Document:

Exhibit
10.1

 

EXECUTION COPY

 

AGENCY AGREEMENT

 

This Agency Agreement (this “Agreement”)
is made as of May 29, 2008, by and between Linens Holding Co., a Delaware
corporation, with a principal place of business at 6 Brighton Road, Clifton,
NJ, and its affiliated debtors and debtors-in-possession (collectively, the “Merchant”)
and a joint venture comprised of Tiger Capital Group, LLC and SB Capital Group,
LLC (the “Agent”).

 

RECITALS

 

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

 

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

 

WHEREAS, Merchant and Agent
have each complied with the applicable requirements of the order of the
Bankruptcy Court dated May 13, 2008 in respect of the auction of the right
to conduct the Sale (the “Auction Order”), and Merchant has consented in
writing to Agent’s joint venture and selected Agent as a “Stalking Horse Bidder”.

 

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

 

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

 

	
  Defined Term

  	
   

  	
  Section Reference

  
	
   

  	
   

  	
   

  
	
  Ad Hoc Noteholder Committee

  	
   

  	
  Section 2.4(b)

  
	
  Adjustment Amount

  	
   

  	
  Section 3.3(a)

  
	
  Agency Accounts

  	
   

  	
  Section 7.2(a)

  
	
  Agency Documents

  	
   

  	
  Section 11.1(b)

  
	
  Agent

  	
   

  	
  Preamble

  
	
  Agent Indemnified Parties

  	
   

  	
  Section 13.1

  

 

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  Agent’s Fee

  	
   

  	
  Section 3.1(b)

  
	
  Applicable Cost Value

  	
   

  	
  Section 5.3(a)

  
	
  Applicable General Laws

  	
   

  	
  Section 2(c)

  
	
  Approval Order

  	
   

  	
  Section 2(b)

  
	
  Auction Order

  	
   

  	
  Recitals

  
	
  Bankruptcy Case

  	
   

  	
  Recitals

  
	
  Bankruptcy Court

  	
   

  	
  Recitals

  
	
  Bankruptcy Code

  	
   

  	
  Recitals, Section 2(c)

  
	
  Beneficiaries

  	
   

  	
  Section 3.4

  
	
  Benefits Cap

  	
   

  	
  Section 4.1(b)

  
	
  Bidding Procedures

  	
   

  	
  Section 15.11

  
	
  Break-Up Fee

  	
   

  	
  Section 15.12

  
	
  Central Service Expenses

  	
   

  	
  Section 4.1(i)

  
	
  Cost File

  	
   

  	
  Section 5.3(a)

  
	
  Cost Factor

  	
   

  	
  Section 11.1(m)

  
	
  Cost Factor Threshold

  	
   

  	
  Section 11.1(m)

  
	
  Cost Value

  	
   

  	
  Section 5.3(a)

  
	
  Court

  	
   

  	
  Section 2(b)

  
	
  Defective Merchandise

  	
   

  	
  Section 5.2(b)

  
	
  Designated Deposit Accounts

  	
   

  	
  Sections 7.2(b)

  
	
  DIP Orders

  	
   

  	
  Section 2.4(b)

  
	
  Display Merchandise

  	
   

  	
  Section 5.2(b)

  
	
  Distribution Center
  Merchandise

  	
   

  	
  Section 5.2(b)

  
	
  Domestic Merchandise

  	
   

  	
  Section 5.2(b)

  
	
  Estimated Guaranteed Amount

  	
   

  	
  Section 3.3(a)

  
	
  Events of Default

  	
   

  	
  Section 14

  
	
  Excluded Benefits

  	
   

  	
  Section 4.1(ii)

  
	
  Excluded Defective
  Merchandise

  	
   

  	
  Section 5.2(b)

  
	
  Excluded Price Adjustments

  	
   

  	
  Section 11.1(m)

  
	
  Expenses

  	
   

  	
  Section 4.1

  
	
  FF&E

  	
   

  	
  Section 5.2(a)

  
	
  Final Inventory Report

  	
   

  	
  Section 3.3(a)

  
	
  GECC

  	
   

  	
  Section 2(b)

  
	
  Global Inventory Adjustment

  	
   

  	
  Section 5.3(b)

  
	
  Gross Rings

  	
   

  	
  Section 6.3

  
	
  Guaranteed Amount

  	
   

  	
  Section 3.1(a)

  
	
  Guaranty Percentage

  	
   

  	
  Section 3.1(a)

  
	
  Imported Merchandise

  	
   

  	
  Section 5.2(b)

  
	
  Indenture Trustee

  	
   

  	
  Section 2.4(b)

  
	
  Intercreditor Agreement

  	
   

  	
  Section 2.4(b)

  
	
  Interim DIP Order

  	
   

  	
  Section 2.4(b)

  
	
  Initial Guaranty Payment

  	
   

  	
  Section 3.3(a)

  
	
  Insurance Proceeds
  Threshold

  	
   

  	
  Section 7.1

  
	
  Interim Receipt Deadline

  	
   

  	
  Section 5.3(a)

  

 

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  Inventory Location

  	
   

  	
  Section 5.1

  
	
  Inventory Taking

  	
   

  	
  Section 5.1(a)

  
	
  Inventory-Taking Service

  	
   

  	
  Section 5.1(a)

  
	
  Inventory-Taking
  Instructions

  	
   

  	
  Section 5.1(a)

  
	
  Lenders

  	
   

  	
  Section 2(b)

  
	
  Lenders’ Designated Account

  	
   

  	
  Section 3.3(a)

  
	
  Letter of Credit

  	
   

  	
  Section 3.4

  
	
  Liquidation Sale Laws

  	
   

  	
  Section 2(c)

  
	
  Lowest Location Price

  	
   

  	
  Section 11.1(m)

  
	
  Merchandise

  	
   

  	
  Section 5.2(a)

  
	
  Merchandise Threshold

  	
   

  	
  Section 3.1(c)

  
	
  Merchant

  	
   

  	
  Preamble

  
	
  Merchant Consignment Goods

  	
   

  	
  Sections 5.4

  
	
  Minimum Overbid

  	
   

  	
  Section 15.12

  
	
  Noteholders

  	
   

  	
  Section 2.4(b)

  
	
  Notes

  	
   

  	
  Section 2.4(b)

  
	
  Occupancy Expenses

  	
   

  	
  Section 4.1(iii)

  
	
  On-Order Merchandise

  	
   

  	
  Section 5.2

  
	
  Owned FF&E

  	
   

  	
  Section 15.9

  
	
  Payment Date

  	
   

  	
  Section 3.3(a)

  
	
  Petition Date

  	
   

  	
  Recitals, Section 2(b)

  
	
  Proceeds

  	
   

  	
  Section 7.1

  
	
  Recovery Amount

  	
   

  	
  Section 3.1(b)

  
	
  Remaining DC Merchandise

  	
   

  	
  Section 5.1(c)

  
	
  Remaining DC Merchandise
  Count

  	
   

  	
  Section 5.1(c)

  
	
  Remaining Merchandise

  	
   

  	
  Section 3.2(b)

  
	
  Retail Price

  	
   

  	
  Section 11.1(m)

  
	
  Retained Employee

  	
   

  	
  Section 9.1

  
	
  Retention Bonuses

  	
   

  	
  Section 9.4

  
	
  Returned Defective
  Merchandise

  	
   

  	
  Section 8.5

  
	
  Returned Merchandise

  	
   

  	
  Section 8.5

  
	
  Returned Merchandise Log

  	
   

  	
  Section 8.5

  
	
  Sale

  	
   

  	
  Recitals

  
	
  Sale Commencement Date

  	
   

  	
  Section 6.1

  
	
  Sale Guidelines

  	
   

  	
  Section 8.1

  
	
  Sale Term

  	
   

  	
  Section 6.1

  
	
  Sale Termination Date

  	
   

  	
  Section 6.1

  
	
  Sales Taxes

  	
   

  	
  Section 8.3

  
	
  Sales Taxes Account

  	
   

  	
  Section 8.3

  
	
  Sharing Threshold

  	
   

  	
  Section 3.1(b)

  
	
  Shipping Variance

  	
   

  	
  Section 5.1(c)

  
	
  Shipping Variance Response

  	
   

  	
  Section 5.1(c)

  
	
  Store(s)

  	
   

  	
  Recitals

  
	
  Supplies

  	
   

  	
  Section 8.4

  

 

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  WARN Act

  	
   

  	
  Section 9.1

  

 

Section 2. Appointment of Agent/Liquidation Sale Laws/Approval
Order.  (a) Effective upon the
entry of the Approval Order, the Merchant hereby appoints the Agent, and the
Agent hereby agrees to serve, as the Merchant’s exclusive agent for the limited
purpose of conducting the Sale at the Stores and disposing of the Owned
FF&E in the Stores in accordance with the terms and conditions of this
Agreement.

