Document:

Exhibit
10.58

 

GUARANTY

(FAO, Inc.)

 

This GUARANTY, dated as of April 23, 2003, is made by
FAO, Inc. (fka The Right Start, Inc.), a Delaware corporation (“Guarantor”),
in favor of KBB Retail Assets Corp., a New York corporation (fka F.A.O.
Schwarz) ( the “Subordinated Note Holder”) the holder of that certain
Subordinated Note (the “Subordinated Note”) issued by FAO Schwarz, Inc.
(fka Toy Soldier, Inc.), a Delaware corporation (“Issuer”) and
wholly-owned subsidiary of Guarantor pursuant to the Plan (defined below):

 

RECITALS

 

A.                                   Pursuant to that certain Asset Purchase
Agreement dated November 19, 2001(the “Purchase Agreement”) entered
into by and among Guarantor, Issuer, Royal Vendex KBB N.V., a Netherlands
corporation, Subordinated Note Holder, and Quality Fulfillment Services, Inc.,
a Virginia corporation (“QFS”) , Issuer issued to the Subordinated Note Holder
and QFS certain subordinated notes in partial payment of the Initial Purchase
Price (as defined by the Purchase Agreement).

 

B.                                     On January 13, 2003 the Guarantor and
Issuer commenced their respective reorganization cases by filing voluntary
petitions for relief under chapter 11 of the Bankruptcy Code.

 

C.                                     The Subordinated Note is being issued to
Subordinated Note Holder pursuant to the Guarantor’s and Issuer’s First Amended
Joint Plan of Reorganization as confirmed on April 4, 2003 by the United States
Bankruptcy Court District of Delaware in Case No. 03-10119(LK) (the “Plan”) in
compromise of such earlier issued subordinated notes.

 

D.                                    Pursuant to the Plan Guarantor is
required to enter into this Guaranty and to guaranty the Guarantied Obligations
as hereinafter provided.

 

AGREEMENT

 

NOW, THEREFORE, 
Guarantor hereby represents, warrants, covenants, agrees and guaranties
as follows:

 

1.                                       Definitions. 
Guarantor is FAO, Inc.  Terms
defined in the Subordinated Note and not otherwise defined in this Guaranty
shall have the meanings given those terms in the Subordinated Note when used
herein and such definitions are incorporated herein as though set forth in full.  In addition, as used herein, the following
terms shall have the meanings respectively set forth after each:

 

“Guarantied Obligations” means any and all
present and future obligations of Issuer to Subordinated Note Holder arising
under or related to the Subordinated Note and/or any one or more of them,
whether due or to become due, matured or unmatured, or liquidated or
unliquidated, including interest that accrues after the commencement of
any bankruptcy or insolvency proceeding by or against any Subordinated Note
Holder, Issuer or any other person.

 

“Guaranty” means this Guaranty, and any
extensions, modifications, renewals, restatements, reaffirmations, supplements
or amendments hereof.

 

2.                                       Subordination Agreement. 
This instrument and the rights and obligations evidenced hereby are
subordinate in the manner and to the extent set forth in that certain
Subordination

 

 

and Intercreditor Agreement dated as of April 23, 2003 (as amended,
supplemented or otherwise modified from time to time, the “Subordination
Agreement”) among Royal Vendex KBB, N.V., KBB Retail Assets Corp., Issuer,
Guarantor and Fleet Retail Finance, Inc., to the indebtedness (including
interest) owed by Guarantor and Issuer pursuant to the Loan and Security
Agreement dated as of April 23, 2003 (as amended, supplemented or otherwise
modified from time to time, the “Fleet Loan Agreement”), among FAO,
Inc., FAO Schwarz, Inc., ZB Company, Inc., The Right Start, Inc., Targoff-RS,
LLC, Fleet Retail Finance Inc., Back Bay Capital Funding LLC and the other
lending institutions party from time to time party thereto and Fleet Retail
Finance Inc. as agent for the lendersand to indebtedness refinancing the
indebtedness under the Fleet Loan Agreement (the “Fleet Indebtedness”)
as contemplated by the Subordination Agreement, and to any other secured
indebtedness of Guarantor for borrowed money permitted by the Fleet Loan
Agreement, and each holder of the Subordinated Note, by acceptance thereof, has
agreed to be bound by the provisions of the Subordination Agreement.  In the event that any provisions of this
Guaranty are deemed to conflict with the Subordination Agreement, the
provisions of the Subordination Agreement shall govern.

 

3.                                       Guaranty of Guarantied Obligations. 
Guarantor hereby irrevocably and unconditionally guaranties and promises
to pay on demand the Guarantied Obligations and each and every one of them, including
all amendments, modifications, supplements, renewals or extensions of any of
them, whether such amendments, modifications, supplements, renewals or
extensions are evidenced by new or additional instruments, documents or
agreements or change the rate of interest on any Guarantied Obligation or the
security therefor, or otherwise.

 

4.                                       Nature of Guaranty. 
This Guaranty is irrevocable and continuing in nature and relates to any
Guarantied Obligations now existing or hereafter arising.  This Guaranty is a guaranty of prompt and
punctual payment and is not merely a guaranty of collection.

 

5.                                       Relationship to Other Agreements. 
Nothing herein shall in any way modify or limit the effect of terms or
conditions set forth in any other document, instrument or agreement executed by
Guarantor in connection with the Guarantied Obligations, but each and every
term and condition hereof shall be in addition thereto.  All provisions contained in the Subordinated
Note are fully applicable to this Guaranty and are incorporated herein by this
reference.

 

6.                                       Waivers and Consents. 
Guarantor acknowledges that the obligations undertaken herein involve
the guaranty of obligations of persons other than Guarantor and, in full
recognition of that fact, consents and agrees that Subordinated Note Holder,
together with Issuer, may, at any time and from time to time, without notice or
demand, and without affecting the enforceability or continuing effectiveness
hereof (a) supplement, modify, amend, extend, renew, accelerate or otherwise
change the time for payment or the terms of the Guarantied Obligations or any
part thereof, including any increase or decrease of the rate of interest
thereon; (b) supplement, modify, amend or waive, or enter into or give any
agreement, approval or consent with respect to, the Guarantied Obligations or
any part thereof, or any of the Subordinated Note to which Guarantor is not a
party or any additional security or guaranties, or any condition, covenant,
default, remedy, right, representation or term thereof or thereunder; (c)
accept new or additional instruments, documents or agreements in exchange for
or relative to any of the Subordinated Note or the Guarantied Obligations or
any part thereof; (d) accept partial payments on the Guarantied Obligations;
(e) receive and hold additional security or guaranties for the Guarantied
Obligations or any part thereof; (f) release, reconvey, terminate, waive,
abandon, fail to perfect, subordinate, exchange, substitute, transfer and/or
enforce any security or guaranties, and apply any security and direct the order
or manner of sale thereof as Subordinated Note Holder in conjunction with
Issuer may determine; (g) release any person from any personal liability with
respect to the Guarantied Obligations or any part thereof; (h) settle, release
on terms satisfactory to Subordinated Note Holder or by operation of applicable
laws or otherwise liquidate or enforce any Guarantied Obligations and any
security or guaranty therefor in

 

2

 

any manner, consent to the transfer of any security and bid and
purchase at any sale; and/or (i) consent to the merger, change or any other
restructuring or termination of the corporate or other existence of Issuer and
correspondingly restructure the Guarantied Obligations, and any such merger,
change, restructuring or termination shall not affect the liability of
Guarantor or the continuing effectiveness hereof, or the enforceability hereof
with respect to all or any part of the Guarantied Obligations.

 

Upon the occurrence and during the continuance of any
Event of Default, Subordinated Note Holder may enforce this Guaranty independently
of any other remedy or security Subordinated Note Holder at any time may have
or hold in connection with the Guarantied Obligations.  Guarantor expressly waives any right to
require Subordinated Note HolderSubordinated Note Holder to marshal assets in
favor of Issuer, or to proceed against Issuer, or upon or against any security
or remedy, before proceeding to enforce this Guaranty.  Guarantor agrees that Subordinated Note
HolderSubordinated Note Holder may proceed against Issuer, or upon or against
any security or remedy, in such order as they shall determine in their sole and
absolute discretion.  Subordinated Note
Holder may file a separate action or actions against Issuer and/or Guarantor
without respect to whether action is brought or prosecuted with respect to any
security or against any other person, or whether any other person is joined in
any such action or actions.  Guarantor
agrees that Subordinated Note Holder, Issuer, any other obligors and any affiliates
of Issuer or such obligors may deal with each other in connection with the
Guarantied Obligations or otherwise, or alter any contracts or agreements now
or hereafter existing between any of them, in any manner whatsoever, all
without in any way altering or affecting the security of this Guaranty.  Subordinated Note Holder’s rights hereunder
shall be reinstated and revived, and the enforceability of this Guaranty shall
continue, with respect to any amount at any time paid on account of the
Guarantied Obligations which thereafter shall be required to be disgorged,
restored or returned by Subordinated Note Holder upon the bankruptcy,
insolvency or reorganization of Issuer or any other person, or otherwise, all
as though such amount had not been paid. 
The rights of Subordinated Note Holder created or granted herein and the
enforceability of this Guaranty with respect to Guarantor at all times shall
remain effective to guaranty the full amount of all the Guarantied Obligations
even though the Guarantied Obligations, or any part thereof, or any security or
guaranty therefor, may be or hereafter may become invalid or otherwise
unenforceable as against Issuer or any other guarantor or surety or any other
person and whether or not Issuer or any other person shall have any personal
liability with respect thereto. 
Guarantor expressly waives any and all defenses now or hereafter arising
or asserted by reason of (a) any disability or other defense of Issuer or any
other obligor with respect to the Guarantied Obligations, (b) the
unenforceability or invalidity of any security or guaranty for the Guarantied
Obligations or the lack of perfection or con­tinuing perfection or failure of
priority of any security for the Guarantied Obligations, (c) the cessation for
any cause whatsoever of the liability of Issuer or any other obligor (other
than by reason of the full payment and performance of all Guarantied
Obligations), (d) any failure of Subordinated Note Holder to marshal assets in
favor of Issuer or any other person, (e) except as otherwise provided in this
Guaranty, any failure of Subordinated Note Holder to give notice of sale or
other disposition of Collateral to Guarantor or any other person or any defect
in any notice that may be given in connection with any sale or disposition of
Collateral, (f) except as otherwise provided in this Guaranty, any failure of
Subordinated Note Holder to comply with applicable laws in connection with the
sale or other disposition of any Collateral or other security for any
Guarantied obligations, including without limitation, any failure of
Subordinated Note Holder to conduct a commercially reasonable sale or other
disposition of any Collateral or other security for any Guarantied Obligation,
(g) any act or omission of Subordinated Note Holder or others that directly or
indirectly results in or aids the discharge or release of Issuer or any other
obligor or the Guarantied Obligations or any security or guaranty therefor by
operation of law or otherwise, (h) any law which provides that the obligation
of a surety or guarantor must neither be larger in amount nor in other respects
more burdensome than that of the principal or which reduces a surety’s or
guarantor’s obligation in proportion to the principal obligation, (i) any
failure of Subordinated Note Holder to file or enforce a claim in any
bankruptcy or other proceeding with respect to any person, (j) the election by
Subordinated Note Holder, in any bankruptcy proceeding of any person, of the
application or non-application of Section 1111(b)(2)

 

3

 

of the United States Bankruptcy Code, (k) any extension of credit or
the grant of any lien under Section 364 of the United States Bankruptcy Code,
(1) any use of cash collateral under Section 363 of the United States
Bankruptcy Code, (m) any agreement or stipulation with respect to the provision
of adequate protection in any bankruptcy proceeding of any person, (n) the
avoidance of any lien in favor of Subordinated Note Holder for any reason, (o)
any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt,
liquidation or dissolution proceeding commenced by or against any person, including
any discharge of, or bar or stay against collecting, all or any of the
Guarantied Obligations (or any interest thereon) in or as a result of any such
proceeding, (p) to the extent permitted, the benefits of any form of one-action
rule under any applicable law, or (q) any action taken by Subordinated Note
Holder that is authorized by this Section or any other provision of the
Subordinated Note.  Guarantor expressly
waives demands for payment or performance, notices of nonpayment or
nonperformance, protests, notices of protest, notices of dishonor and all other
notices or demands of any kind or nature whatsoever with respect to the Guarantied
Obligations, and all notices of acceptance of this Guaranty or of the
existence, creation or incurrence of new or additional Guarantied Obligations.

 

7.                                       Understandings With Respect to Waivers
and Consents.  Guarantor warrants and agrees that each of the
waivers and consents set forth herein are made with full knowledge of their
significance and consequences, with the understanding that events giving rise
to any defense or right waived may diminish, destroy or otherwise adversely
affect rights which Guarantor otherwise may have against Issuer, Subordinated
Note Holder or others, or against any collateral.  Guarantor acknowledges that it has either consulted with legal
counsel regarding the effect of this Guaranty and the waivers and consents set
forth herein, or has made an informed decision not to do so.  If this Guaranty or any of the waivers or
consents herein are determined to be unenforceable under or in violation of
applicable law, this Guaranty and such waivers and consents shall be effective
to the maximum extent permitted by law.

 

8.                                       Limitations on Liability. 
Notwithstanding anything to the contrary elsewhere contained herein or
in the Subordinated Note, the aggregate liability of Guarantor hereunder for
payment of the Guarantied Obligations shall not exceed an amount which, in the
aggregate, is $1.00 less than that amount which if so paid or performed would
constitute or result in a “fraudulent transfer,” “fraudulent conveyance” or
terms of similar import, under applicable state or federal law, including
without limitation, Section 548 of the United States Bankruptcy Code.

 

9.                                       THIS GUARANTY SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.

 

4

 

IN WITNESS WHEREOF,
Guarantor has executed this Guaranty by its duly authorized officer as of the
date first written above.

 

	
   

  	
  “Guarantor”

  
	
   

  	
   

  
	
   

  	
  FAO, INC.,

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
  Address for Guarantor:

  
	
   

  	
   

  
	
   

  	
  2520 Renaissance
  Boulevard

  King of Prussia, Pennsylvania

  
	
   

  	
  Attn.:

  	
  Legal

  
	
   

  	
   

  	
  kroyer@faoinc.com

  
	
   

  	
  Telephone:

  	
  (610) 278-7800

  
	
   

  	
  Fax:

  	
  (610) 278-7804

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Jerry R. Welch

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   President and Chief Executive Officer

  	
   

  
							

 

5Exhibit 10.59

 

LOAN AND SECURITY AGREEMENT

 

FLEET RETAIL FINANCE INC.,

ADMINISTRATIVE AGENT, COLLATERAL AGENT

AND SYNDICATION AGENT FOR

THE LENDERS NAMED HEREIN

 

CONGRESS FINANCIAL CORPORATION (CENTRAL)

and

WELLS FARGO RETAIL FINANCE II, LLC,

CO-DOCUMENTATION AGENTS

 

THE REVOLVING CREDIT LENDERS

NAMED HEREIN

 

BACK BAY CAPITAL FUNDING LLC,

TRANCHE B LENDER

 

FAO, INC. AND ITS SUBSIDIARIES

THE BORROWERS

 

April 23, 2003

 

 

TABLE OF CONTENTS

 

	
  1.

  	
  DEFINITIONS
  AND RULES OF INTERPRETATION

  
	
  1.1

  	
  DEFINITIONS

  
	
  1.2.

  	
  RULES OF INTERPRETATION

  
	
   

  	
   

  
	
  2.

  	
  THE REVOLVING CREDIT
  FACILITY.

  
	
  2.1.

  	
  COMMITMENT
  TO LEND

  
	
  2.2.

  	
  MATURITY

  
	
  2.3.

  	
  UNUSED FEE

  
	
  2.4.

  	
  REDUCTION OF COMMITMENT

  
	
  2.5.

  	
  MANDATORY
  REPAYMENTS OF REVOLVING CREDIT LOANS

  
	
  2.6.

  	
  OPTIONAL
  REPAYMENTS OF REVOLVING CREDIT LOANS

  
	
  2.7.

  	
  THE LOAN ACCOUNT AND
  REVOLVING CREDIT NOTES

  
	
  2.8.

  	
  INTEREST ON
  REVOLVING CREDIT LOANS.

  
	
  2.9.

  	
  REQUESTS FOR
  REVOLVING CREDIT LOANS

  
	
  2.10.

  	
  CONVERSION
  OPTIONS

  
	
  2.11.

  	
  FUNDS FOR REVOLVING
  CREDIT LOAN

  
	
  2.12.

  	
  BORROWING
  BASE/REDUCTIONS TO AVAILABILITY

  
	
  2.13.

  	
  SETTLEMENTS
  

  
	
  2.14.

  	
  REPAYMENTS
  OF REVOLVING CREDIT LOANS ABSENT AN EVENT OF DEFAULT

  
	
  2.15.

  	
  REPAYMENTS
  OF REVOLVING CREDIT LOANS AFTER EVENT OF DEFAULT

  
	
  2.16.

  	
  OVERLOANS AND
  PROTECTIVE OVERADVANCES

  
	
   

  	
   

  
	
  3.

  	
  THE TRANCHE B FACILITY

  
	
  3.1.

  	
  COMMITMENT TO
  LEND

  
	
  3.2.

  	
  THE TRANCHE
  B NOTE

  
	
  3.3.

  	
  PAYMENTS OF PRINCIPAL OF TRANCHE
  B LOAN

  
	
  3.4.

  	
  INTEREST ON TRANCHE B LOAN

  
	
  3.5.

  	
  PAYMENTS ON
  ACCOUNT OF TRANCHE B LOAN

  
	
  3.6.

  	
  BUYOUT
  OPTION

  
	
   

  	
   

  
	
  4.

  	
  LETTERS OF CREDIT

  
	
  4.1.

  	
  LETTER OF CREDIT
  COMMITMENTS

  
	
  4.2.

  	
  REIMBURSEMENT
  OBLIGATION OF THE BORROWERS

  
	
  4.3.

  	
  LETTER OF CREDIT PAYMENTS

  
	
  4.4.

  	
  OBLIGATIONS ABSOLUTE

  
	
  4.5.

  	
  RELIANCE
  BY ISSUER

  
	
  4.6.

  	
  LETTER
  OF CREDIT FEE

  
	
   

  	
   

  
	
  5.

  	
  CERTAIN GENERAL PROVISIONS

  
	
  5.1.

  	
  AGENT FEES

  
	
  5.2.

  	
  TRANCHE B LENDER FEES

  
	
  5.3.

  	
  FUNDS
  FOR PAYMENTS

  

 

i

 

	
  5.4.

  	
  COMPUTATIONS

  
	
  5.5.

  	
  INABILITY TO
  DETERMINE EURODOLLAR RATE

  
	
  5.6.

  	
  ILLEGALITY

  
	
  5.7.

  	
  ADDITIONAL
  COSTS, ETC

  
	
  5.8.

  	
  CERTIFICATE

  
	
  5.9.

  	
  INDEMNITY

  
	
  5.10.

  	
  INTEREST AFTER DEFAULT

  
	
  5.11.

  	
  FEES
  NON-REFUNDABLE

  
	
  5.12.

  	
  CONCERNING
  JOINT AND SEVERAL LIABILITY OF THE BORROWERS

  
	
   

  	
   

  
	
  6.

  	
  COLLATERAL SECURITY

  
	
  6.1.

  	
  GRANT OF SECURITY INTEREST

  
	
  6.2.

  	
  AUTHORIZATION
  TO FILE FINANCING STATEMENTS

  
	
  6.3.

  	
  OTHER
  ACTIONS

  
	
  6.4.

  	
  RELATION TO OTHER
  SECURITY DOCUMENTS

  
	
   

  	
   

  
	
  7.

  	
  REPRESENTATIONS AND
  WARRANTIES

  
	
  7.1.

  	
  CORPORATE
  AUTHORITY

  
	
  7.2.

  	
  GOVERNMENTAL APPROVALS

  
	
  7.3.

  	
  TITLE TO PROPERTIES; LEASES

  
	
  7.4.

  	
  FINANCIAL
  STATEMENTS AND PROJECTIONS

  
	
  7.5.

  	
  NO MATERIAL ADVERSE
  CHANGES, ETC.

  
	
  7.6.

  	
  FRANCHISES,
  PATENTS, COPYRIGHTS, ETC.

  
	
  7.7.

  	
  LITIGATION

  
	
  7.8.

  	
  NO MATERIALLY ADVERSE
  CONTRACTS, ETC.

  
	
  7.9.

  	
  COMPLIANCE WITH OTHER
  INSTRUMENTS, LAWS, ETC.

  
	
  7.10.

  	
  TAX STATUS

  
	
  7.11.

  	
  NO DEFAULT

  
	
  7.12.

  	
  HOLDING
  COMPANY AND INVESTMENT COMPANY ACTS

  
	
  7.13.

  	
  ABSENCE OF FINANCING
  STATEMENTS, ETC.

  
	
  7.14.

  	
  COLLATERAL

  
	
  7.15.

