized national standing, which shall state that said consolidated
financial statements fairly present the consolidated financial condition and results of
operations of the Company and its consolidated Subsidiaries as at the end of, and for, such
fiscal year in accordance with GAAP;

     (ii) within 15 Business Days after the end of each fiscal quarter of the Company, the
unaudited consolidating and consolidated balance sheets of the Company and its consolidated
Subsidiaries as at the end of such period and the related unaudited consolidating and
consolidated statements of income, retained earnings and cash flows for such period;

     (iii) (a) within 12 Business Days after the end of each fiscal month, the unaudited
consolidating and consolidated balance sheets of the Company and its consolidated
Subsidiaries showing the Company’s financial condition as of the close of such month and (b)
within 12 Business Days after the end of each fiscal month, the related unaudited
consolidating and consolidated statements of income, retained earnings and cash flows for
such period;

     (iv) promptly upon transmission thereof, copies of all such financial statements, proxy
statements, notices and reports as it shall send to its public stockholders and copies of
all registration statements (without exhibits) and all reports which it files with the
Securities and Exchange Commission (or any governmental body or agency succeeding to the
functions of the Securities and Exchange Commission);

     (v) promptly upon receipt thereof, a copy of each management letter or other report
submitted to the Company or any Subsidiary by independent accountants in connection with any
annual, interim or special audit made by them of the books of the Company or any Subsidiary;

     (vi) promptly upon preparation thereof, a copy of the Company’s annual operating budget
for each fiscal year which has been approved by the Company’s board of directors (which
shall include, without limitation, projections for the net income of the Company and its
Subsidiaries and projections for net sales for the Company and its Subsidiaries, in each
case, for each twelve fiscal month period ending during such fiscal year);

 

 

     (vii) promptly upon, and in any event not later than the next Business Day after,
receipt thereof, a copy of any notice received from the Bank Agent or any holder of Senior
Debt that any default or event of default under the Credit Agreement has occurred or any
notice of any acceleration of any Senior Debt;

     (viii) promptly, and in any event no later than 15 Business Days after a Responsible
Officer of the Company obtains knowledge thereof, written notice of any actions, suits or
proceedings (including arbitrations) threatened or pending by or against the Company before
any court, arbitrator or other Governmental Authority which would be likely to have a
Material Adverse Effect;

     (ix) simultaneously with the transmission thereof, copies of all notices, reports,
financial statements or other communications given to the Bank Agent or any holder of Senior
Debt under the Credit Agreement, excluding routine borrowing requests; and

     (x) with reasonable promptness, such other information as the Subordinated Collateral
Agent may reasonably request.

Together with each delivery of financial statements required by clauses (i), (ii) and (iii) above,
the Company will deliver to the Subordinated Collateral Agent an Officer’s Certificate
demonstrating (with computations in reasonable detail) compliance by the Company and its
Subsidiaries with the provisions of paragraph 6J and stating that there exists no Event of Default
or Default, or, if any Event of Default or Default exists, specifying the nature and period of
existence thereof and what action the Company proposes to take with respect thereto. Together with
each delivery of financial statements required by clause (i) above, the Company will deliver to the
Subordinated Collateral Agent a certificate of such Accountants stating that, in making the audit
necessary for their report on such financial statements, they have obtained no knowledge of any
Event of Default or Default, or, if they have obtained knowledge of any Event of Default or
Default, specifying the nature and period of existence thereof. Such Accountants, however, shall
not be liable to anyone by reason of their failure to obtain knowledge of any Event of Default or
Default which would not be disclosed in the course of an audit conducted in accordance with
generally accepted auditing standards. The Company also covenants that immediately after any
Responsible Officer obtains knowledge of an Event of Default or Default, it will deliver to the
Subordinated Collateral Agent an Officer’s Certificate specifying the nature and period of
existence thereof and what action the Company proposes to take with respect thereto.

     5B. Information Required by Rule 144A. The Company covenants that it will, upon the
request of the holder of any Subordinated Note, provide such holder, and any qualified
institutional buyer designated by such holder, such financial and other information as such holder
may reasonably determine to be necessary in order to permit compliance with the information
requirements of Rule 144A under the Securities Act in connection with the resale of Subordinated
Notes, except at such times as the Company is subject to and in compliance with the reporting
requirements of section 13 or 15(d) of the Exchange Act. For the purpose of this paragraph 5B, the
term “qualified institutional buyer” shall have the meaning specified in Rule 144A under the
Securities Act.

 

 

     5C Inspection of Property. The Company covenants that it will permit any Person designated by
the Subordinated Collateral Agent in writing, at the Subordinated Collateral Agent’s expense if no
Default or Event of Default exists and at the Company’s expense if a Default or an Event of Default
exists, to visit and inspect any of the properties of the Company and its Subsidiaries, to examine
the corporate books and financial records of the Company and its Subsidiaries and make copies
thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such
corporations with the principal officers of the Company and its independent public accountants, all
at such reasonable times and as often as the Subordinated Collateral Agent may reasonably request;
provided that, during any period when no Event of Default exists, the Subordinated Collateral Agent
shall give the Company not less than 48 hours’ prior notice of such visit.

     5D Covenant to Secure Subordinated Notes Equally. The Company covenants that if it or any
Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or
hereafter acquired, other than Liens permitted by the provisions of paragraph 6A (unless prior
written consent to the creation or assumption thereof shall have been obtained pursuant to
paragraph 12C), it will make or cause to be made effective provision whereby the Subordinated Notes
will be secured by such Lien equally and ratably with any and all other Indebtedness thereby
secured so long as any such other Indebtedness shall be so secured; provided that the creation and
maintenance of such equal and ratable Lien shall not in any way limit or modify the right of the
holders of the Subordinated Notes to enforce the provisions of paragraph 6A.

     5E Compliance with Law. The Company covenants that it will, and will cause each of its
Subsidiaries to, comply with all laws, ordinances or governmental rules or regulations to which
each of them is subject, including, without limitation, environmental laws, and will obtain and
maintain in full force and effect all licenses, certificates, permits, franchises, operating rights
and other authorizations from federal, state, foreign, regional, municipal and other local
regulatory bodies or administrative agencies or governmental bodies having jurisdiction over the
Company and its Subsidiaries or any of their respective properties necessary to the ownership,
operating or maintenance of their respective properties or to the conduct of their respective
businesses, in each case to the extent necessary to ensure that non-compliance with such laws,
ordinances or governmental rules or regulations or failures to obtain or maintain in full force and
effect such licenses, certificates, permits, franchises, operating rights and other authorizations
could not reasonably be expected, individually or in the aggregate, to have a Material Adverse
Effect.

     5G Insurance. The Company covenants that it will, and will cause each of its Subsidiaries to,
maintain, with financially sound and reputable insurers, insurance with respect to their respective
properties and businesses against such casualties and contingencies, of such types, on such terms
and in such amounts as is customary in the case of entities of established reputations engaged in
the same or a similar business and similarly situated. Maintenance of Properties. The Company
covenants that it will, and will cause each of its Subsidiaries to, maintain and keep, or cause to
be maintained and kept, their respective properties in good repair, working order and condition
(other than ordinary wear and tear), and from time to time make, or cause to be made, all needful
and proper repairs, renewals and replacements thereto, so that the business carried on in
connection therewith may be properly conducted at all times, provided that

 

 

this paragraph 5G shall not prevent the Company or any Subsidiary from discontinuing the
operation and the maintenance of any of its properties if such discontinuance is desirable in the
conduct of its business and such discontinuance could not reasonably be expected, individually or
in the aggregate, to have a Material Adverse Effect.

     5H Payment of Taxes. The Company covenants that it will, and will cause each of its
Subsidiaries to, file all income tax or similar tax returns required to be filed in any
jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all
other taxes, assessments, governmental charges or levies payable by any of them, and to pay and
discharge all amounts payable for work, labor and materials, in each case to the extent such taxes,
assessments, charges, levies and amounts payable have become due and payable and before they have
become delinquent, provided that neither the Company nor any Subsidiary need pay any such tax,
assessment, charge, levy or amount payable if (i) the amount, applicability or validity thereof is
being actively contested by the Company or such Subsidiary on a timely basis in good faith and in
appropriate proceedings, and the Company or such Subsidiary has established adequate reserves
therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the
nonpayment of all such taxes, assessments, charges, levies and amounts payable in the aggregate
could not reasonably be expected to have a Material Adverse Effect.

     5I Corporate Existence. The Company will at all times preserve and keep in full force and
effect its corporate existence. Subject to paragraph 6D, the Company will at all times preserve and
keep in full force and effect the corporate existence of each of its Subsidiaries (unless merged
into the Company or a Wholly-Owned Subsidiary), unless the termination of or failure to preserve
and keep in full force and effect such corporate existence, could not reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect.

     5J Lines of Business. The Company covenants that it will not, and it will not permit any
Subsidiary of the Company to, engage in any business if, as a result thereof, the general nature of
the businesses of the Company and its Subsidiaries, taken as a whole, would be substantially
changed from the businesses of the Company and its Subsidiaries as conducted as of the date of
closing.

     5K Agreement Assuming Liability on Subordinated Notes. The Company covenants that, if at any
time any Person should become liable (as co-obligor, endorser, guarantor or surety) on any other
obligation of the Company, the Company will, at the same time, cause such Person to deliver to the
holders of the Subordinated Notes an agreement pursuant to which such Person becomes similarly
liable on the Subordinated Notes; provided this paragraph 5K shall not apply to (1) any Person
becoming liable solely as an endorser of a check in the ordinary course of business and (2) FAC,
Thomas J. Petters, and Theodore Deikel pursuant to the FAC Guaranty and the FAC Member Guaranty, as
applicable (each as defined in the Credit Agreement (as in effect on the date of closing)). The
delivery of such an agreement shall not in any way limit or modify the rights of the holders of the
Subordinated Notes to enforce the provisions of paragraph 6B.

     5L Pay Obligations. The Company covenants that it will, and will cause each of its
Subsidiaries to, pay, discharge or otherwise satisfy at or before maturity or before they become

 

 

delinquent, as the case may be, all of its material obligations, except when the (i) amount or
validity thereof is currently being contested in good faith by appropriate proceedings and such
Person has established adequate reserves in accordance with GAAP with respect thereto and no Liens
in respect thereof have been filed or (ii) the failure to so pay, discharge or otherwise satisfy
such obligations would not be likely to have a Material Adverse Effect.

     5M Further Assurances. The Company covenants that it will, and will cause each of its
Subsidiaries to, maintain the security interest created by this Agreement or any Security Document
subject only to (1) Liens securing the obligations under the Credit Agreement to the extent set
forth in the Intercreditor Agreement and (2) with respect to CIT Bank Collateral, Liens securing
the Company’s obligations under the Program Agreement. At its sole cost and without expense to any
Purchaser or the Subordinated Collateral Agent, on demand, the Company covenants that it will, and
will cause each its Subsidiaries to, do, execute, acknowledge and deliver all and every such
further acts, deeds, conveyances, assignments, notices of assignment, transfers and assurances as
the Subordinated Collateral Agent shall from time to time reasonably require for better assuring,
conveying, assigning, transferring and confirming to the Subordinated Collateral Agent the property
and rights pledged or assigned or intended now or hereafter so to be, or which any such Person may
be or may hereafter become bound to convey, pledge or assign to the Subordinated Collateral Agent
or for carrying out the intention or facilitating the performance of the terms of this Agreement or
any of the Security Documents.

     5L Future Subsidiaries. Upon any Person becoming, after the date of closing, a Subsidiary of
the Company, or upon the Company acquiring additional Equity Interests of any existing Subsidiary,
the Company shall notify each Purchaser and the Subordinated Collateral Agent of such acquisition
and

     (i) the Company shall promptly (but in any event within five (5) days) cause such
Subsidiary to execute and deliver to each Purchaser a supplement to the Subsidiary Guaranty
and a supplement to the Subsidiary Security Agreement, together with appropriate UCC
financing statements;

     (ii) the Company shall promptly deliver, or cause to be delivered to the
Subordinated Collateral Agent or its designee certificates (or, if such Equity Interest is
uncertificated, validly executed control agreements acceptable to the Subordinated
Collateral Agent) representing all the issued and outstanding Equity Interests of such
Subsidiary owned by the Company or any Subsidiary of the Company, as applicable, together
with undated stock powers for such certificates executed in blank (or, if such Equity
Interest is uncertificated, confirmation of all appropriate book entries), and shall take or
cause to be taken all other appropriate steps under applicable law to ensure perfection of
the security interest granted to the Subordinated Collateral Agent under the Security
Documents; provided that so long as the Credit Agreement requires the Company to deliver
certificates evidencing such Equity Interests and stock powers related thereto to the Bank
Agent, the requirement to deliver such certificates and stock powers to the Subordinated
Collateral Agent shall be deemed to be satisfied by the delivery thereof to the Bank Agent
pursuant to the Credit Agreement; and

 

 

     (iii) such opinions, in form and substance and from counsel reasonably satisfactory
to the Required Holder(s), as the Required Holder(s) may reasonably require.

     5O. Amendments to Credit Agreement. Upon entering into any amendment or other modification
of the Credit Agreement (or any other agreement relating to the Senior Debt) the effect of which is
to add or make more restrictive any event of default or any covenant contained in the Credit
Agreement (or any other agreement relating to the Senior Debt) or make any change to any event of
default or any covenant that would have the effect of making such event of default or covenant more
restrictive, the Company shall (1) promptly, and in any event within 3 Business Days provide
written notice thereof to each holder of Subordinated Notes describing such amendment in reasonable
detail and (2) offer to enter into an amendment of this Agreement within 10 Business Days of
consummating such amendment or modification to make corresponding changes or additions herein in
respect of such covenants and events of default; provided, that, during any period when a Senior
Default (as defined in the Intercreditor Agreement) has occurred and is continuing, the Company
shall not be required to make the offer referred to in this clause (2); provided, further, however,
that as to covenants or events of default which set forth any requisite ratio or compliance amounts
such ratios and compliance amounts may, if so required by the terms of the Credit Agreement or the
Intercreditor Agreement, be less restrictive on the Company to the same extent as the applicable
covenant or event of default is on the date of closing.

     5P Delivery of Landlord Lien Waivers. Without limiting the generality of any other provision
of this Agreement or any other Transaction Document, the Company shall, and shall cause its
Subsidiaries to, deliver promptly to the Subordinated Collateral Agent (for the benefit of the
Purchasers) landlord lien waivers (in form and substance satisfactory to the Subordinated
Collateral Agent), duly executed by the Company and/or such Subsidiary and the applicable landlord,
with respect to (i) each property at which a material portion of the Company’s or such Subsidiary’s
business is conducted or (ii) which the loss of use of such property would result in a Material
Adverse Effect.

     5Q Further Actions with Respect to Domain Names. Without limiting the generality of any other
provision of this Agreement or any other Transaction Documents, the Company shall, and shall cause
its Subsidiaries to, take promptly such further actions and to execute and deliver such further
documents and instruments (and, if necessary, use its best efforts to cause the applicable domain
name registrars to execute and deliver such documents and instruments) as the Subordinated
Collateral Agent may deem necessary or desirable from time to time (all in form and substance
satisfactory to the Subordinated Collateral Agent) to enable the Subordinated Collateral Agent (on
behalf of the Purchasers) to establish, preserve and protect its rights, remedies and privileges
with respect to each domain name of the Company and its Subsidiaries from time to time, including
the execution and delivery of such documents and instruments as would enable the Subordinated
Collateral Agent to sell or transfer each such domain name following an Event of Default; provided,
that in the event it is impracticable for the Company to simultaneously comply with the provisions
of this paragraph 5Q and the provisions of Section 8.13 of the Credit Agreement (as in effect on
the date of closing), the Company shall comply with the provisions of Section 8.13 of the Credit
Agreement (as in effect on the date of closing) and shall be relieved from its obligation to comply
with this paragraph 5Q for so long as such impracticability exists.