 

(b)           On the date that Merchant became a debtor and debtor in
possession (the “Petition Date”) under Chapter 11 of the
Bankruptcy Code, Merchant filed an expedited motion with the Bankruptcy Court,
for entry of an order approving this Agreement and authorizing Merchant and
Agent to conduct the Sale in accordance with the terms hereof (the “Approval
Order”).  The Approval Order shall
provide, in a form reasonably satisfactory to the Merchant and Agent, inter alia, that (i) this Agreement (and each of the
transactions contemplated hereby) is approved in its entirety; (ii) Merchant
and Agent shall be authorized to continue to take any and all actions as may be
necessary or desirable to implement this Agreement and each of the transactions
contemplated hereby; (iii) Agent shall be entitled to sell all Merchandise
hereunder free and clear of all liens, claims or encumbrances thereon, with any
presently existing liens encumbering all or any portion of the Merchandise or
the Proceeds attaching only to the Guaranteed Amount and other amounts to be
received by Merchant under this Agreement; (iv) Agent shall have the right
to use the Stores and all related Store services, furniture, fixtures,
equipment and other assets of Merchant as designated hereunder for the purpose
of conducting the Sale, free of any interference from any entity or person
subject to compliance with the Sale Guidelines and Approval Order with respect
to the Assets; (v) Agent, as agent for Merchant, is authorized to conduct,
advertise, post signs and otherwise promote the Sale as a “store closing,” “sale
on everything,” “everything must go,” or similar themed sale, in accordance
with the Sale Guidelines (as the same may be modified and approved by the
Bankruptcy Court) and without compliance with the Liquidation Sale Laws,
subject to compliance with the Sale Guidelines and Approval Order; provided,
however, Agent shall not advertise the Sale as a “going-out-of-business
sale”; (vi) Agent shall be granted a limited license and right to use
until the Sale Termination Date the trade names, logos and customer lists
relating to and used in connection with the operation of the Stores, solely for
the purpose of advertising the Sale in accordance with the terms of this
Agreement; (vii) all newspapers and other advertising media in which the
Sale is advertised shall be directed to accept the Approval Order as binding and
to allow Merchant and Agent to consummate the transactions provided for in this
Agreement, including, without limitation, the conducting and advertising of the
Sale in the manner contemplated by this Agreement; (viii) all utilities,
landlords, creditors and all persons acting for or on their behalf shall not
interfere with or otherwise impede the conduct of the Sale, institute any
action in any court (other than in the Bankruptcy Court) or before any
administrative body which in any way directly or indirectly interferes with or
obstructs or otherwise impedes the conduct of the Sale; (ix) the
Bankruptcy Court shall retain jurisdiction over the parties to enforce this
Agreement; (x) Agent shall not be liable for any claims against the
Merchant other than as expressly provided for in this Agreement; (xi) to the
extent the Agent is owed the Adjustment Amount, and the Lenders received the
Adjustment Amount, then the Lenders shall promptly, upon the written request of

 

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the Agent, disgorge and remit the Adjustment
Amount to the Agent; and (xii) Agent shall be granted a valid, binding,
enforceable and perfected security interest in the Merchandise and the Proceeds
as provided for in Section 16 hereof. 
Subject to the rights and limitations set forth in that certain
Intercreditor Agreement, dated February 14, 2006 (as amended by that
certain Joinder and Acknowledgement Agreement dated October 24, 2007, the “Intercreditor
Agreement”), and the interim order, dated May 2, 2008, authorizing
Merchant to, inter alia, obtain postpetition secured financing and use cash
collateral (the “Interim DIP Order”, and together with any subsequent or
final order approving same, the “DIP Order”), any Approval Order shall
be in form and substance reasonably acceptable to General Electric Capital
Corporation (“GECC”), as agent for itself and Merchant’s other secured
lenders (collectively, the “Lenders”), the Ad Hoc Committee (the “Ad
Hoc Noteholder Committee”) of Holders (the “Noteholders”) of Senior
Floating Rate Notes due 2014 issued by Linens ‘n Things, Inc. and Linens ‘n
Things Center, Inc. (the “Notes”) and The Bank of New York (the “Indenture
Trustee”), as collateral agent and trustee under the indenture, dated as of
February 14, 2006, relating to the Notes.

 

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

 

Section 3.                                            Consideration to
Merchant and Agent.

 

3.1           Payments to
Merchant.

 

  (a)         As
a guaranty of Agent’s performance hereunder, Agent guarantees that Merchant
shall receive (i) ninety-five and ninety six one-hundredths of one
percent  (95.96%) (the “Guaranty
Percentage”) of the aggregate Cost Value of the Merchandise included in the
Sale (the “Guaranteed Amount”), which Guaranteed Amount shall be paid at
such time and in such manner as shall hereinafter be provided.

 

(b)           To the extent that
Proceeds exceed the sum of (x) the Guaranteed Amount, (y) Expenses of
the Sale and (z) five percent (5.0%) of the aggregate Cost Value of the
Merchandise included in the Sale (the “Agent’s Fee”) (the sum of (x), (y) and
(z), the “Sharing Threshold”), then all remaining Proceeds of the Sale
above the Sharing Threshold shall be shared fifty percent (50%) to Merchant and
fifty percent (50%) to Agent.  All
amounts, if any, to be received by Merchant from Proceeds in excess of the
Sharing Threshold shall be referred to as

 

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the “Recovery Amount.” 
Agent shall pay to Merchant the Guaranteed Amount and the Recovery
Amount, if any, in the manner and at the times specified in Section 3.3
below.  The Guaranteed Amount and the
Recovery Amount will be calculated based upon the aggregate Cost Value of the
Merchandise as determined by (A) the final certified report of the
Inventory Taking Service after verification and reconciliation thereof by Agent
and Merchant, (B) the aggregate Cost Value of the Distribution Center
Merchandise and On-Order Merchandise included in the Sale, and (C) the
aggregate Cost Value of the Merchandise subject to Gross Rings, as adjusted for
shrinkage per this Agreement.   To the extent
that Merchant is entitled to receive a Recovery Amount from Proceeds, Agent shall pay
such Recovery Amount as part of the Final Reconciliation under Section 8.7,
as soon as commercially reasonable after the Sale Termination Date.

 

(c)           The Guaranty Percentage
has been fixed based upon the aggregate Cost Value of the Merchandise, without
taking into account the Global Inventory Adjustment, being not less than
$128,000,000 (the “Merchandise Threshold”).  To the extent that the aggregate Cost Value
of the Merchandise included in the Sale, without taking into account the Global
Inventory Adjustment, is less than the Merchandise Threshold, the Guaranty
Percentage shall be adjusted in accordance with Exhibit 3.1(c) annexed
hereto (in addition to any adjustment applicable pursuant to section 11.1(m) hereof),
as and where applicable.  In lieu of the
foregoing adjustment to the Guaranty Percentage, Merchant may, at its election,
transfer into the Stores additional goods acceptable to Agent with respect to
mix, balance, quality, pricing and margin, at Merchant’s expense, to meet the
minimum threshold (the “Transferred Goods”) which Transferred Goods
shall be included as Merchandise; provided  however, within 48
hours of the completion of the Inventory Taking in the Stores and the selection
of the Transferred Goods, Agent shall provide Merchant with  written notice designating the Store
locations to which Merchant shall ship such Transferred Goods.  Irrespective of the achievement of the
Merchandise Threshold, the Merchant may also transfer such other finished goods
inventory to the Stores as Agent shall agree, and such inventory shall be
deemed to be Transferred Goods for all purposes of this Agreement.

 

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

 

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

 

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

 

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constitute Proceeds hereunder. 
Notwithstanding the foregoing, Agent shall exercise commercially
reasonable efforts to dispose of all of the Merchandise during the Sale Term.

 

3.3           Time of Payments.

 

(a)           On the first business
day following issuance of the Approval Order (the “Payment Date”), Agent
shall pay to Merchant an amount (the “Initial Guaranty Payment”) equal
to ninety percent (90%) of the product of (i) the Guaranty Percentage and
the estimated aggregate Cost Value of the Merchandise to be included in the
Sale as reflected on Merchant’s books and records on the last business day
immediately preceding the Sale Commencement Date (the “Estimated Guaranteed
Amount”) by wire transfer to the account designated by GECC prior to the
Payment Date (the “Lenders’ Designated Account).  The balance of the Guaranteed Amount, if any,
shall be paid by Agent by wire transfer to the account designated by GECC on
the earlier of (i) the second business day following the issuance
of the final report of the aggregate Cost Value of the Merchandise included in
the Sale by the Inventory Taking Service, after review, reconciliation and
verification thereof by Agent and Merchant in consultation with Lenders, (the “Final
Inventory Report”); provided, however, that Merchant and
Agent shall exercise reasonable best efforts to reconcile the Inventory Taking
within ten (10) days after its completion and (ii) the date that is
thirty (30) days after the Sale Commencement Date, in which case the payment
shall be of the undisputed balance of the Guaranteed Amount.  In the event that the Final Inventory Report
is issued after payment of the undisputed portion of the Guaranteed Amount, or
in the event that the Initial Guaranty Payment exceeds the Guaranteed Amount,
the Agent or Merchant, as the case may be, shall pay to the Merchant or Agent,
as the case may be, the amount (the “Adjustment Amount”) by which the
actual Guaranteed Amount exceeds or is less than the sum of the Initial
Guaranty Payment and the undisputed balance of the Guaranteed Amount actually
paid as set forth above, within three (3) business days after the Final
Inventory Report has been issued.   To
the extent that Merchant is entitled to receive a Recovery Amount from
Proceeds, Agent shall pay such Recovery Amount as part of the Final
Reconciliation under Section 8.7, as soon as commercially reasonable after
the Sale Termination Date.  To
the extent that the Agent is owed the Adjustment Amount, and the Lenders
received the Adjustment Amount, then the Lenders shall promptly, upon the
written request of Agent, disgorge and remit the Adjustment Amount to Agent.