  	
  CERTAIN TRANSACTIONS

  
	
  7.16.

  	
  EMPLOYEE BENEFIT PLANS

  
	
  7.17.

  	
  USE OF
  PROCEEDS

  
	
  7.18.

  	
  ENVIRONMENTAL COMPLIANCE

  
	
  7.19.

  	
  SUBSIDIARIES,
  ETC.

  
	
  7.20.

  	
  BANK
  ACCOUNTS; CREDIT CARD ARRANGEMENTS

  
	
  7.21.

  	
  LABOR
  RELATIONS

  
	
  7.22.

  	
  DISCLOSURE

  
	
   

  	
   

  
	
  8.

  	
  CERTAIN AFFIRMATIVE
  COVENANTS

  
	
  8.1.

  	
  PUNCTUAL
  PAYMENT

  
	
  8.2.

  	
  NOTICE
  OF CHANGE OF ORGANIZATION/MAINTENANCE OF OFFICE

  
	
  8.3.

  	
  RECORDS AND ACCOUNTS

  
	
  8.4.

  	
  FINANCIAL STATEMENTS, CERTIFICATES
  AND INFORMATION

  
	
  8.5.

  	
  NOTICES

  
	
  8.6.

  	
  LEGAL
  EXISTENCE; MAINTENANCE OF PROPERTIES

  
	
  8.7.

  	
  INSURANCE

  

 

ii

 

	
  8.8.

  	
  TAXES

  
	
  8.9.

  	
  INSPECTION OF
  PROPERTIES AND BOOKS, ETC.

  
	
  8.10.

  	
  COMPLIANCE
  WITH LAWS, CONTRACTS, LICENSES, AND PERMITS

  
	
  8.11.

  	
  EMPLOYEE
  BENEFIT PLANS

  
	
  8.12.

  	
  USE OF PROCEEDS

  
	
  8.13.

  	
  ADDITIONAL SUBSIDIARIES

  
	
  8.14.

  	
  BANK
  ACCOUNTS

  
	
  8.15.

  	
  COVENANTS CONCERNING
  COLLATERAL, ETC.

  
	
  8.16.

  	
  FURTHER
  ASSURANCES

  
	
   

  	
   

  
	
  9.

  	
   

  	
  CERTAIN NEGATIVE COVENANTS

  
	
  9.1.

  	
  RESTRICTIONS ON
  INDEBTEDNESS

  
	
  9.2.

  	
  RESTRICTIONS ON LIENS

  
	
  9.3.

  	
  RESTRICTIONS ON INVESTMENTS

  
	
  9.4.

  	
  RESTRICTED
  PAYMENTS; PAYMENTS ON OTHER INDEBTEDNESS

  
	
  9.5.

  	
  MERGER, CONSOLIDATION
  AND DISPOSITION OF ASSETS

  
	
  9.6.

  	
  SALE
  AND LEASEBACK

  
	
  9.7.

  	
  COMPLIANCE WITH
  ENVIRONMENTAL LAWS

  
	
  9.8.

  	
  EMPLOYEE BENEFIT
  PLANS

  
	
  9.9.

  	
  BUSINESS
  ACTIVITIES; PERMITTED STORE CLOSINGS

  
	
  9.10.

  	
  FISCAL YEAR

  
	
  9.11.

  	
  TRANSACTIONS WITH
  AFFILIATES

  
	
  9.12.

  	
  BANK ACCOUNTS

  
	
   

  	
   

  
	
  10.

  	
   

  	
  FINANCIAL COVENANTS

  
	
  10.1

  	
  MINIMUM EXCESS AVAILABILITY

  
	
   

  	
   

  
	
  11.

  	
  CLOSING CONDITIONS

  
	
  11.1.

  	
  LOAN
  DOCUMENTS

  
	
  11.2.

  	
  CERTIFIED COPIES OF
  GOVERNING DOCUMENTS

  
	
  11.3.

  	
  CORPORATE OR OTHER ACTION

  
	
  11.4.

  	
  INCUMBENCY CERTIFICATE

  
	
  11.5.

  	
  VALIDITY
  OF LIENS

  
	
  11.6.

  	
  PERFECTION
  CERTIFICATES AND UCC SEARCH RESULTS

  
	
  11.7.

  	
  TAXES

  
	
  11.8.

  	
  PLAN OF REORGANIZATION

  
	
  11.9.

  	
  CAPITAL
  STRUCTURE

  
	
  11.10.

  	
  CERTIFICATES OF INSURANCE

  
	
  11.11.

  	
  BLOCKED ACCOUNT AGREEMENTS;
  CREDIT CARD CLEARING HOUSE

  
	
  11.12.

  	
  BORROWING BASE REPORT

  
	
  11.13.

  	
  MINIMUM DAY ONE
  AVAILABILITY, ETC.

  
	
  11.14.

  	
  CREDIT CARD
  ACCOUNTS RECEIVABLE REPORT

  
	
  11.15.

  	
  INTERCREDITOR/SUBORDINATION
  AND OTHER AGREEMENTS

  
	
  11.16.

  	
  OPINION
  OF COUNSEL

  
	
  11.17.

  	
  PAYMENT OF
  FEES

  
	
  11.18.

  	
  COMMITMENTS

  
	
  11.19.

  	
  OTHER ITEMS

  
	
   

  	
   

  
	
  12.

  	
  CONDITIONS TO ALL
  BORROWINGS

  

 

iii

 

	
  12.1.

  	
  REPRESENTATIONS TRUE; NOT IN
  DEFAULT

  
	
  12.2.

  	
  NO
  LEGAL IMPEDIMENT

  
	
  12.3.

  	
  PROCEEDINGS AND DOCUMENTS

  
	
  12.4.

  	
  BORROWING BASE
  REPORT

  
	
  12.5.

  	
  MATERIAL ADVERSE CHANGE

  
	
  12.6.

  	
  SALES TAXES

  
	
   

  	
   

  
	
  13.

  	
  EVENTS OF DEFAULT; ACCELERATION; ETC.

  
	
  13.1.

  	
  EVENTS OF DEFAULT
  AND ACCELERATION

  
	
  13.2.

  	
  TERMINATION OF COMMITMENTS

  
	
  13.3.

  	
  REMEDIES.

  
	
  13.4

  	
  ACCELERATION NOTICES

  
	
  13.5.

  	
  DISTRIBUTION OF
  COLLATERAL PROCEEDS

  
	
   

  	
   

  
	
  14.

  	
  THE AGENT; CONSENTS, AMENDMENTS AND WAIVERS

  
	
  14.1.

  	
  AUTHORIZATION

  
	
  14.2.

  	
  EMPLOYEES
  AND AGENT

  
	
  14.3.

  	
  NO LIABILITY

  
	
  14.4.

  	
  NO
  REPRESENTATIONS

  
	
  14.5.

  	
  PAYMENTS

  
	
  14.6.

  	
  HOLDERS
  OF NOTES

  
	
  14.7.

  	
  INDEMNITY

  
	
  14.8.

  	
  AGENT AS
  LENDER

  
	
  14.9.

  	
  RESIGNATION

  
	
  14.10.

  	
  NOTIFICATION IF DEFAULT
  EXISTS

  
	
  14.11.

  	
  DUTIES IN THE CASE OF
  ENFORCEMENT

  
	
  14.12.

  	
  AGENT’S
  OBLIGATIONS AND DUTIES WITH REGARD TO COLLATERAL

  
	
  14.13.

  	
  CONSENT
  OF LENDERS

  
	
  14.14.

  	
  ACTIONS
  REQUIRING OR ON DIRECTION OF REQUIRED LENDERS

  
	
  14.15.

  	
  ACTIONS
  REQUIRING OR ON DIRECTION OF SUPERMAJORITY REVOLVING CREDIT LENDERS

  
	
  14.16.

  	
  ACTIONS REQUIRING
  CERTAIN CONSENT

  
	
  14.17.

  	
  ACTIONS
  REQUIRING OR DIRECTED BY UNANIMOUS CONSENT

  
	
  14.18.

  	
  ACTIONS
  REQUIRING SWING LINE LENDER CONSENT

  
	
  14.19.

  	
  ACTIONS
  REQUIRING TRANCHE B LENDER CONSENT

  
	
  14.20.

  	
  ACTIONS REQUIRING
  AGENT’S CONSENT

  
	
  14.21.

  	
  MISCELLANEOUS ACTIONS

  
	
  14.22.

  	
  NONCONSENTING
  REVOLVING CREDIT LENDER

  
	
   

  	
   

  
	
  15.

  	
  ASSIGNMENT AND
  PARTICIPATION

  
	
  15.1.

  	
  CONDITIONS TO ASSIGNMENT

  
	
  15.2.

  	
  CERTAIN
  REPRESENTATIONS AND WARRANTIES; LIMITATIONS; COVENANTS

  
	
  15.3.

  	
  NEW NOTES

  
	
  15.4.

  	
  PARTICIPATIONS

  
	
  15.5.

  	
  ASSIGNEE
  OR PARTICIPANT AFFILIATED WITH THE BORROWERS

  
	
  15.6.

  	
  MISCELLANEOUS
  ASSIGNMENT PROVISIONS

  
	
  15.7.

  	
  ASSIGNMENT BY BORROWERS

  

 

iv

 

	
  16.

  	
  PROVISIONS OF GENERAL
  APPLICATION

  
	
  16.1.

  	
  SETOFF

  
	
  16.2.

  	
  EXPENSES

  
	
  16.3.

  	
  INDEMNIFICATION

  
	
  16.4.

  	
  TREATMENT
  OF CERTAIN CONFIDENTIAL INFORMATION

  
	
  16.5.

  	
  SURVIVAL OF COVENANTS, ETC.

  
	
  16.6.

  	
  NOTICES

  
	
  16.7.

  	
  GOVERNING
  LAW

  
	
  16.8.

  	
  HEADINGS

  
	
  16.9.

  	
  COUNTERPARTS

  
	
  16.10.

  	
  ENTIRE
  AGREEMENT, ETC.

  
	
  16.11.

  	
  WAIVER
  OF JURY TRIAL

  
	
  16.12.

  	
  POWER
  OF ATTORNEY

  
	
  16.13

  	
  SURETYSHIP WAIVERS
  BY THE BORROWERS

  
	
  16.14

  	
  MARSHALLING

  
	
  16.15

  	
  SEVERABILITY

  

 

EXHIBITS

 

	
  EXHIBIT A

  	
  Form of
  Borrowing Base Report

  
	
  EXHIBIT B

  	
  Form of
  Revolving Credit Note

  
	
  EXHIBIT C

  	
  Form of Loan
  Request

  
	
  EXHIBIT D

  	
  Form of
  Tranche B Note

  
	
  EXHIBIT E

  	
  Form of
  Compliance Certificate

  
	
  EXHIBIT F

  	
  Form of
  Blocked Account Agreement

  
	
  EXHIBIT G(i)

  	
  Assignment
  and Acceptance/Revolving Credit

  
	
  EXHIBIT G(ii)

  	
  Assignment
  and Acceptance/Tranche B Loan

  

 

SCHEDULES

 

	
  SCHEDULE
  1.1(a)

  	
  Business Plan

  
	
  SCHEDULE
  1.1(b)

  	
  Lenders and
  Commitments

  
	
  SCHEDULE
  1.1(c)

  	
  Emergence
  Vendor Liabilities

  
	
  SCHEDULE 2.12

  	
  Reserves

  
	
  SCHEDULE 6.3

  	
  DDA Notification

  
	
  SCHEDULE 7.3

  	
  Title to
  Properties; Leases

  
	
  SCHEDULE
  7.4.2

  	
  Contingent
  Liabilities Not Shown on Consolidated Balance Sheet

  
	
  SCHEDULE 7.5

  	
  Material
  Adverse Changes

  
	
  SCHEDULE 7.7

  	
  Litigation

  
	
  SCHEDULE 7.8

  	
  Contracts

  
	
  SCHEDULE 7.10

  	
  Tax Status

  
	
  SCHEDULE 7.15

  	
  Affiliate
  Transactions

  
	
  SCHEDULE 7.19

  	
  Subsidiaries
  Etc.

  
	
  SCHEDULE
  7.20(a)

  	
  Local
  Accounts and Interim Concentration Accounts

  
	
  SCHEDULE
  7.20(b)

  	
  Credit Card
  Arrangements

  
	
  SCHEDULE
  8.4(h)

  	
  Certain
  Required Reports

  

 

v

 

	
  SCHEDULE
  8.7.1

  	
  Insurance
  Policies

  
	
  SCHEDULE 8.10

  	
  Noncompliance
  with Laws, Contracts, Licenses and Permits

  
	
  SCHEDULE 9.1

  	
  Existing
  Letters of Credit

  
	
  SCHEDULE
  9.2.2

  	
  Negative
  Pledges

  
	
  SCHEDULE 9.3

  	
  Existing
  Investments

  
	
  SCHEDULE 9.9

  	
  Permitted
  Store Closings

  
	
  SCHEDULE
  11.18

  	
  Closing
  Agenda

  

 

vi

 

LOAN AND SECURITY AGREEMENT

 

	
  FLEET RETAIL
  FINANCE INC.

  	
  As of April 23, 2003

  
	
  Agent

  	
   

  

 

This LOAN AND SECURITY AGREEMENT is made by
and among Fleet Retail Finance Inc., as Administrative Agent, Collateral Agent
and Syndication Agent for the Lenders and the Issuing Bank (in each such
capacity, the “AGENT”), a Delaware corporation, with offices at 40 Broad
Street, Boston, Massachusetts 02109,

 

and

 

Fleet Retail Finance Inc., a Delaware
corporation, with offices at 40 Broad Street, Boston, Massachusetts 02109 and
the other revolving credit lending institutions listed on SCHEDULE 1.1(b), as
Revolving Credit Lenders,

 

and

 

Back Bay Capital Funding LLC, a Delaware
limited liability company, with offices at 40 Broad Street, Boston,
Massachusetts 02109, as Tranche B Lender,

 

and

 

FAO, Inc. (“FAO”), a Delaware corporation, FAO
Schwarz, Inc. (“SCHWARZ”), a Delaware corporation, ZB Company, Inc. (“ZB”), a
Delaware corporation, The Right Start, Inc. (“RIGHT START”), a Delaware
corporation, and Targoff-RS, LLC (“TARGOFF”), a New York limited liability
company, each having its principal place of business at 2520 Renaissance
Boulevard, King of Prussia, Pennsylvania 19406, and the other Subsidiaries of
FAO which hereafter become parties hereto.

 

In consideration of the mutual covenants
contained herein and benefits derived herefrom, the parties hereto agree as
follows:

 

1.                                       DEFINITIONS AND RULES OF
INTERPRETATION.

 

1.1                                 DEFINITIONS.  The following
terms shall have the meanings set forth in this Section 1 or elsewhere in the
provisions of this Agreement referred to below:

 

ACCELERATION.  The making of demand or declaration that any
indebtedness, not otherwise due and payable in the ordinary course, is due and
payable.  Derivations of the word
“Acceleration” (such as “Accelerate”) are used with like meaning in this
Agreement.

 

ACCELERATION NOTICE.  Written notice as follows:

 

(a)                                  From
the Agent to the Lenders as provided in Section 13.4.1; or

 

 

(b)                                 From
the SuperMajority Revolving Credit Lenders to the Agent, as provided in
Section 13.4.2.

 

ACCOUNTS or
ACCOUNTS RECEIVABLE.  All rights of the
Borrowers or any of their Subsidiaries to payment for goods sold, leased or
otherwise marketed in the ordinary course of business and all rights of the
Borrowers or any of their Subsidiaries to payment for services rendered in the
ordinary course of business and all sums of money or other proceeds due thereon
pursuant to transactions with account debtors, except for that portion of the
sum of money or other proceeds due thereon that relate to sales, use or
property taxes in conjunction with such transactions, recorded on the books of
account in accordance with GAAP.

 

ACH.  Automated clearing house.

 

AFFILIATE.  Any Person that would be considered to be an
affiliate of another Person under Rule 144(a) of the Rules and Regulations of
the Securities and Exchange Commission, as in effect on the date hereof, such
other Person were issuing securities.

 

AGENT.  FRFI, acting as administrative, collateral
and syndication agent for the Lenders, and each other Person appointed as the
successor Agent in accordance with Section 14.9.

 

AGENT FEE
LETTER.  The fee letter dated as of the
date hereof among the Borrowers and the Agent, as amended from time to time.

 

AGENT
FEES.  See Section 5.1.

 

AGENT’S
OFFICE.  The Agent’s office located at
40 Broad Street, Boston, Massachusetts 02109, or at such other location as the
Agent may designate from time to time.

 

AGENT’S SPECIAL
COUNSEL.  Edwards & Angell, LLP, or
such other counsel as may be approved by the Agent.

 

AGREEMENT.  This Loan and Security Agreement, including
the Schedules and Exhibits hereto, as the same may be supplemented, extended,
amended, restated or modified from time to time.

 

APPLICABLE
MARGIN.  The Applicable Margin for each
calendar quarter shall be the applicable margin set forth below with respect to
the average daily level of Availability during the previous calendar quarter;
PROVIDED, HOWEVER, during the four complete calendar quarters following the
Closing Date, the Applicable Margin will be set at Level II if the table would
otherwise indicate that the Applicable Margin was to be based on Level I:

 

2

 

	
  Level

  	
   

  	
  Availability

  	
   

  	
  Applicable Margin

  for Base Rate

  Loans

  	
   

  	
  Applicable Margin

  for Eurodollar Rate

  Loans

  	
   

  
	
  I

  	
   

  	
  Greater than $25,000,000

  	
   

  	
  -
  0 - 

  	
   

  	
  2.00

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  II

  	
   

  	
  Greater than $11,000,000
  and equal to or less than $25,000,000

  	
   

  	
  0.25

  	
  %

  	
  2.25

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  III

  	
   

  	
  Equal to or less than
  $11,000,000

  	
   

  	
  0.50

  	
  %

  	
  2.50

  	
  %

  

 

APPLICABLE
PENSION LEGISLATION.  At any time, any
pension or retirement benefits legislation (be it national, federal,
provincial, territorial or otherwise) then applicable to the Borrowers or any
of their Subsidiaries.

 

APPRAISED
INVENTORY LIQUIDATION VALUE.  The
product of (a) the Cost of Eligible Inventory (net of Inventory Reserves)
MULTIPLIED BY (b) that percentage, determined from the then most recent
appraisal of the Borrowers’ Inventory undertaken at the request of the Agent,
to reflect the appraiser’s estimate of the net recovery on the Borrowers’
Inventory in the event of an in-store liquidation of that Inventory.

 

APPRAISED
INVENTORY PERCENTAGE.  85%.

 

APPRAISED
INVENTORY TRANCHE B PERCENTAGE.  95% for
the period from November 1 through August 14, and 102.5% for the period from
August 15 through October 31.

ASSIGNMENT AND
ACCEPTANCE.  See Section 15.1.1.

AVAILABILITY.  The least of (a), (b) and (c), where:

 

(a)                                  is
the result of

 

(i)                                     The
Total Revolving Commitment,

 

MINUS

 

(ii)                                  The
Outstanding amount of the Revolving Credit Loans (after giving effect to all
amounts requested for Revolving Credit Loans and Letters of Credit),

 

MINUS

 

(iii)                               The
Maximum Drawing Amount and all Unpaid Reimbursement Obligations;

 

3

 

(b)                                 is
the result of

 

(i)                                     The
Borrowing Base,

 

MINUS

 

(ii)                                  The
Outstanding amount of the Revolving Credit Loans (after giving effect to all
amounts requested for Revolving Credit Loans and Letters of Credit),

 

MINUS

 

(iii)                               The
Maximum Drawing Amount and all Unpaid Reimbursement Obligations,

 

MINUS

 

(iv)                              The
aggregate of the Availability Reserves; and

 

(c)                                  is
the result of

 

(i)                                     The
Tranche B Borrowing Base,

 

MINUS

 

(ii)                                  The
Outstanding amount of the Revolving Credit Loans and Tranche B Loans (after
giving effect to all amounts requested for Loans and Letters of Credit and
including Tranche B Loan PIK Interest),

 

MINUS

 

(iii)                               The
Maximum Drawing Amount and all Unpaid Reimbursement Obligations,

 

MINUS

 

(iv)                              The
aggregate of the Availability Reserves.

 

AVAILABILITY
BLOCK.  (a) At all times except as
specified in (b), $4,000,000 and (b) from September 7, 2003 through September
30, 2003, $1,500,000, and from October 1, 2003 through October 31, 2003, $500,000.

 

AVAILABILITY
LETTER OF CREDIT.  A letter or letters
of credit in Agent’s possession in form and substance satisfactory to the Agent
in its sole discretion in the aggregate maximum drawing amount in increments of
$1,000,000 of up to $5,000,000, naming the Agent as beneficiary and with an
expiry date of November 30, 2003, with the Kayne Credit Support Indebtedness
Holders as of the Closing Date as the obligors thereunder, under which the
Agent may draw the amount thereof in one (1) draw upon (x) the occurrence of
any Event of Default, (y) the occurrence of any Default within fourteen (14)
days of such expiry date, or (z) any time within fourteen (14) days prior to
such

 

4

 

expiry date if,
on any day within such fourteen-day period, an Event of Default would exist if
the Availability Letter of Credit were to expire on such day.