 

 

     5R. Further Assurances with Respect to Deposit Accounts. Without limiting the generality
of any other provision of this Agreement or any other Transaction Document,

     (i) the Company shall deliver to the Subordinated Collateral Agent promptly, and in
any event within 45 days of the date of closing, a consent from U.S. Bank National
Association and Huntington National Bank to any future assignment of the Bank Agent’s
interest in the related deposit account control agreement in form and substance reasonably
satisfactory to the Subordinated Collateral Agent; and

     (ii) the Company shall cause any deposit account control agreement entered into
after the date of closing to permit the future assignment of the Bank Agent’s interest in
such agreement to the Subordinated Collateral Agent.

     5S. Applicable Projected Cash Burn Rate. Within 30 days prior to December 1, 2007, the
Company shall deliver to the Subordinated Collateral Agent an updated forecast of the Applicable
Projected Cash Burn Rate for each of the three-month rolling periods ending on March 31, April 30
and May 31, 2008.

6. NEGATIVE COVENANTS. The Company covenants that so long as any Subordinated Note is
outstanding the Company will not undertake or suffer to exist any of the following, unless the
Subordinated Collateral Agent, as agent for the Purchasers, otherwise consents in writing:

     6A. Liens and Other Interests. The Company covenants that it will not, and will not permit any
Subsidiary to, grant, create, incur, assume or suffer to exist any Lien or assign or transfer any
of its Property, whether now owned or hereafter acquired, to secure any Indebtedness, including any
option to buy or right to receive income with respect to such Property, except for:

     (i) Liens securing payment of the Senior Debt;

     (ii) Liens securing payment of the Subordinated Notes and the other Obligations;

     (iii) Liens granted on or prior to the date of closing securing payment of
Indebtedness of the type permitted and described in paragraph 6B(iii) and are identified as
Permitted Liens on Schedule 6A; and

     (iv) other Permitted Liens.

     6B. Indebtedness; Guarantees. The Company covenants that it will not, and will not permit
any Subsidiary to, create, incur, assume or suffer to exist or otherwise become liable for any
Indebtedness other than, without duplication, the following: Senior Debt;

     (i) Indebtedness under the Subordinated Notes and the other Obligations;

 

 

     (ii) Indebtedness existing on the date of closing and set forth in Schedule 6B
(identified by the holder of such Indebtedness, the outstanding principal amount thereof as
of the date of closing and the instrument pursuant to which such Indebtedness was incurred);

     (iii) unsecured Indebtedness incurred in the ordinary course of business including
open accounts extended by suppliers on normal trade terms in connection with purchases of
goods and services by the Company, but excluding Indebtedness incurred through the borrowing
of money or any Guarantee thereof; provided, however, that if the Company or its
Subsidiaries can properly incur Indebtedness under this paragraph 6B, then the Company or
its Subsidiaries, as applicable may provide a Guarantee for such Indebtedness so incurred;
and

     (iv) Indebtedness of the Company to any of its Wholly-Owned Subsidiaries, or
Indebtedness of any such Wholly-Owned Subsidiary to the Company, which intercompany
Indebtedness (a) shall be evidenced by one or more promissory notes in form and substance
satisfactory to the Required Holder(s) and which has been duly executed and delivered to
(and indorsed to the order of) the Subordinated Collateral Agent (or, until such time as no
Senior Debt is outstanding, the Bank Agent) in pledge pursuant to a Security Document, and
(b) shall not be forgiven or otherwise discharged for any consideration other than full
payment in cash unless the Required Holder(s) shall otherwise consent.

     6C. Investments. The Company covenants that it will not, and will not permit any Subsidiary
to, make, incur, assume or suffer to exist any Investment in any other Person, except:

     (i) Investments existing on the date of closing and set forth in Schedule 6C;

     (ii) Permitted Investments;

     (iii) without duplication, Investments permitted as Indebtedness pursuant to
paragraph 6B;

     (iv) without duplication, Investments made in the ordinary course of business by
the Company in any of its Wholly-Owned Subsidiaries, or by any such Subsidiary in any of its
Wholly-Owned Subsidiaries, by way of contributions to capital (subject, in all cases, to
compliance with paragraph 5N);

     (v) commissions, travel and similar advances to officers, directors and employees
made in the ordinary cause of business not to exceed $10,000 in the aggregate outstanding at
any time; and

     (vi) advances in the form of prepaid rent (not to exceed one month in the case of
Related Parties, and three months in all other cases); provided, however, that no Investment
otherwise permitted by clause (iii) shall be permitted to be made if, immediately before or
after giving effect thereto, any Default or Event of Default shall have occurred and be
continuing.

 

 

     6D. Merger or Consolidation. The Company covenants that it will not, and will not permit
any Subsidiary to, sell, pledge, assign or transfer to any other Person, all or substantially all
of its Property, or merge or consolidate with or acquire all or substantially all of the Property
of, any other Person; provided however, that the Company may merge any of its Wholly-Owned
Subsidiaries into itself and may acquire all or substantially all of the Property of such
Subsidiaries.

     6E Asset Dispositions. The Company covenants that it will not, and will not permit any
Subsidiary to, sell, transfer, lease, contribute or otherwise convey, or grant options, warrants or
other rights with respect to, all or a substantial part of its Property (including receivables and
Equity Interests of its Subsidiaries) to any Person, unless such sale, transfer, lease,
contribution or conveyance is a sale of inventory made in the ordinary course of its business or is
a sale or disposition of surplus or obsolete goods being retired or replaced; provided, however,
that (a) any of the Company’s Wholly-Owned Subsidiaries may transfer all or substantially all of
the Property of such Subsidiary to the Company, (b) the Company may sell receivables pursuant to a
Securitization so long as the proceeds of any such Securitization are used to prepay Senior Debt to
the extent contemplated in the Intercreditor Agreement and (c) the Company may sell, transfer or
otherwise dispose of any receivable which is more than 180 days past due (as reflected on the
Company’s computer system). All sales of inventory will be sold and shipped by the Company to its
customers only in the ordinary course of the Company’s business, and then only on open account or
in exchange for cash, check or payment by credit or debit card or other similar means and on terms
currently being extended by the Company to its customers, provided that, absent the prior written
consent of the Required Holder(s), the Company shall not sell inventory on a consignment basis nor
retain any lien or security interest in any sold inventory. None of the Company’s Subsidiaries
shall own any inventory.

     6F. Restricted Payments.

     (i) The Company covenants that it will not, and will not permit any Subsidiary to,
declare or make, or agree to declare or make, directly or indirectly, any Restricted
Payment, or incur any obligation (contingent or otherwise) to do so; provided, however, that
the Wholly-Owned Subsidiaries may make Restricted Payments to the Company.

     (ii) The Company covenants that it will not, and will not permit any Subsidiary to,
make any Investment in or advances to FAC or any of its Affiliates (other than such
Affiliates of FAC that are Subsidiaries of the Company).

     (iii) The Company covenants that it will not, and will not permit any Subsidiary
to, provide any Guarantee in respect of Indebtedness of FAC or any of its Affiliates (other
than in respect of Indebtedness of the Company or a Subsidiary permitted under paragraph
6B).

     6G. Negative Pledge. The Company covenants that it will not, and will not permit any
Subsidiary to, enter into or suffer to exist any agreement (excluding this Agreement, any other
Transaction Document and the Credit Agreement), prohibiting:

 

 

     (i) the creation or assumption of any Lien upon its properties, revenues or assets,
whether now owned or hereafter acquired, or, except as set forth in the Intercreditor
Agreement, the ability of the Company or any Subsidiary of the Company to amend or otherwise
modify this Agreement or any other Transaction Document; or

     (ii) the ability of any Subsidiary of the Company to make any payments, directly or
indirectly, to the Company by way of dividends, advances, repayments of loans or advances,
reimbursements or management and other intercompany charges, expenses and accruals or other
returns on investments, or any other agreement or arrangement which restricts the ability of
any such Subsidiary to make any payment, directly or indirectly, to the Company.

     6H. Amendments to Organizational Documents. The Company covenants that it will not, and
will not permit any Subsidiary to, amend, modify, supplement or restate any Organizational Document
without the prior consent of the Required Holder(s) if such amendment, modification, supplement or
restatement:

     (i) could reasonably be expected to materially adversely affect (a) any Purchaser’s
rights and remedies hereunder or (b) the Company’s or any other Obligor’s ability to perform
hereunder or under any other Transaction Document; or

     (ii) would increase the amount or accelerate the time for any payment, dividend or
other distribution to the holders of any Equity Interest of the Company or any Subsidiary.

     6I. Changes in Name, Location of Inventory, Etc.

     (i) The Company covenants that it will not, and will not permit any Subsidiary to,
(a) change its jurisdiction of organization, name, identity or corporate structure or the
equivalent, (b) change the location of its chief executive office/chief place of business,
unless it shall have given each holder of a Subordinated Note at least 45 days’ prior
written notice thereof or (c) change its fiscal year from a fiscal year ending on the Friday
closest in number of days (either prior or subsequent) to January 31st of each calendar
year. Notwithstanding the foregoing, the Purchasers hereby acknowledge that the Company will
relocate its chief executive office/chief place of business to 7777 Golden Triangle Drive,
Eden Prairie, Minnesota 55344, commencing on or prior to May 1, 2006.

     (ii) The Company shall not change the location of any of its inventory (other than
to another inventory location identified on Schedule 8T), unless (a) it shall have given the
Subordinated Collateral Agent at least 45 days’ prior written notice thereof and, at the
time of such change in location, it shall have delivered to the Subordinated Collateral
Agent an updated Schedule 8T, (b) except to the extent such requirement is expressly waived
by the Subordinated Collateral Agent in writing, the landlord with respect to each new
inventory location shall have executed and delivered to the Subordinated Collateral Agent a
landlord lien waiver in a form approved by the Subordinated Collateral Agent at or prior to
the time of such change in location and (c)

 

 

the Company shall have taken such actions (if
any) as the Subordinated Collateral Agent
may reasonably request to perfect (or maintain the perfection of) the Subordinated
Collateral Agent’s security interest in the inventory located at such new location.

     6J. Financial Covenants.

     (i) Leverage Ratio. The Company shall not permit the Leverage Ratio as of the end
of any fiscal quarter of the Company (or occurring on any date during any fiscal quarter of
the Company) to be greater than 6.65:1.00.

     (ii) Current Ratio. The Company shall not permit the Current Ratio as of the end of
any fiscal quarter of the Company (or occurring on any date during any fiscal quarter of the
Company) to be less than 0.9:1.0.

     (iii) Minimum Tangible Net Worth. The Company shall not permit its Tangible Net
Worth as of the end of any fiscal quarter of the Company (or occurring on any day during any
fiscal quarter of the Company) to be less than (a) for each fiscal quarter ending on or
prior to March 23, 2007, $21,000,000, (b) for each fiscal quarter ending after March 23,
2007 but on or prior to March 23, 2008, $25,000,000 and (c) for each fiscal quarter
thereafter, (i) 75% of the Tangible Net Worth as of February 1, 2008 plus (ii) an aggregate
amount equal to 100% of the consolidated net income (as determined in accordance with GAAP)
of the Company and its Subsidiaries (but, in each case, only if a positive number) for each
completed fiscal year thereafter.

     (iv) Minimum Cash Balance. The Company shall not permit, on any day, the amount of
cash including, without duplication, Permitted Investments, which would appear on the
Company’s balance sheet for such day, to be less than the sum of (a) $750,000 and (b) the
Applicable Projected Cash Burn Rate.

     (v) Maximum Sales Shortfall. The Company shall not permit net sales for any period
set forth in Schedule 6J(v), to be less than 70% of the projected net sales for such period
as set forth in Schedule 6J(v).

     (vi) Maximum Net Income Shortfall. The Company shall not permit net income
(determined in accordance with GAAP) for any period set forth in Schedule 6J(vi), to be less
than the net income set forth opposite such period as set forth in Schedule 6J(vi).

     (vii) Maximum Capital Expenditures~ The Company shall not, and shall not permit any
Subsidiary to, contract for, purchase or make any expenditure or commitments for Capital
Expenditures in any fiscal year in an aggregate amount in excess of the amount set forth
below for such fiscal year:

 

 

	 	 	 
	Maximum Capital Expenditures.	 	 
	The Company shall not, and shall	 	 
	not permit any Subsidiary to,	 	 
	contract for, purchase or make any	 	 
	expenditure or commitments for	 	 
	Capital Expenditures in any fiscal	 	 
	year in an aggregate amount in	 	 
	excess of the amount set forth	 	 
	below for such fiscal year:	 	 
	Fiscal Year	 	Amount
	2006
	 	$8,250,000
	2007
	 	$9,350,000
	2008 and each fiscal year thereafter
	 	125% of the amount of Capital Expenditures

indicated in the budget for such fiscal year

delivered pursuant to paragraph 5A(vi)

     (viii) Minimum EBITDA. The Company shall not permit EBITDA for any fiscal year set
forth below to be less than the amount set forth below for such fiscal year:

	 	 	 
	Fiscal Year	 	Amount
	2008
	 	$35,000,000
	2009
	 	$40,000,000
	2010
	 	$50,000,000
	2011
	 	$55,000,000
	2012 and each fiscal year thereafter
	 	$60,000,000

     6K Related Party Transactions. The Company covenants that it will not, and will not permit any
Subsidiary to, enter into, or otherwise be a party to, directly or indirectly, any transaction
(including, without limitation, the purchase, lease, sale or exchange of properties of any kind or
the rendering of any service) with any Related Party, except pursuant to the reasonable
requirements of the Company’s or such Subsidiary’s business and on fair and reasonable terms no
less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm’s
length transaction with a Person not a Related Party; provided, however, that the foregoing
covenant shall not apply to (i) any agreement set forth on Schedule 6K as in effect on the date of
closing or (ii) out-of-pocket expense reimbursement for officers of the Company or a Subsidiary
(consistent with paragraph 6C(v)) and for directors of the Company and observers of the Company’s
Board of Directors meetings.

     6L Issuance of Stock by Subsidiaries. The Company covenants that it will not permit any
Subsidiary to issue, sell or otherwise dispose of any shares of any class of its stock (either
directly or indirectly by the issuance of rights or options for, or securities convertible into,
such shares) except to the Company or another Wholly-Owned Subsidiary.

     6M Limitation on Issuance of Other Subordinated Indebtedness Senior to the Subordinated Notes.
The Company shall not create, incur, assume, permit or exist, Guarantee, or in any other manner
become liable with respect to any Indebtedness, other than the
Subordinated Notes, that is contractually subordinate in right of payment to any Senior Debt

 

 

unless such Indebtedness is otherwise permitted by the terms hereof and is Indebtedness that is
pari passu with, or subordinate pursuant to provisions substantially similar to those
contained in the Intercreditor Agreement in right of payment to, the Subordinated Notes.

     6N. Payment Limitations. The Company covenants that it will not enter into or become
subject to any restriction on the payment of any Subordinated Obligations which payment is required
pursuant to the terms of this Agreement other than the provisions of the Intercreditor Agreement.

     6O. Credit Agreement. The Company covenants that it will not (i) enter into any oral or
written amendment, supplement, alteration, waiver or other modification of any of the terms or
provisions of the Credit Agreement (or any instrument or agreement relating thereto) if the effect
or result of any such amendment, supplement, alteration, waiver or other modification is to
increase the advance rates on collateral by more than 5% (in the aggregate when added to the amount
of overadvances referred to in clause (ii) below) from those in effect on the date of closing and
(ii) request or receive any loan under the Credit Agreement in excess of 5% (in the aggregate when
added to the amount of increases to the advance rates referred to in clause (i) above) over the
amount permitted by the advance rates contained in the Credit Agreement as in effect on the date of
closing.