 

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

 

3.4           Security.  In order to secure the Agent’s obligations
under this Agreement, in respect of (x) the payment of the unpaid portion
of the Guaranteed Amount and (y) Expenses of

 

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the Sale, on the Payment Date, Agent shall furnish Merchant an
irrevocable standby Letter(s) of Credit naming GECC and Merchant as
co-beneficiaries (the “Beneficiaries”) in the aggregate original face
amount equal to the difference between the Estimated Guaranteed Amount and the
Initial Guaranty Payment, plus three (3) weeks’ estimated Expenses that
Merchant pays in the ordinary course, which shall be substantially in the form
of Exhibit 3.4 hereof (collectively, the “Letter of Credit”).  The Letter of Credit shall have an expiration
date of no earlier than sixty days after the Sale Termination Date.  Unless the parties shall have mutually agreed
that they have completed the final reconciliation and verification of the Final
Inventory Report under this Agreement, then, at least thirty (30) days prior to
the initial or any subsequent expiration date, the Beneficiaries shall receive
an amendment to the Letter of Credit solely extending (or further extending, as
the case may be) the expiration date by at least sixty (60) days.  If the Beneficiaries fail to receive such
amendment to the Letter of Credit no later than thirty (30) days before the
expiration date, then all amounts hereunder shall become immediately due and
payable and the Beneficiaries shall be permitted to draw under the Letter of
Credit in payment of amounts owed and the Beneficiaries shall hold the balance
of the amount drawn under the Letter of Credit as security for amounts that may
become due and payable to Merchant.  At
Agent’s request, the Beneficiaries shall take all actions reasonably required
to reduce the amount available to be drawn under the Letter of Credit by
amounts credited against the Guaranteed Amount; provided, however,
that the Letter of Credit shall not be reduced below three (3) weeks of
estimated Expenses of the Sale.  In the
event that Agent, after receipt of five (5) days’ notice (which notice shall
not be required if Agent or any member of Agent shall be a debtor under title
11, United States Code), fails to pay the Guaranteed Amount, or portion
thereof, or any Expenses of the Sale when due, GECC, individually, or the
Beneficiaries, collectively, may draw on the Letter of Credit in an amount
equal to the unpaid, past due amount of the Guaranteed Amount or Expenses that
is not the subject of a reasonable dispute.

 

Section 4.               Expenses
of the Sale.

 

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

 

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

 

(b)           any amounts payable
by Merchant for benefits for Retained Employees (including FICA, unemployment
taxes, workers’ compensation and healthcare insurance, and vacation benefits
that accrue during the Sale Term, but excluding Excluded Benefits) for Retained
Employees used in the Sale, in an amount equal to 21.5% of the aggregate base
payroll for all Retained Employees in the Stores (the “Benefits Cap”);

 

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

 

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service
and alarm service maintenance;

 

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

 

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

 

(f)            [intentionally omitted]

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(p)           Store trash and snow removal;

 

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

 

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

 

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

 

(t)            Central Service
Expenses equal to $20,000 per week;

 

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

 

(v)           Agent’s reasonable
out-of-pocket costs and expenses, including but not limited to, legal fees and
expenses, incurred in connection with the review of data, preparation,
negotiation and execution of this Agreement, the Approval Order and any
ancillary documents, in an amount not to exceed $275,000.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Section 5.               Inventory
Valuation; Merchandise.

 

5.1           Inventory Taking.

 

(a)           Inventory Taking.  As soon as
practicable following the Sale Commencement Date, but in no event later than
twenty-one (21) days after the Sale Commencement Date, Merchant and Agent shall
cause an SKU inventory taking (the “Inventory Taking”) at each of the
Stores (the “Inventory Locations”). 
Merchant and Agent shall jointly employ a mutually acceptable
independent inventory taking service (the “Inventory Taking Service”) to
conduct the Inventory Taking.  The
Inventory Taking shall be conducted in accordance with the procedures and
instructions attached hereto as Exhibit 5.1(a)(i) (the “Inventory
Taking Instructions”).  Agent shall
be responsible for fifty percent (50%) of the fees and expenses of the
Inventory Taking Service as an Expense hereunder and Merchant shall pay the
remaining fifty percent (50%).  Except
for the Inventory Taking costs payable to the Inventory Taking Service,
Merchant and Agent shall each bear its respective costs and expenses relative
to the Inventory Taking.  Merchant, Agent
and the Lender may each have representatives present during the Inventory
Taking and each shall have the right to review and verify the listing and
tabulation of the Inventory Taking Service. 
Merchant agrees that, during the conduct of the Inventory Taking in each
of the Inventory Locations, the applicable Inventory Location shall be closed
to the public, and no sales or other transactions shall be conducted.  Merchant and the Agent further agree that
until the Inventory Taking in each particular Inventory Location is completed,
neither Merchant nor the Agent shall: (i) transfer any Merchandise to or
from that Inventory Location, (ii) move Merchandise within or about the
Inventory Locations, and/or (iii) remove any hang tags, price tickets, or
inventory control tags affixed to any Merchandise. Merchant and Agent agree to
cooperate with each other to conduct the Inventory Taking commencing at a time
that would

 

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minimize the number of hours that such locations would be
closed for business.  On a weekly basis,
as part of the Weekly Sale Reconciliations, Merchant and Agent shall count and
reconcile all shipments and receipts of Distribution Center Merchandise and
On-Order Merchandise in the Stores in accordance with the procedures set forth
on Exhibit 5.1(a)(ii) (to be reasonably agreed upon by
Merchant and Agent); provided,  however, that the aggregate Cost
Value of such Merchandise shall be included for purposes of calculating the
Guaranteed Amount.

 

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

 

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

 

5.2           Merchandise
Subject to This Agreement.

 

(a)           For
purposes of this Agreement, “Merchandise” shall mean:  (i) all finished goods inventory
(including Domestic Merchandise and Imported Merchandise) that is owned by
Merchant and (x) located at the Stores as of the Sale Commencement Date,
including (A) Defective Merchandise; (B) Distribution Center
Merchandise received in the Stores prior to the Sale Commencement Date;  (C) Aged Merchandise; (D) the
Display Merchandise, and (E) Merchandise subject to Gross Rings; (ii) Distribution
Center Merchandise received in the Stores on or prior to the date that is
thirty (30) days after the Sale Commencement Date (the “Store Receipt
Deadline”); (iii) On-Order Merchandise received in the Stores on or
prior to the Store Receipt Deadline; and (iv) to the extent Merchant so
elects in accordance with the terms hereof, Transferred Goods received prior to
the Store Receipt Deadline. 
Notwithstanding the foregoing, “Merchandise” shall not include: (1) goods
which belong to sublessees, licensees, department lessees, or concessionaires
of Merchant; (2) goods held by Merchant on memo, on consignment, or as
bailee; (3) furnishings, trade fixtures, equipment and/or improvements to
real property

 

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which are located in the Stores
(collectively, “FF&E”); provided that, Agent shall be
permitted to sell Owned FF&E as set forth in Section 15.9; and (4) Excluded
Defective Merchandise.

 

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

 

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

 

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

 

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

 

“Distribution Center Merchandise”
means those items of inventory identified by SKU on Exhibit 5.2(b) annexed
hereto, that was located in Merchant’s Distribution Centers and was
specifically earmarked for transfer to the Stores both prior to and after the
Sale Commencement Date for purposes of inclusion in the Sale, which goods, to
the extent not delivered to the Stores prior to the Sale Commencement Date,
shall be delivered by Merchant to the Stores in accordance with Schedule 5.1(c) annexed
hereto on or before the date that is thirty (30) days after the Sale
Commencement Date.