 

AVAILABILITY
RESERVES.  Without duplication as to
other Reserves, such reserves as the Agent from time to time determines in the
Agent’s reasonable discretion as then being appropriate (determined in
accordance with its customary credit considerations) to reflect the impediments
to the Agent’s ability to realize upon the Collateral.  Without limiting the generality of the
foregoing, Availability Reserves may include (but are not limited to) reserves
based on the following:

 

(a)                                  Common
carrier reserves and warehousemen/fullfillment servicer reserves, unless common
carrier or warehousemen/third party Lien waivers reasonably acceptable to the
Agent have been obtained therefor and Lease reserves, including without
limitation rent due under Leases but not yet paid and two months rent (whether
or not paid) in states where a landlord Lien could reasonably be expected to
prime the Agent’s Lien under the Security Documents (initially, Washington,
Virginia and Pennsylvania), unless a landlord Lien waiver reasonably acceptable
to the Agent has been obtained therefor);

 

(b)                                 Inventory
Landing Costs;

 

(c)                                  Customer
Credit Liabilities; PROVIDED (i) initial reserves with respect to Customer
Credit Liabilities (other than gift certificates in existence for 24 or more
months) shall not exceed 50% of the amount thereof, and (ii) initial reserves
with respect to gift certificates in existence for 24 or more months shall not
exceed 50% of the amount of such gift certificates in excess of $300,000;

 

(d)                                 Taxes
and other governmental charges, including, ad valorem, personal property, and
other taxes which could reasonably be expected to have priority over the security
interests of the Agent in the Collateral;

 

(e)                                  The
FAO Royalty Reserve; and

 

(f)                                    the
amount of the Availability Block in effect at such time.

 

BALANCE SHEET
DATE.  February 1, 2003.

 

BANKRUPTCY
CODE.  Title 11, U.S.C., as amended from
time to time.

 

BASE RATE.  The higher of (a) the variable annual rate
of interest so designated from time to time by Fleet (or any successor in
interest thereto) as its “prime rate”, such rate being a reference rate and not
necessarily representing the lowest or best rate being charged to any customer,
and (b) one-half of one percent (1/2%) above the Federal Funds Effective
Rate.  For the purposes of this
definition, “FEDERAL FUNDS EFFECTIVE RATE” shall mean for any day, the rate per
annum equal to the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by federal
funds brokers, as published for such day (or, if such day is

 

5

 

not a Business
Day, for the next preceding Business Day) by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day that is a Business Day,
the average of the quotations for such day on such transactions received by
Fleet from three funds brokers of recognized standing selected by the
Agent.  Changes in the Base Rate
resulting from any changes in Fleet’s “Prime Rate” shall take place immediately
without notice or demand of any kind.

 

BASE RATE
LOANS.  Revolving Credit Loans bearing
interest calculated by reference to the Base Rate.

 

BLOCKED ACCOUNT
AGREEMENT.  See Section 6.3.2.

 

BOARD OF
DIRECTORS.  The Board of Directors of
any Borrower or any committee thereof duly authorized to act on behalf of such
Board.

 

BORROWERS.  FAO, SCHWARZ, RIGHT START, ZB, and TARGOFF,
and the Subsidiaries of the Borrowers hereafter formed or acquired, but
excluding The Right Start Subsidiary I, Inc.

 

BORROWERS’
REPRESENTATIVE.  FAO.

 

BORROWING
BASE.  The aggregate of the following:

 

(a)                                  The
face amount of Eligible Credit Card Receivables MULTIPLIED BY the Credit Card
Advance Rate,

 

PLUS

 

(b)                                 The
lesser of (i) the Cost of Eligible Inventory (net of Inventory Reserves)
MULTIPLIED BY the Inventory Advance Rate or (ii) the Appraised Inventory
Percentage MULTIPLIED BY the Appraised Inventory Liquidation Value,

 

PLUS

 

(c) If the Availability Letter of Credit exists, until fourteen (14)
days prior to expiry of Availability Letter of Credit, one hundred percent
(100%) of the undrawn amount of the Availability Letter of Credit.

 

BORROWING BASE
REPORT.  A Borrowing Base Report signed
by the chief financial officer, senior vice president-finance, vice
president-accounting or vice president-treasury of the Borrowers’
Representative and in substantially the form of EXHIBIT A hereto.

 

BUSINESS
DAY.  Any day on which banking
institutions in Boston, Massachusetts, and New York, New York, are open for the
transaction of banking business and, in the case of Eurodollar Rate Loans, also
a day which is a Eurodollar Business Day.

 

6

 

BUSINESS
PLAN.  The Borrowers’ business plan
attached hereto as SCHEDULE 1.1(a), as updated from time to time pursuant to
this Agreement.

 

BUYOUT
ACCEPTANCE NOTICE.  See Section 3.6.

 

BUYOUT EXERCISE
NOTICE.  The Agent giving the Tranche B
Lender notice that the Agent intends to grant, consent to, or otherwise
approve, a sale or transfer by the Borrowers of assets at a time when an
OverLoan exists or an OverLoan will exist, or is projected to exist, upon the
completion of such sale or transfer.

 

BUYOUT EXERCISE
PERIOD.  Any time (a) within sixty (60)
days following any Standstill Termination Date, (b) within ten (10) days
following the Tranche B Lender’s receipt of a Buyout Exercise Notice, or (c)
within five (5) days following any Funding Breach.

 

CAPITAL
ASSETS.  Fixed assets, both tangible
(such as land, buildings, fixtures, machinery and equipment) and intangible
(such as patents, copyrights, trademarks, franchises and good will); PROVIDED
that Capital Assets shall not include any item customarily charged directly to
expense or depreciated over a useful life of twelve (12) months or less in
accordance with GAAP.

 

CAPITAL
EXPENDITURES.  Amounts paid or
Indebtedness incurred by any of the Borrowers or any of their Subsidiaries in
connection with (i) the purchase or lease by the Borrowers or any of their
Subsidiaries of Capital Assets that would be required to be capitalized and
shown on the balance sheet of such Person in accordance with GAAP or (ii) the
lease of any assets by the Borrowers or any of their Subsidiaries as lessee
under any Synthetic Lease to the extent that such assets would have been
Capital Assets had the Synthetic Lease been treated for accounting purposes as
a Capitalized Lease.

 

CAPITAL
STOCK.  Any and all shares, interests,
participations or other equivalents (however designated) of capital stock of a
corporation, any and all equivalent ownership interests in a Person (other than
a corporation) and any and all warrants, rights or options to purchase any of the
foregoing.

 

CAPITALIZED
LEASES.  Any and all leases under which
any of the Borrowers or any of their Subsidiaries is the lessee or obligor, the
discounted future rental payment obligations under which are required to be
capitalized on the balance sheet of the lessee or obligor in accordance with
GAAP.

 

CASH
EQUIVALENTS.  As to the Borrowers and
their Subsidiaries, (a) cash money in U.S. Dollars; (b) securities issued or
directly and fully guaranteed or insured by the United States of America and
having a maturity of not more than six (6) months from the date of acquisition;
(c) certificates of deposit, time deposits and eurodollar time deposits with
maturities of six (6) months or less from the date of acquisition, bankers’
acceptances with maturities not exceeding six (6) months and overnight bank
deposits, in each case, (i) with any Lenders or (ii) with any domestic
commercial bank organized under the laws of the United States of America or any
state thereof, in each case having a

 

7

 

rating of not
less than A or its equivalent by S&P or any successor and having capital
and surplus in excess of $1,000,000,000; (d) repurchase obligations with a term
of not more than seven (7) days for underlying securities of the types
described in clauses (b) and (c) above; and (e) any commercial paper or finance
company paper issued by (i) any Lender or any holding company controlling any
Lender or (ii) any other Person that is rated not less than “P-1” or “A-1” or
their equivalents by Moody’s or S&P or their successors.

 

CERCLA.  See definition of “ENVIRONMENTAL LAWS”.

 

CHANGE OF
CONTROL.  An event or series of events
by which (a) the Permitted Holders cease to own beneficial ownership and
control, directly or indirectly, of shares of Capital Stock of FAO representing
thirty five percent (35%) or more of the combined voting power of all Capital
Stock of FAO (on a fully diluted basis) entitled to vote in the election of the
Board of Directors; (b) any Person (other than a Permitted Holder) or any group
(within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended) of Persons (other than Permitted Holders) shall have acquired
beneficial ownership and control, directly or indirectly, of shares of Capital
Stock of FAO representing more than the percentage amount held by the Permitted
Holders of the combined voting power of the Capital Stock of FAO (on a fully
diluted basis) entitled to vote in the election of the Board of Directors; (c)
the individuals on the Closing Date that constituted the Board of Directors of
FAO (together with any new directors whose election by such Board of Directors
or whose nomination for election by the stockholders of FAO was approved by a
vote of a majority of the directors of FAO then still in office who were either
directors on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of FAO then in office; or (d) any of the Borrowers ceases to
own beneficially and legally one hundred percent (100%) of the outstanding
shares of Capital Stock of each of its Subsidiaries on a fully diluted basis.

 

CLOSING
DATE.  The first date on which the
conditions set forth in Section 11 have been satisfied and any Revolving Credit
Loans or Tranche B Loans are to be made or any Letter of Credit is to be issued
hereunder, which date shall not be later than May 9, 2003.

 

CODE.  The Internal Revenue Code of 1986.

 

COLLATERAL.  See Section 6.1.

 

COMMITMENT.  With respect to each Revolving Credit
Lender, the amount set forth on SCHEDULE 1.1(b) hereto as the amount of such
Revolving Credit Lender’s commitment to make Revolving Credit Loans to, and to
participate in the issuance, extension and renewal of Letters of Credit for the
account of, the Borrowers, as the same may be reduced from time to time; or if
such commitment is terminated pursuant to the provisions hereof, zero.  With respect to the Tranche B Lender, the
outstanding principal amount of the Tranche B Loan.

 

8

 

COMMITMENT
PERCENTAGE.  With respect to each
Revolving Credit Lender, the percentage set forth on SCHEDULE 1.1(b) hereto as
such Revolving Credit Lender’s percentage of the aggregate Commitments of all
of the Revolving Credit Lenders.

 

COMMITMENT
REDUCTION FEE.  See Section 2.4.

 

COMPLIANCE
CERTIFICATE.  See Section 8.4(d).

 

CONSOLIDATED.  With reference to any term defined herein,
shall mean that term as applied to the accounts of FAO and its Subsidiaries,
consolidated in accordance with GAAP.

 

CONVERSION
REQUEST.  A notice given by the
Borrowers’ Representative to the Agent of the Borrowers’ election to convert or
continue a Loan in accordance with Section 2.10.

 

COPYRIGHT
SECURITY AGREEMENT.  The Copyright
Security Agreement, dated or to be dated on the Closing Date, made by the
Borrowers and their Subsidiaries in favor of the Agent, in form and substance
satisfactory to the Lenders and the Agent.

 

COST.  The calculated cost of purchases, based upon
the Borrowers’ accounting practices, known to the Agent, which practices are in
effect on the date on which this Agreement was executed as such calculated cost
is determined from: invoices received by the Borrowers; the Borrowers’ purchase
journal; or the Borrowers’ stock ledger. 
“Cost” does not include inventory capitalization costs or other
non-purchase price charges used in the Borrowers’ calculation of cost of goods
sold (other than freight expense which may be capitalized consistent with GAAP
to the extent included in the Agent’s Inventory appraisal and consistent with
the Borrowers’ prior practices).  The
Cost of Eligible Inventory will be determined in a manner consistent with the
Borrowers’ then current tracking practices, based on the Borrowers’ stock
ledger inventory.

 

CREDIT CARD
ADVANCE RATE.  85%.

 

CUSTOMER CREDIT
LIABILITY.  Gift certificates, customer
deposits, offsets, merchandise credits, layaway obligations, frequent shopping
programs, and similar liabilities of the Borrowers and their Subsidiaries to
their retail customers and prospective customers.

 

CUSTOMS BROKER
AGREEMENTS.  Agreements between the
Agent and customs brokers with respect to Eligible L/C Inventory, each in form
and substance satisfactory to the Agent.

 

DDA
NOTIFICATION.  See Section 6.3.2.

 

DEFAULT.  Any occurrence, circumstance, or state of
facts with respect to the Borrowers which (a) is an Event of Default; or (b)
would become an Event of Default if

 

9

 

any requisite
notice were given and/or any requisite period of time were to run and such
occurrence, circumstance, or state of facts were not absolutely cured within
any applicable grace period.

 

DELINQUENT
LENDER.  See Section 14.5.3.

 

DEPOSIT
ACCOUNT.  See Section 6.3.2.

 

DERIVATIVE
CONTRACT.  See definition of
“Indebtedness”.

 

DESIGNATED
BORROWER OFFICER.  As to any Borrower or
Subsidiary thereof, the President, Chief Executive Officer, Chief Financial
Officer, Chief Accounting Officer, any Executive Vice President, Senior Vice
President-Finance, Controller, the General Counsel, and any other Person
who delivers or is authorized or permitted hereunder to deliver any
certificates or reports hereunder.

 

DISTRIBUTION.  The declaration or payment of any dividend
on or in respect of any shares of any class of Capital Stock of the Borrowers,
other than dividends payable solely in shares of Capital Stock of the
Borrowers; the purchase, redemption, defeasance, retirement or other
acquisition of any shares of any class of Capital Stock of the Borrowers,
directly or indirectly through a Subsidiary of the Borrowers or otherwise
(including the setting apart of assets for a sinking or other analogous fund to
be used for such purpose); the return of capital by the Borrowers to their
shareholders as such; or any other distribution on or in respect of any shares
of any class of Capital Stock of the Borrowers.

 

DOLLARS or
$.  Dollars in lawful currency of the
United States of America.

 

DOMESTIC
LENDING OFFICE.  Initially, the office
of each Revolving Credit Lender designated as such in SCHEDULE 1.1(b) hereto;
thereafter, such other office of such Revolving Credit Lender, if any, located
within the United States that will be making or maintaining Base Rate Loans.

 

DRAWDOWN DATE.  The date on which any Revolving Credit Loan
or Tranche B Loan is made or is to be made, and the date on which any Revolving
Credit Loan is converted or continued in accordance with Section 2.10.

 

ELIGIBLE CREDIT
CARD RECEIVABLES.  Accounts due to a Borrower
within three (3) to five (5) Business Days from the date of sale on a
non-recourse basis from (a) Visa, MasterCard, American Express Co. or Discover,
and (b) other credit card issuers and/or processors acceptable to the Agent and
the Tranche B Lender in their reasonable discretion as arise in the ordinary
course of business for the purchase of merchandise or services which have been
earned by performance; PROVIDED, none of the following shall be deemed to be
Eligible Credit Card Receivables:

 

(i)                                     Accounts
that are past due;

 

10

 

(ii)                                  Accounts
with respect to which a Borrower does not have good, valid and marketable title
thereto, free and clear of any Lien (other than Liens granted to the Agent
hereunder);

 

(iii)                               Accounts
that are not subject to a first priority security interest in favor of the
Agent;

 

(iv)                              Accounts
which are disputed, are with recourse, or with respect to which a claim,
counterclaim, offset or chargeback has been asserted (to the extent of such
claim, counterclaim, offset or chargeback); and

 

(v)                                 Accounts
which the Agent determines in its reasonable discretion to be unlikely to be
collected.

 

ELIGIBLE
INVENTORY.

 

(a)                                  Such
of the Borrowers’ Inventory which is finished goods, merchantable and readily
saleable, and located at such locations, and of such types, character,
qualities and quantities, as the Agent in its reasonable discretion (based on
customary credit considerations of the Agent) from time to time determines to
be acceptable for borrowing, as to which Inventory, the Agent has a perfected
security interest which is prior and superior to all security interests,
claims, and Liens, PROVIDED none of the following shall be Eligible Inventory:
(i) Inventory that is not owned solely by a Borrower or for which a Borrower
does not have good and valid title thereto or Inventory that is leased or on
consignment; (ii) Inventory (including any portion thereof in transit from
vendors) that is not located at a distribution center used by a Borrower in the
ordinary course or at a property that is owned or leased by a Borrower, unless
in each case appropriate waivers have been obtained by the Agent, except
Inventory owned by a Borrower and in transit from a distribution center to a
retail store may be deemed Eligible Inventory provided adequate Reserves
therefor are established by the Agent with respect to overdue common carrier
charges in accordance with the terms of this Agreement; (iii) Inventory that
represents (A) goods damaged, defective or otherwise unmerchantable, (B) goods
that do not conform in all material respects to the representations and
warranties contained in this Agreement or any of the other Loan Documents, or
(C) return to vendor goods; (iv) Inventory that is not located in the United
States of America (excluding territories and possessions thereof); (v)
Inventory that is not subject to a perfected first-priority security interest
in favor of the Agent for the benefit of the Lenders; (vi) Inventory which
consists of samples, labels, bags, packaging, and other similar non-merchandise
categories; (vii) Inventory as to which insurance in compliance with the
provisions of this Agreement is not in effect; and (viii) Inventory which has
been sold but not yet delivered; and

 

(b)                                 Eligible
L/C Inventory.

 

ELIGIBLE L/C
INVENTORY.  Inventory (other than
Eligible Inventory described in subparagraph (a) of the definition thereof),
the purchase of which by a Borrower is

 

11

 

supported by a
documentary Letter of Credit issued by the Letter of Credit Issuer and having
an initial expiry of sixty (60) or fewer days, PROVIDED

 

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

 

(b)                                 The
documentary Letter of Credit supporting such purchase names the Agent as
consignee of the subject Inventory and the Agent has control over the documents
which evidence ownership of the subject Inventory (such as by the providing to
the Agent of a Customs Broker Agreement).

 

EMERGENCE
VENDOR LIABILITIES.  Existing
Liabilities of the Borrowers owed to holders of Allowed Class 8 Claims under
and as defined in the Plan of Reorganization, as set forth on SCHEDULE 1.1(c)
to this Agreement.

 

EMPLOYEE
BENEFIT PLAN.  Any employee benefit plan
within the meaning of Section 3(3) of ERISA maintained or contributed to by the
Borrowers or any ERISA Affiliate, other than a Guaranteed Pension Plan or a
Multiemployer Plan.

 

ENVIRONMENTAL
LAWS.  Any decree, order, law, license,
rule or regulation pertaining to environmental matters, including without
limitation, those arising under the Resource Conservation and Recovery Act
(“RCRA”), the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 as amended (“CERCLA”), the Superfund Amendments and Reauthorization
Act of 1986 (“SARA”), the Federal Clean Water Act, the Federal Clean Air Act,
the Toxic Substances Control Act, or any state, local or foreign law, statute,
regulation, ordinance, order or decree relating to health, safety or the
environment.

 

EPA.  See Section 7.18.

 

EQUIPMENT.  All of Borrowers’ now owned or hereafter
acquired right, title, and interest with respect to “equipment”, as such term
is defined from time to time in the UCC, fixtures and vehicles (including motor
vehicles) including all attachments, accessories, accessions, replacements,
substitutions, additions, and improvements to any of the foregoing.

 

EQUIPMENT
FINANCING INDEBTEDNESS.  Indebtedness
for borrowed money incurred after the Closing Date, including without
limitation the Kayne Credit Support Indebtedness, secured by an Equipment
Financing Lien.

 

EQUIPMENT
FINANCING LIEN.  A Lien granted by FAO, Schwarz
or ZB on Equipment owned by such Borrower as of the Closing Date.

 

ERISA.  The Employee Retirement Income Security Act
of 1974.

 

12

 

ERISA
AFFILIATE.  Any Person which is treated
as a single employer with the Borrowers under Section 414(b), (c), (m) and (o)
of the Code.

 

ERISA
REPORTABLE EVENT.  A reportable event
with respect to a Guaranteed Pension Plan within the meaning of Section 4043 of
ERISA and the regulations promulgated thereunder.

 

EUROCURRENCY
RESERVE RATE.  For any day with respect
to a Eurodollar Rate Loan, the maximum rate (expressed as a decimal) at which
any bank subject thereto would be required to maintain reserves under
Regulation D of the Board of Governors of the Federal Reserve System (or any
successor or similar regulations relating to such reserve requirements) against
“EUROCURRENCY LIABILITIES” (as that term is used in Regulation D), if such
liabilities were outstanding.  The
Eurocurrency Reserve Rate shall be adjusted automatically on and as of the
effective date of any change in the Eurocurrency Reserve Rate.

 

EURODOLLAR
BUSINESS DAY.  Any day on which
commercial banks are open for international business (including dealings in
Dollar deposits) in London or such other eurodollar interbank market as may be
selected by the Agent in its sole reasonable discretion acting in good faith.