     6P. Terrorism Sanctions Regulations. The Company covenants that it will not and will not
permit any Subsidiary to (i) become a Person described or designated in the Specially Designated
Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the
Anti-Terrorism Order or (ii) engage in any dealings or transactions with any such Person.

7. EVENTS OF DEFAULT.

     7A. Acceleration. If any of the following events shall occur and be continuing for any
reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or
be effected by operation of law or otherwise):

     (i) the Company defaults in the payment of any principal of or Prepayment Amount or
Specified Event Prepayment Amount payable with respect to any Subordinated Note when the
same shall become due, either by the terms thereof or otherwise as herein provided; or

     (ii) the Company defaults in the payment of any interest on any Subordinated Note
for more than 5 days after the date due; or

     (iii) (a) the Company or any Subsidiary defaults in the payment or performance of any
term contained in the Credit Agreement (or if any other event thereunder shall occur and be
continuing) and the effect of such default or other event is to cause (or the Bank Lenders
cause) the loans under the Credit Agreement to become due prior to stated maturity or (b)
the Company or any Subsidiary defaults (whether as primary obligor or as guarantor or other
surety) in any payment of principal of or interest on any other
obligation for money borrowed (or any Capitalized Lease Obligation, any

 

 

obligation
under a conditional sale or other title retention agreement, any obligation issued or
assumed as full or partial payment for property whether or not secured by a purchase money
mortgage or any obligation under notes payable or drafts accepted representing extensions of
credit) beyond any period of grace provided with respect thereto, or the Company or any
Subsidiary fails to perform or observe any other agreement, term or condition contained in
any agreement under which any such obligation is created (or if any other event thereunder
or under any such agreement shall occur and be continuing) and the effect of such failure or
other event is to cause, or to permit the holder or holders of such obligation (or a trustee
on behalf of such holder or holders) to cause, such obligation to become due (or to be
repurchased by the Company or any Subsidiary) prior to any stated maturity, provided that
the amount of such obligation as to which such a payment default shall occur and be
continuing or such a failure or other event causing or permitting acceleration (or resale to
the Company or any Subsidiary) shall occur and be continuing exceeds $150,000; or

     (iv) any representation or warranty made by the Company or any Subsidiary
herein or in any other Transaction Document or by the Company, any Subsidiary or any of
their respective officers in any writing furnished in connection with or pursuant to this
Agreement or any other Transaction Document shall be false or misleading in any material
respect on the date as of which made; or

     (v) the Company (a) fails to perform or observe any agreement contained
in paragraph 5A(vii), paragraph 51 or paragraph 6 or (b) fails to give notice of a Default
or Event of Default as required by the last sentence of paragraph 5A; or

     (vi) the Company fails to perform or observe (a) any agreement contained
in paragraph 5C, paragraph 5E, paragraph 5H, paragraph 5L or paragraph 5S and such failure
shall continue unremedied for a period of 5 consecutive Business Days; provided, that the
Company shall not have the right to cure Defaults arising pursuant to this clause (vi)(a)
(and thereby prevent the occurrence of an Event of Default) more than three times in any
calendar year or (b) any other agreement, term or condition contained herein and such
failure shall not be remedied within 10 Business Days after any Responsible Officer obtains
actual knowledge thereof, or the Company or any Subsidiary fails to perform or observe any
agreement contained in any other Transaction Document and such failure shall not be remedied
within the grace period, if any, provided therefor in such Transaction Document (or, if no
grace period is provided therefor in such Transaction Document, within 10 Business Days
after any Responsible Officer obtains actual knowledge thereof); provided that the Company
and its Subsidiaries shall not, in the aggregate, have the right to cure Defaults arising
pursuant to this clause (vi)(b) (and thereby prevent the occurrence of an Event of Default)
more than three times in any calendar year; or

     (vii) the Company or any Subsidiary makes an assignment for the benefit
of creditors or is generally not paying its debts as such debts become due; or

     (ix) any decree or order for relief in respect of the Company or any Subsidiary is
entered under any bankruptcy, reorganization, compromise, arrangement, insolvency,

 

 

readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in
effect (herein called the “Bankruptcy Law”), of any jurisdiction; or the Company or any
Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or
taking possession by, a trustee, receiver, custodian, liquidator or similar official of the
Company or any Subsidiary, or of any substantial part of the assets of the Company or any
Subsidiary, or commences a voluntary case under the Bankruptcy Law of the United States or
any proceedings (other than proceedings for the voluntary liquidation and dissolution of a
Subsidiary) relating to the Company or any Subsidiary under the Bankruptcy Law of any other
jurisdiction; or

     (x) any such petition or application described in clause (ix) of this paragraph 7A
is filed, or any such case or proceedings described in clause (ix) of this paragraph 7A are
commenced, against the Company or any Subsidiary and the Company or such Subsidiary by any
act indicates its approval thereof, consent thereto or acquiescence therein, or an order,
judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator
or similar official, or approving the petition in any such proceedings, and such order,
judgment or decree remains unstayed and in effect for more than 60 days; or

     (xi) any order, judgment or decree is entered in any proceedings against the
Company decreeing the dissolution of the Company and such order, judgment or decree remains
unstayed and in effect for more than 60 days; or

     (xii) any order, judgment or decree is entered in any proceedings against the
Company or any Subsidiary decreeing a split-up of the Company or such Subsidiary which
requires the divestiture of assets representing a substantial part, or the divestiture of
the stock of a Subsidiary whose assets represent a substantial part, of the consolidated
assets of the Company and its Subsidiaries (determined in accordance with GAAP) or which
requires the divestiture of assets, or stock of a Subsidiary, which shall have contributed a
substantial part of the consolidated net income of the Company and its Subsidiaries
(determined in accordance with GAAP) for any of the three fiscal years then most recently
ended, and such order, judgment or decree remains unstayed and in effect for more than 60
days; or

     (xiii) one or more final judgments in an aggregate amount in excess of $500,000 (to
the extent not covered by independent third-party insurance as to which the insurer does not
dispute coverage) is rendered against the Company or any Subsidiary and either (a)
enforcement proceedings have been commenced by any creditor upon any such judgment or (b)
within 30 days after entry thereof, any such judgment is not discharged or execution thereof
stayed pending appeal, or within 30 days after the expiration of any such stay, such
judgment is not discharged; or

     (xiv) any ERISA Event shall occur; or

     (xv) any Change of Control shall occur; or

 

 

     (xvi) the Subsidiary Guaranty or any Security Document shall cease to be in full
force and effect, or the Company or any Subsidiary Guarantor shall contest or deny the
validity or enforceability of, or deny that it has any liability or obligations under, the
Subsidiary Guaranty or any Security Document, or the Subordinated Collateral Agent does not
have or ceases to have a valid perfected security interest (subject only to Liens permitted
by clause (i) of paragraph 6A and Liens and, with respect to CIT Bank Collateral, Liens
securing the Company’s obligations under the Program Agreement) in any Collateral for the
benefit of the holders of the Subordinated Notes;

then (a) if such event is an Event of Default specified in clause (i) or (ii) of this
paragraph 7A, any holder of any Subordinated Note (other than the Company or any of its
Subsidiaries or Affiliates) may at its option, by notice in writing to the Company, declare
all of the Subordinated Notes held by such holder to be, and all of the Subordinated Notes
held by such holder shall thereupon be and become, immediately due and payable at par
together with interest accrued thereon, without presentment, demand, protest or other notice
of any kind, all of which are hereby waived by the Company, (b) if such event is an Event of
Default specified in clause (viii), (ix) or (x) of this paragraph 7A with respect to the
Company, all of the Subordinated Notes at the time outstanding shall automatically become
immediately due and payable together with interest accrued thereon and together with the
Prepayment Amount, if any, (or, if less, the Yield-Maintenance Amount) with respect to each
Subordinated Note, without presentment, demand, protest or notice of any kind, all of which
are hereby waived by the Company, and (c) if such event is not an Event of Default specified
in clause (viii), (ix) or (x) of this paragraph 7A with respect to the Company, the Required
Holder(s) may at its or their option, by notice in writing to the Company, declare all of
the Subordinated Notes to be, and all of the Subordinated Notes shall thereupon be and
become, immediately due and payable together with interest accrued thereon and together with
(1) the Prepayment Amount (or, if less, the Yield-Maintenance Amount) or (2) if such event
is an Event of Default specified in clause (xv) which also constitutes a Specified Event,
the Specified Event Prepayment Amount (or, if less, the Yield-Maintenance Amount) with
respect to each Subordinated Note, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Company. The Company acknowledges, and the
parties hereto agree, that each holder of a Subordinated Note has the right to maintain its
investment in the Subordinated Notes free from repayment by the Company (except as herein
specifically provided for) and without the occurrence of an Event of Default and that the
provision for payment of Yield-Maintenance Amount, Prepayment Amount or Specified Event
Prepayment Amount, as applicable, by the Company in the event the Subordinated Notes are
prepaid or are accelerated as a result of an Event of Default is intended to provide
compensation for the deprivation of such right under such circumstances.

     7B. Rescission of Acceleration. At any time after any or all of the Subordinated Notes shall
have been declared immediately due and payable pursuant to paragraph 7A, the Required Holder(s)
may, by notice in writing to the Company, rescind and annul such declaration and its consequences
if (i) the Company shall have paid all overdue interest on the Subordinated Notes, the principal of
and Yield-Maintenance Amount, Prepayment Amount or Specified Event Prepayment Amount payable with
respect to any Subordinated Notes which

 

 

have become due otherwise than by reason of such declaration, and interest on such overdue
interest and overdue principal and Yield-Maintenance Amount, Prepayment Amount or Specified Event
Prepayment Amount at the Default Rate, (ii) the Company shall not have paid any amounts which have
become due solely by reason of such declaration, (iii) all Events of Default and Defaults, other
than non-payment of amounts which have become due solely by reason of such declaration, shall have
been cured or waived pursuant to paragraph 12C, and (iv) no judgment or decree shall have been
entered for the payment of any amounts due pursuant to the Subordinated Notes or this Agreement. No
such rescission or annulment shall extend to or affect any subsequent Event of Default or Default
or impair any right arising therefrom.

     7C Notice of Acceleration or Rescission. Whenever any Subordinated Note shall be declared
immediately due and payable pursuant to paragraph 7A or any such declaration shall be rescinded and
annulled pursuant to paragraph 7B, the Company shall forthwith give written notice thereof to the
holder of each Subordinated Note at the time outstanding.

     7D Other Remedies. If any Event of Default or Default shall occur and be continuing, the
holder of any Subordinated Note may proceed to protect and enforce its rights under this Agreement
and such Subordinated Note by exercising such remedies as are available to such holder in respect
thereof under applicable law, either by suit in equity or by action at law, or both, whether for
specific performance of any covenant or other agreement contained in this Agreement or in aid of
the exercise of any power granted in this Agreement. No remedy conferred in this Agreement upon the
holder of any Subordinated Note or the Subordinated Collateral Agent is intended to be exclusive of
any other remedy, and each and every such remedy shall be cumulative and shall be in addition to
every other remedy conferred herein or now or hereafter existing at law or in equity or by statute
or otherwise.

8. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company represents, covenants and warrants as
follows:

     8A(1). Organization; Subsidiary Preferred Stock. The Company is a corporation duly
organized and existing in good standing under the laws of the State of Delaware and each Subsidiary
is duly organized and existing in good standing under the laws of the jurisdiction in which it is
incorporated. The Company and each of its Subsidiaries have duly qualified or been duly licensed,
and are authorized to do business and are in good standing, in each jurisdiction in which the
ownership of their respective properties or the nature of their respective businesses makes such
qualification or licensing necessary and in which the failure to be so qualified or licensed could
be reasonably likely to have a Material Adverse Effect. Schedule 8A(1) hereto sets forth, as of the
date hereof, a correct list of each Subsidiary, its jurisdiction of incorporation and its
ownership. No Subsidiary has any outstanding shares of any class of Equity Interests which has
priority over any other class of Equity Interests of such Subsidiary as to dividends or in
liquidation except as may be owned beneficially and of record by the Company or a Wholly-Owned
Subsidiary.

     8A(2). Equity Interests.

     (i) On the date of closing, immediately after giving effect to the transactions
contemplated by the Transaction Documents:

 

 

     (a) the authorized and issued Equity Interests of the Company will consist of
(1) 1,255,114,166 shares of authorized Common Stock, 125,029,168 shares of which
will be issued and outstanding and 789,055,211 shares of which will be reserved for
issuance upon conversion of the Preferred Stock and upon conversion of the Preferred
Stock issuable upon exercise of the Warrants, and (2) 789,055,211 shares of
authorized Preferred Stock, 747,312,753 shares of which will be issued and
outstanding and 41,742,458 shares of which will be reserved for issuance upon the
exercise of the Warrants;

     (b) other than (1) the Warrants, (2) the Preferred Stock, (3) outstanding
warrants to purchase 49,991,158 shares of Common Stock, (4) shares of Common Stock
issuable upon exercise of outstanding options or available for additional awards
under the 2003 Equity Incentive Plan and the 2005 Non-Employee Directors Plan in the
aggregate amount of 79,485,909 shares and (5) issuance of Common Stock, in lieu of
cash, in payment of the 8% dividend on the Preferred Stock when declared by the
Board of Directors and upon written election of the holders of at least 75% of the
then outstanding Preferred Stock, there are no other options for, rights to acquire,
agreements to issue, or securities exercisable for or convertible into shares of the
Company’s Equity Interests; and

     (c) Schedule 8A(2) hereto sets forth a true and complete list of
stockholders of the Company and the number and class of shares held by each.

     (ii) The total number of outstanding shares of Common Stock, on a fully-diluted basis
after giving effect to the exercise of the Warrants, the conversion of the Preferred Stock,
the exercise of outstanding Common Stock Warrants,’ the exercise of options outstanding and
available for additional grants and the transactions contemplated by the Transaction
Documents, is 1,043,561,446.

     8A(3). Power and Authority. The Company and each Subsidiary has all requisite corporate
power to own or hold under lease and operate their respective properties which it purports to own
or hold under lease and to conduct its business as currently conducted and as currently proposed to
be conducted.

     8A(4). Execution and Delivery of Transaction Documents. The Company has all requisite
corporate power to execute, deliver and perform its obligations under this Agreement, the
Subordinated Notes and the other Transaction Documents to which it is a party. The execution,
delivery and performance of this Agreement, the Subordinated Notes and the other Transaction
Documents to which it is a party have been duly authorized by all requisite corporate action, and
this Agreement, the Subordinated Notes and the other Transaction Documents to which it is a party
have been duly executed and delivered by authorized officers of the Company and are valid
obligations of the Company, legally binding upon and enforceable against the Company in accordance
with their terms, except as such enforceability may be limited by (i) bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors’ rights generally and
(ii) general principles of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law). The Company has duly authorized the issuance of 41,742,458 shares
of the Preferred Stock upon the exercise of the

 

 

Warrants, such number of shares of the Preferred Stock has been reserved for issuance upon the
exercise of the Warrants and, upon such exercise and payment of the purchase price therefor
pursuant to the Warrants, such shares will be duly authorized and issued, fully paid and
non-assessable.