 

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

 

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

 

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

 

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

 

5.3           Valuation.

 

(a)           For
purposes of this Agreement, “Cost Value” shall mean (i) with
respect to each item of Domestic Merchandise, the last cost for the SKU for
such item of Domestic Merchandise as reflected on Merchant’s inventory item
master cost file (the “Cost File”), which amount does not include
freight or any additional vendor credits; and (ii) with respect to
Imported Merchandise, the landed cost for such item of Imported Merchandise as
reflected in the Cost File, which amount reflects last cost for the SKU for
such item of Imported Merchandise plus a damage allowance, duty rate, freight,
and brokerage fee, harbor maintenance fees, drayage, brokers’ fees, insurance,
commissions, processing costs and other costs directly associated with landing
the product in the Distribution Centers; provided, that in no event
shall the Cost Value of any Merchandise exceed the Retail Price for such item
of Merchandise; provided  however, any adjustment to the Cost
Value as a result of the immediately preceding provisio shall not be factored
into the calculation for purposes of determining whether the aggregate Cost
Value of the Merchandise has satisfied the Merchandise Threshold provided for
in Section 3.1(c) hereof and/or the Cost Factor providing for in Section 11.1(m) hereof.  Items of Distribution Center Merchandise and
On-Order Merchandise received in the Stores on or prior to the date that is
fifteen (15) days after the Sale Commencement Date (excluding the Sale
Commencement Date for purposes of such calculation) (the “Interim Receipt
Deadline”), will be included in Merchandise at the applicable Cost Value
for Domestic Merchandise or Imported Merchandise, as applicable (the “Applicable
Cost Value”), for each such item; provided, however, that
items of Distribution Center Merchandise, Transferred Goods and/or On-Order
Merchandise received at the Stores after the Interim Receipt Deadline but prior
to the Store Receipt Deadline shall be included in Merchandise at the
Applicable Cost Value for each such item multiplied by the inverse of the
prevailing discount on similar items of Merchandise as of the date of receipt
in the Stores; provided  further, that items of Distribution
Center Merchandise, Transferred Goods and/or On-Order Merchandise received in
the Stores after the Store Receipt Deadline shall not constitute Merchandise,
shall be given no Cost Value, and shall be excluded from Merchandise, and
shall, at Merchant’s option either be sold by Agent as Merchant Consignment
Goods pursuant to Section 5.4 hereof, or excluded from the Sale and
removed by Merchant from the Stores.  The
Cost File does not account for any advertising co-op allowances or discounts
associated with expedited payment terms offered by any vendor, and, further,
the Applicable Cost Value of any item of Merchandise shall not be adjusted for any
such amounts.

 

(b)           Other
than Excluded Defective Merchandise, in lieu of any other adjustments to the
Cost Value of Merchandise under this Agreement (e.g.,
adjustments for Defective Merchandise, clearance merchandise, mis-mates and
near-mates, sample merchandise and/or Excluded Price Adjustments), the
aggregate Cost Value of the Merchandise shall be adjusted

 

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(i.e., reduced) by means of a single
global downward adjustment equal to one percent (1.0%) of the aggregate Cost
Value of the Merchandise (the “Global Inventory Adjustment”).

 

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

 

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

 

Section 6.               Sale Term.

 

6.1           Term.  Subject to satisfaction of the conditions
precedent set forth in Section 10 hereof, the Sale shall commence at each
Store on the first business day following the entry of the Approval Order, but
in no event later than June 1, 2008 (the “Sale Commencement Date”).  Subject to the prior expiration of the term
of any Store Lease (as reflected on Exhibit 4.1(s)), the Agent
shall complete the Sale at each Store and vacate such Store in broom-clean
condition by no later than August 31, 2008, unless the Sale is extended by
mutual written agreement of Agent and Merchant (the “Sale Termination Date”;
the period from the Sale Commencement Date to the Sale Termination Date as to
each Store being the “Sale Term”). 
The Agent may, in its discretion, terminate the Sale at any Store upon
not less than ten (10) days’ prior written notice (a “Vacate Notice”)
to Merchant.  In the event the Agent
fails to provide Merchant with such timely notice, Agent shall be liable for
and pay the actual amounts payable to landlords for the days by which notice of
a Store closing was less than ten (10) days.

 

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

 

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

 

Section 7.               Sale Proceeds.

 

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

 

7.2           Deposit
of Proceeds.

 

(a)           Agent
may establish its own accounts, dedicated solely for the deposit of the
Proceeds and the disbursement of amounts payable to Agent hereunder (the “Agency

 

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

 

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

 

7.3           Credit
Card Proceeds.  To the extent
available from credit card processors, Agent shall have the right to use
Merchant’s credit card facilities (including Merchant’s credit card terminals
and processor(s), credit card processor coding, Merchant identification number(s) and
existing bank accounts) for credit card Proceeds relating solely to the
Sale.  So long as Merchant’s credit card
facilities are available to the Agent, in the event that Agent elects to use
Merchant’s credit card facilities, Merchant shall process credit card
transactions on behalf of Agent and for Agent’s account, applying customary
practices and procedures.  Agent shall
not accept Merchant’s proprietary card. 
Without limiting the foregoing, Merchant shall cooperate with Agent to
down-load data from all credit card terminals each day during the Sale Term and
to effect settlement with Merchant’s credit card processor(s) and shall
take such other actions necessary to process credit card transactions on behalf
of Agent under Merchant’s identification number(s).  At Agent’s request following the Payment Date
and the payment of all amounts then due to Merchant by Agent, Merchant shall
cooperate with Agent to establish Merchant identification numbers under Agent’s
name to enable Agent to process all such credit card Proceeds for Agent’s
account.  Merchant shall not be
responsible for and Agent shall pay as an Expense hereunder, all credit card
fees, charges and chargebacks related to the Sale, whether received during or
after the Sale Term.  Merchant makes no
representation that the credit card processors shall permit the use of Merchant’s
credit card facilities on the same terms and 

 

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conditions as they did prior to the date
hereof, and Merchant shall not be obligated to assure the availability of such
credit card facilities.  Notwithstanding
anything herein to the contrary, if Agent elects to use Merchant’s credit card
facilities during the Sale, Agent shall be required to make all arrangements
necessary with Merchant’s credit card processors regarding the establishment of
reserves for credit card sales during the Sale Term, and no funds of Merchant
shall be used to establish any such reserves.

 

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

 

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

 

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

 

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

 

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

 

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Stores (whether owned, leased, or licensed) consistent with applicable
terms of leases or licenses (except as modified by the Approval Order);

 

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

 

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

 

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

 

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

 

8.2           Terms
of Sales to Customers.

 

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

 

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

 

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

 

8.3           Sales
Taxes.

 

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

 

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

 

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8.4           Supplies.  Agent shall have the right to use, without
charge, all existing supplies located at the Stores, including, without
limitation, boxes, bags, paper, twine and similar sales materials
(collectively, “Supplies”).  In
the event that additional Supplies are required in any of the Stores during the
Sale, Merchant agrees to promptly provide the same to Agent, if available, for
which Agent shall reimburse Merchant at Merchant’s cost therefor.  Merchant does not warrant that the existing
Supplies as of the Sale Commencement Date are adequate for the purposes of the
Sale.

 

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

 

8.6.          [Intentionally
Omitted]

 

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8.7           Sale
Reconciliation.  On each Wednesday
during the Sale Term, commencing on the second Wednesday after the Sale
Commencement Date, Agent and Merchant shall cooperate to reconcile Expenses of
the Sale, receipts of Distribution Center Merchandise and/or On-Order
Merchandise in the Stores, and such other Sale-related items as either party
shall reasonably request, in each case for the prior week or partial week (i.e.
Sunday through Saturday), all pursuant to procedures agreed upon by Merchant
and Agent.  Within thirty (30) days after
the end of the Sale Term, Agent and Merchant shall complete a final
reconciliation of the Sale, the written results of which shall be certified by
representatives of each of Merchant and Agent as a final settlement of accounts
between Merchant and Agent.

 

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

 

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

 

Section 9.               Employee Matters.

 

9.1           Merchant’s
Employees.  Agent may use Merchant’s
employees in the conduct of the Sale to the extent Agent deems expedient, and
Agent may select and schedule the number and type of Merchant’s employees
required for the Sale.  Agent shall
identify any such employees to be used in connection with the Sale (each such
employee, a “Retained Employee”) prior to the Sale Commencement
Date.  Notwithstanding the foregoing,
Merchant’s employees shall at all times remain employees of Merchant.  Agent’s selection and scheduling of Merchant’s
employees shall at all times comply with all applicable laws and regulations.
Merchant and Agent agree that, except to the extent that wages and benefits of
Retained Employees constitute Expenses hereunder, nothing contained in this
Agreement and none of Agent’s actions taken in respect of the Sale shall be
deemed to constitute an assumption by Agent of any of Merchant’s obligations
relating to any of Merchant’s employees including, without limitation, Excluded
Benefits, Worker Adjustment Retraining Notification Act (“WARN Act”)
claims and other termination type claims and obligations, or any other amounts
required to be paid by statute or law; nor shall Agent become liable under any
employment agreement or be 

 

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deemed a joint or successor employer with
respect to such employees.  Agent shall
comply in the conduct of the Sale with all of Merchant’s employee rules,
regulations, guidelines and policies which have been provided to Agent in
writing.  Merchant shall not, without the
prior consent of Agent, raise the salary or wages or increase the benefits for,
or pay any bonuses or other extraordinary payments to, any Store employees
prior to the Sale Termination Date. 
Merchant shall not transfer any Retained Employee during the Sale Term
without Agent’s prior consent, which consent shall not be unreasonably
withheld.