 

EURODOLLAR
LENDING OFFICE.  Initially, the office
of each Revolving Credit Lender designated as such in SCHEDULE 1.1(b) hereto;
thereafter, such other office of such Lender, if any, that shall be making or
maintaining Eurodollar Rate Loans.

 

EURODOLLAR
RATE.  For any Interest Period with
respect to a Eurodollar Rate Loan, the rate of interest equal to (a) the
arithmetic average of the rates per annum (rounded upwards to the nearest 1/100
of one percent) determined by the Agent in good faith to be the highest
prevailing rate per annum at which Fleet is offered Dollar deposits two
Eurodollar Business Days prior to the beginning of such Interest Period in the
interbank eurodollar market where the eurodollar and foreign currency and
exchange operations of Fleet are customarily conducted, for delivery on the
first day of such Interest Period for the number of days comprised therein and
in an amount comparable to the amount of the Eurodollar Rate Loan of the Lender
to which such Interest Period applies, divided by (b) a number equal to 1.00
minus the Eurocurrency Reserve Rate, if applicable.

 

EURODOLLAR RATE
LOANS.  Revolving Credit Loans bearing
interest calculated by reference to the Eurodollar Rate.

 

EVENT OF
DEFAULT.  See Section 13.1.  An “Event of Default” shall be deemed to
have occurred and be continuing unless and until duly waived by the requisite
Lenders or by the Agent, as applicable, in accordance with this Agreement.

 

EXCESS
AVAILABILITY.  The result of
(a) Availability MINUS (b) all then past due obligations of the
Borrowers including accounts payable which are beyond customary trade terms and
rent obligations which are beyond applicable grace periods.

 

13

 

FAO.  See preamble.

 

FAO ROYALTY
RESERVE.  At any date, with respect to
the projected annual royalties payable under the FAO Trademark License, at
least 1/12th of such annual royalty for each month covered by such
annual royalty through such date until such annual royalty is paid in
full.  Such projected annual royalty
shall be reasonably projected by FAO in good faith based upon the projected and
actual financial performance of the Borrowers.

 

FAO TRADEMARK
LICENSE.  See Section 7.6.

 

FEES.  Collectively, the Unused Fee, the Letter of
Credit Fees, the Agent Fees and the Tranche B Lender Fees.

 

FINANCIAL
AFFILIATE.  A Subsidiary of the bank
holding company controlling any Lender, which Subsidiary is engaging in any of
the activities permitted by Section 4(e) of the Bank Holding Company Act of
1956 (12 U.S.C. Section 1843).

 

FLEET.  Fleet National Bank, a national banking
association.

 

FLEET
CONCENTRATION ACCOUNT.  See Section
8.14.1.

 

FRFI.  Fleet Retail Finance Inc., a Delaware
corporation.

 

GAAP OR
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. 
Principles that are (i) consistent with the principles promulgated or
adopted by the Financial Accounting Standards Board and its predecessors, as in
effect from time to time in the United States of America, and (ii) consistently
applied with past financial statements of the Borrowers adopting the same
principles, provided that in each case referred to in this definition of “GAAP”
a certified public accountant would, insofar as the use of such accounting
principles is pertinent, be in a position to deliver an unqualified opinion
(other than a qualification regarding changes in GAAP) as to financial
statements in which such principles have been properly applied.

 

GOVERNING
DOCUMENTS.  With respect to any Person,
its certificate or articles of incorporation, its by-laws or other
organizational documents and all shareholder agreements, voting trusts and
similar arrangements applicable to any of its Capital Stock.

 

GOVERNMENTAL
AUTHORITY.  Any foreign, federal, state,
regional, local, municipal or other government, or any department, commission,
board, bureau, agency, public authority or instrumentality thereof, or any
court or arbitrator.

 

GUARANTEED
PENSION PLAN.  Any employee pension
benefit plan within the meaning of Section 3(2) of ERISA maintained or
contributed to by the Borrowers or any ERISA Affiliate the benefits of which
are guaranteed on termination in full or in part by the PBGC pursuant to Title
IV of ERISA, other than a Multiemployer Plan.

 

14

 

HAZARDOUS
SUBSTANCES.  Any hazardous waste, as
defined by 42 U.S.C. Section 6903(5), any hazardous substances as defined by 42
U.S.C. Section 9601(14), any pollutant or contaminant as defined by 42 U.S.C.
Section 9601(33) and any toxic substances, oil or hazardous materials or other
chemicals or substances regulated by any Environmental Laws.

 

HOST
STORE.  Saks and any other Person which
operates retail stores at which any Borrower operates retail departments as
so-called “licensed departments”.

 

HOST STORE
ACKNOWLEDGEMENT.  An agreement which is
reasonably satisfactory to the Agent and the Tranche B Lender which is executed
and delivered by a Host Store and the Borrowers in favor of the Agent and
includes reasonable safeguards and protections concerning the interests of the
Agent and the Lenders in the assets and operations of the Borrowers operating
in such Host Store.

 

INDEBTEDNESS.  As to any Person and whether recourse is
secured by or is otherwise available against all or only a portion of the
assets of such Person and whether or not contingent, but without duplication:

 

(a)                                  every
obligation of such Person for money borrowed,

 

(b)                                 every
obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses,

 

(c)                                  every
reimbursement obligation of such Person with respect to letters of credit,
bankers’ acceptances or similar facilities issued for the account of such
Person,

 

(d)                                 every
obligation of such Person issued or assumed as the deferred purchase price of
property or services (including securities repurchase agreements but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business which are not overdue or which are being contested in good faith),

 

(e)                                  every
obligation of such Person under any Capitalized Lease,

 

(f)                                    every
obligation of such Person under any Synthetic Lease,

 

(g)                                 all
sales by such Person of (i) accounts or general intangibles for money due or to
become due, (ii) chattel paper, instruments or documents creating or evidencing
a right to payment of money or (iii) other receivables (collectively
“RECEIVABLES”),  whether pursuant to a
purchase facility or otherwise, other than in connection with the disposition
of the business operations of such Person relating thereto or a disposition of
defaulted receivables for collection and not as a financing arrangement, and
together with any obligation of such Person to pay any discount, interest,
fees, indemnities, penalties, recourse, expenses or other amounts in connection
therewith,

 

15

 

(h)                                 every
obligation of such Person (an “EQUITY RELATED PURCHASE OBLIGATION”) to
purchase, redeem, retire or otherwise acquire for value,  any shares of Capital Stock issued by such
Person or any rights measured by the value of such Capital Stock,

 

(i)                                     every
obligation of such Person under any forward contract, futures contract, swap,
option or other financing agreement or arrangement (including, without
limitation, caps, floors, collars and similar agreements), in each case the
value of which is dependent upon interest rates, currency exchange rates,
commodities or other indices (in each case, a “DERIVATIVE CONTRACT”),

 

(j)                                     every
obligation in respect of Indebtedness of any other entity (including any
partnership in which such Person is a general partner) to the extent that such
Person is liable therefor as a result of such Person’s ownership interest in or
other relationship with such entity, except to the extent that the terms of
such Indebtedness provide that such Person is not liable therefor and such
terms are enforceable under applicable law,

 

(k)                                  every
obligation, contingent or otherwise, of such Person guaranteeing, or having the
economic effect of guarantying or otherwise acting as surety for, any
obligation of a type described in any of clauses (a) through (j) (the “PRIMARY
OBLIGATION”) of another Person (the “PRIMARY OBLIGOR”), in any manner, whether
directly or indirectly, and including, without limitation, any obligation of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
of) any security for the payment of such primary obligation, (ii) to purchase
property, securities or services for the purpose of assuring the payment of
such primary obligation, or (iii) to maintain working capital, equity capital
or other financial statement condition or liquidity of the Primary Obligor so
as to enable the primary obligor to pay such primary obligation.

 

The “AMOUNT” or
“PRINCIPAL AMOUNT” of any Indebtedness at any time of determination represented
by (t) any Indebtedness, issued at a price that is less than the principal
amount at maturity thereof, shall be the amount of the liability in respect
thereof determined in accordance with GAAP, (u) any Capitalized Lease shall be
the principal component of the aggregate of the rental obligations under such
Capitalized Lease payable over the term thereof that is not subject to
termination by the lessee, (v) any sale of receivables shall be the amount of
unrecovered capital or principal investment of the purchaser (other than the
Borrowers or any of their wholly-owned Subsidiaries) thereof, excluding amounts
representative of yield or interest earned on such investment, (w) any
Synthetic Lease shall be the stipulated loss value, termination value or other
equivalent amount, (x) any Derivative Contract shall be the maximum amount of
any net termination or loss payment required to be paid by such Person if such
Derivative Contract were, at the time of determination, to be terminated by
reason of any event of default or early termination event thereunder, whether
or not such event of default or early termination event has in fact occurred,
(y) any Equity Related Purchase Obligation shall be the maximum fixed
redemption or purchase price thereof inclusive of any accrued and unpaid
dividends to be comprised in such redemption or purchase price and (z) any

 

16

 

guaranty or
other contingent liability referred to in clause (k) shall be an amount equal
to the stated or determinable amount of the primary obligation in respect of
which such guaranty or other contingent obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof
(assuming such Person is required to perform thereunder) as determined by such
Person in good faith.

 

INELIGIBLE
SECURITIES.  Securities which may not be
underwritten or dealt in by member banks of the Federal Reserve System under
Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as
amended.

 

INSTRUMENT.  See Section 1.2(a).

 

INTERCOMPANY
NOTES.  See Section 9.1(e).

 

INTEREST
PAYMENT DATE.  (a) As to any Base Rate
Loan, the last day of the calendar month with respect to interest accrued
during such calendar month, including, without limitation, the calendar month
which includes the Drawdown Date of such Base Rate Loan; (b) as to any
Eurodollar Rate Loan, the last day of such Interest Period and, if the Interest
Period applicable to such Eurodollar Rate Loan is more than three (3) months,
the date which is three (3) months after the commencement of such Interest
Period, and (c) following the occurrence of any Event of Default, with such
frequency as may be determined by the Agent.

 

INTEREST
PERIOD.  With respect to each Revolving
Credit Loan, (a) initially, the period commencing on the Drawdown Date of such
Loan and ending on the last day of one of the periods set forth below, as
selected by the Borrowers’ Representative in a Loan Request or as otherwise
required by the terms of this Agreement (i) for any Base Rate Loan, the last
day of the calendar month; and (ii) for any Eurodollar Rate Loan, 1, 2, 3 or 6
months; and (b) thereafter, each period commencing on the last day of the next
preceding Interest Period applicable to such Revolving Credit Loan and ending
on the last day of one of the periods set forth above, as selected by the
Borrowers’ Representative in a Conversion Request; PROVIDED that all of the
foregoing provisions relating to Interest Periods are subject to the following:

 

(A)                              if
any Interest Period with respect to a Eurodollar Rate Loan would otherwise end
on a day that is not a Eurodollar Business Day, that Interest Period shall be
extended to the next succeeding Eurodollar Business Day unless the result of
such extension would be to carry such Interest Period into another calendar
month, in which event such Interest Period shall end on the immediately
preceding Eurodollar Business Day;

 

(B)                                if
any Interest Period with respect to a Base Rate Loan would end on a day that is
not a Business Day, that Interest Period shall end on the next succeeding
Business Day;

 

17

 

(C)                                if
the Borrowers’ Representative shall fail to give notice as provided in Section
2.10, the Borrowers shall be deemed to have requested a conversion of the
affected Eurodollar Rate Loan to a Base Rate Loan and the continuance of all
Base Rate Loans as Base Rate Loans on the last day of the then current Interest
Period with respect thereto;

 

(D)                               any
Interest Period relating to any Eurodollar Rate Loan that begins on the last
Eurodollar Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Eurodollar Business Day of a calendar month; and

 

(E)                                 no
Interest Period shall extend beyond the Maturity Date.

 

INTEREST RATE
AGREEMENT.  Any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement,
interest rate futures contract, interest rate option agreement or other similar
agreement or arrangement to which the Borrowers and the Agent is a party,
designed to protect the Borrowers against fluctuations in interest rates.

 

INTERIM
CONCENTRATION ACCOUNT.  Deposit Accounts
(other than Local Accounts and the Fleet Concentration Account) with financial
institutions which have entered into Blocked Account Agreements.

 

INVENTORY.  With respect to the Borrowers, finished
goods, work in progress and raw materials and component parts inventory owned
by the Borrowers.

 

INVENTORY
ADVANCE RATE.  For each calendar month,
the corresponding percentage set forth below opposite such month, as such
percentage is adjusted from time to time by the Agent to reflect changes in the
nature and quality of Borrowers’ Inventory based upon the most recent appraisal
of the Borrower’s Inventory undertaken at the Agents’ request, using modeling
criteria consistent with the modeling criteria applied by the Agent to set the
initial Inventory Advance Rates hereunder, but not adjusted by the Agent more
than 500 basis points above each of the initial Percentages set forth below
without the consent of the Required Revolving Credit Lenders:

 

	
  Month

  	
   

  	
  Percentage

  	
   

  
	
  February

  	
   

  	
  57.0

  	
  %

  
	
  March

  	
   

  	
  58.8

  	
  %

  
	
  April

  	
   

  	
  57.1

  	
  %

  
	
  May

  	
   

  	
  58.1

  	
  %

  
	
  June

  	
   

  	
  58.2

  	
  %

  
	
  July

  	
   

  	
  58.8

  	
  %

  
	
  August

  	
   

  	
  60.9

  	
  %

  
	
  September

  	
   

  	
  61.3

  	
  %

  
	
  October

  	
   

  	
  64.0

  	
  %

  
	
  November

  	
   

  	
  77.0

  	
  %

  
	
  December

  	
   

  	
  74.5

  	
  %

  
	
  January

  	
   

  	
  55.2

  	
  %

  

 

18

 

INVENTORY
LANDING COSTS.  Customs, customs broker
fees, duties, freight (to the extent not included in Agent’s applicable
Inventory appraisal), and other costs and expenses which will be expended to
release Inventory being imported into the United States.

 

INVENTORY
RESERVES.  Without duplication as to
other Reserves, such reserves as may be established from time to time by the
Agent in the Agent’s reasonable discretion with respect to the determination of
shrink, the saleability, at retail, of the Eligible Inventory or which reflect
such other factors as affect the market value of the Eligible Inventory.

 

INVESTMENTS.  All expenditures made and all liabilities
incurred (contingently or otherwise) for the acquisition of stock or
Indebtedness of, or for loans, advances, capital contributions or transfers of
property to, or in respect of any guaranties (or other commitments as described
under Indebtedness), or obligations of, any Person.  In determining the aggregate amount of Investments outstanding at
any particular time: (a) the amount of any Investment represented by a guaranty
shall be taken at not less than the principal amount of the obligations
guaranteed and still outstanding; (b) there shall be included as an Investment
all interest accrued with respect to Indebtedness constituting an Investment
unless and until such interest is paid; (c) there shall be deducted in respect
of each such Investment any amount received as a return of capital (but only by
repurchase, redemption, retirement, repayment, liquidating dividend or
liquidating distribution); (d) there shall not be deducted in respect of any Investment
any amounts received as earnings on such Investment, whether as dividends,
interest or otherwise, except that accrued interest included as provided in the
foregoing clause (b) may be deducted when paid; and (e) there shall not be
deducted from or added to the aggregate amount of Investments any decrease or
increase in the value thereof.

 

KAYNE CREDIT
SUPPORT INDEBTEDNESS.  Indebtedness to
the extent permitted hereunder hereafter incurred and owing by the Borrowers to
the Kayne Credit Support Indebtedness Holders in the aggregate principal amount
of up to the face amount of the Availability Letter of Credit whether
contingent as to a draw not yet made thereunder or evidenced by the New Kayne
Availability Notes with respect to a draw made under the Availability Letter of
Credit.

 

KAYNE CREDIT
SUPPORT INDEBTEDNESS HOLDERS.  Fred
Kayne, Kayne Anderson Capital Advisors, L.P., Richard Kayne, Hancock Park
Capital II, L.P., Woodacres LLC, Les Biller and Charles Norris, and their
respective assigns; PROVIDED they have assumed pursuant to an agreement in form
and substance reasonably satisfactory to the Agent the intercreditor and
subordination agreement in favor of Agent with respect to the Kayne Credit
Support Indebtedness and the Kayne Existing Lien.

 

19

 

KAYNE EXISTING
INDEBTEDNESS.  Existing Indebtedness
held by the Kayne Existing Indebtedness Holders under the Plan of
Reorganization evidenced by the “New Kayne Anderson Equipment Notes” of FAO,
Schwarz and ZB under and as defined in the Plan of Reorganization in the
original principal amount of $4,000,000.

 

KAYNE EXISTING
INDEBTEDNESS HOLDERS.  Arbco Associates,
Inc., Richard A. Kayne & Suzanne L. Kayne, Trustees, Kayne Anderson Capital
Income Partners (Q.P.), L.P., Kayne Anderson Diversified Capital Partners,
L.P., Kayne Anderson Capital Income Partners, L.P., Kayne Anderson
Non-Traditional, and Kayne Anderson Capital Partners, L.P., and their
respective assigns; PROVIDED they have assumed pursuant to an agreement in form
and substance reasonably satisfactory to the Agent the intercreditor and
subordination agreement in favor of the Agent with respect to the Kayne
Existing Indebtedness and the Kayne Existing Lien.

 

KAYNE EXISTING
LIEN.  A Lien on the existing and
hereafter acquired Equipment of FAO, Schwarz and ZB in favor of the Kayne
Existing Indebtedness Holders to secure the Kayne Existing Indebtedness and, if
hereafter incurred and to the extent permitted hereunder, the Kayne Credit
Support Indebtedness and the Equipment Financing Indebtedness, superior to the
Lien of the Agent as to Equipment owned by FAO, Schwarz or ZB and existing on
the Closing Date and subordinate to the Lien of the Agent as to all other
Equipment.

 

KAYNE
GROUP.  Fred Kayne, Richard Kayne, and
Affiliates of Kayne Anderson Capital Advisors, L.P.

 

KBB EXISTING
INDEBTEDNESS.  Existing Indebtedness
held by the KBB Existing Indebtedness Holders under the Plan of Reorganization
consisting of (a) the “New KBB Subordinated Note” of Schwarz and guaranteed by
FAO under and as defined in the Plan of Reorganization in the original
principal amount of $9,900,000, and (b) a $500,000 cash payment of Schwarz due
and payable pursuant to the Plan of Reorganization.

 

KBB EXISTING
INDEBTEDNESS HOLDERS.  KBB Retail Assets
Corp. (f/k/a F.A.O. Schwarz) a New York corporation, and Quality Fulfillment
Services, Inc., a Virginia corporation, and their respective assigns; PROVIDED
they have assumed pursuant to an agreement in form and substance satisfactory
to the Agent the intercreditor and subordination agreement in favor of the
Agent with respect to the KBB Existing Indebtedness and the KBB Existing Lien.

 

KBB EXISTING
LIEN.  A Lien on the existing and future
assets of FAO and Schwarz pursuant to the security agreement of FAO and the
Security Agreement of Schwarz securing the KBB Existing Indebtedness,
subordinate to the Lien of the Agent on all such assets.

 

LEASE.  Any lease or other agreement, no matter how
styled or structured, pursuant to which a Borrower is entitled to the use or
occupancy of any space.

 

20

 

LENDER
AFFILIATE.  (a) With respect to any
Lender, (i) an Affiliate of such Lender or (ii) any entity (whether a
corporation, partnership, limited liability company, trust or legal entity)
that is engaged in making, purchasing, holding or otherwise investing in bank
loans and similar extensions of credit in the ordinary course of its business
and is administered or managed by such Lender or an Affiliate of such Lender
and (b) with respect to any Lender that is a fund which invests in bank loans
and similar extensions of credit, any other entity (whether a corporation,
partnership, limited liability company, trust or other legal entity) that is a
fund that invests in bank loans and similar extensions of credit and is managed
by the same investment advisor as such Lender or by an Affiliate of such
investment advisor.

 

LENDERS.  The Revolving Credit Lenders and the Tranche
B Lender.

 

LENDERS SPECIAL
COUNSEL.  See Section 16.2.

 

LETTER OF
CREDIT.  See Section 4.1.1.

 

LETTER OF
CREDIT APPLICATION.  See Section 4.1.1.

 

LETTER OF
CREDIT FEE.  See Section 4.6.

 

LETTER OF
CREDIT ISSUER.  Fleet or such other
Person selected by the Agent to issue Letters of Credit.

 

LETTER OF
CREDIT PARTICIPATION.  See Section
4.1.4.

 

LIEN.  Any mortgage, deed of trust, security
interest, pledge, hypothecation, assignment, attachment, deposit arrangement,
encumbrance, lien (statutory, judgment or otherwise), or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including any conditional sale or other title retention agreement, any
Capitalized Lease, any Synthetic Lease, any financing lease involving
substantially the same economic effect as any of the foregoing and the filing
of any financing statement under the UCC or comparable law of any
jurisdiction).

 

LIQUIDATION.  See Section 13.1.  Derivations of the word “Liquidation” (such as “Liquidate”) are
used with like meaning in this Agreement.