     8B Financial Statements. The Company has furnished each Purchaser with the following financial
statements, identified by a principal financial officer of the Company: (i) a consolidated balance
sheet of the Company and its Subsidiaries as at January 31, 2003, and consolidated statements of
income, retained earnings and cash flows of the Company and its Subsidiaries for the period from
September 11, 2002 to January 31, 2003, all reported on by Deloitte & Touche; (ii) a consolidated
balance sheet of the Company and its Subsidiaries as at January 30, 2004 and January 28, 2005, and
consolidated statements of income, retained earnings and cash flows of the Company and its
Subsidiaries for each such year, all reported on by Deloitte & Touche; and (iii) a consolidated
balance sheet of the Company and its Subsidiaries for each completed fiscal month since January 28,
2005 and consolidated statements of income, retained earnings and cash flows for the fiscal period
ended on each such date, prepared by the Company. Such financial statements (including any related
schedules and/or notes) are true and correct in all material respects (subject, as to interim
statements, to changes resulting from audits and year-end adjustments), have been prepared in
accordance. with GAAP consistently followed throughout the periods involved and show all
liabilities, direct and contingent, of the Company and its Subsidiaries required to be shown in
accordance with such principles. The balance sheets fairly present the condition of the Company and
its Subsidiaries as at the dates thereof, and the statements of income, retained earnings and cash
flows fairly present the results of the operations of the Company and its Subsidiaries and their
cash flows for the periods indicated. Since November 1, 2004, neither the Company nor any
Subsidiary of the Company has paid or declared any dividend on any shares of its Equity Interests
or made any other distribution on account of any shares of its Equity Interests (other than
dividends or distributions payable solely to the Company or a Wholly-Owned Subsidiary of the
Company) or redeemed, purchased, retired or otherwise acquired any shares of its Equity Interests
or any warrants, rights or options to acquire, or securities convertible into or exchangeable for,
any shares of its Equity Interests (other than from the Company or a Wholly-Owned Subsidiary of the
Company). There has been no material adverse change in the business, property or assets, condition
(financial or otherwise), operations or prospects of the Company and its Subsidiaries taken as a
whole since January 28, 2005.

     8C Actions Pending. There is no action, suit, investigation or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of its Subsidiaries, or any
properties or rights of the Company or any of its Subsidiaries, by or before any court, arbitrator
or administrative or governmental body which, individually or in the aggregate, could reasonably be
expected to result in any Material Adverse Effect.

     8D Outstanding Indebtedness. Neither the Company nor any of its Subsidiaries has outstanding
any Indebtedness except as permitted by paragraph 6B. There exists no default under the provisions
of any instrument evidencing such Indebtedness or of any agreement relating thereto.

 

 

     8E Title to Properties. Neither the Company nor any of its Subsidiaries is fee owner of any
real properties. The Company and each of its Subsidiaries has good title to all of its respective
properties and assets, including the properties and assets reflected in the balance sheet as at
January 28, 2005 referred to in paragraph 8B (other than properties and assets disposed of in the
ordinary course of business), subject to no Lien of any kind except Liens permitted by paragraph
6A. All leases necessary in any material respect for the conduct of the respective businesses of
the Company and its Subsidiaries are valid and subsisting and are in full force and effect.

     8F Taxes. The Company has and each of its Subsidiaries has filed all federal, state and other
income tax returns which, to the knowledge of the officers of the Company and its Subsidiaries, are
required to be filed, and each has paid all taxes as shown on such returns and on all assessments
received by it to the extent that such taxes have become due, except such taxes as are being
actively contested in good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP.

     8G Conflicting Agreements and Other Matters. Neither the Company nor any of its Subsidiaries
is a party to any contract or agreement or subject to any charter or other corporate restriction
which materially and adversely affects its business, property or assets, condition (financial or
otherwise) or prospects. Neither the execution nor delivery of this Agreement, the Subordinated
Notes or the other Transaction Documents, nor the offering, issuance and sale of the Subordinated
Notes or the Warrants, nor fulfillment of nor compliance with the terms and provisions hereof, of
the Subordinated Notes, of the Warrants and of the other Transaction Documents will conflict with,
or result in a breach of the terms, conditions or provisions of, or constitute a default under, or
result in any violation of, or result in the creation of any Lien (other than Liens created
pursuant to the Security Documents) upon any of the properties or assets of the Company or any of
its Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any
award of any arbitrator or any agreement (including any agreement with stockholders), instrument,
order, judgment, decree, statute, law, rule or regulation to which the Company or any of its
Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is a party to, or
otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the
Company or such Subsidiary, any agreement relating thereto or any other contract or agreement
(including its charter) which limits the amount of, or otherwise imposes restrictions on the
incurring of, Indebtedness of the Company of the type to be evidenced by the Subordinated Notes or
Indebtedness of any Subsidiary Guarantor of the type to be evidenced by the Subsidiary Guaranty
except as set forth in the agreements listed in Schedule 8G attached hereto.

     8H Offering of Subordinated Notes and Warrants. Neither the Company nor any agent acting on
its behalf has, directly or indirectly, offered the Subordinated Notes or the Warrants or any
similar security of the Company for sale to, or solicited any offers to buy the Subordinated Notes
or the Warrants or any similar security of the Company from, or otherwise approached or negotiated
with respect thereto with, any Person other than Institutional Investors, and neither the Company
nor any agent acting on its behalf has taken or will take any action which would subject the
issuance or sale of the Subordinated Notes or the Warrants to the provisions of section 5 of the
Securities Act or to the provisions of any securities or Blue Sky law of any applicable
jurisdiction.

 

 

     8I. Use of Proceeds. Neither the Company nor any Subsidiary owns or has any present intention
of acquiring any “margin stock” as defined in Regulation U (12 CI-R Part 221) of the Board of
Governors of the Federal Reserve System (herein called “margin stock”). The proceeds of sale of the
Subordinated Notes will be used to refinance existing Indebtedness of the Company (including
Indebtedness outstanding under the Stafford Loan Agreement) and for working capital purposes. None
of such proceeds will be used, directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of purchasing or carrying any margin stock or for the purpose of
maintaining, reducing or retiring any Indebtedness which was originally incurred to purchase or
carry any stock that is currently a margin stock or for any other purpose which might constitute
the sale or purchase of any Subordinated Notes a “purpose credit” within the meaning of such
Regulation U. The Company is not engaged principally, or as one of its important activities, in the
business of extending credit for the purpose of purchasing or carrying margin stock. Neither the
Company nor any agent acting on its behalf has taken or will take any action which might cause this
Agreement or any Subordinated Note to violate Regulation T, Regulation U or any other regulation of
the Board of Governors of the Federal Reserve System or to violate the Exchange Act, in each case
as in effect now or as the same may hereafter be in effect.

     8J ERISA. No accumulated funding deficiency (as defined in section 302 of ERISA
and section 412 of the Code), whether or not waived, exists with respect to any Plan (other
than a Multiemployer Plan). No liability to the PBGC has been or is expected by the Company or any
ERISA Affiliate to be incurred with respect to any Plan (other than a Multiemployer Plan) by the
Company, any Subsidiary or any ERISA Affiliate which is or could reasonably be expected to be
materially adverse to the business, property or assets, condition (financial or otherwise) or
operations of the Company and its Subsidiaries taken as a whole. Neither the Company, any
Subsidiary nor any ERISA Affiliate has incurred or presently expects to incur any withdrawal
liability under Title IV of ERISA with respect to any Multiemployer Plan which is or could
reasonably be expected to be materially adverse to the business, condition (financial or otherwise)
or operations of the Company and its Subsidiaries taken as a whole. The execution and delivery of
this Agreement and the issuance and sale of the Subordinated Notes and the Warrants will be exempt
from, or will not involve any transaction which is subject to, the prohibitions of section 406 of
ERISA and will not involve any transaction in connection with which a penalty could be imposed
under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975 of the Code. The
representation by the Company in the next preceding sentence is made in reliance upon and subject
to the accuracy of each Purchaser’s representation in paragraph 9B.

     8K Governmental Consent. Neither the nature of the Company or of any Subsidiary, nor any of
their respective businesses or properties, nor any relationship between the Company or any
Subsidiary and any other Person, nor any circumstance in connection with the offering, issuance,
sale or delivery of the Subordinated Notes or the Warrants is such as to require any authorization,
consent, approval, exemption or other action by or notice to or filing with any court or
administrative or governmental body (other than routine filings after the date of closing with the
Securities and Exchange Commission and/or state Blue Sky authorities and other than the filings and
recordings necessary to perfect the Liens in the Collateral intended to be created by the Security
Documents described on Schedule 8K hereto) in connection with the execution

 

 

and delivery of this Agreement and the other Transaction Documents, the offering, issuance,
sale or delivery of the Subordinated Notes or the Warrants or fulfillment of or compliance with the
terms and provisions hereof, of the Subordinated Notes, or of the other Transaction
Documents.Compliance with Environmental and Other Laws. The Company and its Subsidiaries and all of
their respective properties and facilities have complied at all times and in all respects with all
federal, state, local, foreign and regional statutes, laws, ordinances and judicial or
administrative orders, judgments, rulings and regulations, including, without limitation, those
relating to protection of the environment except, in any such case, where failure to comply,
individually or in the aggregate, could not reasonably be expected to result in a Material Adverse
Effect.

     8L Regulatory Status. Neither the Company nor any of its Subsidiaries is (i) an “investment
company” as defined in, or subject to regulation under, the Investment Company Act of 1940, as
amended, (ii) a “holding company” as defined in, or subject to regulation under the Public Utility
Holding Company Act of 2005, as amended, or (iii) a “public utility” within the meaning of the
Federal Power Act, as amended.

     8M Permits and Other Operating Rights. The Company and each Subsidiary has all such valid and
sufficient certificates of convenience and necessity, franchises, licenses, permits, operating
rights and other authorizations from federal, state, foreign, regional, municipal and other local
regulatory bodies or administrative agencies or other governmental bodies having jurisdiction over
the Company or any Subsidiary or any of its properties, as are necessary for the ownership,
operation and maintenance of its businesses and properties, as presently conducted and as proposed
to be conducted, while the Subordinated Notes are outstanding, subject to exceptions and
deficiencies which, individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect, and such certificates of convenience and necessity, franchises, licenses,
permits, operating rights and other authorizations from federal, state, foreign, regional,
municipal and other local regulatory bodies or administrative agencies or other governmental bodies
having jurisdiction over the Company, any Subsidiary or any of its properties are free from
restrictions or conditions which, individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect, and neither the Company nor any Subsidiary is in violation of any
thereof in any material respect.

     8O. Rule 144A. The Subordinated Notes are not of the same class as securities of the
Company, if any, listed on a national securities exchange, registered under Section 6 of the
Exchange Act or quoted in a U.S. automated inter-dealer quotation system.

     8P Absence of Financing Statements, etc. Except with respect to Liens permitted by
paragraph 6A hereof, there is no financing statement, security agreement, chattel mortgage, real
estate mortgage or other document filed or recorded with any filing records, registry or other
public office, that purports to cover, affect or give notice of any present or possible future Lien
on, or security interest in, any assets or property of the Company or any of its Subsidiaries or
any rights relating thereto.

     8Q Establishment of Security Interest. Schedule 8Q hereto sets forth as of the
date of closing a complete and accurate list of (i) the location of the chief executive office of
the Company and each of its Subsidiaries, (ii) all real property owned or leased by the Company or

 

 

any of its Subsidiaries, (iii) all locations at which any property of the Company or any of
its Subsidiaries is located (or at any time within the last 6 months has been located) or at which
the Company or any of its Subsidiaries maintains a place of business or keeps any records (or at
any time within the last 6 months has maintained a place of business or kept records), (iv) all
patents, trademarks, trade names, service marks, services names or copyrights owned or licensed by
the Company or any of its Subsidiaries, (v) the organizational identification number of the Company
and each of its Subsidiaries, and (vi) any name under which the Company or any Subsidiary has
conducted business at any time during the last 5 years. As of the date hereof, all filings,
assignments, pledges and deposits of documents or instruments have been made, and all other actions
have been taken, that are necessary or advisable under applicable law and are required to be made
or taken on or prior to the date of closing under the provisions of this Agreement and the other
Transaction Documents to create and perfect a security interest in the Collateral in favor of the
Subordinated Collateral Agent to secure the Subordinated Notes, and each Subsidiary Guarantor’s
obligations under its Subsidiary Guaranty, subject to no Liens other than Liens permitted under
clause (i) of paragraph 6A and, with respect to CIT Bank Collateral, Liens securing the Company’s
obligations under the Program Agreement. The Collateral and the Subordinated Collateral Agent’s
rights with respect to the Collateral are not subject to any setoff, claims, withholdings or other
defenses (except any such setoff, claim or defense which could not, individually or in the
aggregate, materially impair the rights of the Subordinated Collateral Agent with respect to the
Collateral). The Company or a Subsidiary is the owner of the Collateral described in the Security
Documents free from any Lien, security interest, encumbrance and any other claim or demand, except
for Liens permitted under paragraph 6A.

     8R. Foreign Assets Control Regulations, Etc.

     (i) Neither the sale of the Subordinated Notes or the Warrants by the Company
hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act,
as amended, or any of the foreign assets control regulations of the United States Treasury
Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or
executive order relating thereto; provided, that the representation set forth in this
paragraph 8R(i) is made on the assumption that no Purchaser is a Person described in clause
(a) of paragraph 8R(ii).

     (ii) Neither the Company nor any Subsidiary (a) is a Person described or designated
in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign
Assets Control or in Section 1 of the Anti-Terrorism Order or (b) engages in any dealings or
transactions with any such Person; provided, that the representation set forth in this
clause (b) is made on the assumption that no Purchaser is a Person described in clause (a)
above. The Company and its Subsidiaries are in compliance, in all material respects, with
the USA Patriot Act.

     (iii) No part of the proceeds from the sale of the Subordinated Notes or the
Warrants hereunder will be used, directly or indirectly, for any payments to any
governmental official or employee, political party, official of a political party, candidate
for political office, or anyone else acting in an official capacity, in order to obtain,
retain or direct business or obtain any improper advantage, in violation of the United
States

 

 

Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act
applies to the Company.

     8S. Disclosure. Neither this Agreement nor any other document, certificate or statement
furnished to any Purchaser by or on behalf of the Company in connection herewith contains any
untrue statement of a material fact or omits to state a material fact necessary in order to make
the statements contained herein and therein not misleading. There is no fact or facts peculiar to
the Company or any of its Subsidiaries which materially adversely affects or in the future may (so
far as the Company can now reasonably foresee), individually or in the aggregate, reasonably be
expected to materially adversely affect the business, property or assets, or financial condition of
the Company or any of its Subsidiaries and which has not been’ set forth in this Agreement or in
the other documents, certificates and statements furnished to each Purchaser by or on behalf of the
Company prior to the date hereof in connection with the transactions contemplated hereby. Any
financial projections delivered to any Purchaser on or prior to the date hereof are reasonable
based on the assumptions stated therein and the best information available to the officers of the
Company.

     8T. Inventory Locations; Etc. Except for inventory drop shipped directly from a supplier
or vendor directly to a customer, all of the Company’s inventory is located at one of the locations
identified on Schedule 8T, as such Schedule may be modified from time to time in accordance with
paragraph 6I(ii). Except to the extent such requirement has been expressly waived by the
Subordinated Collateral Agent in writing, the landlord with respect to each inventory location has
executed and delivered to the Subordinated Collateral Agent a landlord lien waiver in a form
approved by the Subordinated Collateral Agent.

9. REPRESENTATIONS OF EACH PURCHASER. Each Purchaser represents as follows:

     9A Nature of Purchase. Such Purchaser is an Institutional Investor and is not acquiring the
Subordinated Notes or the Warrants to be purchased by it or issued to it hereunder with a view to
or for sale in connection with any distribution thereof within the meaning of the Securities Act,
provided that the disposition of such Purchaser’s property shall at all times be and remain within
its control.