 

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

 

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

 

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

 

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

 

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

 

(b)           Merchant
shall have obtained the Approval Order on or before May 31, 2008.

 

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

 

Section 11.             Representations, Warranties and Covenants.

 

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

 

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

 

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

 

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(c)         Merchant
owns, and will own at all times during the Sale Term, good and marketable title
to all of the Merchandise to be included in the Sale, free and clear of all
liens, claims and encumbrances of any nature, other than the liens listed on Exhibit 11.1(c) and
any applicable statutory liens.  Merchant
shall not create, incur, assume or suffer to exist any security interest, lien
or other charge or encumbrance upon or with respect to any of the Merchandise
or the Proceeds other than as provided for herein (including those listed on Exhibit 11.1(c)).  Any Approval Order shall provide that all
such liens shall be transferred to and attach only to the Guaranteed Amount or
other amounts payable to Merchant hereunder.

 

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

 

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

 

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

 

(g)         Since
May 1, 2008 Merchant has not, and through the Sale Commencement Date
Merchant shall not purchase for or transfer to or from the Stores any
merchandise or goods outside the ordinary course, except  for the transfer of Distribution Center
Merchandise to the Stores prior to the Sale Commencement Date in a manner
consistent with Exhibit 5.1(c). 
Since May 1, 2008 and through May 18, 2008, Merchant has
continued and will continue to replenish

 

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goods in the Stores in a manner and at levels
consistent with Merchant’s replenishment of on-going stores, it being
understood and agreed that such replenishment has not and will not be
consistent with historic and customary levels or practices, as a result of,
among other things, Merchant’s Chapter 11 filing and/or delays in procuring
shipments from its vendors.  From and
after May 19, 2008, Merchant shall discontinue designating replenishment
for the Stores; provided  however, On-Order Merchandise earmarked
for the Stores prior to May 19, 2008, to the extent received, shall
continue to flow through to the Stores, with some arriving after the Sale
Commencement Date, but in any event prior to the Store Receipt Deadline.

 

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

 

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

 

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

 

(k)         Since
December 31, 2007, Merchant has not intentionally taken, and shall not
throughout the Sale Term intentionally take, any actions with the intent of
increasing the Expenses of Sale, including, without limitation, increasing
salaries or other amounts payable to employees, except (i) there may have
been instances that, in an effort to encourage one or more employees to remain
in Merchant’s employ, Merchant increased the salaries of such employees (such
action not being with any intent to increase any Expense of the Sale or in
anticipation thereof); and (ii) to the extent an employee was due an
annual raise.  Merchant shall discontinue
the foregoing practices from and after the date hereof, unless otherwise agreed
in writing between Merchant and Agent.

 

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(l)                               Except as may be
impacted by the filing for Chapter 11 protection, or otherwise restricted by
the Chapter 11 filing, Merchant covenants to continue to operate the Stores in
all material respects in the ordinary course of business from the date of this
Agreement to the Sale Commencement Date by: (i) selling inventory during
such period at customary prices consistent with the ordinary course of
business; (ii) not promoting or advertising any sales or in-store
promotions (including POS promotions) to the public (except for Merchant’s
pending advertisements as of the date of this Agreement and/or Merchant’s
promotions for the period through the Sale Commencement Date, as reflected on Exhibit 11.1(l));
(iii) except as may occur in the ordinary course of business, not
returning inventory to vendors and not transferring inventory or supplies
between or among Stores; and (iv) except as may occur in the ordinary
course of business, not making any management personnel moves or changes at the
Stores without prior written notice to and consultation with (but not approval
of) Agent.

 

(m)                                                                               The
aggregate Cost Value of the Merchandise as a percentage of the aggregate Retail
Price of the Merchandise (in each case as determined in accordance with the
Inventory Taking) (the “Cost Factor”) shall not be greater than 47.05%
(the “Cost Factor Threshold”) and to the extent that the actual Cost
Factor for the  Merchandise is greater
than the Cost Factor, then the Guaranty Percentage shall be adjusted (in addition to any adjustment applicable
pursuant to section 3.1(c) hereof) in accordance with Exhibit 11.1(m).  For the purposes of this Agreement,  “Retail Price”
means the current retail or aged price, as applicable, for each item of
Merchandise, as reflected in the Merchant’s Output SKU Master File, dated as of
May 30, 2008  (which is substantially identical to the Merchant’s
Output SKU Master File, dated as of May 20, 2008, except as may be
impacted by receipts)  and the “low” price reflected in the MUC On
Hand for Closing Stores 5-15 , as applicable, excluding in each instance
Excluded Price Adjustments.

 

.  For
the purposes of this Agreement, “Excluded Price Adjustments” means the following discounts or price adjustments offered
by the Merchant: (i) point of sale discounts or similar adjustments
regardless of duration other than with respect to (A) Aged Merchandise,
for which the current selling price is reflective of point of sale discounts,
as reflected on the Output SKU Master File, dated as of May 17,
2008;  (B) those
items Merchandise identified on the file entitled “MUC On Hand for
Closing Stores 5-15”, for which the current “low” price is the current selling
price and which price is reflective of point of
sale discounts (ii) employee discounts; (iii) member or customer
appreciation points or coupons; (iv) multi-unit purchase discounts; (v) adjustments
for damaged, defective or “as-is” items; (vi) coupons (Merchant’s or
competitors’), catalog, website, or circular prices, or “buy one get one” type
discounts; (vii) customer savings pass discounts or “bounce back” coupons,
or discounts for future purchases based on dollar value of past purchases; (viii) obvious
ticketing or marking errors; (x) instant (in-store) or mail in rebates; or
(ix) similar customer specific, temporary, or employee non-product
specific discounts or pricing accommodations. 
If an item of Merchandise has more than one ticketed price, or if
multiple items of the same SKU are ticketed at different prices, or have a
different PLU price, and such pricing does not otherwise qualify as an Excluded
Price Adjustment, the lowest ticketed, marked or PLU price on any such item
shall prevail for such item or for all such items within the same SKU, as the
case may be, that are located within the same location (as the case may be, the
“Lowest Location Price”), unless it is reasonably determined by Merchant
and Agent that the applicable Lowest Location Price was mismarked or

 

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such item was priced because it was damaged
or marked as “as is,” in which case the higher price shall control; provided,
however, in determining the Lowest Location Price with respect to any
item of Merchandise at a Store, the Lowest Location Price shall be determined based
upon the lowest ticketed, marked or PLU price for such item on a per Store
basis.  No adjustment to Retail Price
shall be made with respect to different ticketed price, marked price, or PLU
prices for items located in different Stores. 
For
purposes of this Agreement, the Cost Factor shall be calculated by diving the
aggregate Cost Value of the Merchandise by the aggregate Retail Price (as
defined herein) of the Merchandise. .

 

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

 

(o)                           To the best of Merchant’s
knowledge, Merchant has not since December 31, 2007 shipped any Excluded Defective
Merchandise from the Distribution Centers to the Stores.  Merchant will not ship any Excluded Defective
Merchandise from the date of this Agreement from the Distribution Centers to
the Stores.

 

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

 

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

 

(r)                                    From the date of
this agreement through the Sale Commencement Date, the “Retail Price” for those
items of Merchandise identified on the file entitled MUC On Hand for Closing
Stores 5-15 shall be the the applicable selling prices set forth in the column
entited “Low”.  Merchant shall post in-Store signage that will clearly
show that the current selling price of such items of Merchandise is the “low”
price and Merchandse and Merchant shall exercise best effort to ticket such MUC
Merchandise at the “low” price prior to the Sale Commencement Date.

 

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

 

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

 

(b)                                 Agent has the right,
power and authority to execute and deliver each of the Agency Documents to
which it is a party and to perform fully its obligations thereunder.  Agent

 

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

 

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

 

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

 

Section 12.                                Insurance.

 

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

 

12.2                           Merchant’s Casualty
Insurance.  Merchant will provide
throughout the Sale Term, at Agent’s cost as an Occupancy Expense hereunder,
fire, flood, theft and extended coverage casualty insurance covering the
Merchandise in a total amount equal to no less than the retail

 

29

 

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value thereof.  From and after the date of this Agreement
until the Sale Termination Date, all such policies will also name Agent as loss
payee (as its interest may appear).  In the
event of a loss to the Merchandise on or after the date of this Agreement, the
Proceeds of such insurance attributable to the Merchandise, plus any self
insurance amounts and the amount of any deductible or self-insured retention
(which amounts shall be paid by Agent as an Expense), shall constitute Proceeds
hereunder.  Merchant shall deliver to
Agent certificates evidencing such insurance, setting forth the duration
thereof and naming the Agent as loss payee (as its interest may appear), in
form and substance reasonably satisfactory to Agent.  All such policies shall require at least
thirty (30) days’ prior notice to the Agent of cancellation, non-renewal or
material change during the Sale Term. 
Merchant shall not make any change in the amount of any deductibles or
self insurance amounts prior to the Sale Termination Date without Agent’s prior
written consent.