 

LOAN
ACCOUNT.  See Section 2.7.1.

 

LOAN
DOCUMENTS.  This Agreement, the Notes,
the Agent Fee Letter, the Tranche B Fee Letter, the Letter of Credit
Applications, the Letters of Credit and the Security Documents.

 

LOAN
REQUEST.  See Section 2.9.l.

 

LOANS.  The Revolving Credit Loans and the Tranche B
Loan.

 

21

 

LOCAL
ACCOUNTS.  Deposit Accounts, in each
case maintained for the benefit of four (4) or less retail locations of the
Borrowers (excluding the New York City and Boston stores, respectively) which
at no time contain a balance in excess of $10,000.

 

MATERIAL
ADVERSE EFFECT.  With respect to any
event or occurrence of whatever nature (including any adverse determination in
any litigation, arbitration or governmental investigation or proceeding):

 

(a)                                  a
material adverse effect on the business, properties, financial condition,
assets or operations of any of the Borrowers or of the Borrowers and their
Subsidiaries, taken as a whole;

 

(b)                                 any
material impairment of the ability of the Borrowers taken as a whole, to
perform any of their respective Obligations under any of the Loan Documents to
which it is a party; or

 

(c)                                  any
material impairment of the validity, binding effect or enforceability of this
Agreement or any of the other Loan Documents, any material impairment of the
rights, remedies or benefits available to the Agent or any Lender under any
Loan Document, any material impairment of the ability of the Agent or any
Lender to realize upon the Collateral, or any impairment of the attachment,
perfection or priority of any Lien of the Agent under the Security Documents.

 

MATURITY
DATE.  April 22, 2006.

 

MAXIMUM DRAWING
AMOUNT.  The maximum aggregate amount
that the beneficiaries may at any time draw under outstanding Letters of
Credit, as such aggregate amount may be reduced from time to time pursuant to
the terms of the Letters of Credit.

 

MOODY’S.  Moody’s Investors Services, Inc.

 

MULTIEMPLOYER
PLAN.  Any multiemployer plan within the
meaning of Section 3(37) of ERISA maintained or contributed to by the Borrowers
or any ERISA Affiliate.

 

NEW KAYNE
AVAILABILITY NOTES.  Promissory notes
issued after the Closing Date by FAO, Schwarz and ZB in favor of the Kayne
Credit Support Indebtedness Holders, evidencing draws made under the
Availability Letter of Credit, each of which shall be in form and substance
reasonably satisfactory to the Agent.

 

NONCONSENTING
LENDER.  See Section 14.22.

 

NOTES.  The Revolving Credit Notes and Tranche B
Notes.

 

OBLIGATIONS.  (a) All indebtedness, obligations and
liabilities of any of the Borrowers and their Subsidiaries to any of the
Lenders, the Letter of Credit Issuer, the Agent and any Affiliates of the
Agent, individually or collectively, existing on the date of this Agreement or
arising thereafter, direct or indirect, joint or several, absolute or
contingent,

 

22

 

matured or
unmatured, liquidated or unliquidated, secured or unsecured, arising by
contract, operation of law or otherwise, to the extent arising or incurred
under this Agreement or any of the other Loan Documents or in respect of any of
the Loans made or Reimbursement Obligations incurred or any of the Notes,
Letter of Credit Applications, Letters of Credit or other instruments at any time
evidencing any thereof; and

 

(b)                                 Any
and all direct or indirect liabilities, debts, and obligations of the Borrowers
to the Agent or any Affiliate of the Agent, each of every kind, nature, and
description owing on account of any service or accommodation provided to, or
for the account of any of the Borrowers pursuant to any Interest Rate Agreement
or pursuant to this or any other Loan Document, including cash management
services or any other fee based banking products.

 

OPERATING
ACCOUNT.  See Section 2.9.2.

 

OUTSTANDING.  With respect to the Loans, the aggregate
unpaid principal balance thereof as of any date of determination.

 

OVERLOAN.  A Loan, advance, or providing of credit
support (such as the issuance of any Letter of Credit) (a) to the extent that,
immediately after its having been made, Availability is less than $0, or (b) at
a time when the Borrowers not in compliance with Section 10.1 of this
Agreement.

 

PARTICIPANT.  Any Person that acquires a direct or
indirect participation in a Lender’s rights and obligations under this
Agreement and the other Loan Documents.

 

PBGC.  The Pension Benefit Guaranty Corporation
created by Section 4002 of ERISA and any successor entity or entities having
similar responsibilities.

 

PERFECTION
CERTIFICATE.  See Section 7.14.1.

 

PERMITTED
HOLDERS.  (a) Any of the Kayne Group,
and (b) Permitted Transferees.

 

PERMITTED
LIENS.  Liens permitted by Section 9.2.

 

PERMITTED
PROTECTIVE ADVANCE.  See Section
14.15(a).

 

PERMITTED
PROTEST.  The right of Borrowers to
protest any tax (other than payroll taxes or taxes that are the subject of a
federal tax lien or any state or local tax lien), PROVIDED (a) a reserve with
respect to such tax is established on the books of Borrowers in an amount that
is reasonably satisfactory to the Agent, (b) any such protest is instituted and
diligently prosecuted by Borrowers in good faith, and (c) the Agent is
satisfied that, while any such protest is pending, there will be no impairment
of the enforceability, validity, or priority of any of the Liens of the Agent
in and to the Collateral.

 

23

 

PERMITTED
TRANSFEREES.  With respect to any
Person, (a) any Affiliate of such Person, (b) the heirs, executors,
administrators, testamentary trustees, legatees or beneficiaries of any such
Person or (c) a trust, the beneficiaries of which, or a corporation,
partnership or other entity, the stockholders or general or limited partners or
other owners of which, include only such Person or his or her spouse or lineal
descendants, in each case to whom such Person has transferred the beneficial
ownership of any Capital Stock of FAO.

 

PERMITTED STORE
CLOSINGS.  The closing on or after the
Closing Date of certain of the Borrowers’ retail locations on terms approved by
the Agent and the Tranche B Lender and which, in the aggregate, do not
affect or involve Inventory which is more than ten percent (10%) of the
Borrowers’ total Inventory as reflected on the initial Borrowing Base Report.

 

PERSON.  Any individual, corporation, limited
liability company, partnership, limited liability partnership, trust, other
unincorporated association, business, or other legal entity, and any
Governmental Authority.

 

PIK
ELECTION.  See Section 3.4(b)(i).

 

PLAN
CONFIRMATION ORDER.  Orders of the U.S.
Bankruptcy Court, District of Delaware, entered April 7, 2003 and April 21,
2003, in connection with the FAO Chapter 11 Proceeding, in form and substance
reasonably acceptable to the Agent and the Tranche B Lender, confirming
and modifying the Plan of Reorganization of FAO; unless otherwise agreed to in
writing by the Agent and the Tranche B Lender, the Bankruptcy Court’s
retention of jurisdiction under such order shall not govern the enforcement of
the Obligations under this Agreement and the Loan Documents.

 

PLAN OF
REORGANIZATION.  The final plan of
reorganization of FAO in the form confirmed as of April 7, 2003 as modified on
April 21, 2003 pursuant to the Plan Confirmation Orders in the Chapter 11
Proceeding In re: FAO, INC., Case No. 03-10119 (LK) (the “FAO
CHAPTER 11 PROCEEDING”) with a copy thereof having been provided to the Agent
and the Tranche B Lender, with changes thereto as agreed to in writing by
the Agent and the Tranche B Lender. 
Such plan of reorganization shall provide among other things for the
approval of the financing and Collateral contemplated under this Agreement,
including without limitation the Agent’s first priority security interest in
the Collateral.

 

PLEDGE
AGREEMENT.  The Securities Pledge
Agreement, dated or to be dated on or prior to the Closing Date, among certain
of the Borrowers and the Agent, in form and substance satisfactory to the
Agent.

 

PNC.  PNC Leasing, LLC.

 

PNC EXISTING
INDEBTEDNESS.  The existing Indebtedness
of ZB under the Letter Agreement-Term Loan dated September 5, 2001 between PNC
and ZB, as evidenced by

 

24

 

the Equipment Loan
Promissory Note of ZB dated as of September 5, 2001 in the principal amount as
of the Closing Date of no greater than $1,400,000.

 

PNC EXISTING LIEN.  The security interest of PNC in certain
Equipment of ZB existing as of the Closing Date pursuant to the Security
Agreement (Equipment) dated as of September 5, 2001 between ZB and PNC,
securing the PNC Existing Indebtedness, superior to the Lien of Agent in such
Equipment.

 

PROTECTIVE
OVERADVANCES.  Revolving Credit Loans
which are OverLoans or which are made at such time as there is a Default, but
as to which each of the following conditions is satisfied: (a) the Total
Revolving Commitment is not exceeded, (b) when aggregated with all other
Protective OverAdvances, such Revolving Credit Loans do not aggregate more than
5% of the aggregate of the Borrowing Base, (c) Protective OverAdvances may not
be outstanding for more than forty-five (45) consecutive Business Days or more
than twice in any twelve month period without the consent of the SuperMajority
Revolving Credit Lenders and the Tranche B Lender and (d) such Revolving Credit
Loans are made or undertaken in the Agent’s sole discretion to protect and
preserve the interests of the Lenders.

 

RCRA.  See the definition of “ENVIRONMENTAL LAWS”.

 

RECEIPTS.  All cash, Cash Equivalents, money, checks,
credit card slips, receipts and other proceeds from any sale of the Collateral.

 

RECEIVABLES.  See the definition of “INDEBTEDNESS”.

 

RECORD.  The grid attached to a Note, or the
continuation of such grid, or any other similar record, including computer
records, maintained by any Lender with respect to any Loan referred to in such
Note.

 

REFINANCING.  Any refinancing, renewal or extension of
Indebtedness so long as (a) the terms and conditions of such refinancing,
renewal or extension do not materially impair the prospects of repayment of the
Obligations by the Borrowers, (b) the net cash proceeds of such refinancing,
renewal or extension does not result in an increase in the aggregate principal
amount of the Indebtedness so refinanced, renewed or extended or add one or
more of the Borrowers as liable with respect thereto if such additional Borrower
or Borrowers were not liable with respect to the original Indebtedness, (c)
such refinancing, renewal, refunding or extension does not result in a
shortening of the average weighted maturity of the Indebtedness so refinanced,
renewed or extended, and (d) to the extent that the Indebtedness that is
refinanced was subordinated in right of payment to the Obligations, then the
subordination terms and conditions of the refinancing must be acceptable to the
Agent and the Tranche B Lender in their reasonable discretion and must include,
in any event without limitation, terms and conditions at least as favorable to
the Lenders as those applicable to the original Indebtedness (PROVIDED if such
subordination terms are the same as those relating to the original Indebtedness
such terms shall be deemed to be acceptable).

 

25

 

REGISTER.  See Section 2.7.1.

 

REIMBURSEMENT
OBLIGATION.  The Borrowers’ obligation
to reimburse the Letter of Credit Issuer and the Lenders on account of any
drawing under any Letter of Credit as provided in Section 4.2.

 

REQUIRED
LENDERS.  As of any date, Lenders (other
than Delinquent Lenders) holding at least fifty-one percent (51%) (the
“REQUIRED LENDERS PERCENTAGE”) of the sum of the Commitments (exclusive of
Commitments held by Delinquent Lenders).

 

REQUIRED
REVOLVING CREDIT LENDERS.  As of any
date, the Revolving Credit Lenders (other than Revolving Credit Lenders who are
Delinquent Lenders) whose aggregate Commitments constitute at least fifty-one
percent (51%) of the Total Revolving Commitment (exclusive of Commitments held
by Delinquent Lenders); PROVIDED at any time there are only two Revolving
Credit Lenders, Required Revolving Credit Lenders will mean both such Revolving
Credit Lenders.

 

RESERVES.  Availability Reserves and Inventory
Reserves.

 

RESTRICTED
PAYMENT.  In relation to the Borrowers
and their Subsidiaries, any (a) Distribution, (b) payment or prepayment by the
Borrowers or their Subsidiaries to the Borrowers’ or any Subsidiary’s
shareholders (or other equity holders), in each case, other than to the
Borrowers, or to any Affiliate of the Borrowers or any Subsidiary or any
Affiliate of the Borrowers’ or such Subsidiary’s shareholders (or other equity
holders), in each case, other than to the Borrowers in cash or property or
both, but excluding payments for goods or services rendered which comply with
the provisions of Section 9.11, (c) derivatives or other transactions with any
financial institution, commodities or stock exchange or clearinghouse (a
“DERIVATIVES COUNTERPARTY”) obligating the Borrowers or any Subsidiary to make
payments to such Derivatives Counterparty as a result of any change in market
value of any Capital Stock of the Borrowers or such Subsidiary, or (d) payment
or prepayment of principal of, premium, if any, or interest on, or redemption,
purchase, retirement defeasance, sinking fund or similar payment in cash or
property or both (i) with respect to Subordinated Debt, including without
limitation with respect to the KBB Existing Indebtedness, (ii) with respect to
the Kayne Existing Indebtedness, (iii) with respect to the Kayne Credit Support
Indebtedness, (iv) with respect to the Emergence Vendor Liabilities, or (v)
with respect to the Equipment Financing Indebtedness.

 

REVOLVING
COMMITMENT FEE.  As defined and provided
for in the Agent Fee Letter, payable on or before the Closing Date as provided
herein.

 

REVOLVING
CREDIT EARLY TERMINATION FEE.  See
Section 2.4.

 

26

 

REVOLVING
CREDIT LENDERS.  FRFI and any other
Person who becomes an assignee of any rights and obligations of a Revolving
Credit Lender pursuant to Section 15.

 

REVOLVING
CREDIT LOANS.  Revolving credit loans
made or to be made by the Revolving Credit Lenders to the Borrowers pursuant to
Section 2.

 

REVOLVING
CREDIT NOTE RECORD.  A Record with
respect to a Revolving Credit Note.

 

REVOLVING
CREDIT NOTES.  See Section 2.7.2.

 

RIGHT
START.  See preamble.

 

S&P.  Standard & Poor’s Ratings Group.

 

SAKS.  Saks Incorporated, a Tennessee corporation.

 

SARA.  See the definition of “ENVIRONMENTAL LAWS”.

 

SCHWARZ.  See preamble.

 

SECURITIES
PURCHASE AGREEMENT.  That certain
Securities Purchase Agreement dated as of April 3, 2003 among FAO and Saks,
Fred Kayne, Kayne Anderson Capital Advisors, L.P., Richard Kayne, Hancock Park
Capital II, L.P. and PCG Tagi, LLC (Series H), as amended by the First
Amendment to Securities Purchase Agreement dated as of April 21, 2003 among
FAO, Saks and the Kayne Credit Support Indebtedness Holders.

 

SECURITY
DOCUMENTS.  This Agreement, the
Trademark Security Agreement, the Copyright Security Agreement, the Pledge
Agreement, all blocked account agreements and Blocked Account Agreements in
respect to the Borrowers’ deposit accounts, all Customs Broker Agreements, all
common carrier, landlord, fulfillment servicer and warehouseman’s consents and
waivers, and all intercreditor and subordination agreements required to be
delivered in connection with this Agreement, and all other instruments and
documents, including without limitation Uniform Commercial Code financing
statements authorized or required to be executed or delivered pursuant to any
Security Document.

 

SETTLEMENT.  The making or receiving of payments, in
immediately available funds, by the Revolving Credit Lenders, to the extent
necessary to cause each Revolving Credit Lender’s actual share of the
outstanding amount of Revolving Credit Loans (after giving effect to any Loan
Request) to be equal to such Revolving Credit Lender’s Commitment Percentage of
the outstanding amount of such Revolving Credit Loans (after giving effect to
any Loan Request), in any case where, prior to such event or action, the actual
share is not so equal.

 

27

 

SETTLEMENT
AMOUNT.  See Section 2.13.1.

 

SETTLEMENT
DATE.  (a) The Drawdown Date relating to
any Loan Request which would cause the Swing Line Loans to exceed the Swing
Line Ceiling, (b) at the option of the Agent, on any Business Day following a
day on which the account officers of the Agent active upon the Borrowers’
account become aware that a Default exists, (c) at the option of the Agent, the
Business Day following notice to the Lenders of the Agent’s intent to effect a
Settlement, (d) any Business Day on which the amount of Revolving Credit Loans
outstanding from FRFI PLUS FRFI’s Commitment Percentage of the sum of the
Maximum Drawing Amount and any Unpaid Reimbursement Obligations is equal to or
greater than FRFI’s Commitment Percentage of the Total Revolving Commitment,
(e) the Business Day immediately following any Business Day on which the amount
of Swing Line Loans exceeds the Swing Line Ceiling, (f) if it is a Business
Day, Wednesday of each week (including without limitation with respect to Swing
Line Loans) or (g) any Business Day on which (i) the amount of outstanding
Revolving Credit Loans decreases and (ii) the amount of the FRFI’s Revolving
Credit Loans outstanding equals zero Dollars ($0).

 

SETTLING
LENDER.  See Section 2.13.1.

 

SPECIFIED PROVISIONS.  Sections 2.12, 2.15, 2.16, 5.2, 5.3, 5.4,
5.12, 8.4, 8.9, 8.15, all of the Sections of Articles 9, 10 and 13 and Sections
14.9, 14.13, 14.14, 14.15, 14.16, 14.17, 14.18, 14.19, 14.20, 14.21 and 15.1.2
and any component definition utilized in any of such Sections.

 

STANDSTILL
TERMINATION DATE.  Any date

 

(a)                                that
an Event of Default under Section 13.1(g), (h), (k) or (q) exists,

 

(b)                                 on
which an Event of Default exists under Section 13.1(a) or (b) in respect of the
Obligations owed to the Tranche B Lender and has existed for at least fifteen
(15) consecutive days prior to such date,

 

(c)                                  on
which Availability is less than $0 and (i) fifteen (15) days prior to such date
Availability was less than $0 and during such fifteen (15) day period there was
no period of three (3) consecutive days in which Availability was equal to or
exceeded $0 or (ii) during the forty-five (45) days prior to such date
Availability was less than $0 for twenty-five (25) or more days during such
period,

 

(d)                                 which
is thirty (30) days after the occurrence of any Event of Default under Section
10,

 

(e)                                  which
is fifteen (15) days after the Borrowers’ failure to deliver (i) within thirty
(30) days after the date when due under Section 8.4 (after giving effect to
applicable grace periods, if any, pursuant to Section 13.1(d), any of the
financial statements required by any of Sections 8.4(a), 8.4(b), 8.4(c) or
8.4(d), or (ii) within five

 

28

 

(5) days after
the date when due under Section 8.4(f), a Borrowing Base Report required by
Section 8.4(f),

 

(f)                                    which
is three (3) days after the failure of the Revolving Credit Lenders to fund all
or any portion of two (2) consecutive Loan Requests, and

 

(g)                                 which
is ninety (90) days after the occurrence of any breach of any of the Specified
Provisions.

 

STATED
AMOUNT.  The maximum amount for which a
Letter of Credit may be honored.

 

SUBORDINATED
DEBT.  (a) The KBB Existing
Indebtedness, and (b) unsecured Indebtedness hereafter incurred by the Borrowers
with the prior written consent of the Required Revolving Credit Lenders and the
Tranche B Lender, on terms and conditions reasonably acceptable to the Agent
and the Tranche B Lender, including the subordination thereof to the
Obligations pursuant to a written intercreditor and subordination agreement in
form and substance reasonably acceptable to the Agent and the Tranche B Lender.

 

SUBSIDIARY.  Any corporation, association, trust, or
other business entity of which the designated parent shall at any time own
directly or indirectly through a Subsidiary or Subsidiaries at least a majority
(by number of votes) of the outstanding Voting Stock.

 

SUPERMAJORITY
LENDERS.  As of any date, Lenders (other
than Delinquent Lenders) holding at least sixty-six and two-thirds percent (66
and 2/3%) of the Commitments (other than Commitments held by Delinquent
Lenders).

 

SUPERMAJORITY
REVOLVING CREDIT LENDERS.  As of any
date, Revolving Credit Lenders (other than Delinquent Lenders) holding at least
sixty-six and two-thirds percent (66 and 2/3%) of the Commitments (other than
Commitments held by Revolving Credit Lenders who are Delinquent Lenders).

 

SWING LINE
CEILING.  $7,500,000.

 

SWING LINE
LOANS.  Revolving Credit Loans made by
the Agent to the Borrowers pursuant to Section 2.9.2.

 

SYNTHETIC
LEASE.  Any lease of goods or other
property, whether real or personal, which is treated as an operating lease
under GAAP and as a loan or financing for U.S. income tax purposes.

 

TARGOFF.  See preamble.

 

TOTAL REVOLVING
COMMITMENT.  The lesser of (a)
$67,000,000, or (b) the sum of the Commitments of the Revolving Credit Lenders,
as in effect from time to time.