     9B Source of Funds. At least one of the following statements is an accurate representation as
to each source of funds (a “Source”) to be used by such Purchaser to pay the purchase price of the
Subordinated Notes to be purchased by such Purchaser hereunder:

     (i) the Source is an “insurance company general account” (as that term is defined
in the United States Department of Labor’s Prohibited Transaction Exemption (“PTE”) 95-60)
in respect of which the reserves and liabilities (as defined by the annual statement for
life insurance companies approved by the National Association of Insurance Commissioners
(the “NAIC Annual Statement”)) for the general account contract(s) held by or on behalf of
any employee benefit plan together with the amount of the reserves and liabilities for the
general account contract(s) held by or on behalf of any other employee benefit plans
maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the
same employee organization in the general account do

 

 

not exceed 10% of the total reserves
and liabilities of the general account (exclusive of
separate account liabilities) plus surplus as set forth in the NAIC Annual Statement
filed with such Purchaser’s state of domicile; or the Source is a separate account that is
maintained solely in connection with such Purchaser’s fixed contractual obligations under
which the amounts payable, or credited, to any employee benefit plan (or its related trust)
that has any interest in such separate account (or to any participant or beneficiary of such
plan (including any annuitant)) are not affected in any manner by the investment performance
of the separate account; or

     (ii) the Source is either (a) an insurance company pooled separate account, within
the meaning of PTE 90-1, or (b) a bank collective investment fund, within the meaning of the
PTE 91-38 and, except as disclosed by such Purchaser to the Company in writing pursuant to
this clause (iii), no employee benefit plan or group of plans maintained by the same
employer or employee organization beneficially owns more than 10% of all assets allocated to
such pooled separate account or collective investment fund; or

     (iii) the Source constitutes assets of an “investment fund” (within the meaning of
Part V of PTE 84-14 (the “QPAIVI Exemption”)) managed by a “qualified professional asset
manager” or “QPAM” (within the meaning of Part V of the QPAM Exemption), no employee benefit
plan’s assets that are included in such investment fund, when combined with the assets of
all other employee benefit plans established or maintained by the same employer or by an
affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or
by the same employee organization and managed by such QPAM, exceed 20% of the total client
assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are
satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the
definition of “control” in Section V(e) of the QPAM Exemption) owns a 5% or more interest in
the Company and (a) the identity of such QPAM and (b) the names of all employee benefit
plans whose assets are included in such investment fund have been disclosed to the Company
in writing pursuant to this clause (iv); or

     (iv) the Source constitutes assets of a “plan(s)” (within the meaning of Section IV
of PTE 96-23 (the “INHAM Exemption”)) managed by an “in-house asset manager” or “INHAM”
(within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and
(h) of the INHAM Exemption are satisfied, neither the WHAM nor a person controlling or
controlled by the INHAM (applying the definition of “control” in Section IV(h) of the INHAM
Exemption) owns a 5% or more interest in the Company and (a) the identity of such INHAM and
(b) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been
disclosed to the Company in writing pursuant to this clause (v); or

     (v) the Source is a governmental plan; or

     (viii) the Source is one or more employee benefit plans, or a separate account or
trust fund comprised of one or more employee benefit plans, each of which has been
identified to the Company in writing pursuant to this clause (vii); or the Source does not

 

 

include assets of any employee benefit plan, other than a plan exempt from the coverage
of ERISA; or

     (ix) the Source does not include “plan assets” within the meaning of 29 C.F.R.
section 2510.3-101.

As used in this paragraph 9B, the terms “employee benefit plan”, “governmental plan”, and
“separate account” shall have the respective meanings assigned to such terms in Section
3 of ERISA.

     10. [INTENTIONALLY OMITTED].

     11. DEFINITIONS; ACCOUNTING MATTERS. For the purpose of this Agreement, the terms defined
in paragraphs 11A and 11B (or within the text of any other paragraph) shall have the respective
meanings specified therein and all accounting matters shall be subject to determination as provided
in paragraph 11C.

     11A. Yield-Maintenance Amount and Related Terms.

          “Called Principal” shall mean, with respect to any Subordinated Note, the principal of such
Subordinated Note that is declared to be immediately due and payable pursuant to paragraph 7A, as
the context requires.

          “Discounted Value” shall mean, with respect to the Called Principal of any Subordinated Note,
the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called
Principal from their respective scheduled due dates to the Settlement Date with respect to such
Called Principal, in accordance with accepted financial practice and at a discount factor (as
converted to reflect the periodic basis on which interest on such Subordinated Note is payable, if
interest is payable other than on a semi-annual basis) equal to the Reinvestment Yield with respect
to such Called Principal.

          “Prepayment Amount” shall mean, with respect to the principal amount of any Subordinated Note
that is to be prepaid pursuant to paragraph 4B(1) hereof or is declared or deemed to be immediately
due and payable pursuant to paragraph 7A hereof, the Yield-Maintenance Amount or percentage of such
principal amount set forth below opposite the Settlement Date:

 

 

	 	 	 
	 	 	Yield-Maintenance Amount /
	Settlement Date	 	Percentage
	After the date of closing and 

on or before March 24, 2008
	 	Yield-Maintenance Amount with 
respect to such principal amount
	After March 24, 2008 and on or 

before March 24, 2009
	 	5.00%
	After March 24, 2009 and on or 

before March 24, 2010
	 	2.00%
	After 24, 2010 	 	0.00%

          “Reinvestment Yield” shall mean, with respect to the Called Principal of any Subordinated
Note, 2.00% over the yield to maturity implied by (i) the yields reported as of 10:00 a.m. (New
York City local time) on the Business Day next preceding the Settlement Date with respect to such
Called Principal for actively traded U.S. Treasury securities having a maturity equal to the
Remaining Average Life of such Called Principal as of such Settlement Date on the display
designated as “Page PX1” on the Bloomberg Financial Services Screen (or such other display as may
replace Page PX1 on the Bloomberg Financial Services Screen or, if Bloomberg Financial Services
shall cease to report such yields or shall cease to be Prudential Capital Group’s customary source
of information for calculating yield-maintenance amounts on privately placed notes, then such
source as is then Prudential Capital Group’s customary source of such information), or if such
yields shall not be reported as of such time or the yields reported as of such time shall not be
ascertainable, (ii) the Treasury Constant Maturity Series yields reported, for the latest day for
which such yields shall have been so reported as of the Business Day next preceding the Settlement
Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15(519) (or
any comparable successor publication) for actively traded U.S. Treasury securities having a
constant maturity equal to the Remaining Average Life of such Called Principal as of such
Settlement Date. Such implied yield shall be determined, if necessary, by (a) converting U.S.
Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice
and (b) interpolating linearly between yields reported for various maturities. The Reinvestment
Yield shall be rounded to that number of decimal places as appears in the coupon of the applicable
Subordinated Note.

          “Remaining Average Life” shall mean, with respect to the Called Principal of any Subordinated
Note, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i)
such Called Principal into (ii) the sum of the products obtained by multiplying (a) each Remaining
Scheduled Payment of such Called Principal (but not of interest thereon) by (b) the number of years
(calculated to the nearest one-twelfth year) which will elapse between the Settlement Date with
respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.

          “Remaining Scheduled Payments” shall mean, with respect to the Called Principal of any
Subordinated Note, all payments of such Called Principal and interest thereon
that would be due on or after the Settlement Date with respect to such Called Principal if no
payment of such Called Principal were made prior to its scheduled due date.

 

 

          “Settlement Date” shall mean, with respect to the Called Principal of any Subordinated Note,
the date on which such Called Principal is to be prepaid pursuant to paragraph 4B or is declared to
be immediately due and payable pursuant to paragraph 7A, as the context requires.

          “Specified Event Prepayment Amount” shall mean, with respect to the principal amount of any
Subordinated Note that is to be prepaid pursuant to paragraph 4B(2) hereof or is declared or deemed
to be immediately due and payable pursuant to paragraph 7A hereof solely as a result of an Event of
Default described in paragraph 7A(xv) hereof which also constitutes a Specified Event, the
Yield-Maintenance Amount or percentage of such principal amount set forth below opposite the
Settlement Date:

	 	 	 
	 	 	Yield-Maintenance Amount /
	Settlement Date	 	Percentage
	After the date of closing and 

on or before March 24, 2007
	 	Yield-Maintenance Amount with 
respect to such principal amount
	After March 24, 2007 and on or 

before March 24, 2008
	 	8.00%
	After March 24, 2008 and on or 

before March 24, 2010
	 	2.00%
	After March 24, 2010
	 	0.00%

; provided, that in the event the Specified Event Prepayment Amount is payable in connection with
an acceleration as a result of an Event of Default described in paragraph 7A(xv) based solely on
clause (v) of the definition of “Change of Control” and such event also constitutes a Specified
Event, the Yield-Maintenance Amount or percentage of principal amount set forth below shall apply:

	 	 	 
	 	 	Yield-Maintenance Amount /
	Settlement Date	 	Percentage
	After the date of closing and 

on or before March 24, 2007
	 	Yield-Maintenance Amount with 
respect to such principal amount
	After March 24, 2007 and on or 

before March 24, 2008
	 	8.00%
	After March 24, 2008 and on or 

before March 24, 2009
	 	5.00%
	After March 24, 2009 and on or 

before March 24, 2010
	 	2.00%
	After March 24, 2010
	 	0.00%

 

 

          “Yield-Maintenance Amount” shall mean, with respect to any Subordinated Note, an amount equal
to the excess, if any, of the Discounted Value of the Called Principal of such Subordinated Note
over the sum of (i) such Called Principal plus (ii) interest accrued thereon as of (including
interest due on) the Settlement Date with respect to such Called Principal. The Yield-Maintenance
Amount shall in no event be less than zero.

     11B. Other Terms.

          “Accountants” shall mean any of Deloitte Touche Tohmatsu, Ernst & Young, KPMG or
PricewaterhouseCoopers.

          “Affiliate” shall mean with respect to any Person, any other Person directly or indirectly
controlling, controlled by, or under direct or indirect common control with, such first Person,
except a Subsidiary of the Company shall not be an Affiliate of the Company. A Person shall be
deemed to control a corporation or other entity if such Person possesses, directly or indirectly,
the power to direct or cause the direction of the management and policies of such corporation or
entity, whether through the ownership of voting securities, by contract or otherwise.

          “Agreement” shall have the meaning given in paragraph 12C hereof.

          “Agreement to Subordinate” shall have the meaning given in paragraph 3A(xi) hereof.

          “Anti-Terrorism Order” shall mean Executive Order No. 13,224 of September 24, 2001, Blocking
Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support
Terrorism, 66 U.S. Fed. Reg. 49, 079 (2001), as amended.

          “Applicable Projected Cash Burn Rate” shall mean (i) on January 1, 2008, the greater of (x)
$3,000,000 and (y) 75% of the minimum amount required to pay in cash all forecast monthly net cash
requirements for the three months ending March 31, 2008 (as determined by the Bank Agent for
purposes of determining the “Applicable Projected Cash Burn Rate” under the Credit Agreement); (ii)
on February 1, 2008, the greater of (x) $3,000,000 and (y) 75% of the minimum amount required to
pay in cash all forecast monthly net cash requirements for the three months ending April 30, 2008
(as determined by the Bank Agent for purposes of determining the “Applicable Projected Cash Burn
Rate” under the Credit Agreement); (iii) on March 1, 2008, the greater of (x) $3,000,000 and (y)
75% of the minimum amount required to pay in cash all forecast monthly net cash requirements for
the three months ending May 31, 2008 (as determined by the Bank Agent for purposes of determining
the “Applicable Projected Cash Burn Rate” under the Credit Agreement); and (d) on any other day,
zero.

          “Bank Agent” shall mean CIGPF I Corp., in its capacity as agent under the Credit Agreement,
and its successors and assigns in that capacity.

          “Banks” shall mean CIGPF. I Corp. and the other lending parties to the Credit Agreement, and
their respective successors and assigns.

44

 

          “Bankruptcy Law” shall have the meaning given in clause (viii) of paragraph 7A.

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

          “Capital Expenditures” shall mean, for any period, all amounts capitalized during such period
by the Company and its Subsidiaries as capital expenditures for property, plant, and equipment or
similar fixed asset accounts, including any such expenditures by way of Capitalized Leases, the
acquisition of a Person or by way of assumption of Indebtedness or other obligations, to the extent
reflected as property, plant and equipment.

          “Capitalized Lease” shall mean any lease the obligations of the lessee under which constitute
Capitalized Lease Obligations.

          “Capitalized Lease Obligation” shall mean any rental obligation which, under GAAP, would be
required to be capitalized on the books of the Company or any Subsidiary, taken at the amount
thereof accounted for as indebtedness (net of interest expense) in accordance with such principles.

          “Change of Control” shall mean the occurrence of any of the following:

     (i) an acquisition of any Equity Interests or voting securities of the Company or
FAC (the “Voting Securities”) by any “Person” (as the term person is used for purposes of
Section 13(d) or 14(d) of the Exchange Act), as a result of which immediately after such
acquisition such Person has acquired “Beneficial Ownership” (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of the then
outstanding Equity Interests or the combined voting power of the Company’s or FAC’s then
outstanding Voting Securities; or

     (ii) the consummation of:

     (a) a merger, consolidation or reorganization with or into the Company or FAC
or in which securities of the Company or FAC are issued, unless such merger,
consolidation or reorganization is a “Non-Control Transaction.” A “Non-Control
Transaction” shall mean a merger, consolidation or reorganization with or into the
Company or FAC, as applicable, or in which securities of the Company or FAC are
issued where:

     (1) the beneficial owners of the Voting Securities of the Company
or FAC, as applicable, immediately before such merger, consolidation or
reorganization, own directly or indirectly immediately following such
merger, consolidation or reorganization, at least ninety percent (90%) of
the combined voting power of the outstanding voting
securities of the entity resulting from such merger or consolidation or

45

 

reorganization (the “Surviving Entity”) in substantially the same proportion
as their ownership of the Voting Securities immediately before such merger,
consolidation or reorganization;

     (2) the individuals who were members of the incumbent board of
directors (or other comparable governing body) of the Company or FAC, as
applicable, immediately prior to the execution of the agreement providing
for such merger, consolidation or reorganization constitute at least 75% of
the members of the board of directors (or other comparable governing body)
of the Surviving Entity, or a corporation beneficially directly or
indirectly owning a majority of the Voting Securities of the Surviving
Entity; and

     (3) no Person other than (A) the Company, (B) FAC or (C) any
Person who, immediately prior to such merger, consolidation or
reorganization had beneficial ownership of ten percent (10%) or more of the
then outstanding Voting Securities or Equity Interests, has beneficial
ownership of ten percent (10%) or more of the combined voting power of the
Surviving Entity’s then outstanding voting securities or Equity Interests;

     (iii) a complete (or substantially complete) liquidation or dissolution of the
Company or FAC;

     (iv) the sale or other disposition of all or substantially all of the assets of the
Company or FAC to any Person; or

     (v) the occurrence of a “Change in Control” (or similar event) under the Credit
Agreement (or any replacement thereto) which has not been cured or waived pursuant to the
terms thereof.

     Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because
any Person (the “Subject Person”) acquired beneficial ownership of more than the permitted amount
of the then outstanding Equity Interests or Voting Securities, of additional Equity Interests or
Voting Securities as a result of (x) the acquisition by a Subject Person already a beneficial owner
of Equity Interests or Voting Securities from the Company or FAC, as applicable, for fair value
paid in cash, (y) the acquisition of Equity Interests or Voting Securities of the Company or FAC,
as applicable, by the Subject Person from a Person who qualifies as a “Permitted Transferee” under
the Stockholders Agreement; or (z) the acquisition of Equity Interests or Voting Securities by the
Company or FAC, as applicable, which, by reducing the number of Equity Interests or Voting
Securities then outstanding, increases the proportional number of shares beneficially owned by the
Subject Person, provided that if a Change of Control would occur (but for the operation of this
sentence), and after such share acquisition, such Subject Person becomes the beneficial owner of
any additional Equity Interests or Voting Securities (not otherwise covered by this sentence) which
increases the percentage of the then
outstanding Equity Interests or Voting Securities beneficially owned by such Subject Person,
then a Change of Control shall occur.