 

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

 

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

 

Section 13.              Indemnification

 

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

 

13.2                           Agent Indemnification.  Agent shall indemnify and hold Merchant and
its officers, directors, employees, agents and representatives harmless from
and against all claims,

 

30

 

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

 

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

 

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

 

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

 

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

 

Section 15.                                      Miscellaneous.

 

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

 

	
  If to the Agent:

  	
   

  	
  SB CAPITAL GROUP, LLC

  
	
   

  	
   

  	
  1010 Northern Blvd, Suite 340

  
	
   

  	
   

  	
  Great Neck, NY 11021

  
	
   

  	
   

  	
  Attn:

  	
  Robert Raskin

  
	
   

  	
   

  	
  Tel:

  	
  (516) 829-2400

  
	
   

  	
   

  	
  Fax:

  	
  (516) 829-2404

  
	
   

  	
   

  	
  Email:

  	
  rraskin@sbcapitalgroup.com

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  TIGER CAPITAL GROUP, LLC

  
	
   

  	
   

  	
  84 State Street, Suite 420

  
	
   

  	
   

  	
  Boston, MA 02109

  
	
   

  	
   

  	
  Attn:

  	
  Steve Goldberger

  
	
   

  	
   

  	
   

  	
  Dan Kane

  
	
   

  	
   

  	
  Tel:

  	
  (617) 523-7002

  
	
   

  	
   

  	
  Fax:

  	
  (617) 523-3007

  
	
   

  	
   

  	
  Email:

  	
  sgoldberger@tigercapitalgroup.com

  
	
   

  	
   

  	
   

  	
  dkane@tigercapitalgroup.com

  

 

31

 

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  With a copy to:

  	
   

  	
  WACHTELL, LIPTON, ROSEN & KATZ

  
	
   

  	
   

  	
  51 West 52nd Street

  
	
   

  	
   

  	
  New York, NY 10019

  
	
   

  	
   

  	
  Attn:

  	
  Scott Charles

  
	
   

  	
   

  	
   

  	
  Josh Feltman

  
	
   

  	
   

  	
  Tel:

  	
  (212) 403-1200

  
	
   

  	
   

  	
  Fax:

  	
  (212) 403-2200

  
	
   

  	
   

  	
  Email:

  	
  skcharles@wlrk.com

  
	
   

  	
   

  	
   

  	
  jafeltman@wlrk.com

  
	
   

  	
   

  	
   

  	
   

  
	
  If to the Merchant:

  	
   

  	
  LINENS
  HOLDING CO.

  
	
   

  	
   

  	
  6
  Brighton Road

  
	
   

  	
   

  	
  Clifton,
  NJ 07012

  
	
   

  	
   

  	
  Attn:

  	
  Frank
  Rowan

  
	
   

  	
   

  	
   

  	
  Dave
  Coder

  
	
   

  	
   

  	
  Fax:

  	
  (973)
  836-0309

  
	
   

  	
   

  	
  Email:

  	
  frowan@lnt.com

  
	
   

  	
   

  	
   

  	
  dcoder@lnt.com

  
	
   

  	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  ASSET DISPOSITION ADVISORS, LLC

  
	
   

  	
   

  	
  499 Park Avenue

  
	
   

  	
   

  	
  New York, NY 10022

  
	
   

  	
   

  	
  Attn:

  	
  Paul Traub

  
	
   

  	
   

  	
   

  	
  Steven Fox

  
	
   

  	
   

  	
  Tel:

  	
  (212) 573-9084

  
	
   

  	
   

  	
  Fax:

  	
  (212)
  652-3863

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  RICHARDS, LAYTON, & FINGER, P.A.

  
	
   

  	
   

  	
  920 N. King Street

  
	
   

  	
   

  	
  Wilmington, DE 19801

  
	
   

  	
   

  	
  Attn:

  	
  Mark D. Collins

  
	
   

  	
   

  	
   

  	
  Michael J. Merchant

  
	
   

  	
   

  	
  Tel:

  	
  (302) 651-7700

  
	
   

  	
   

  	
  Fax:

  	
  (302) 651-7701

  
	
   

  	
   

  	
  Email:

  	
  Collins@rlf.com

  
	
   

  	
   

  	
   

  	
  Merchant@rlf.com

  

 

32

 

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  GARDERE WYNNE SEWELL LLP

  
	
   

  	
   

  	
  1601 Elm Street, Suite 3000

  
	
   

  	
   

  	
  Dallas, TX 75201

  
	
   

  	
   

  	
  Attn:

  	
  Stephen A. McCartin, Esq.

  
	
   

  	
   

  	
   

  	
  Randy Ray, Esq.

  
	
   

  	
   

  	
   

  	
  Fax:      (214) 999-3544

  
	
   

  	
   

  	
  Email:

  	
  smccartin@gardere.com

  
	
   

  	
   

  	
   

  	
  rray@gardere.com

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  MORGAN, LEWIS & BOCKIUS LLP

  
	
   

  	
   

  	
  101 Park Avenue

  
	
   

  	
   

  	
  New York, NY 10178

  
	
   

  	
   

  	
  Attn:

  	
  Neil E. Herman, Esq.

  
	
   

  	
   

  	
  Fax:

  	
  (212) 309-6001

  
	
   

  	
   

  	
  Email:

  	
  nherman@morganlewis.com

  
	
   

  	
   

  	
   

  
	
  If to Lenders:

  	
   

  	
  GENERAL
  ELECTRIC CAPITAL

  
	
   

  	
   

  	
  CORPORATION

  
	
   

  	
   

  	
  401
  Merritt 7

  
	
   

  	
   

  	
  125 Summer Street, 12th Floor

  
	
   

  	
   

  	
  Boston, MA 02110

  
	
   

  	
   

  	
  Attention:  Mark Forti

  
	
   

  	
   

  	
  Tel:

  	
  (617) 378-4779

  
	
   

  	
   

  	
  Fax:

  	
  (617) 261-1206

  
	
   

  	
   

  	
   

  
	
  With
  a copy to:

  	
   

  	
  BINGHAM
  MCCUTCHEN LLP

  
	
   

  	
   

  	
  150
  Federal Street

  
	
   

  	
   

  	
  Boston,
  MA 02110

  
	
   

  	
   

  	
  Attention:   Robert A. J. Barry, Esq.

  
	
   

  	
   

  	
  Tel:
    (617) 951-8624

  
	
   

  	
   

  	
  Email:  raj.barry@bingham.com

  
	
   

  	
   

  	
   

  
	
  If to Indenture Trustee:

  	
   

  	
  ROPES & GRAY LLP

  
	
   

  	
   

  	
  1211 Avenue of the Americas

  
	
   

  	
   

  	
  New York, NY 10036-8704

  
	
   

  	
   

  	
  Attn:

  	
  Mark I. Bane, Esq.

  
	
   

  	
   

  	
   

  	
  Anne H. Pak, Esq.

  
	
   

  	
   

  	
  Tel:

  	
  (212) 596-9000

  
	
   

  	
   

  	
  Fax:

  	
  (212) 596-9090

  
	
   

  	
   

  	
  Email:

  	
  mark.bane@ropesgray.com

  
	
   

  	
   

  	
   

  	
  ann.pak@ropesgray.com

  

 

33

 

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  If
  to Ad Hoc Noteholders

  	
   

  	
   

  
	
  Committee:

  	
   

  	
  KASOWITZ,
  BENSON, TORRES

  
	
   

  	
   

  	
  &
  FRIEDMAN LLP

  
	
   

  	
   

  	
  1633
  Broadway

  
	
   

  	
   

  	
  New
  York, NY 10019

  
	
   

  	
   

  	
  Attn:

  	
  David
  M. Friedman, Esq.

  
	
   

  	
   

  	
   

  	
  Adam
  L. Shiff, Esq.

  
	
   

  	
   

  	
  Tel:

  	
  (212)
  506-1700

  
	
   

  	
   

  	
  Fax:

  	
  (212)
  506-1800

  
	
   

  	
   

  	
  Email:

  	
  dfriedman@kasowitz.com

  
	
   

  	
   

  	
   

  	
  ashiff@kasowitz.com

  
	
   

  	
   

  	
   

  
	
  If
  to the Official Committee

  	
   

  	
   

  
	
  of
  Unsecured Creditors:

  	
   

  	
  OTTERBOURG,
  STEINDLER, HOUSTON

  
	
   

  	
   

  	
  &
  ROSEN, P.C.

  
	
   

  	
   

  	
  230
  Park Avenue

  
	
   

  	
   

  	
  New
  York, NY 10169-0075

  
	
   

  	
   

  	
  Attn:

  	
  Glenn
  B. Rice, Esq.