 

29

 

TRADEMARK
SECURITY AGREEMENT.  The Trademark
Security Agreement, dated or to be dated on the Closing Date, made by the
Borrowers and their Subsidiaries in favor of the Agent, in form and substance
satisfactory to the Lenders and the Agent, and the related Security
Agreement-Trademarks relating thereto.

 

TRANCHE B
BORROWING BASE.  The aggregate of the
following:

 

(a)                                  The
face amount of Eligible Credit Card Receivables MULTIPLIED BY the Credit Card
Advance Rate,

 

PLUS

 

(b)                                 The
lesser of (i) the Appraised Inventory Tranche B Percentage MULTIPLIED BY
the Appraised Inventory Liquidation Value, and (ii) the Tranche B
Inventory Advance Rate MULTIPLIED BY the Cost of Eligible Inventory (net of
Inventory Reserves).

 

PLUS

 

(c)                                if
the Availability Letter of Credit exists, until fourteen (14) days prior to
expiry of Availability Letter of Credit, one hundred percent (100%) of the
undrawn amount of the Availability Letter of Credit.

 

TRANCHE B
COMMITMENT FEE.  As defined and provided
for in the Tranche B Fee Letter, payable on or before the Closing Date as
provided therein.

 

TRANCHE B EARLY
TERMINATION FEE.  See Section 3.3.

 

TRANCHE B FEE
LETTER.  The fee letter dated as of the
date hereof, among the Borrowers and the Tranche B Lender, as amended from time
to time.

 

TRANCHE B
INVENTORY ADVANCE RATE.  For each
calendar month, the corresponding percentage set forth below opposite such
month, as such percentage may be adjusted from time to time by the Agent taking
into account increases in the Inventory Advance Rate made by the Agent pursuant
to the definition thereof, but not adjusted by the Agent more than 500 basis
points above each of the initial Percentages set forth below without the
consent of the Tranche B Lender.

 

	
  Month

  	
   

  	
  Percentage

  	
   

  
	
  February

  	
   

  	
  63.7

  	
  %

  
	
  March

  	
   

  	
  65.7

  	
  %

  
	
  April

  	
   

  	
  63.8

  	
  %

  
	
  May

  	
   

  	
  65.0

  	
  %

  
	
  June

  	
   

  	
  65.1

  	
  %

  
	
  July

  	
   

  	
  65.7

  	
  %

  
	
  August

  	
   

  	
  73.5

  	
  %

  
	
  September

  	
   

  	
  73.9

  	
  %

  
	
  October

  	
   

  	
  77.2

  	
  %

  
	
  November

  	
   

  	
  86.1

  	
  %

  
	
  December

  	
   

  	
  83.2

  	
  %

  
	
  January

  	
   

  	
  61.7

  	
  %

  

 

30

 

TRANCHE B
LENDER.  Back Bay Capital Funding LLC
and any other Person who becomes an assignee of any rights and obligations of
the Tranche B Lender pursuant to Section 15.

 

TRANCHE B
LENDER FEES.  See Section 5.2.

 

TRANCHE B
LOAN.  The Tranche B Loan made or to be
made by the Tranche B Lender to the Borrowers on the Closing Date originally in
the aggregate principal amount of $10,000,000 pursuant to Section 3.1.

 

TRANCHE B LOAN
CURRENT PAY INTEREST.  See Section
3.4(a).

 

TRANCHE B LOAN
INTEREST PAYMENT DATE.  See Section
3.4(a).

 

TRANCHE B LOAN
INTEREST RATE.  See Section 3.4.

 

TRANCHE B LOAN
PIK INTEREST.  See Section 3.4(b).

 

TRANCHE B
MONITORING FEE.  As defined and provided
for in the Tranche B Fee Letter.

 

TRANCHE B
NOTES.  See Section 3.2.

 

TYPE.  As to any Revolving Credit Loan, its nature
as a Base Rate Loan or a Eurodollar Rate Loan.

 

UCC or UNIFORM
COMMERCIAL CODE.  Unless otherwise
indicated, the Uniform Commercial Code of the State of New York.

 

UNIFORM
CUSTOMS.  See Section 4.1.3.

 

UNPAID
REIMBURSEMENT OBLIGATION.  Any
Reimbursement Obligation for which the Borrowers do not reimburse the Agent and
the Lenders on the date specified in, and in accordance with, Section 4.2.

 

UNUSED
FEE.  See Section 2.3.

 

VOTING
STOCK.  Stock or similar interests, of
any class or classes (however designated), the holders of which are at the time
entitled, as such holders, to vote for the

 

31

 

election of a
majority of the directors (or persons performing similar functions) of the
corporation, association, trust or other business entity involved, whether or
not the right so to vote exists by reason of the happening of a contingency.

 

ZB.  See preamble.

 

1.2.                              RULES OF INTERPRETATION.

 

(a)                                  A
reference to any document or agreement shall include such document or agreement
as amended, modified or supplemented from time to time in accordance with its
terms and the terms of this Agreement. 
The singular includes the plural and the plural includes the
singular.  A reference to any law
includes any amendment or modification to such law.  A reference to any Person includes its permitted successors and
permitted assigns.  Accounting terms not
otherwise defined herein have the meanings assigned to them by GAAP applied on
a consistent basis by the accounting entity to which they refer.  The words “include”, “includes” and
“including” are not limiting.  All terms
not specifically defined herein or by GAAP, which terms are defined in the UCC,
have the meanings assigned to them therein, with the term “INSTRUMENT” being
that defined under Article 9 of the UCC. 
The words “herein”, “hereof”, “hereunder” and words of like import shall
refer to this Agreement as a whole and not to any particular section or
subdivision of this Agreement.  Any
reference to a Person’s “knowledge” (or words of similar import) are to such
Person’s knowledge assuming that such Person has undertaken reasonable and
diligent investigation with respect to the subject of such “knowledge” (whether
or not such investigation has actually been undertaken).

 

(b)                                 This
Agreement and the other Loan Documents are the result of negotiation among, and
have been reviewed by counsel to, among others, the Agent and the Borrowers and
are the product of discussions and negotiations among all parties.  Accordingly, this Agreement and the other
Loan Documents are not intended to be construed against the Agent or any of the
Lenders merely on account of the Agent’s or any Lender’s involvement in the
preparation of such documents.

 

2.                                       THE REVOLVING CREDIT FACILITY.

 

2.1.                              COMMITMENT TO LEND. 
Subject to the terms and conditions set forth in this Agreement, each of
the Revolving Credit Lenders severally agrees to lend to the Borrowers, and the
Borrowers on a joint and several basis may borrow, repay, and reborrow from
time to time from the Closing Date up to but not including the Maturity Date
upon notice by the Borrowers’ Representative to the Agent given in accordance
with Section 2.9, such sums as are requested by the Borrowers’ Representative
up to a maximum aggregate amount outstanding (after giving effect to all
amounts requested) at any one time equal to such Revolving Credit Lender’s
Commitment MINUS such Revolving Credit Lender’s Commitment Percentage of the
sum of the Maximum Drawing Amount and all Unpaid Reimbursement Obligations,
PROVIDED that the Agent and the Revolving Credit Lenders shall have no obligation
to make any Revolving Credit Loans which would constitute an OverLoan or which
would cause the sum of all outstanding amounts of Revolving Credit Loans (after
giving effect to all amounts requested) plus the Maximum Drawing Amount and all
Unpaid Reimbursement Obligations to be greater then the

 

32

 

Total Revolving Commitment.  Each request for a Revolving Credit Loan
hereunder shall constitute a representation and warranty by the Borrowers that
the conditions set forth in Section 11 and Section 12, in the case of the
initial Revolving Credit Loans to be made on the Closing Date, and Section 12,
in the case of all other Revolving Credit Loans, have been satisfied on the
date of such request.

 

2.2.                              MATURITY.  The
Borrowers jointly and severally promise to pay on the Maturity Date, and there
shall become absolutely due and payable on the Maturity Date, all of the
Revolving Credit Loans outstanding on such date, together with any and all
accrued and unpaid interest thereon.

 

2.3.                              UNUSED FEE.  The
Borrowers jointly and severally agree to pay to the Agent for the accounts of
the Revolving Credit Lenders in accordance with their respective Commitment
Percentages a commitment fee (the “UNUSED FEE”) calculated at the rate of three-eighths
of one percent (0.375%) on the average daily amount during each calendar month
or portion thereof from the date hereof to the Maturity Date by which the Total
Revolving Commitment MINUS the sum of the Maximum Drawing Amount and all Unpaid
Reimbursement Obligations exceeds the outstanding amount of Revolving Credit
Loans during such calendar month.  The
Unused Fee shall be payable monthly in arrears on the first day of each month
for the immediately preceding month commencing on the first such date following
the date hereof, with a final payment on the Maturity Date or any earlier date
on which the Commitments shall terminate.

 

2.4.                              REDUCTION OF COMMITMENT.  The Borrowers shall have the right, at any
time and from time to time upon five (5) Business Days prior written notice to
the Agent, to reduce by $5,000,000 or an integral multiple of $1,000,000 in
excess thereof, or terminate entirely the Total Revolving Commitment, whereupon
the Commitments of the Revolving Credit Lenders shall be reduced PRO RATA in
accordance with their respective Commitment Percentages of the amount specified
in such notice, or as the case may be, terminated.  Promptly after receiving any notice of the Borrowers delivered
pursuant to this Section 2.4, the Agent will notify the Revolving Credit
Lenders of the substance thereof.  If
the Borrowers repay or prepay all outstanding Revolving Credit Loans, or the
Total Revolving Commitment is reduced or terminated, during the period
commencing on the Closing Date and ending on the date which is ninety (90) days
prior to the Maturity Date in a single transaction or series of related
transactions, the Borrowers shall pay to the Agent a premium in an amount equal
to the Commitment Reduction Fee MULTIPLIED BY the amount of the reduction of
the Total Revolving Commitment if the Total Revolving Commitment is not
terminated or on the amount of the Total Revolving Commitment immediately prior
to such repayment or prepayment or the first of such related series of
prepayments or repayments, as the case may be (each a “REVOLVING CREDIT EARLY
TERMINATION FEE”); PROVIDED, HOWEVER, no Revolving Credit Early Termination Fee
shall be due if the Total Revolving Commitment is terminated and Obligations
hereunder are paid in connection with the Borrowers entering into a new credit
facility agented by the Agent.  No
reduction or termination of the Total Revolving Commitment may be
reinstated.  The “COMMITMENT REDUCTION
FEE” shall be two percent (2%) if such reduction or termination occurs prior to
the first anniversary of the Closing

 

33

 

Date, or one percent (1%) if
such reduction or termination occurs on or after the first anniversary of the
Closing Date.

 

2.5.                              MANDATORY REPAYMENTS OF REVOLVING
CREDIT LOANS.  If at any time
Availability is less than $0 or there is an OverLoan, then the Borrowers shall
immediately pay to the Agent for the respective accounts of the Revolving
Credit Lenders for application amounts necessary so that Availability is $0 or
greater and there are no OverLoans to be applied: first, to any Unpaid
Reimbursement Obligations; second, to the Revolving Credit Loans; and third, to
provide to the Agent cash collateral for Reimbursement Obligations as
contemplated by Section 4.2(b) and (c). 
Each payment of any Unpaid Reimbursement Obligations or prepayment of
Revolving Credit Loans shall be allocated among the Revolving Credit Lenders,
in proportion, as nearly as practicable, to each Reimbursement Obligation or
(as the case may be) the respective unpaid principal amount of each Revolving
Credit Lender’s Revolving Credit Note, with adjustments to the extent
practicable to equalize any prior payments or repayments not exactly in
proportion.

 

2.6.                              OPTIONAL REPAYMENTS OF REVOLVING
CREDIT LOANS.  The Borrowers shall
have the right, at their election, to repay the outstanding amount of the
Revolving Credit Loans, as a whole or in part, at any time without penalty or
premium, PROVIDED that any full or partial prepayment of the outstanding amount
of any Eurodollar Rate Loans pursuant to this Section 2.6 may be made only on
the last day of the Interest Period relating thereto.  Except for repayments of the Revolving Credit Loans as
contemplated by Section 2.14, the Borrowers’ Representative shall give the
Agent, no later than 12:00 noon, Boston time, at least one (1) Business Day
prior written notice of any proposed prepayment pursuant to this Section 2.6 of
Base Rate Loans, and three (3) Eurodollar Business Days notice of any proposed prepayment
pursuant to this Section 2.6 of Eurodollar Rate Loans, in each case, specifying
the proposed date of prepayment of Revolving Credit Loans and the principal
amount to be prepaid.  Each such partial
prepayment of the Revolving Credit Loans shall be in an amount equal to
$1,000,000 or an integral multiple of $1,000,000 in excess thereof, shall be
accompanied by the payment of accrued interest on the principal prepaid to the
date of prepayment and shall be applied, in the absence of instruction by the
Borrowers’ Representative, first to the principal of Base Rate Loans and then
to the principal of Eurodollar Rate Loans. 
Each partial prepayment shall be allocated among the Revolving Credit
Lenders, in proportion, as nearly as practicable, to the respective unpaid
principal amount of each Revolving Credit Lender’s Revolving Credit Note, with
adjustments to the extent practicable to equalize any prior repayments not
exactly in proportion.

 

2.7.                              THE LOAN ACCOUNT AND REVOLVING CREDIT
NOTES.

 

2.7.1.                     LOAN
ACCOUNT.  An account (the “LOAN
ACCOUNT”) shall be opened on the books of the Agent in which a record shall be
kept of all Revolving Credit Loans.  The
Agent shall also keep a record (either in the Loan Account or elsewhere, as the
Agent may from time to time elect) (such record, the “REGISTER”) of the name
and addresses of the Revolving Credit Lenders, the Commitment Percentage of the
Revolving Credit Lenders, all interest, fees, service charges, costs, expenses,
and other debits owed to the Agent and each Revolving Credit Lender on account
of the Obligations and all

 

34

 

credits against
such amounts so owed.  The Borrowers
irrevocably authorize the Agent to make or cause to be made, at or about the
time of the Drawdown Date of any Revolving Credit Loan or at the time of
receipt of any payment of principal on the Loan Account, an appropriate
notation on the Loan Account reflecting the making of such Revolving Credit
Loan or (as the case may be) the receipt of such payment, but the failure to
record, or any error in so recording, any such amount on the Loan Account shall
not limit or otherwise affect the obligations of the Borrowers hereunder or
under any Revolving Credit Loan to make payments of principal of or interest on
any Revolving Credit Loan when due.  The
Borrowers jointly and severally promise to pay all of the Obligations in
accordance with the provisions of this Agreement.  All credits against the Obligations shall be conditional upon
final payment to the Agent for the account of each Revolving Credit Lender of
the items giving rise to such credits. 
The amount of any item credited against the Obligations due to the
Revolving Credit Lenders which is charged back against the Agent or any
Revolving Credit Lender for any reason or is not so paid shall be an Obligation
and shall be added to the Loan Account, whether or not the item so charged back
or not so paid is returned.  Any
statement rendered by the Agent to the Borrowers concerning the Obligations
shall be considered correct and accepted (absent manifest error) by the
Borrowers and shall be conclusively binding upon the Borrowers unless the
Borrowers’ Representative provides the Agent with written objection thereto
within thirty (30) days from the mailing of such statement, which written
objection shall indicate, with reasonable particularity, the reason for such
objection.  The Loan Account, the
Register and the Agent’s books and records concerning the loan arrangement
contemplated herein and the Obligations shall be prima facie evidence and proof
of the items described therein.  The
Loan Account and Register shall be available for inspection by the Borrowers’
Representative and the Revolving Credit Lenders at any reasonable time and from
time to time upon reasonable prior notice.

 

2.7.2.                     REVOLVING
CREDIT NOTES.  At the request of any
Revolving Credit Lender the Borrowers shall deliver to such Revolving Credit
Lender separate promissory notes of the Borrowers in substantially the form of
EXHIBIT B hereto (each a “REVOLVING CREDIT NOTE”), dated as of the Closing Date
(or such other date on which a Revolving Credit Lender may become a party
hereto in accordance with Section 15 hereof) and completed with appropriate
insertions.  Each Revolving Credit Note
shall be payable to the order of such Revolving Credit Lender in a principal
amount equal to such Revolving Credit Lender’s Commitment or, if less, the
outstanding amount of all Revolving Credit Loans made by such Revolving Credit
Lender, plus interest accrued thereon, as set forth below.  No Revolving Credit Note shall be required
to establish or prove any Obligation. 
In the event that any Revolving Credit Note is ever lost, mutilated, or
destroyed, the Borrowers shall execute a replacement thereof and deliver such
replacement to the Agent; PROVIDED, HOWEVER, in the event that a Revolving
Credit Note is to be exchanged following its acceleration or the entry of an
order for relief under the Bankruptcy Code with respect to the Borrowers, the
Agent, in lieu of causing the Borrowers to execute one or more new Revolving
Credit Notes, may issue a certificate of the Agent confirming the resulting
Lender’s Commitment and Percentage Commitments.

 

35

 

2.8.                              INTEREST ON REVOLVING CREDIT LOANS.

 

2.8.1.                     ACCRUAL
OF INTEREST.  Except as otherwise
provided in Section 5.10,

 

(a)                                  Each
Revolving Credit Loan which is a Base Rate Loan shall bear interest for the
period commencing with the Drawdown Date thereof and ending on the last day of
the Interest Period with respect thereto at the rate per annum equal to the
Base Rate PLUS the Applicable Margin with respect to Base Rate Loans as in
effect from time to time.

 

(b)                                 Each
Revolving Credit Loan which is a Eurodollar Rate Loan shall bear interest for
the period commencing with the Drawdown Date thereof and ending on the last day
of the Interest Period with respect thereto at the rate per annum equal to the
Eurodollar Rate determined for such Interest Period PLUS the Applicable Margin with
respect to Eurodollar Rate Loans as in effect from time to time.  The Borrowers jointly and severally promise
to pay interest on each Revolving Credit Loan in arrears on each Interest
Payment Date with respect thereto.

 

2.8.2.                     AUTOMATIC
DEBIT OF INTEREST.  The Agent, without
the request of the Borrowers, may make Revolving Credit Loans to pay any
interest, fee, service charge, or other payment to which the Agent or any
Lender is entitled from the Borrowers pursuant hereto and may charge the same
to the Loan Account notwithstanding that an OverLoan may result thereby.  Such action on the part of the Agent shall
not constitute a waiver of the Agent’s rights and the Borrowers’ obligations
under Section 13.  Any amount which is
added to the principal balance of the Loan Account as provided in this Section
2.8.2 shall bear interest at the interest rate then and thereafter applicable
to Base Rate Loans.

 

2.9.                              REQUESTS FOR REVOLVING CREDIT LOANS.

 

2.9.1.                     GENERAL.  The Borrowers’ Representative shall give to
the Agent written notice in the form of EXHIBIT C hereto (or telephonic or
electronic mail notice confirmed in a writing in the form of EXHIBIT C hereto)
of each Revolving Credit Loan requested hereunder (a “LOAN REQUEST”) no later
than (a) 12:00 noon (Boston time) on the Business Day of the proposed Drawdown
Date of any Base Rate Loan and (b) 1:00 p.m. (Boston time) three (3) Eurodollar
Business Days prior to the proposed Drawdown Date of any Eurodollar Rate
Loan.  Each such notice shall specify
(i) the principal amount of the Revolving Credit Loan requested, (ii) the
proposed Drawdown Date of such Revolving Credit Loan, (iii) the Interest Period
for such Revolving Credit Loan and (iv) the Type of such Revolving Credit
Loan.  Promptly upon receipt of any such
notice, the Agent shall notify each of the Revolving Credit Lenders
thereof.  Each Loan Request shall be
irrevocable and binding on the Borrowers and shall obligate the Borrowers to
accept the Revolving Credit Loan requested from the Revolving Credit Lenders on
the proposed Drawdown Date.  Each Loan
Request shall be in a minimum aggregate amount of $1,000,000 or an integral
multiple of $100,000 in excess thereof.

 

36

 

2.9.2.                     SWING
LINE.  Notwithstanding the notice and
minimum amount requirements set forth in Section 2.9.1 but otherwise in
accordance with the terms and conditions of this Agreement (except with respect
to Protective OverAdvances), the Agent may, in its sole discretion and without
conferring with the Lenders, make Revolving Credit Loans to the Borrowers (a)
by entry of credits to the Borrowers’ operating account or such other account
(the “OPERATING ACCOUNT”) with the Agent to cover checks or other charges which
the Borrowers have drawn or made against such account, (b) in an amount as
otherwise requested by the Borrowers or (c) as Protective OverAdvances.  The Borrowers hereby request and authorize
the Agent to make from time to time such Revolving Credit Loans by means of
appropriate entries of such credits sufficient to cover checks and other
charges then presented for payment from the Operating Account or as otherwise
so requested.  The Borrowers acknowledge
and agree that the making of such Revolving Credit Loans shall, in each case,
be subject in all respects to the provisions of this Agreement as if they were
Revolving Credit Loans covered by a Loan Request including, without limitation,
the limitations set forth in Section 2.1 and the requirements that the
applicable provisions of Section 11 (in the case of Revolving Credit Loans made
on the Closing Date) and Section 12 be satisfied (except in the case of
Protective OverAdvances).  All actions
taken by the Agent pursuant to the provisions of this Section 2.9.2 shall be
conclusive and binding on the Borrowers and the Revolving Credit Lenders absent
the Agent’s gross negligence or willful misconduct.  Revolving Credit Loans made pursuant to this Section 2.9.2 shall
be Base Rate Loans until converted in accordance with the provisions of this
Agreement and, prior to a Settlement, such interest shall be for the account of
the Agent.