46

 

          “CIT Bank Collateral” shall mean the reserve account securing the Company’s obligation to
purchase receivables from CIT Bank pursuant to the Program Agreement (and documents related
thereto) in an amount not to exceed 10% of the aggregate outstanding amount of such receivables
owned and held by CIT Bank from time to time.

          “closing” or “date of closing” shall have the meaning given in paragraph 2 hereof.

          “Code” shall mean the Internal Revenue Code of 1986, as amended.

          “Collateral” shall mean all property and assets upon which Liens have been created or are
purported to have been created under or pursuant to any Security Document.

          “Collateral Agency Agreement” shall have the meaning given in paragraph 3A(xiii) hereof.

          “Common Stock” shall mean the Company’s Common Stock, par value $0.00001 per share.

          “Company” shall have the meaning given in the introductory paragraph hereof.

          “Company Sale” shall mean (i) the sale of all or substantially all of the Common Stock and
Preferred Stock to a Person or Persons (other than any Related Party) in the same transaction or
series of related transactions, or (ii) the sale of all or substantially all of the assets of the
Company and its Subsidiaries to a Person or Persons (other than any Related Party) in the same
transaction or series of related transactions, in each case on terms and conditions reasonably
acceptable to the Required Holder(s).

          “Credit Agreement” shall mean the Amended and Restated Warehouse Loan Agreement dated as of
March 23, 2006, among the Company, as borrower and servicer, the Bank Agent and the Banks, as
amended, restated, supplemented or otherwise modified from time to time.

          “Current Assets” shall mean, at any time, the total assets of the Company and its Subsidiaries
which would be shown as current assets on a balance sheet of the Company and its Subsidiaries
prepared in accordance with GAAP at such time, provided, that in determining such current assets,
(a) notes and accounts receivable shall be included only if good and collectible and payable on
demand or within one year from such date (and not by their terms or by the terms of any instrument
or agreement relating thereto directly or indirectly renewable or extendible at the option of the
obligor beyond such year) and shall be valued at their face value less reserves or accruals for
uncollectible accounts determined to be sufficient in accordance with GAAP, and (b) life insurance
policies (other than the cash surrender value of any unencumbered policies that is properly
classified as a current asset in accordance with GAAP) shall be excluded.

          “Current Liabilities” shall mean, at any time, the Total Liabilities of the

47

 

Company and its Subsidiaries at such time, but in any event including as current liabilities, without limitation,
Current Maturities of Funded Debt.

          “Current Maturities of Funded Debt” shall mean, at any time and with respect to any item of
Funded Debt, the portion of such Funded Debt outstanding at such time which by the terms of such
Funded Debt or the terms of any instrument or agreement relating thereto is due on demand or within
one year from such time (whether by sinking fund, other required prepayment or final payment at
maturity) and is not directly or indirectly renewable, extendible or refundable at the option of
the obligor under an agreement or firm commitment in effect at such time to a date one year or more
from such time.

          “Current Ratio” shall mean, as of any date, the ratio of (a) Current Assets to (b) Current
Liabilities.

          “Default” shall mean any of the events specified in paragraph 7A, whether or not any
requirement for such event to become an Event of Default has been satisfied.

          “Default Rate” shall mean a rate per annum from time to time equal to the greater of (i)
23.00%, or (ii) 10% over the rate of interest publicly announced by JPMorgan Chase Bank from time
to time in New York City as its Prime Rate; provided, that in no event shall the Default Rate
exceed the maximum rate of interest allowed under applicable law.

          “EBITDA” shall mean, for any period, the consolidated net income (determined in accordance
with GAAP) of the Company and its Subsidiaries for such period, plus, to the extent deducted in
computing such consolidated net income and without duplication, (i) depreciation, depletion, if
any, and amortization expense for such period, (ii) consolidated interest expense for such period,
(iii) income tax expense for such period and (iv) any one-time item(s) as may be consented to by
the Subordinated Collateral Agent in its discretion from time to time, all as determined in
accordance with GAAP.

          “Equity Interests” shall mean shares of capital stock, partnership interests, membership
interests in a limited liability company, beneficial interests in a trust or other equity interests
in any person, or any obligations convertible into or exchangeable for, or giving any person a
right, option or warrant to acquire such equity interests or such convertible or exchangeable
obligations.

          “Equityholder Agreement” shall have the meaning given in paragraph 3A(viii) hereof.

          “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

          “ERISA Affiliate” shall mean any trade or business (whether or not incorporated) that,
together with the Company or any of its Subsidiaries, is treated as a single employer under Section
414(b) or (c) of the Code or, solely for purposes of Section 302 of
ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the
Code.

48

 

          “ERISA Event” shall mean (i) any “reportable event”, as defined in Section 4043 of ERISA or
the regulations issued thereunder with respect to a Plan (except an event for which the 30-day
notice period is waived); (ii) the existence with respect to any Plan of an “accumulated funding
deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived;
(iii) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an
application for a waiver of the minimum funding standard with respect to any Plan; (iv) the
incurrence by the Company or any ERISA Affiliate of any liability under Title IV of ERISA with
respect to the termination of any Plan; (v) the receipt by the Company or any ERISA Affiliate from
the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or
Plans or to appoint a trustee to administer any Plan; (vi) the incurrence by the Company or any
ERISA Affiliate of any liability with respect to withdrawal or partial withdrawal from any Plan or
Multiemployer Plan; or (vii) the receipt by the Company or any ERISA Affiliate of any notice, or
the receipt by any Multiemployer Plan from the Company or any ERISA Affiliate of any notice,
concerning the imposition of withdrawal liability or a determination that a Multiemployer Plan is,
or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA.

          “Event of Default” shall mean any of the events specified in paragraph 7A, provided that there
has been satisfied any requirement in connection with such event for the giving of notice, or the
lapse of time, or the happening of any further condition, event or act.

          “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended. “FAC” shall mean
FAC Acquisition, LLC, a Delaware limited liability company.

          “Funded Debt” shall mean, with respect to any Person, all Indebtedness of such Person which by
its terms or by the terms of any instrument or agreement relating thereto matures, or which is
otherwise payable or unpaid, one year or more from, or is directly or indirectly renewable or
extendible at the option of the obligor in respect thereof to a date one year or more (including,
without limitation, an option of such obligor under a revolving credit or similar agreement
obligating the lender or lenders to extend credit over a period of one year or more) from the date
of the creation thereof.

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

          “Governmental Authority” shall mean any nation, government or state, or any political
subdivision thereof, or any court, stock exchange, self-regulatory organization, entity or agency
exercising executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.

          “Guarantee” shall mean, with respect to any Person (the “guaranteeing person”), any obligation
of the guaranteeing person guaranteeing or in effect guaranteeing any Indebtedness, leases,
dividends or other obligations (the “primary obligations”) of any other third Person (the “primary
obligor”) in any manner, whether directly or indirectly, including any
obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such
primary obligation or any property constituting direct or indirect security therefor, (ii) to
advance

49

 

or supply funds for the purchase or payment of any such primary obligation or to maintain
working capital or equity capital of the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor, (iii) to purchase property, securities or services primarily for
the purpose of assuring the owner of any such primary obligation of the ability of the primary
obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the
owner of any such primary obligation against loss in respect thereof; provided, however, that the
term Guarantee shall not include any endorsements of instruments for deposit or collection in the
ordinary course of business. The amount of any Guarantee of any guaranteeing person shall be deemed
to be the lower of (i) an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Guarantee is made and (ii) the maximum amount for which such
guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee,
unless such primary obligation and the maximum amount for which such guaranteeing person may be
liable are not stated or determinable, in which case the amount of such Guarantee shall be such
guaranteeing person’s maximum reasonably anticipated liability in respect thereof as determined by
the guaranteeing person in good faith.

          “including” shall mean, unless the context clearly requires otherwise, “including without
limitation”, whether or not so stated.

          “Indebtedness” shall mean, with respect to any Person, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by
bonds, debentures, notes or similar instruments, (iii) all indebtedness of others secured by (or
for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien on property owned or acquired by such Person, whether or not the obligations
secured thereby have been assumed (only to the extent of the fair market value of such asset if
such Indebtedness has not been assumed by such Person), (iv) all Guarantees of such Person, (v) all
capitalized lease obligations of such Person and (vi) all obligations of such Person as an account
party in respect of letters of credit and similar instruments issued for the account of such
Person; provided however, that the Preferred Stock outstanding on the date of closing shall in no
event be considered Indebtedness.

          “Institutional Investor” shall mean any insurance company, commercial, investment or merchant
bank, finance company, mutual fund, registered money or asset manager, savings and loan
association, credit union, registered investment advisor, pension fund, investment company,
licensed broker or dealer, “qualified institutional buyer” (as such term is defined under Rule 144A
promulgated under the Securities Act) or “accredited investor” (as such term is defined in
Regulation D promulgated under the Securities Act).

          “Intercreditor Agreement” shall mean the Intercreditor Agreement, dated as of March 23, 2006,
between the Bank Agent and the Subordinated Collateral Agent, as amended, restated, supplemented or
otherwise modified from time to time in accordance with its terms.

          “IP Security Agreement” shall have the meaning given in paragraph 3A(vii) hereof.

          “Lien” shall mean any mortgage, pledge, security interest, encumbrance, minimum or
compensating balance arrangement, lien (statutory or otherwise) or charge of any

50

 

kind (including any agreement to give any of the foregoing, any conditional sale or other title retention
agreement, any lease in the nature thereof (including Capitalized Leases), and the filing of or
agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction),
or any other type of preferential arrangement for the purpose, or having the effect, of protecting
a creditor against loss or securing the payment or performance of an obligation.

          “Leverage Ratio” shall means the ratio of (i) Total Liabilities to (ii) Tangible Net Worth.

          “Material Adverse Effect” shall mean a (i) material adverse effect on the business, assets,
liabilities, operations, prospects or condition, fmancial or otherwise, of the Company and its
Subsidiaries, taken as a whole, (ii) material impairment of the Company’s ability to perform any of
its obligations under this Agreement, the Subordinated Notes, the Warrants or the other Transaction
Documents, (iii) material impairment of the validity or enforceability of the rights of, or the
benefits available to, the holders of any of the Subordinated Notes or the Warrants under this
Agreement, the Subordinated Notes, the Warrants or the other Transaction Documents, (iv) material
adverse effect on the existence, perfection or priority of the Subordinated Collateral Agent’s
security interest in the Collateral, or (v) material adverse effect on the enforceability,
collectibility, marketability of 15% or more of the Company’s inventory.

          “Moody’s” shall mean Moody’s Investors Service, Inc., and its successors.

          “Multiemployer Plan” shall mean any Plan which is a “multiemployer plan” (as such term is
defined in section 4001(a)(3) of ERISA).

          “Obligations” shall mean (i) the unpaid principal and interest (including interest accruing at
the then-applicable Default Rate and interest accruing at the then-applicable rate provided in the
Subordinated Notes after the filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or similar proceeding, relating to Company whether or not a claim for
post-filing or post-petition interest is allowed in such proceeding) on the Subordinated Notes,
when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or
otherwise, and (ii) all other obligations and liabilities of every nature of Company from time to
time owing to the Subordinated Collateral Agent or the holders of Subordinated Notes, in each case
whether direct or indirect, absolute or contingent, due or to become due, or now existing or
hereafter incurred (including monetary obligations incurred during the pendency of any bankruptcy,
insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in
such proceeding), which may arise under, out of, or in connection with, this Agreement or any other
Security Document or under any other document made, delivered or given in connection with any of
the foregoing (excluding the Warrants, the Investor Rights Agreement, the Stockholders Agreement,
the Equityholder Agreement and the VCOC Letter), in each case whether on account of principal,
premium, if any, interest, fees, indemnities, costs, expenses or otherwise (including all fees and
disbursements of counsel to such Persons) that are required to be paid by the Company pursuant to
the terms of this Agreement or any other Security Document, including, without limitation,
any contingent or unliquidated Obligations related to unresolved claims, causes of action or
liabilities which have been asserted or threatened against the Subordinated Collateral Agent or

51

 

any
holder of a Subordinated Note or which otherwise can be reasonably identified by the Subordinated
Collateral Agent or any holder of a Subordinated Note based on then known facts and circumstances.

          “Obligors” shall mean the Company, each Subsidiary and any other Person that now or hereafter
guarantees or grants a Lien in any of its assets to secure any of the Obligations.

          “Officer’s Certificate” shall mean a certificate signed in the name of the Company by its
President, one of its Vice Presidents or its Treasurer.

          “Organizational Documents” shall mean, with respect to any (i) corporation, its certificate or
articles of incorporation and bylaws, (ii) limited partnership, its certificate of limited
partnership and limited partnership agreement, (iii) general partnership, its partnership
agreement, (iv) limited liability company, its certificate of formation or limited liability
company and limited liability company agreement, (v) trust, its certificate of trust and trust
agreement or (vi) any other entity, its governing documents of a similar nature.

          “PBGC” shall mean the Pension Benefit Guaranty Corporation, or any successor or replacement
entity thereto under ERISA.

          “Permitted Investments” shall mean, with respect to any Person, (i) investments in direct
obligations of the United States of America or any agency or instrumentality thereof whose
obligations constitute full faith and credit obligations of the United States of America having a
maturity of ninety (90) days or less, commercial paper rated “A-1” or higher by Standard & Poor’s
or “P-1” or higher by Moody’s or certificates of deposit or bankers’ acceptances having a maturity
of one year or less issued by banks rated “A-1” or higher by Standard & Poor’s or “P-1” or higher
by Moody’s; and (ii) investments in money market fund securities rated “AA” or better by Standard &
Poor’s or “Aa” or higher by Moody’s.

          “Permitted Liens” shall mean, with respect to any Person, (i) Liens for taxes, assessments or
governmental charges or levies on its Property if the same shall not at the time be delinquent or
thereafter can be paid without penalty, or are being contested in good faith and by appropriate
proceedings and for which adequate reserves in accordance with generally accepted principles of
accounting shall have been set aside on its books; (ii) Liens imposed by law, such as carriers’,
warehousemen’s and mechanics’ liens and other similar liens arising in the ordinary course of
business that secure payment of obligations not more than 30 days past due; (iii) Liens arising out
of pledges or deposits under worker’s compensation laws, unemployment insurance, old age pensions,
or other social security or retirement benefits, or similar legislation; (iv) utility easements,
building restrictions and such other encumbrances or charges against real property as are of a
nature generally existing with respect to properties of a similar character and which do not in any
material way affect the marketability of the same or interfere with the use thereof in the business
of the Company; (v) Liens identified on Schedule 6A; provided, however, that with respect
to Liens described in this clause (v), such Liens shall constitute Permitted Liens only so long as
with respect to any Collateral, such Liens shall be second-priority or lower relative to the
Lien of the Subordinated Collateral Agent and the holders of Subordinated Notes; and (vi) a
Lien granted by the Company for the benefit of Liberty Property Limited Partnership, on a cash

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security deposit securing the Company’s obligations under its lease with respect to the premises
located at 7777 Golden Triangle, Eden Prairie, Minnesota; provided, that, the amount of such
deposit shall not exceed $175,000.

          “Person” shall mean and include an individual, a partnership, a joint venture, a corporation,
a trust, a limited liability company, an unincorporated organization and a government or any
department or agency thereof.

          “Plan” shall mean any “employee pension benefit plan” (as such term is defined in section 3 of
ERISA) which is or has been established or maintained, or to which contributions are or have been
made, by the Company or any ERISA Affiliate.

          “Preferred Stock” shall mean the Company’s Series A Convertible Preferred Stock, par value
0.00001 per share.

          “Program Agreement” shall mean the Second Amended and Restated Revolving Loan Product Program
Agreement, dated as of February 11, 2004, between CIT Bank, FDMAR1, Inc. and the Company, as the
same may be amended, restated or supplemented from time to time.