  
	
   

  	
   

  	
  Tel:

  	
  (212)
  661-9829

  
	
   

  	
   

  	
  Fax:

  	
  (212)
  982-6104

  
	
   

  	
   

  	
  Email:

  	
  grice@oshr.com

  

 

 

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

 

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

 

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

 

15.5                           No Waiver.  No consent or waiver by any party, express or
implied, to or of any breach or default by the other in the performance of its
obligations hereunder shall be deemed or 

 

34

 

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construed to be a consent or waiver to or of
any other breach or default in the performance by such other party of the same
or any other obligation of such party. 
Failure on the part of any party to complain of any act or failure to
act by the other party or to declare the other party in default, irrespective
of how long such failure continues, shall not constitute a waiver by such party
of its rights hereunder.

 

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

 

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

 

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

 

15.9                           FF&E.  With respect to the FF&E owned by
Merchant (the “Owned FF&E”) and located at the Stores, Agent shall
sell such Owned FF&E in any Store in its discretion; provided, however,
Merchant shall have the right, at any time prior to the date that is fourteen
(14) days after the Sale Commencement Date, to (with the consent of the the
Indenture Trustee, the Ad Hoc Noteholder Committee, and the Lenders) designate
certain FF&E located at any of the Stores that Merchant intends to keep for
its own use and which Agent shall not be permitted or entitled to sell.  Agent is entitled to receive a commission
equal to twenty percent (20.0%) of the net proceeds from the sale of any Owned
FF&E (net of sales taxes and expenses, including any expenses associated
with the removal of such FF&E incurred by Merchant as part of such sale); provided,
however, Merchant shall be responsible for payment of expenses incurred
in connection with the disposition of the Owned FF&E in accordance with a
budget to be mutually agreed upon between Merchant and Agent; provided  further,
however, to the extent Agent, at its sole option, offers to purchase the
Owned FF&E directly from Agent, Merchant may elect to receive, in lieu of
proceeds net of expenses and Agent’s commission, a lump sum payment, on a per
Store basis, in an amount to be agreed upon between Merchant, in consultation
with the Lenders and the Ad Hoc Noteholder Committee, and Agent, in which case
all costs and expenses associated with the disposition thereof shall be borne
by Agent.  In either event, as of the
Sale Termination Date, Agent may abandon, in place, any unsold FF&E, at the
Stores.   All net Proceeds from the
disposition of the FF&E, net of sales taxes, Agent’s commission, and the
expenses associated with the disposition the FF&E (collectively, the “Net
FF&E Proceeds”), shall be deposited in a segregated account designated
solely for the deposit of the Net FF&E Proceeds.

 

35

 

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

 

15.11                     Agent.  All references to “Agent” hereunder shall
mean each of Tiger Capital Group, LLC and SB Capital Group, LLC, jointly and
severally.

 

15.12                     Bidding Procedures/Break-Up Fee.  (a)  In consideration of Agent
conducting its due diligence and entering into this Agreement, which serves as
a base by which other offers may be measured and is subject to higher and
better offers by way of an auction process (as more fully set forth in the
Auction Order),

 

(i)  in the event that this Agreement
shall not be consummated because Merchant elects to pursue an alternative
transaction, Merchant agrees to pay Agent from the proceeds of the winning bid
at auction (or of any other alternative disposition of the Merchandise) a
break-up fee in the amount of $1,500,000, such Break-Up Fee to be paid upon the
earlier of the closing of the winning bid (or other alternative transaction)
and ten (10) days after the Bankruptcy Court hearing approving such
winning bid (or other alternative transaction);

 

(ii) the Merchant shall not, at auction
or otherwise, accept any alternative to this Agreement with Agent with respect
to the disposition of the Merchandise unless such alternative shall provide net
(after taking into account payment of the Break-Up Fee) value to the Merchant
that exceeds the value provided hereunder by an amount equal to not less than
$500,000 (the “Initial Minimum Overbid”).

 

(b)  It shall be a condition to the
consummation of this Agreement that an order of the Court approving the
Break-Up Fee and the Initial Minimum Overbid, each as contemplated herein,
shall be entered not later than seven days following the execution of this
Agreement.  Agent hereby consents that at
the auction the Break-Up Fee shall not be subject to credit bidding.

 

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

 

36

 

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

 

 

[Signature Pages Follow]

 

37

 

EXECUTION
COPY

 

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

 

	
   

  	
  LINENS
  HOLDING CO.,

  
	
   

  	
  On Behalf of
  Itself and its Affiliated Debtors

  
	
   

  	
  and
  Debtors-in-Possession

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ F. DAVID
  CODER

  
	
   

  	
  Name:  F.
  David Coder

  
	
   

  	
  Its:       President &
  Chief Operating Officer

  
	
   

  	
   

  
	
   

  	
  TIGER CAPITAL GROUP, LLC,

  
	
   

  	
  On behalf of itself and SB
  Capital Group, LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ DANIEL KANE

  
	
   

  	
  Dan Kane

  
	
   

  	
  Managing
  Member

  
				

 

 

CONSENTED AND AGREED TO

AS IT RELATES TO SECTIONS 3.3, 3.4

4.2, 15.9 AND 16 HEREOF, BY:

 

GENERAL ELECTRIC CAPITAL CORPORATION

 

	
  By:

  	
   /s/ MARK J. FORTI

  	
   

  
	
  Name   Mark
  J. Forti

  
	
  Title     Managing
  Director

  

 

 

Signature Page to Agency Agreement

 

 

LIST OF OMITTED EXHIBITS

 

The exhibits to the foregoing Agency Agreement listed below have been
omitted.  Except to the extent separately
filed as an exhibit with the Securities and Exchange Commission, as noted
below, the registrants agree supplementally to furnish any omitted exhibit to
the Securities and Exchange Commission upon request.

 

Document Description

 

	
  Exhibit 1A

  	
   

  	
  List of Closing Stores

  
	
  Exhibit 3.1(c)

  	
   

  	
  Adjustments to Guaranty Percentage (Based on Merchandise Threshold)

  
	
  Exhibit 3.4

  	
   

  	
  Form of Irrevocable Standby Letter of Credit

  
	
  Exhibit 4.1(s)

  	
   

  	
  Per Store Per Diem Occupancy Expenses

  
	
  Exhibit 5.1(a)(i)

  	
   

  	
  Inventory Taking Instructions

  
	
  Exhibit 5.1(a)(ii)

  	
   

  	
  Distribution Center Merchandise and On-Order Merchandise Receipt
  Reconciliation Procedures

  
	
  Exhibit 5.1(c)

  	
   

  	
  Store Allocation of On-Order Merchandise

  
	
  Exhibit 5.2(b)

  	
   

  	
  Distribution Center Merchandise

  
	
  Exhibit 8.1

  	
   

  	
  Sale Guidelines (separately filed as an exhibit with the Securities
  and Exchange Commission)

  
	
  Exhibit 11.1(c)

  	
   

  	
  Permitted Liens on Merchandise

  
	
  Exhibit 11.1(l)

  	
   

  	
  Merchant’s Pending Advertisements and Promotions June, July and
  August

  
	
  Exhibit 11.1(m)

  	
   

  	
  Adjustments to Guaranty Percentage (Based on Cost Factor)

  
	
  Exhibit 11.1(p)

  	
   

  	
  Transferred Employees

  
	
  Exhibit 11.1(q)

  	
   

  	
  Certain Promotions or Discounts (same as Exhibit 11.1(l))Exhibit 10.2

 

SALE GUIDELINES

 

Exhibit 8.1

To

Agency Agreement

 

- And -

 

Exhibit C

To

Approval Order

 

 

EXHIBIT 8.1

 

STORE CLOSING GUIDELINES

 

The following
procedures shall apply to the Sale1 to be held at the closing
Stores and the disposal of the Owned FF&E in the closing Stores:

 

1.                                       The
Sale shall be conducted so that the closing Stores in which sales are to occur
remain open no longer than the normal hours of operation provided for in the
respective leases or other occupancy agreements for the closing Stores.

 

2.                                       The
Sale shall be conducted in accordance with applicable state and local “Blue
Laws,” and thus, where applicable, no Sale shall be conducted on Sunday unless
the Merchant had been operating such Stores on a Sunday.

 

3.                                       All
display and hanging signs used by the Merchant and the Agent in connection with
Sale shall be professionally produced and all hanging signs shall be hung in a
professional manner. The Merchant and the Agent may advertise the Sale as a “sale
on everything”, “store closing”, or similar theme sale at the closing Stores as
provided by the Agency Agreement. 
Neither the Merchant, nor the Agent shall advertise the Sale as a “going-out-of-business”
sale.  The Merchant and the Agent shall
not use neon or day-glo signs. Furthermore, with respect to enclosed mall
locations no exterior signs or signs in common areas of a mall shall be used.
Nothing contained herein shall be construed to create or impose upon the
Merchant and the Agent any additional restrictions not contained in the applicable
lease or other occupancy agreement. In addition, the Merchant and the Agent
shall be permitted to utilize exterior banners at non-enclosed mall Stores; provided,
however, that such banners shall be located or hung so as to make clear
that the Sale is being conducted only at the affected store and shall not be
wider than the closing Storefront of the closing Store. In addition, the
Merchant and the Agent shall be permitted to utilize sign walkers and street
signage, notwithstanding any state, county or local law or ordinance; provided
however the use of sign walkers and use of street signage shall be done
in a safe manner and shall not be permitted on mall or shopping center
property.