 

2.10.                        CONVERSION
OPTIONS.

 

2.10.1.               CONVERSION
TO DIFFERENT TYPE OF REVOLVING CREDIT LOAN. 
The Borrowers’ Representative may elect from time to time to convert any
outstanding Revolving Credit Loan to a Revolving Credit Loan of another Type,
PROVIDED that (a) with respect to any such conversion of a Eurodollar Rate Loan
to a Base Rate Loan, the Borrowers’ Representative shall give the Agent at
least one (1) Business Day’s prior written notice of such election; (b) with
respect to any such conversion of a Base Rate Loan to a Eurodollar Rate Loan,
the Borrowers’ Representative shall give the Agent at least three (3)
Eurodollar Business Days’ prior written notice of such election; (c) with
respect to any such conversion of a Eurodollar Rate Loan into a Base Rate Loan,
such conversion shall only be made on the last day of the Interest Period with
respect thereto and (d) no Revolving Credit Loan may be converted into a
Eurodollar Rate Loan when any Default has occurred and is continuing.  On the date on which such conversion is
being made, each Revolving Credit Lender shall take such action as is necessary
to transfer its Commitment Percentage of such Revolving Credit Loans to its Domestic
Lending Office or its Eurodollar Lending Office, as the case may be.  All or any part of outstanding Revolving
Credit Loans of any Type may be converted into a Revolving Credit Loan of
another Type as provided herein, PROVIDED that any partial conversion shall be
in an aggregate principal amount of $1,000,000 or an integral multiple of
$1,000,000 in excess thereof.  Each
Conversion Request relating to the

 

37

 

conversion of a
Revolving Credit Loan to a Eurodollar Rate Loan shall be irrevocable by the
Borrowers.

 

2.10.2.               CONTINUATION
OF TYPE OF REVOLVING CREDIT LOAN.  Any
Revolving Credit Loan of any Type may be continued as a Revolving Credit Loan
of the same Type upon the expiration of an Interest Period with respect thereto
by compliance by the Borrowers with the notice provisions contained in Section
2.10.1; PROVIDED that no Eurodollar Rate Loan may be continued as such when any
Default has occurred and is continuing, but shall be automatically converted to
a Base Rate Loan on the last day of the first Interest Period relating thereto
ending during the continuance of any Default of which officers of the Agent
active upon the Borrowers’ account have actual knowledge.  In the event that the Borrowers fail to
provide any such notice with respect to the continuation of any Eurodollar Rate
Loan as such, then such Eurodollar Rate Loan shall be automatically converted
to a Base Rate Loan on the last day of the first Interest Period relating
thereto.  The Agent shall notify the
Revolving Credit Lenders promptly when any such automatic conversion
contemplated by this Section 2.10.2 is scheduled to occur.

 

2.10.3.               EURODOLLAR
RATE LOANS.  Any conversion to or from
Eurodollar Rate Loans shall be in such amounts and be made pursuant to such
elections so that, after giving effect thereto, the aggregate principal amount
of all Eurodollar Rate Loans having the same Interest Period shall not be less
than $1,000,000 or an integral multiple of $1,000,000 in excess thereof.  No more than five (5) Eurodollar Rate Loans
having different Interest Periods may be outstanding at any time.

 

2.11.                        FUNDS FOR REVOLVING CREDIT LOAN.

 

2.11.1.               FUNDING
PROCEDURES.  Not later than 3:00 p.m.
(Boston time) on the proposed Drawdown Date of any Revolving Credit Loans, each
of the Revolving Credit Lenders will make available to the Agent, at the
Agent’s Office, in immediately available funds, the amount of such Revolving
Credit Lender’s Commitment Percentage of the amount of the requested Revolving
Credit Loans.  Upon receipt from each
Revolving Credit Lender of such amount, and upon receipt of the documents
required by Sections 11 and 12 and the satisfaction of the other conditions set
forth therein, to the extent applicable, the Agent will make available to the
Borrowers’ Representative the aggregate amount of such Revolving Credit Loans
made available to the Agent by the Revolving Credit Lenders.  The failure or refusal of any Revolving
Credit Lender to make available to the Agent at the aforesaid time and place on
any Drawdown Date the amount of its Commitment Percentage of the requested
Revolving Credit Loans shall not relieve any other Revolving Credit Lender from
its several obligation hereunder to make available to the Agent the amount of such
other Revolving Credit Lender’s Commitment Percentage of any requested
Revolving Credit Loans.

 

2.11.2.               ADVANCES
BY AGENT.  The Agent may, unless
notified to the contrary by any Revolving Credit Lender prior to a Drawdown
Date, assume that such Revolving Credit Lender has made available to the Agent
on such Drawdown Date the

 

38

 

amount of such
Revolving Credit Lender’s Commitment Percentage of the Revolving Credit Loans
to be made on such Drawdown Date, and the Agent may (but it shall not be
required to), in reliance upon such assumption, make available to the Borrowers
a corresponding amount.  If any
Revolving Credit Lender makes available to the Agent such amount on a date
after such Drawdown Date, such Revolving Credit Lender shall pay to the Agent
on demand all such costs and expenses as may be incurred by the Agent in the
enforcement of the Agent’s rights against such Revolving Credit Lender plus an
amount equal to the greater of (a) the amount of interest actually paid by the
Borrowers on account of such amounts or (b) the product of (i) the average
computed for the period referred to in clause (iii) below, of the weighted
average interest rate paid by the Agent for federal funds acquired by the Agent
during each day included in such period, MULTIPLIED BY (ii) the amount of such
Revolving Credit Lender’s Commitment Percentage of such Revolving Credit Loans,
MULTIPLIED BY (iii) a fraction, the numerator of which is the number of days
that elapse from and including such Drawdown Date to the date on which the
amount of such Revolving Credit Lender’s Commitment Percentage of such
Revolving Credit Loans shall become immediately available to the Agent, and the
denominator of which is 360 with respect to Eurodollar Rate Loans and 365 with
respect to Base Rate Loans.  A statement
of the Agent submitted to such Revolving Credit Lender with respect to any
amounts owing under this paragraph shall be PRIMA FACIE evidence of the amount
due and owing to the Revolving Credit Agent by such Revolving Credit
Lender.  If the amount of such Lender’s
Commitment Percentage of such Revolving Credit Loans is not made available to
the Agent by such Revolving Credit Lender within three (3) Business Days
following such Drawdown Date, the Agent shall be entitled to recover such
amount from the Borrowers on demand, with interest thereon at the rate per
annum applicable to the Revolving Credit Loans made on such Drawdown Date.

 

2.11.3.               LIMITATION
OF LIABILITY.  There shall not be any recourse
to or liability of the Agent or any Revolving Credit Lender, on account of: (a)
any delay in the making of any Revolving Credit Loan, (b) any delay by any bank
or other depository institution in treating the proceeds of any such Revolving
Credit Loan as collected funds or (c) any delay in the receipt, and/or any
loss, of funds which constitute a Revolving Credit Loan, the wire transfer of
which was properly initiated by the Agent in accordance with wire instructions
provided to the Agent by the Borrowers.

 

2.12.                        BORROWING BASE/REDUCTIONS TO
AVAILABILITY.

 

2.12.1.               CHANGE
IN BORROWING BASE.  The Borrowing Base
and the Tranche B Borrowing Base shall be determined daily (or at such other
interval as may be specified pursuant to Section 8.4(f)) by the Agent by
reference to the Borrowing Base Report, commercial finance and collateral audit
reports, and the appraisals of Inventory delivered to the Lenders and the Agent
pursuant to Section 8.4(h) and other information obtained by or provided to the
Agent.  Without in any way limiting the
Agent’s right to modify them at any time in the future on the terms set forth
in this Agreement, as of the Closing Date the current Reserves are as set forth
on SCHEDULE 2.12 hereto.  In determining
whether to reduce the lending formula(s), the Agent may consider events,

 

39

 

conditions,
contingencies or risks which are also considered in determining Eligible Credit
Card Receivables, Eligible Inventory or in establishing the Reserves; PROVIDED,
HOWEVER, that such reduction lending formula shall not be based upon any event,
condition, contingency or risk to the extent that a Reserve has been
established.  The Agent shall give to
the Borrowers’ Representative five (5) days written notice of its determination
of the actual Borrowing Base, Tranche B Borrowing Base and Availability, if
taking into account such new Reserves as the Agent may reasonably determine as
being applicable thereto, and the Agent shall have discussed its basis for such
determination with the Borrowers’ Representative if the Borrowers’
Representative shall so request.

 

2.12.2.               RISK
OF VALUE OF COLLATERAL.  The Agent’s
reference to a given asset in connection with the making of Loans and advances
and the providing of financial accommodations under this Agreement and/or the
monitoring of compliance with the provisions hereof shall not be deemed a
determination by the Agent or any Lender relative to the actual value of the
asset in question.  All risks concerning
the value of the Collateral are and remain upon the Borrowers.  All Collateral secures the prompt, punctual,
and faithful performance of the Obligations whether or not relied upon by the
Agent in connection with the making of Loans, credits, and advances and the
providing of financial accommodations under this Agreement.

 

2.12.3.               REDUCTIONS
TO AVAILABILITY.  In the determination
of Availability, the Agent may deem fees, service charges, accrued interest,
and other payments (excluding prepayment penalties) which will be due and
payable between the date of such determination and the first day of the then
next succeeding month as having been advanced as Revolving Credit Loans whether
or not such amounts are then due and payable.

 

40

 

2.13.                        SETTLEMENTS.

 

2.13.1.               GENERAL.  On each Settlement Date, the Agent shall,
not later than 12:00 noon (Boston time), give telephonic or facsimile notice
(a) to the Revolving Credit Lenders and the Borrowers of the respective
outstanding amount of Revolving Credit Loans made by the Agent on behalf of the
Revolving Credit Lenders from the immediately preceding Settlement Date through
the close of business on the prior day and the amount of any Eurodollar Rate
Loans to be made (following the giving of notice pursuant to Section 2.9.1) on
such date pursuant to a Loan Request and (b) to the Revolving Credit Lenders of
the amount (a “SETTLEMENT AMOUNT”) that each Revolving Credit Lender (a
“SETTLING LENDER”) shall pay to effect a Settlement of any Revolving Credit
Loan.  A statement of the Agent
submitted to the Revolving Credit Lenders and the Borrowers or to the Revolving
Credit Lenders with respect to any amounts owing under this Section 2.13.1
shall be PRIMA FACIE evidence of the amount due and owing (absent manifest
error).  Each Settling Lender shall, not
later than 3:00 p.m. (Boston time) on such Settlement Date, effect a wire
transfer of immediately available funds to the Agent in the amount of the
Settlement Amount for such Settling Lender. 
All funds advanced by any Lender as a Settling Lender pursuant to this
Section 2.13.1 shall for all purposes be treated as a Revolving Credit Loan
made by such Settling Lender to the Borrowers and all funds received by any
Revolving Credit Lender pursuant to this Section 2.13.1 shall for all purposes
be treated as repayment of amounts owed with respect to Revolving Credit Loans
made by such Revolving Credit Lender. 
In the event that any bankruptcy, reorganization, liquidation,
receivership or similar cases or proceedings in which any Borrower is a debtor
prevent a Settling Lender from making any Revolving Credit Loan to effect a
Settlement as contemplated hereby, such Settling Lender will make such
dispositions and arrangements with the other Revolving Credit Lenders with
respect to such Revolving Credit Loans, either by way of purchase of
participations, distribution, PRO TANTO assignment of claims, subrogation or
otherwise as shall result in each Revolving Credit Lender’s share of the
outstanding Revolving Credit Loans being equal, as nearly as may be, to such
Revolving Credit Lender’s Commitment Percentage of the outstanding amount of
the Revolving Credit Loans.

 

2.13.2.               FAILURE
TO MAKE FUNDS AVAILABLE.  The Agent may,
unless notified to the contrary by any Settling Lender prior to a Settlement
Date, assume that such Settling Lender has made or will make available to the
Agent on such Settlement Date the amount of such Settling Lender’s Settlement
Amount, and the Agent may (but it shall not be required to), in reliance upon
such assumption, make available to the Borrowers a corresponding amount.  If any Settling Lender makes available to
the Agent such amount on a date after such Settlement Date, such Settling Lender
shall pay to the Agent on demand an amount equal to the product of (a) the
average computed for the period referred to in clause (c) below, of the
weighted average interest rate paid by the Agent for federal funds acquired by
the Agent during each day included in such period, times (b) the amount of such
Settlement Amount, times (c) a fraction, the numerator of which is the number
of days that elapse from and including such Settlement Date to the date on
which the amount of such Settlement Amount shall become immediately available
to the Agent, and the denominator of which is 360.  A statement of the Agent submitted to such Settling Lender with
respect to any amounts owing under this Section 2.13.2 shall be prima facie
evidence of the amount due and owing to the Agent by such

 

41

 

Settling Lender
(absent manifest error).  If such
Settling Lender’s Settlement Amount is not made available to the Agent by such
Settling Lender within three (3) Business Days following such Settlement Date,
the Agent shall be entitled to recover such amount from the Borrowers on
demand, with interest thereon at the rate per annum applicable to the Revolving
Credit Loans as of such Settlement Date.

 

2.13.3.               NO
EFFECT ON OTHER LENDERS.  The failure or
refusal of any Settling Lender to make available to the Agent at the aforesaid
time and place on any Settlement Date the amount of such Settling Lender’s
Settlement Amount shall not (a) relieve any other Settling Lender from its
several obligations hereunder to make available to the Agent the amount of such
other Settling Lender’s Settlement Amount or (b) impose upon any Lender, other
than the Settling Lender so failing or refusing, any liability with respect to
such failure or refusal or otherwise increase the Commitment of such other
Lender.

 

2.14.                        REPAYMENTS OF REVOLVING CREDIT LOANS
ABSENT AN EVENT OF DEFAULT.

 

2.14.1.               CREDIT
FOR FUNDS RECEIVED IN FLEET CONCENTRATION ACCOUNT.  (a) All funds and cash proceeds in the form of money, checks and
like items received in the Fleet Concentration Account as contemplated by
Section 8.14 shall be credited, on the next Business Day on which the Agent
determines that good collected funds have been received, and, prior to the
receipt of good collected funds, on a provisional basis until final receipt of
good collected funds, and applied as contemplated by Section 2.14.2, or as
applicable, Section 13.5, (b) all funds and cash proceeds in the form of a wire
transfer received in the Fleet Concentration Account as contemplated by Section
8.14 shall be credited on the next Business Day as the Agent’s receipt of such
amounts (or up to such later date as the Agent determines that good collected
funds have been received), and applied as contemplated by Section 2.14.2, or as
applicable, Section 13.5, and (c) all funds and cash proceeds in the form of an
ACH transfer received in the Fleet Concentration Account as contemplated by
Section 8.14 shall be credited, on the next Business Day following the Agent’s
receipt of such amounts (or up to such later date as the Agent determines that
good collected funds have been received), and applied as contemplated by
Section 2.14.2, or as applicable, Section 13.5.  For purposes of the foregoing provisions of this Section 2.14.1,
the Agent shall not be deemed to have received any such funds or cash proceeds
on any day unless received by the Agent before 2:00 p.m. (Boston time) on such
day.  The Borrowers further acknowledge
and agree that any such provisional credits or credits in respect of wire or
automatic clearing house funds transfers shall be subject to reversal if final
collection in good funds of the related item is not received by, or final
settlement of the funds transfer is not made in favor of, the Agent in
accordance with the Agent’s customary procedures and practices for collecting
provisional items or receiving settlement of funds transfers.  No Revolving Credit Lender shall have any
interest in, or right to receive any part of any interest which reflects
amounts described in the provisions of this Section 2.14.1.

 

42

 

2.14.2.               APPLICATION
OF PAYMENTS ABSENT AN EVENT OF DEFAULT.

 

(a)                                  Absent
an Event of Default of which the account officers of the Agent active on the
Borrowers’ account have knowledge, all funds transferred to the Fleet
Concentration Account and for which the Borrowers have received credits shall
be applied to the Obligations as follows:

 

(i)                                     first,
to pay amounts then due and payable under this Agreement, the Notes and the
other Loan Documents;

 

(ii)                                  second,
to reduce Swing Line Loans made by the Agent and for which Settlement has not
then been made;

 

(iii)                               third,
to reduce other Revolving Credit Loans which are Base Rate Loans;

 

(iv)                              fourth,
to reduce Revolving Credit Loans which are Eurodollar Rate Loans; and

 

(v)                                 fifth,
except as otherwise required by Section 2.14.2(b) and (c), to the Operating
Account.

 

(b)                                 All
prepayments of Eurodollar Rate Loans prior to the end of an Interest Period
shall obligate the Borrowers to pay any breakage costs associated with such
Eurodollar Rate Loans in accordance with Section 5.9.  Prior to the occurrence of an Event of Default, the Borrowers may
elect to avoid such breakage costs by providing to the Agent cash in an amount
sufficient to cash collateralize such Eurodollar Rate Loans, but in no event
shall the Borrowers be deemed to have paid such Eurodollar Rate Loans until
such cash has been paid to the Agent for application to such Eurodollar Rate
Loans.  The Agent may elect to cause
such cash collateral to be deposited into a cash collateral account pursuant to
the terms of a cash collateral agreement executed by the Borrowers and the
Agent and in form and substance satisfactory to the Agent.  In each such case, the Borrowers agree to
execute and deliver to the Agent such instruments and documents, including
Uniform Commercial Code financing statements and agreements with any third
party depository banks, as the Agent may request.

 

(c)                                  All
prepayments of the Revolving Credit Loans pursuant to this Section 2.14.2 shall
be allocated among the Revolving Credit Lenders making such Revolving Credit
Loans, in proportion, as nearly as practicable, to the respective unpaid
principal amount of such Revolving Credit Loans outstanding, with adjustments
to the extent practicable to equalize any prior payments or repayments not
exactly in proportion.  Prior to any
Settlement Date, however, all prepayments of the Revolving Credit Loans shall
be applied in accordance with this Section 2.14.2, first to outstanding
Revolving Credit Loans of the Agent.

 

43

 

2.15.                        REPAYMENTS OF REVOLVING CREDIT LOANS
AFTER EVENT OF DEFAULT.  Following
the occurrence and during the continuance of an Event of Default of which the
account officers of the Agent active on the Borrower’s account have knowledge,
all funds transferred to the Fleet Concentration Account and for which the
Borrowers have received credits shall be applied to the Obligations in
accordance with Section 13.5.

 

2.16.                        OVERLOANS AND PROTECTIVE
OVERADVANCES.

 

2.16.1.               PROTECTIVE
OVERADVANCES.  NOTWITHSTANDING ANY
PROVISION CONTAINED IN THIS AGREEMENT TO THE CONTRARY, THE AGENT MAY (WITHOUT
ANY OBLIGATION TO DO SO) IN ITS SOLE AND ABSOLUTE DISCRETION MAKE PROTECTIVE
OVERADVANCES TO THE BORROWERS WHICH WOULD CONSTITUTE OVERLOANS.  THE AGENT SHALL NOT MAKE ANY OVERLOAN THAT
DOES NOT CONSTITUTE A PROTECTIVE ADVANCE.

 

2.16.2.               OVERLOANS.  Each Revolving Credit Lender recognizes that
subsequent to the making of a Revolving Credit Loan which does not constitute a
Protective OverAdvance, Availability may be less than $0 on account of changed
circumstances beyond the control of the Agent (such as a drop in collateral
value).

 

2.16.3.               NO
OBLIGATION TO PROVIDE OVERLOANS.  The
Agent’s and the Revolving Credit Lenders’ providing of an OverLoan or
Protective OverAdvance on any one occasion does not affect the obligations of
the Borrowers hereunder (including the Borrowers’ obligation to immediately
repay any amount which otherwise constitutes an OverLoan) nor obligate the
Revolving Credit Lenders or the Agent to do so on any other occasion.

 

3.                                       THE TRANCHE B FACILITY.

 

3.1.                              COMMITMENT TO LEND. 
Subject to the terms and conditions set forth in this Agreement, the
Tranche B Lender agrees to lend to the Borrowers on the Closing Date the
principal amount of $10,000,000.