          “Property” of a Person shall mean any and all property, whether real, personal, tangible,
intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person.

          “Purchasers” shall have the meaning given in the introductory paragraph hereof.

          “Qualified IPO” shall mean the closing of a firm commitment underwritten initial public
offering pursuant to an effective registration statement filed under the Securities Act covering
the offer and sale of shares of the Company’s Common Stock at a public offering price reasonably
acceptable to the Required Holder(s).

          “Related Party” shall mean (i) any officer or director of the Company or any Subsidiary, (ii)
any Person directly or indirectly owning any shares of Equity Interests of the Company or any
Subsidiary, (iii) any Person who is related by blood, adoption or marriage to any Person described
in clause (i) or (ii), or (iv) any Affiliate of the Company or any Affiliate of any Person
described in clause (i), (ii) or (iii); provided, however, that the Company and any Subsidiary of
the Company shall not be Related Parties.

          “Required Holder(s)” shall mean the holder or holders of more than 50% of the aggregate
principal amount of the Subordinated Notes from time to time outstanding.

          “Responsible Officer” shall mean the chief executive officer, chief operating officer, chief
financial officer or chief accounting officer of the Company or any other officer of the Company
involved principally in its financial administration or its controllership function.

          “Restated Certificate of Incorporation” shall have the meaning given in paragraph 3J hereof.

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          “Restricted Payment” shall mean (i) any dividend or other distribution (whether in cash, or
other property) with respect to any Equity Interests in the Company or any of its Subsidiaries, or
any payment (whether in cash or other property), including any sinking fund or similar deposit, on
account of the purchase, redemption, retirement, acquisition, cancellation or termination of any
Equity Interests in the Company or any of its Subsidiaries or any option, warrant or other right to
acquire any Equity Interests in the Company or any of its Subsidiaries, provided however that such
dividends, distributions or payment in the form of shares of Equity Interests in the Company or its
Subsidiary, as applicable shall not be considered Restricted Payments so long as no Default or
Event of Default has occurred and is continuing and (ii) management consulting advisory fees in any
fiscal year of the Company other than reasonable compensation (no less favorable to the Company or
a Subsidiary than would be obtainable in a comparable arm’s length transaction with a Person not an
Affiliate) for services in excess of services provided as of the date of closing.

          “Securities” shall have the meaning given in paragraph 1B hereof.

          “Securities Act” shall mean the Securities Act of 1933, as amended.

          “Securitization” shall mean any (i) financing transaction undertaken by the Company or an
Affiliate thereof that is secured, directly or indirectly, by any portion or all of the receivables
of the Company and its Subsidiaries or any interest therein, or (ii) any sale, lease or other
transfer by the Company or an Affiliate thereof of an interest in any portion or all of the
receivables of the Company and its Subsidiaries to or by means of a conduit, trust or special
purpose vehicle under the following conditions: (1) the consideration received in exchange for such
transfer is cash and/or equity interests in any such entity in an aggregate amount of not less than
the reasonably equivalent value of such transferred interests as determined by the Required
Holder(s) in the exercise of their reasonable discretion, and (2) the sale is nonrecourse to the
Company with respect to collectibility of the transferred receivables.

          “Security Agreement” shall have the meaning given in paragraph 3A(v) hereof.

          “Security Documents” shall mean the Security Agreement, the IP Security Agreement, the
Subsidiary Guaranty, the Subsidiary Security Agreement and any other agreement, document or
instrument in effect on the date of closing or executed by the Company or any Subsidiary after the
date of closing under which the Company or such Subsidiary has granted a lien upon or security
interest in any property or assets to the Subordinated Collateral Agent to secure all or any part
of the obligations of the Company under this Agreement or the Subordinated Notes or of any
Subsidiary Guarantor under the Subsidiary Guaranty, and all financing statements, certificates,
documents and instruments relating thereto or executed or provided in connection therewith, each as
amended, restated, supplemented or otherwise modified from time to time.

          “Senior Debt” shall mean all Senior Obligations under and as defined in the Intercreditor
Agreement; provided that “Senior Debt” shall not include any obligation owed to the Company or any
Subsidiary of the Company.

          “Significant Holder” shall mean (i) each Purchaser, so long as such Purchaser or

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one of its Affiliates shall hold (or be committed under this Agreement to purchase) any Subordinated Note, or
(ii) any other Person which, together with its Affiliates, is the holder of at least 5% of the
aggregate principal amount of the Subordinated Notes from time to time outstanding.

          “Specified Event” shall mean the consummation of (i) a Qualified IPO or (ii) a Company Sale.

          “Standard & Poor’s” shall mean Standard & Poor’s, a Division of The McGraw-Hill Companies,
Inc., and its successors.

          “Stockholders Agreement” shall have the meaning given in paragraph 3A(iii) hereof.

          “Subordinated Collateral Agent” shall have the meaning given in paragraph 3A(v) hereof.

          “Subordinated Notes” shall have the meaning given in paragraph lA hereof.

          “Subsidiary” shall mean, as to any Person, any corporation, association or other business
entity in which such Person or one or more of its Subsidiaries or such Person and one or more of
its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group)
ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons
performing similar function) of such entity, and any partnership or joint venture if more than a
50% interest in profits or capital thereof is owned by such Person or one or more of its
Subsidiaries of such Person and one or more of its Subsidiaries (unless such partnership can and
does ordinarily taken major business actions without the approval of such Person or one or more of
its Subsidiaries). Unless the context otherwise clearly requires, any reference to a “Subsidiary”
is a reference to a Subsidiary of the Company.

          “Subsidiary Guarantors” shall mean Fingerhut Fulfillment Inc., a Delaware corporation, and
each other Subsidiary from time to time required to enter into the Subsidiary Guaranty pursuant to
paragraph 5N.

          “Subsidiary Guaranty” shall have the meaning given in paragraph 3A(iv) hereof.

          “Subsidiary Security Agreement” shall have the meaning given in paragraph 3A(vi) hereof.

          “Tangible Net Worth” shall mean, at any time:

     (i) the total assets of the Company and its Subsidiaries which would be
shown as assets on a consolidated balance sheet of the Company and its Subsidiaries as of
such time prepared in accordance with GAAP, after eliminating all amounts properly
attributable to minority interests, if any, in the stock and surplus of Subsidiaries, minus

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     (ii) the Total Liabilities of the Company and its Subsidiaries as of such
time, minus

     (iii) the net book value of all assets, after deducting any reserves
applicable thereto, which would be treated as intangible under GAAP, including, without
limitation, good will, trademarks, trade names, service marks, brand names, copyrights,
patents and unamortized debt discount and expense, organizational expenses and the excess of
the equity in any Subsidiary over the cost of the investment in such Subsidiary.

          “Total Liabilities” shall mean, at any time, the total liabilities of the Company and its
Subsidiaries which would be shown as liabilities on a consolidated balance sheet of the Company and
its Subsidiaries as of such time prepared in accordance with GAAP.

          “Transaction Documents” shall mean this Agreement, the Subordinated Notes, the Warrants, the
Investor Rights Agreement, the Stockholders Agreement, the Equityholder Agreement, the VCOC Letter,
the Security Documents, the Agreement to Subordinate, the Collateral Agency Agreement and the other
agreements, documents, certificates and instruments now or hereafter executed or delivered by the
Company or any Subsidiary or Affiliate in connection with this Agreement.

          “Transferee” shall mean any direct or indirect transferee of all or any part of any
Subordinated Note purchased by any Purchaser under this Agreement.

          “USA Patriot Act” shall mean United States Public Law 107-56, Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT
ACT) Act of 2001, as amended from time to time, and the rules and regulations promulgated
thereunder from time to time in effect.

          “VCOC Letter” shall have the meaning given in paragraph 3A(ix) hereof.

          “Warrants” shall have the meaning given in paragraph 1B hereof.

          “Wholly-Owned Subsidiary” shall mean any Subsidiary of the Company all of the outstanding
Equity Interests of every class of which is owned by the Company or another Wholly-Owned Subsidiary
of the Company, and which has outstanding no options, warrants, rights or other securities
entitling the holder thereof (other than the. Company or a Wholly-Owned Subsidiary) to acquire
shares of Equity Interests of such Subsidiary. 11C. Accounting and Legal Principles, Terms and
Determinations. Unless otherwise specified herein, all accounting terms used herein shall be
interpreted, all determinations with respect to accounting matters hereunder shall be made, and all
unaudited financial statements and certificates and reports as to financial matters required to be
furnished hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent with
the most recent audited consolidated
financial statements of the Company and its Subsidiaries delivered pursuant to clause (ii) of
paragraph 5A or, if no such statements have been so delivered, the most recent audited financial
statements referred to in clause (i) of paragraph 8B. Any reference herein to any specific
citation, section or form of law, statute, rule or regulation shall refer to such new, replacement
or analogous citation, section or form should citation, section or form be modified, amended or
replaced.

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12. MISCELLANEOUS.

     12A Subordinated Note Payments. The Company agrees that, so long as any Purchaser shall hold
any Subordinated Note, it will make payments of principal of, interest on and any Yield-Maintenance
Amount, Prepayment Amount and Specified Event Prepayment Amount payable with respect to such
Subordinated Note, which comply with the terms of this Agreement, by wire transfer of immediately
available funds for credit (not later than 12:00 noon, New York City time, on the date due) to such
Purchaser’s account or accounts as specified in the Purchaser Schedule attached hereto, or such
other account or accounts in the United States as such Purchaser may designate in writing,
notwithstanding any contrary provision herein or in any Subordinated Note with respect to the place
of payment. Each Purchaser agrees that, before disposing of any Subordinated Note, such Purchaser
will make a notation thereon (or on a schedule attached thereto) of all principal payments
previously made thereon and of the date to which interest thereon has been paid. The Company agrees
to afford the benefits of this paragraph 12A to any Transferee which shall have made the same
agreement as each Purchaser has made in this paragraph 12A. No holder shall be required to present
or surrender any Subordinated Note or make any notation thereon, except that upon the written
request of the Company made concurrently with or reasonably promptly after the payment or
prepayment in full of any Subordinated Note, the applicable holder shall surrender such
Subordinated Note for cancellation, reasonably promptly after such request, to the Company at its
principal office.

     12B Expenses. Whether or not the transactions contemplated hereby shall be consummated, the
Company shall pay, and save each Purchaser and any Transferee harmless against liability for the
payment of, all out-of-pocket expenses arising in connection with such transactions, including:

     (i) (a) all stamp and documentary taxes and similar charges, (b) costs of obtaining a
private placement number from Standard and Poor’s Ratings Group for the Subordinated Notes
and Warrants and (c) fees and expenses of brokers, agents, dealers, investment banks or
other intermediaries or placement agents, in each case as a result of the execution and
delivery of this Agreement or the other Transaction Documents or the issuance of the
Subordinated Notes;

     (ii) document production and duplication charges and the fees and expenses of any
special counsel engaged by such Purchaser or such Transferee in connection with (a) this
Agreement, any of the other Transaction Documents and the transactions contemplated hereby
or thereby and (b) any subsequent proposed waiver, amendment or modification of, or proposed
consent under, this Agreement or any other Transaction
Document, whether or not such proposed waiver, amendment, modification or consent shall
be effected or granted;

     (iii) the costs and expenses, including attorneys’ and financial advisory fees,
incurred by such Purchaser or such Transferee in enforcing (or determining whether or how to
enforce or cause the Subordinated Collateral Agent to enforce) any rights under

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this Agreement, the Subordinated Notes or any other Transaction Document (including, without
limitation, to protect, collect, lease, sell, take possession of, release or liquidate any
of the Collateral) or in responding to any subpoena or other legal process or informal
investigative demand issued in connection with this Agreement or any other Transaction
Document or the transactions contemplated hereby or by reason of your or such Transferee’s
having acquired any Subordinated Note or any Warrant, including without limitation costs and
expenses incurred in any workout, restructuring or renegotiation proceeding or bankruptcy
case;

     (iv) all costs and expenses, including without limitation reasonable attorneys’
fees, preparing, recording and filing all financing statements, instruments and other
documents to create, perfect and fully preserve and protect the Liens granted in the
Security Documents and the rights of the holders of the Subordinated Notes or of the
Subordinated Collateral Agent for the benefit of the holders of the Subordinated Notes; and

     (v) any judgment, liability, claim, order, decree, cost, fee, expense, action or
obligation resulting from the consummation of the transactions contemplated hereby,
including the use of the proceeds of the Subordinated Notes by the Company.

     The Company also will promptly pay or reimburse each Purchaser or holder of a Subordinated
Note (upon demand, in accordance with each such Purchaser’s or holder’s written instruction) for
all fees and costs paid or payable by such Purchaser or holder to the Securities Valuation Office
of the National Association of Insurance Commissioners in connection with the initial filing of
this Agreement and all related documents and financial information, and all subsequent annual and
interim filings of documents and financial information related to this Agreement, with such
Securities Valuation Office or any successor organization acceding to the authority thereof.

     The obligations of the Company under this paragraph 12B shall survive the transfer of any
Subordinated Note or portion thereof or interest therein by any Purchaser or Transferee and the
payment of any Subordinated Note.

     12C. Consent to Amendments. This Agreement may be amended, and the Company may take any
action herein prohibited, or omit to perform any act herein required to be performed by it, if the
Company shall obtain the written consent to such amendment, action or omission to act, of the
Required Holder(s) except that, without the written consent of the holder or holders of all
Subordinated Notes at the time outstanding, no amendment to this Agreement shall change the
maturity of any Subordinated Note, or change the principal of, or the rate, method of computation
or time of payment of interest on or any Yield-Maintenance Amount,
Prepayment Amount or Specified Event Prepayment Amount payable with respect to any
Subordinated Note, or affect the time, amount or allocation of any prepayments, or change the
proportion of the principal amount of the Subordinated Notes required with respect to any consent,
amendment, waiver or declaration. Each holder of any Subordinated Note at the time or thereafter
outstanding shall be bound by any consent authorized by this paragraph 12C, whether or not such
Subordinated Note shall have been marked to indicate such consent, but any

58

 

Subordinated Notes
issued thereafter may bear a notation referring to any such consent. No course of dealing between
the Company and the holder of any Subordinated Note nor any delay in exercising any rights
hereunder or under any Subordinated Note shall operate as a waiver of any rights of any holder of
any Subordinated Note. As used herein and in the Subordinated Notes, the term “this Agreement” and
references thereto shall mean this Agreement as it may from time to time be amended or
supplemented.

     12D. Form, Registration, Transfer and Exchange of Subordinated Notes; Lost Subordinated
Notes. The Subordinated Notes are issuable as registered notes without coupons in denominations of
at least $100,000, except as may be necessary to (i) reflect any principal amount not evenly
divisible by $100,000 or (ii) enable the registration of transfer by a holder of its entire holding
of Subordinated Notes; provided, however, that no such minimum denomination shall apply to
Subordinated Notes issued upon transfer by any holder of the Subordinated Notes to any other entity
or group of Affiliates with respect to which the Notes so issued or transferred shall be managed by
a single entity. The Company shall keep at its principal office a register in which the Company
shall provide for the registration of Subordinated Notes and of transfers of Subordinated Notes.
Upon surrender for registration of transfer of any Subordinated Note at the principal office of the
Company, the Company shall, at its expense, execute and deliver one or more new Subordinated Notes
of like tenor and of a like aggregate principal amount, registered in the name of such transferee
or transferees. At the option of the holder of any Subordinated Note, such Subordinated Note may be
exchanged for other Subordinated Notes of like tenor and of any authorized denominations, of a like
aggregate principal amount, upon surrender of the Subordinated Note to be exchanged at the
principal office of the Company. Whenever any Subordinated Notes are so surrendered for exchange,
the Company shall, at its expense, execute and deliver the Subordinated Notes which the holder
making the exchange is entitled to receive. Every Subordinated Note surrendered for registration of
transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer
duly executed, by the holder of such Subordinated Note or such holder’s attorney duly authorized in
writing. Any Subordinated Note or Subordinated Notes issued in exchange for any Subordinated Note
or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which
were carried by the Subordinated Note so exchanged or transferred, so that neither gain nor loss of
interest shall result from any such transfer or exchange. Upon receipt of written notice from the
holder of any Subordinated Note of the loss, theft, destruction or mutilation of such Subordinated
Note and, in the case of any such loss, theft or destruction, upon receipt of such holder’s
unsecured indemnity agreement, or in the case of any such mutilation upon surrender and
cancellation of such Subordinated Note, the Company will make and deliver a new Subordinated Note,
of like tenor, in lieu of the lost, stolen, destroyed or mutilated Subordinated Note.