 

4.                                       Conspicuous
signs shall be posted in the cash register areas of each Store to the effect
that all sales are “final” and that customers with any questions or complaints
subsequent to the conclusion of the Sale may contact a named representative of
the Merchant or the Agent at a specified telephone number.  Agent shall make available consumers inserts
identifying that that  the manufacturer’s
warranty, if any, may still exist and you should consult the packaging
materials to see what, if any, manufacturer’s warranties are available, and
Agent shall instruct the cashiers to place such inserts in the consumer’s
shopping bag.

 

1                                            Capitalized
terms used but not defined herein shall have the meanings ascribed to such
terms in the Agency Agreement.

 

 

5.                                       Within
a “Shopping Center”, the Agent shall not distribute handbills, leaflets or
other written materials to customers outside of any of the closing Stores,
unless permitted by the applicable lease or, if distribution is customary in
the shopping center in which the closing Store is located. Otherwise, the Agent
may solicit customers in the closing Stores themselves. The Agent shall not use
any flashing lights or amplified sound to advertise the Sale or solicit
customers, except as permitted under the applicable lease or agreed to by the
landlord.

 

6.                                       At
the conclusion of the Sale, Agent shall vacate the closing Stores in “broom-clean”
condition, and shall otherwise leave the closing Stores in the same condition
as on the commencement of the Sale, ordinary wear and tear excepted; provided,
however, that the Merchant and Agent hereby do not undertake any greater
obligation than as set forth in an applicable lease with respect to a Stores.
The Merchant may abandon any FF&E or other materials (the “Abandoned
Property”) not sold in the Sale at the closing Store premises at the conclusion
of the Sale. Any Abandoned Property left in a Store after a lease is rejected
shall be deemed abandoned with the landlord having the right to dispose of the
same as the landlord chooses without any liability whatsoever on the part of
the landlord to any party and without waiver of any damage claims against the
Merchant.

 

7.                                       Subject
to the provisions of Section 15.9 of the Agency Agreement, the Agent shall
have the right to sell Owned FF&E located in the closing Stores; provided,
however, Merchant shall have the right (subject to the const of the
Indenture Trustee and the Noteholders), at any time prior to the date that is
fourteen days after the Sale Commencement Date, to designate certain FF&E
located in the closing Stores that Merchant intends to keep for its own use and
which Agent shall not be permitted or entitled to sell. The Agent may advertise
the sale of the Owned FF&E consistent with the guidelines provided in
paragraphs 4 and 6 hereof. Additionally, the purchasers of any Owned FF&E
sold during the Sale shall only be permitted to remove the Owned FF&E
either through the back shipping areas or through other areas after store
business hours.  For the avoidance of
doubt, as of the Sale Termination Date, Agent may abandon, in place, and
without further responsibility, any unsold FF&E located at the closing
Stores.

 

8.                                       The
Agent shall not make any alterations to interior or exterior Store lighting. No
property of any landlord of a Store shall be removed or sold during the Sale.
The hanging of exterior banners or other signage shall not constitute an
alteration to a Store.

 

9.                                       At
the conclusion of the Sale at each Store, pending assumption or rejection of
applicable leases, the landlords of the closing Stores shall have reasonable
access to the closing Store premises as set forth in the applicable leases. The
Merchant, the Agent and their agents and representatives shall continue to have
exclusive and unfettered access to the closing Stores.

 

10.                                 Post-petition
rents shall be paid shall be performed by the Merchant as required by the
Bankruptcy Code until the rejection or assumption and assignment of each lease.

 

11.                                 The
rights of the landlords for any damages to the closing Stores shall be reserved
in accordance with the applicable leases.

 

 

12.                                 The
Merchant shall notify a representative of the relevant landlord of the date on
which the Sale is scheduled to conclude at a given Store, within three business
days of the Merchant’s receipt of such notice from the Agent.

 

13.                                 To
the extent that any Store landlord affected hereby contends that the Merchant
is in breach or default under these Store Closing Guidelines, such landlord
shall provide at least five (5) days’ written notice, served by facsimile
and overnight delivery, on the Merchant and the Merchant’s counsel, and the
Agent and the Agent’s counsel, at the following facsimile numbers and
addresses:

 

	
  If to the Merchant:

  	
  LINENS
  HOLDING CO.

  
	
   

  	
  6
  Brighton Road

  
	
   

  	
  Clifton,
  NJ 07012

  
	
   

  	
  Attn:

  	
  Frank
  Rowan

  
	
   

  	
   

  	
  Dave
  Coder

  
	
   

  	
  Fax:

  	
  (973)
  836-0309

  
	
   

  	
  Email:

  	
  frowan@lnt.com

  
	
   

  	
   

  	
  dcoder@lnt.com

  
	
   

  	
   

  
	
  With a copy to:

  	
  ASSET DISPOSITION ADVISORS, LLC

  
	
   

  	
  499 Park Avenue

  
	
   

  	
  New York, NY 10022

  
	
   

  	
  Attn:

  	
  Paul Traub

  
	
   

  	
   

  	
  Steven Fox

  
	
   

  	
  Tel:

  	
  (212) 573-9084

  
	
   

  	
  Fax:

  	
  (212) 652-3863

  
	
   

  	
   

  
	
   

  	
  RICHARDS, LAYTON, & FINGER, P.A.

  
	
   

  	
  920 N. King Street

  
	
   

  	
  Wilmington, DE 19801

  
	
   

  	
  Attn:

  	
  Mark D. Collins

  
	
   

  	
   

  	
  Michael J. Merchant

  
	
   

  	
  Tel:

  	
  (302) 651-7700

  
	
   

  	
  Fax:

  	
  (302) 651-7701

  
	
   

  	
  Email:

  	
  Collins@rlf.com

  
	
   

  	
   

  	
  Merchant@rlf.com

  

 

 

	
   

  	
  GARDERE WYNNE SEWELL LLP

  
	
   

  	
  1601 Elm Street, Suite 3000

  
	
   

  	
  Dallas, TX 75201

  
	
   

  	
  Attn:

  	
  Stephen A. McCartin, Esq.

  
	
   

  	
   

  	
  Randy Ray, Esq.

  
	
   

  	
  Fax:

  	
  (214) 999-3544

  
	
   

  	
  Email:

  	
  smccartin@gardere.com

  
	
   

  	
   

  	
  rray@gardere.com

  
	
   

  	
   

  
	
   

  	
  MORGAN, LEWIS & BOCKIUS LLP

  
	
   

  	
  101 Park Avenue

  
	
   

  	
  New York, NY 10178

  
	
   

  	
  Attn:

  	
  Neil E. Herman, Esq.

  
	
   

  	
  Fax:

  	
  (212) 309-6001

  
	
   

  	
  Email:

  	
  nherman@morganlewis.com

  
	
   

  	
   

  
	
  If to the Agent:

  	
  SB CAPITAL GROUP, LLC

  
	
   

  	
  1010 Northern Blvd, Suite 340

  
	
   

  	
  Great Neck, NY 11021

  
	
   

  	
  Attn:

  	
  Robert Raskin

  
	
   

  	
  Tel:

  	
  (516) 829-2400

  
	
   

  	
  Fax:

  	
  (516) 829-2404

  
	
   

  	
  Email:

  	
  rraskin@sbcapitalgroup.com

  
	
   

  	
   

  
	
   

  	
  TIGER CAPITAL GROUP, LLC

  
	
   

  	
  84 State Street, Suite 420

  
	
   

  	
  Boston, MA 02109

  
	
   

  	
  Attn:

  	
  Steve Goldberger

  
	
   

  	
   

  	
  Dan Kane

  
	
   

  	
  Tel:

  	
  (617) 523-7002

  
	
   

  	
  Fax:

  	
  (617) 523-3007

  
	
   

  	
  Email:

  	
  sgoldberger@tigercapitalgroup.com

  
	
   

  	
   

  	
  dkane@tigercapitalgroup.com

  
	
   

  	
   

  
	
  With a copy to:

  	
  WACHTELL, LIPTON, ROSEN & KATZ

  
	
   

  	
  51 West 52nd Street

  
	
   

  	
  New York, NY 10019

  
	
   

  	
  Attn:

  	
  Scott Charles

  
	
   

  	
   

  	
  Josh Feltman

  
	
   

  	
  Tel:

  	
  (212) 403-1200

  
	
   

  	
  Fax:

  	
  (212) 403-2200

  
	
   

  	
  Email:

  	
  skcharles@wlrk.com

  
	
   

  	
   

  	
  jafeltman@wlrk.com

  

 

 

If the parties are
unable to resolve the dispute between themselves, either the landlord or the
Merchant shall have the right to schedule a “status hearing” before the
Bankruptcy Court on no less than five (5) days notice to the other
parties.

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