     12E Persons Deemed Owners; Participations. Prior to due presentment for registration of
transfer, the Company may treat the Person in whose name any Subordinated Note is registered as the
owner and holder of such Subordinated Note for the purpose of receiving payment of principal of,
interest on and any Yield-Maintenance Amount, Prepayment Amount or Specified Event Prepayment
Amount payable with respect to such Subordinated Note and for all other purposes whatsoever,
whether or not such Subordinated Note shall be overdue, and the Company shall not be affected by
notice to the contrary. Subject to the preceding sentence, the

59

 

holder of any Subordinated Note may
from time to time grant participations in such Subordinated Note to any Person on such terms and
conditions as may be determined by such holder in its sole and absolute discretion.

     12F Survival of Representations and Warranties; Entire Agreement. All representations and
warranties contained herein or made in writing by or on behalf of the Company in connection
herewith shall survive the execution and delivery of this Agreement, the Subordinated Notes and the
other Transaction Documents, the transfer by any Purchaser of any Subordinated Note or portion
thereof or interest therein and the payment of any Subordinated Note, and may be relied upon by any
Transferee, regardless of any investigation made at any time by or on behalf of any Purchaser or
any Transferee. Subject to the preceding sentence, this Agreement, the Subordinated Notes and the
other Transaction Documents embody the entire agreement and understanding between the Purchasers
and the Company with respect to the subject matter hereof and supersede all prior agreements and
understandings relating to such subject matter.

     12G Successors and Assigns. All covenants and other agreements in this Agreement contained by
or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective
successors and assigns of the parties hereto (including, without limitation, any Transferee)
whether so expressed or not.

     12H. Independence of Covenants. All covenants hereunder shall be given independent effect
so that if a particular action or condition is prohibited by any one of such covenants, the fact
that it would be permitted by an exception to, or otherwise be in compliance within the limitations
of, another covenant shall not (i) avoid the occurrence of a Default or Event of Default if such
action is taken or such condition exists or (ii) in any way prejudice an attempt by the holder of
any Subordinated Note to prohibit through equitable action or otherwise the taking of any action by
the Company or any Subsidiary which would result in a Default or Event of Default.

     12I. Notices. All written communications provided for hereunder shall be sent by first
class mail or nationwide overnight delivery service (with charges prepaid) and (i) if to the
Subordinated Collateral Agent, addressed to the Subordinated Collateral Agent at the address
specified for such communications for Prudential Capital Partners II, L.P., in the Purchaser
Schedule attached hereto, or at such other address as the Subordinated Collateral Agent shall have
specified to the Company in writing, (ii) if to any Purchaser, addressed to such Purchaser at the
address specified for such communications in the Purchaser Schedule attached hereto, or at such
other address as such Purchaser shall have specified to the Company in writing, (iii) if to any
other holder of any Subordinated Note, addressed to such other holder at such address as
such other holder shall have specified to the Company in writing or, if any such other holder
shall not have so specified an address to the Company, then addressed to such other holder in care
of the last holder of such Subordinated Note which shall have so specified an address to the
Company, and (iv) if to the Company, addressed to it at 4400 Baker Road, Minnetonka, Minnesota
55343, Attention: President (Telecopier no. (952) 933-9307; Telephone no. (952) 936-5389) or Chief
Financial Officer (Telecopier no. (952) 933-9306; Telephone no. (952) 9323230), with a copy to
Attention: General Counsel (Telecopier no. (952) 933-9314; Telephone no.

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(952) 932-3151), or at such other address as the Company shall have specified to the Subordinated Collateral Agent and the
holder of each Subordinated Note in writing; provided, however, that any such communication to the
Company may also, at the option of the Subordinated Collateral Agent or a holder of any
Subordinated Note, be delivered by any other means either to the Company at its address specified
above or to any officer of the Company if a copy of such communication is sent to the Company as
set forth above reasonably promptly thereafter.

     12J Payments Due on Non-Business Days. Anything in this Agreement or the Subordinated Notes to
the contrary notwithstanding, any payment of principal of or Yield-Maintenance Amount, Prepayment
Amount or Specified Event Prepayment Amount or interest on any Subordinated Note that is due on a
date other than a Business Day shall be made on the next succeeding Business Day without including
the additional days elapsed in the computation of the interest payable on such next succeeding
Business Day.

     12K Satisfaction Requirement. If any agreement, certificate or other writing, or any action
taken or to be taken, is by the terms of this Agreement required to be satisfactory to any
Purchaser or to the Required Holder(s), the determination of such satisfaction shall be made by
such Purchaser or the Required Holder(s), as the case may be, in the sole and exclusive judgment
(exercised in good faith) of the Person or Persons making such determination.

     12L GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE
RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF ILLINOIS (EXCLUDING ANY
CONFLICTS OF LAW RULES WHICH WOULD OTHERWISE CAUSE THIS AGREEMENT TO BE CONSTRUED OR ENFORCED IN
ACCORDANCE WITH, OR THE RIGHTS OF THE PARTIES TO BE GOVERNED BY, THE LAWS OF ANY OTHER
JURISDICTION).

     12M SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. ANY LEGAL ACTION OR PROCEEDING WITH
RESPECT TO THIS AGREEMENT OR THE SUBORDINATED NOTES MAY BE BROUGHT IN THE COURTS OF THE STATE OF
ILLINOIS IN COOK COUNTY, ILLINOIS, OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS
AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY HEREBY IRREVOCABLY ACCEPTS,
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR
PROCEEDING. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE
AFOREMENTIONED COURTS IN ANY SUCH
ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE
PREPAID, TO IT AT ITS ADDRESS PROVIDED IN PARAGRAPH 121 OR TO CT CORPORATION SYSTEM AT 208 S.
LASALLE STREET, 8TH FLOOR, CHICAGO, ILLINOIS 60604, SUCH SERVICE TO BECOME EFFECTIVE UPON RECEIPT.
THE COMPANY AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND
MAY BE ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON SUCH

61

 

JUDGMENT OR IN ANY OTHER MANNER PROVIDED
BY LAW. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY HOLDER OF A SUBORDINATED NOTE TO SERVE PROCESS
IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST
THE COMPANY IN ANY OTHER JURISDICTION. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT
MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS BROUGHT IN
ANY OF THE AFORESAID COURTS AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM
IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN
AN INCONVENIENT FORUM. TO THE EXTENT THAT THE COMPANY HAS OR MAY HEREAFTER ACQUIRE IMMUNITY FROM
JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OF NOTICE, ATTACHMENT
PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION, EXECUTION OR OTHERWISE WITH RESPECT TO ITSELF OR
ITS PROPERTY), THE COMPANY HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS
UNDER THIS AGREEMENT. THE COMPANY AND EACH PURCHASER HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED THEREBY.

     12N. Severability. Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition
or unenforceability without invalidating the remaining provisions hereof, and any such prohibition
or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision
in any other jurisdiction.

     12O. Descriptive Headings; Advice of Counsel; Interpretation. The descriptive headings of
the several paragraphs of this Agreement are inserted for convenience only and do not constitute a
part of this Agreement. Each party to this Agreement represents to the other parties to this
Agreement that such party has been represented by counsel in connection with this Agreement, the
Subordinated Notes and the other Transaction Documents, that such party has discussed this
Agreement, the Subordinated Notes and the other Transaction Documents with its counsel and that any
and all issues with respect to this Agreement, the Subordinated Notes and the other Transaction
Documents have been resolved as set forth herein. No provision of this Agreement, the Subordinated
Notes or any other Transaction Document shall be construed
against or interpreted to the disadvantage of any party hereto by any court or other
governmental or judicial authority by reason of such party having or being deemed to have
structured, drafted or dictated such provision.

     12P Counterparts; Facsimile Signatures. This Agreement may be executed in any number of
counterparts (or counterpart signature pages), each of which counterparts shall be an original but
all of which together shall constitute one instrument. Delivery of an executed

62

 

counterpart of a signature page to this Agreement by facsimile shall be effective as delivery of a manually executed
counterpart of this Agreement.

     12Q Severalty of Obligations. The sales of Subordinated Notes to the Purchasers are to be
several sales, and the obligations of the Purchasers under this Agreement are several obligations.
No failure by any Purchaser to perform its obligations under this Agreement shall relieve any other
Purchaser or the Company of any of its obligations hereunder, and no Purchaser shall be responsible
for the obligations of, or any action taken or omitted by, any other Purchaser hereunder.

     12R Independent Investigation. Each Purchaser represents to and agrees with each other
Purchaser that it has made its own independent investigation of the condition (financial and
otherwise), prospects and affairs of the Company and its Subsidiaries in connection with its
purchase of the Notes hereunder and has made and shall continue to make its own appraisal of the
creditworthiness of the Company. No holder of Subordinated Notes shall have any duties or
responsibility to any other holder of Subordinated Notes, either initially or on a continuing
basis, to make any such investigation or appraisal or to provide any credit or other information
with respect thereto. No holder of Subordinated Notes is acting as agent or in any other fiduciary
capacity on behalf of any other holder of Subordinated Notes.

     12S Directly or Indirectly. Where any provision in this Agreement refers to actions to be
taken by any Person, or which such Person is prohibited from taking, such provision shall be
applicable whether the action in question is taken directly or indirectly by such Person.

     12T Confidential Information. For the purposes of this paragraph 12T,
“Confidential Information” shall mean information delivered to any Purchaser or any other
holder of a Security by or on behalf of the Company or any Subsidiary in connection with the
transactions contemplated by or otherwise pursuant to this Agreement or any other Transaction
Document that is proprietary in nature and that was clearly marked or labeled or otherwise
adequately identified when received by such Purchaser or holder as being confidential information
of the Company or such Subsidiary, provided that such term does not include information that (i)
was publicly known or otherwise known to such Purchaser or such holder prior to the time of such
disclosure, (ii) subsequently becomes publicly known through no act or omission by such Purchaser
or such holder or any Person acting on such Purchaser’s or such holder’s behalf, (iii) otherwise
becomes known to such Purchaser or such holder other than through disclosure by the Company or any
Subsidiary or (iv) constitutes financial statements delivered to such Purchaser or such holder
under paragraph 5A that are otherwise publicly available. Each Purchaser and each other holder of a
Security will maintain the confidentiality of such Confidential Information in accordance with
procedures adopted by such Purchaser or such
holder in good faith to protect confidential information of third parties delivered to such
Purchaser or such holder, provided that such Purchaser or such holder may deliver or disclose
Confidential Information to (1) such Purchaser’s or such holder’s directors, trustees, officers,
employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to
the administration of the investment represented by such Purchaser’s or such holder’s Securities),
(2) such Purchaser’s or such holder’s financial advisors and other professional advisors who agree
to hold confidential the Confidential Information substantially in accordance with the terms of
this

63

 

paragraph 12T, (3) any other holder of any Security, (4) any Institutional Investor to which
such Purchaser or such holder sells or offers to sell such Security or any part thereof or any
participation therein (if such Person has agreed in writing prior to its receipt of such
Confidential Information to be bound by the provisions of this paragraph 12T), (5) any Person from
which such Purchaser or such holder offers to purchase any security of the Company (if such Person
has agreed in writing prior to its receipt of such Confidential Information to be bound by the
provisions of this paragraph 12T), (6) any federal or state regulatory authority having
jurisdiction over such Purchaser or such holder, (7) the National Association of Insurance
Commissioners or the Securities Valuation Office thereof or, in each case, or any similar
organization, or any nationally recognized rating agency that requires access to information about
such Purchaser’s or such holder’s investment portfolio or (8) any other Person to which such
delivery or disclosure may be necessary or appropriate (A) to effect compliance with any law, rule,
regulation or order applicable to such Purchaser or such holder, (B) in response to any subpoena or
other legal process, (C) in connection with any litigation to which such Purchaser or such holder
is a party or (D) if an Event of Default has occurred and is continuing, to the extent such
Purchaser or such holder may reasonably determine such delivery and disclosure to be necessary or
appropriate in the enforcement or for the protection of the rights and remedies under such
Purchaser’s or such holder’s Notes, this Agreement and the other Transaction Documents. Each holder
of a Security, by its acceptance of a Security, will be deemed to have agreed to be bound by and to
be entitled to the benefits of this paragraph 12T as though it were a party to this Agreement. On
reasonable request by the Company in connection with the delivery to any holder of a Security of
information required to be delivered to such holder under this Agreement or another Transaction
Document or requested by such holder (other than a holder that is a party to this Agreement or its
nominee), such holder will enter into an agreement with the Company embodying the provisions of
this paragraph 12T.

     12U. Original Issue Discount. The Company and the Purchasers hereby acknowledge and agree
that (i) the fair market value of the Warrants on their date of issuance is equal to an amount
which is less than the product of (a) one-quarter of one percent (0.25%) of the stated redemption
price at maturity (as such term is defined in the Code) of the Subordinated Notes and (b) the
number of complete years to maturity of the Subordinated Notes, (ii) a portion of the purchase
price of the Subordinated Notes which is less than the product described in clause (i), above, will
be allocable to the Warrants pursuant to Treas. Reg. 1.1273-2(h), with the balance of the purchase
price of the Subordinated Notes allocable to the Subordinated Notes, and (iii) pursuant to Treas.
Reg. 1.1273, the original issue discount on the Subordinated Notes shall be considered to be zero.
The foregoing agreement shall be applicable for all United States federal, state and local tax
purposes of the Company and the Purchasers.

     12V. Binding Agreement. When this Agreement is executed and delivered by the Company and each
of the Purchasers it shall become a binding agreement between the Company and each of the
Purchasers.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK. SIGNATURES ON
THE FOLLOWING PAGE.]

64

 

	 	 	 	 	 
	 	Very truly yours,

 	 
	 	By:  	/s/ Brian Smith
 	 
	 	 	Name:  	Brian Smith 	 
	 	 	Title:  	Chief Executive Officer and President 	 
	 

	 	 	 	 	 
	The foregoing Agreement is 
hereby accepted as of the 
date first above written.

PRUDENTIAL CAPITAL PARTNERS II, L.P.

By: Stetson Street Partners, L.P., its general partner

 	 	 

	 	 	 	 	 
	By:  	/s/
[ILLEGIBLE]	 	 
	 	Vice President 	 	 
	 	 	 	 
	 

	 	 	 	 	 
	PRUDENTIAL CAPITAL PARTNERS MANAGEMENT FUND II, L.P.

By: Mulberry Street Holdings, LLC, its general partner

By: Prudential Investment Management, Inc., its managing member

 	 	 

	 	 	 	 	 
	By:  	/s/ [ILLEGIBLE]
 	 	 
	 	Vice President 	 	 
	 	 	 	 

	 	 	 	 	 
	PRUDENTIAL CAPITAL PARTNERS (PARALLEL FUND) II, L.P.

By: Stetson Street Partners, L.P., its general partner

 	 	 

	 	 	 	 	 
	By:  	/s/ [ILLEGIBLE]
 	 	 
	 	Vice President 	 	 
	 	 	 	 
	 

65

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