 

3.2.                              THE TRANCHE B NOTE. 
The Tranche B Loan shall be evidenced by a separate promissory note of
the Borrowers in substantially the form of EXHIBIT D hereto (the “TRANCHE B
NOTE”), dated the Closing Date, and completed with appropriate insertions.  The Borrowers irrevocably authorize the
Tranche B Lender to make or cause to be made a notation on the Tranche B
Lender’s records reflecting the original principal amount of the Tranche B Loan
and, at or about the time of the Tranche B Lender’s receipt of any principal
payment on the Tranche B Note, an appropriate notation on the Tranche B
Lender’s records reflecting such payment. 
The aggregate unpaid amount set forth on the Tranche B Lender’s records
shall be PRIMA FACIE evidence of the principal amount thereof owed and unpaid
on the Tranche B Loan, but the failure to record, or any error in so recording,
any such amount on the Tranche B Lender’s records shall not affect the
obligations of the Borrowers hereunder or under the Tranche B Note to make
payments of principal of and interest on the Tranche B Note when due.

 

44

 

3.3.                              PAYMENTS OF PRINCIPAL OF TRANCHE B LOAN.  Except as contemplated by Section 13.5, the
Borrowers may not make any principal payments on account of the Tranche B Loan
until the Borrowers’ Obligations to the Revolving Credit Lenders have been
indefeasibly paid in full and the Commitments have been terminated; PROVIDED,
HOWEVER, the Borrowers may prepay the Tranche B Loan in its entirety after the
first anniversary of the Closing Date if at such time (i) a Default does not
exist and one would not result from such prepayment, (ii) after giving effect
to such payment, Availability is in excess of $25,000,000 and (iii) the
Borrowers shall have delivered to the Agent pro forma financial statements for
the next twelve (12) months demonstrating, in form and substance satisfactory
to the Agent, that Availability will exceed $25,000,000 at all times during the
next 12 months after giving effect to the prepayment of the Tranche B
Loan.  The Borrowers jointly and
severally promise to pay on the Maturity Date, and there shall become
absolutely due and payable on the Maturity Date, all of the Tranche B Loans
outstanding on such date, together with any and all accrued and unpaid interest
thereon.  In the event of any repayment
or prepayment of the Tranche B Loan prior to the Maturity Date for any
reason, including (a) the acceleration of the Obligations after the occurrence
of an Event of Default, (b) foreclosure and sale of Collateral, (c) sale of the
Collateral in any insolvency proceeding, or (d) the restructure, reorganization
or compromise of the Obligations by the confirmation of a plan of reorganization,
or any other plan of compromise, restructure, or arrangement in any insolvency
proceeding, then, in view of the impracticability and extreme difficulty of
ascertaining the actual amount of damages to the Tranche B Lender or
profits lost by the Tranche B Lender as a result of such early
termination, and by mutual agreement of the parties as to a reasonable
estimation and calculation of the lost profits or damages of the Tranche B
Lender, and as compensation for the cost of making the Tranche B Loan available
to the Borrowers, and not as a penalty, the Borrowers shall pay to the
Tranche B Lender, an early termination fee (the “TRANCHE B EARLY
TERMINATION FEE”) equal to one percent (1%) of the amount repaid or prepaid;
PROVIDED, HOWEVER that the event of any such repayment or prepayment prior to
the fifteen month anniversary of the Closing Date, such Tranche B Early
Termination Fee shall be equal to the greater of (i) the product of (x) the
result of (A) the sum of all fees payable to the Tranche B Lenders
pursuant to the Tranche B Fee Letter and all interest on the
Tranche B Loan (including any Tranche B Loan PIK Interest that would
have been payable but for such prepayment or repayment payable with respect to
the Tranche B Loan during the period from the Closing Date to the date
that is fifteen (15) months thereafter), MINUS (B) amounts actually paid by the
Borrowers in respect of all such fees and interest through the date of
prepayment, multiplied by (y) a quotient the numerator of which is the amount repaid
or prepaid and the denominator of which is the initial amount of the
Tranche B Loan; and (ii) one percent (1%) of the amount repaid or
prepaid.  Notwithstanding the foregoing,
the Tranche B Early Termination Fee shall not be due if the Tranche B
Loans are paid in full in cash during the period from January 1, 2006
through the Maturity Date.

 

3.4.                              INTEREST ON TRANCHE B LOAN.  Except as otherwise provided in Section
3.4(c), the outstanding amount of the Tranche B Loan shall be calculated on the
basis of a three hundred sixty (360) day year and actual days elapsed and shall
bear interest until repaid at the rate of fifteen and one-half percent (15.5%)
per annum from the Closing Date through March 31, 2004, thereafter at a rate
per annum equal to the Base Rate in effect on the first day of each fiscal
quarter, beginning April 1, 2004, PLUS 11.25%, adjusting quarterly on the first
day of each subsequent fiscal quarter to reflect any change in the Base Rate as
of each such date (in each

 

45

 

case, the “TRANCHE B LOAN
INTEREST RATE”).  The Tranche B Loan
Interest Rate, shall be payable as follows:

 

(a)                                  From
the Closing Date through March 31, 2004, accrued interest on the unpaid
principal balance of the Tranche B Loan at the rate of thirteen percent (13%)
per annum and, thereafter, at a rate per annum equal to the Base Rate in effect
on the first day of each fiscal quarter, beginning April 1, 2004, PLUS 8.75%,
adjusting quarterly on the first day of each subsequent fiscal quarter to
reflect any change in the Base Rate as of each such date (in each case,
“TRANCHE B LOAN CURRENT PAY INTEREST”) shall be payable monthly in arrears on
the first Business Day of each month (the “TRANCHE B LOAN INTEREST PAYMENT
DATE”), and on the Maturity Date.

 

(b)                                 Accrued
interest on the unpaid principal balance of the Tranche B Loan in excess of
Tranche B Loan Current Pay Interest (which excess is referred to herein as
“TRANCHE B LOAN PIK INTEREST”) shall be payable as follows:

 

(i)                                     Unless
the payment would cause an OverLoan or the Agent and the Tranche B Lender have
been given written notice by the Borrowers’ Representative at least three (3)
Business Days prior to the relevant Tranche B Loan Interest Payment Date that
the Borrowers are exercising their option to pay interest in kind (the “PIK
ELECTION”), the Tranche B Loan PIK Interest will be due on such date in cash.

 

(ii)                                  If
the Agent and the Tranche B Lender have received a PIK Election or the payment
would cause an OverLoan, all or any part of Tranche B Loan PIK Interest shall
be paid by adding the same to the principal balance of the Tranche B Loan Note
on that Tranche B Loan Interest Payment Date.

 

(iii)                               At
the direction of the Tranche B Lender, following the occurrence and during the
continuance of any Default, all interest shall be paid in cash on each Tranche
B Loan Interest Payment Date.

 

(c)                                  Following
the occurrence and during the continuance of any Event of Default, at the
direction of the Tranche B Lender, interest shall accrue and shall be payable
on the unpaid principal balance of the Tranche B Loan at the aggregate of the
Tranche B Loan Interest Rate plus three percent (3%) per annum.

 

3.5.                              PAYMENTS ON ACCOUNT OF TRANCHE B LOAN.  The Borrowers authorize the Agent to determine
and to pay over directly to the Tranche B Lender any and all amounts due and
payable from time to time under or on account of the Tranche B Loan as advances
under the Revolving Credit Loans, IT BEING UNDERSTOOD, HOWEVER, that the
authorization of the Agent provided in this Section 3.5 shall not excuse the
Borrowers from fulfilling their obligations to the Tranche B Lender on account
of the Tranche B Loan nor place any obligation on the Agent to do so.  The Agent shall provide prompt advice to the
Borrowers of any amount which is so paid over by the Agent to the Tranche B
Lender pursuant to this Section 3.5. 
The Borrowers shall not be entitled to any credit, rebate or repayment
of any fee or

 

46

 

assessment previously earned by
the Tranche B Lender pursuant to this Agreement notwithstanding any termination
of this Agreement or suspension or termination of the Agent’s and any Lender’s
respective obligation to make loans and advances hereunder.

 

3.6.                              BUYOUT OPTION.  At
any time during any Buyout Exercise Period, the Tranche B Lender may (but shall
not be obligated to) give notice to the Agent (the “BUYOUT ACCEPTANCE NOTICE”)
of its intent to cause the assignment to the Tranche B Lender, or its designee,
by the Revolving Credit Lenders, of all right, title and interest in, to,
arising under or in respect of all Obligations of the Revolving Credit
Lenders.  Such assignments shall be
effected on the Business Day which is not more than three (3) Business Days
following the Buyout Acceptance Notice by the execution, by the Revolving
Credit Lenders, of an Assignment and Acceptance in exchange for the payment, in
immediately available funds, of the amount of the Obligations in respect of the
Revolving Credit Loans (excluding the Revolving Credit Early Termination Fee)
and cash collateral with respect to the Maximum Drawing Amount and all Unpaid
Reimbursement Obligations in the amount of 105% of the face amount of Letter of
Credit, in each case (and cash collateral) as of the date on which such
assignment is made.  The Tranche B
Lender’s buy out right under this Section 3.6 may only be exercised completely
with respect to all of the Obligations of the Revolving Credit Lenders.  Following its exercise of the buy out right
under this Section 3.6, the Tranche B Lender shall, during the first 180 days
following exercise of the buyout right and payment in full therefor, (a) not
waive or alter the Revolving Credit Early Termination Fee or alter the payment
provisions in Section 13.5 to change when the Revolving Credit Early
Termination Fee would be paid and (b) upon receipt during said 180-day period
of any amounts on account of the Revolving Credit Early Termination Fee, pay
such amounts to the Agent for the account of the Revolving Credit Lenders in
accordance with their Commitment Percentages as of the date of the buy out
under this Section 3.6.

 

4.                                       LETTERS OF CREDIT.

 

4.1.                              LETTER OF CREDIT COMMITMENTS.

 

4.1.1.                     COMMITMENT
TO ISSUE LETTERS OF CREDIT.  Subject to
the terms and conditions hereof and the execution and delivery by the
Borrowers’ Representative of a letter of credit application on the Letter of
Credit Issuer’s customary form (a “LETTER OF CREDIT APPLICATION”), the
Borrowers’ Representative may request that Agent cause the Letter of Credit
Issuer to issue on behalf of the Revolving Credit Lenders and in reliance upon
the agreement of the Revolving Credit Lenders set forth in Section 4.1.4 and
upon the representations and warranties of the Borrowers contained herein, in its
individual capacity, to issue, extend and renew for the account of the
Borrowers one or more standby or documentary letters of credit (individually, a
“LETTER OF CREDIT”), in such form as may be requested from time to time by the
Borrowers’ Representative and agreed to by the Letter of Credit Issuer;
PROVIDED, HOWEVER, that, after giving effect to such request, (a) the sum of
the aggregate Maximum Drawing Amount and all Unpaid Reimbursement Obligations
shall not exceed $15,000,000 at any one time, (b) Availability is greater than
$1 and (c) there are no OverLoans.  In
addition to the Letter of Credit Application, the Borrowers’

 

47

 

Representative
shall execute such other documents reasonably required by the Letter of Credit
Issuer to apply for and support the issuance of a Letter of Credit.  There shall not be any recourse to, nor
liability of, the Agent or any Lender or Letter of Credit Issuer on account of
any delay or refusal by any Letter of Credit Issuer to issue a Letter of
Credit.

 

4.1.2.                     LETTER
OF CREDIT APPLICATIONS.  Each Letter of
Credit Application shall be completed to the satisfaction of the Agent and the
Letter of Credit Issuer.  In the event
that any provision of any Letter of Credit Application shall be inconsistent
with any provision of this Agreement, then the provisions of this Agreement
shall, to the extent of any such inconsistency, govern.

 

4.1.3.                     TERMS
OF LETTERS OF CREDIT.  Each Letter of
Credit issued, extended or renewed hereunder shall, among other things, (a)
provide for the payment of sight drafts for honor thereunder when presented in
accordance with the terms thereof and when accompanied by the documents
described therein, and (b) have an expiry date no later than the earlier of (i)
the date which is fourteen (14) days (or, if the Letter of Credit is confirmed
by a confirmer or otherwise provides for one or more nominated persons,
forty-five (45) days) prior to the Maturity Date and (ii) with respect to (A)
standby Letters of Credit one (1) year after the date of issuance and (B)
documentary Letters of Credit sixty (60) after the date of issuance.  Each Letter of Credit so issued, extended or
renewed shall be subject to the Uniform Customs and Practice for Documentary
Credits (1993 Revision), International Chamber of Commerce Publication No. 500
or any successor version thereto adopted by the Letter of Credit Issuer in the
ordinary course of its business as a letter of credit issuer and in effect at
the time of issuance of such Letter of Credit (the “UNIFORM CUSTOMS”) or, in
the case of a standby Letter of Credit, either the Uniform Customs or the
International Standby Practices (ISP98), International Chamber of Commerce
Publication No. 590, or any successor code of standby letter of credit
practices among banks adopted by the Letter of Credit Issuer in the ordinary
course of its business as a standby letter of credit issuer and in effect at
the time of issuance of such Letter of Credit.

 

4.1.4.                     REIMBURSEMENT
OBLIGATIONS OF REVOLVING CREDIT LENDERS. 
Each Revolving Credit Lender severally agrees that it shall be
absolutely liable, without regard to whether a Default exists or any other
condition precedent whatsoever, to the extent of such Revolving Credit Lender’s
Commitment Percentage, to reimburse the Letter of Credit Issuer and/or the
Agent on demand for the amount of each draft paid by the Letter of Credit
Issuer under each Letter of Credit to the extent that such amount is not
reimbursed by the Borrowers pursuant to Section 4.2 (such agreement for a
Lender being called herein the “LETTER OF CREDIT PARTICIPATION” of such
Revolving Credit Lender).

 

4.1.5.                     PARTICIPATIONS
OF REVOLVING CREDIT LENDERS.  Each such
payment made by a Revolving Credit Lender shall be treated as the purchase by
such Revolving Credit Lender of a participating interest in the Borrowers’
Reimbursement Obligation under Section 4.2 in an amount equal to such
payment.  Each Revolving

 

48

 

Credit Lender
shall share in accordance with its participating interest in any interest which
accrues pursuant to Section 4.2.

 

4.2.                              REIMBURSEMENT OBLIGATION OF THE
BORROWERS.  In order to induce the
Agent to cause the Letter of Credit Issuer to issue, extend and renew each
Letter of Credit and the Revolving Credit Lenders to participate therein, the
Borrowers hereby jointly and severally agree to reimburse or pay to the Agent
and the Letter of Credit Issuer, for the account of the Agent and the Letter of
Credit Issuer or (as the case may be) the Revolving Credit Lenders, with
respect to each Letter of Credit issued, extended or renewed by the Letter of
Credit Issuer hereunder,

 

(a)                                  except
as otherwise expressly provided in Section 4.2(b) and (c), on each date that
any draft presented under such Letter of Credit is honored by the Letter of
Credit Issuer, or the Letter of Credit Issuer otherwise makes a payment with
respect thereto, (i) the amount paid by the Letter of Credit Issuer under or
with respect to such Letter of Credit, and (ii) the amount of any taxes,
reasonable fees, charges or other costs and expenses whatsoever incurred by the
Letter of Credit Issuer, the Agent or any Revolving Credit Lender in connection
with any payment made by the Letter of Credit Issuer, the Agent or any
Revolving Credit Lender under, or with respect to, such Letter of Credit,

 

(b)                                 upon
the reduction (but not termination) of the Total Revolving Commitment to an
amount less than the Maximum Drawing Amount, an amount equal to such
difference, which amount shall be held by the Agent for the benefit of the
Letter of Credit Issuer, the Revolving Credit Lenders and the Agent as cash
collateral for all Reimbursement Obligations, and

 

(c)                                  upon
the termination of the Total Revolving Commitment, or the acceleration of the
Reimbursement Obligations with respect to all Letters of Credit in accordance
with Section 13, an amount equal to the then Maximum Drawing Amount on all
Letters of Credit, which amount shall be held by the Agent for the benefit of
the Letter of Credit Issuer, the Revolving Credit Lenders and the Agent as cash
collateral for all Reimbursement Obligations.

 

Each such
payment shall be made to the Agent at the Agent’s Office in immediately
available funds.  Interest on any and
all amounts remaining unpaid by the Borrowers under this Section 4.2 at any
time from the date such amounts become due and payable (whether as stated in
this Section 4.2, by acceleration or otherwise) until payment in full (whether
before or after judgment) shall be payable to the Agent on demand at the rate
specified in Section 5.10 for overdue principal on the Revolving Credit
Loans.  Notwithstanding the foregoing,
the Agent, without the request of the Borrowers, may advance Revolving Credit
Loans in the amount of any honoring of any Letter of Credit and other amount
for which the Borrowers, the Letter of Credit Issuer, the Agent or the
Revolving Credit Lenders become obligated on account of, or in respect to, any
Letter of Credit.  Such advance shall be
made whether or not a Default exists or such advance

 

49

 

would result in
an OverLoan.  Such action shall not
constitute a waiver of the Agent’s and the Revolving Credit Lenders’ rights
under this Section 4.

 

4.3.                              LETTER OF CREDIT PAYMENTS.  If any draft shall be presented or other
demand for payment shall be made under any Letter of Credit, the Letter of
Credit Issuer shall notify the Borrowers’ Representative of the date and amount
of the draft presented or demand for payment and of the date and time when it
expects to pay such draft or honor such demand for payment.  If the Borrowers’ Representative fails to
reimburse the Letter of Credit Issuer and the Agent as provided in Section 4.2
on or before the date that such draft is paid or other payment is made by the
Letter of Credit Issuer, the Agent may at any time thereafter notify the
Revolving Credit Lenders of the amount of any such Unpaid Reimbursement
Obligation.  No later than 3:00 p.m.
(Boston time) on the Business Day next following the receipt of such notice,
each Revolving Credit Lender shall make available to the Letter of Credit
Issuer in immediately available funds, such Revolving Credit Lender’s
Commitment Percentage of such Unpaid Reimbursement Obligation, together with an
amount equal to the product of (a) the average, computed for the period
referred to in clause (c) below, of the weighted average interest rate paid by
the Letter of Credit Issuer for federal funds acquired by the Letter of Credit
Issuer during each day included in such period, MULTIPLIED BY (b) the amount
equal to such Revolving Credit Lender’s Commitment Percentage of such Unpaid
Reimbursement Obligation, MULTIPLIED BY (c) a fraction, the numerator of which
is the number of days that elapse from and including the date the Letter of
Credit Issuer paid the draft presented for honor or otherwise made payment to
the date on which such Revolving Credit Lender’s Commitment Percentage of such
Unpaid Reimbursement Obligation shall become immediately available to the
Letter of Credit Issuer, and the denominator of which is 360.  The responsibility of the Agent and the
Letter of Credit Issuer to the Borrowers and the Revolving Credit Lenders shall
be only to determine that the documents (including each draft) delivered under
each Letter of Credit in connection with such presentment shall be in
conformity in all material respects with such Letter of Credit.

 

4.4.                              OBLIGATIONS ABSOLUTE.  The Borrowers’ obligations under this Section 4 shall be absolute
and unconditional under any and all circumstances and irrespective of whether a
Default exists or any condition precedent whatsoever or any setoff,
counterclaim or defense to payment which the Borrowers may have or have had
against the Letter of Credit Issuer, the Agent, any Revolving Credit Lender or
any beneficiary of a Letter of Credit. 
The Borrowers further agree with the Letter of Credit Issuer, the Agent
and the Revolving Credit Lenders that the Letter of Credit Issuer, the Agent
and the Revolving Credit Lenders shall not be responsible for, and the
Borrower’s Reimbursement Obligations under Section 4.2 shall not be affected
by, among other things, the validity or genuineness of documents or of any
endorsements thereon, even if such documents should in fact prove to be in any
or all respects invalid, fraudulent or forged, or any dispute between or among
the Borrowers, the beneficiary of any Letter of Credit or any financing
institution or other party to which any Letter of Credit may be transferred or
any claims or defenses whatsoever of the Borrowers against the beneficiary of
any Letter of Credit or any such transferee. 
The Letter of Credit Issuer, the Agent and the Revolving Credit Lenders
shall not be liable for any error, omission, interruption or delay in transmission,
dispatch or delivery of any message or advice, however transmitted, in
connection with any Letter of Credit. 
The Borrowers agree that any action taken or omitted by the Letter of
Credit Issuer, the Agent or any Revolving Credit Lender under or in connection
with each Letter of Credit and the related

 

50

 

drafts and documents, if done in
good faith, shall be binding upon the Borrowers and shall not result in any
liability on the part of the Letter of Credit Issuer, the Agent or any
Revolving Credit Lender to the Borrowers.

 

4.5.                              RELIANCE BY ISSUER. 
To the extent not inconsistent with Section 4.4, the Letter of Credit
Issuer and the Agent shall be entitled to rely, and shall be fully protected in
relying upon, any Letter of Credit, draft, writing, resolution, notice,
consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex
or teletype message, statement, order or other document believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel, independent
accountants and other experts selected by the Letter of Credit Issuer or the
Agent.  The Letter of Credit Issuer and
the Agent shall be fully justified in failing or refusing to take any action
under this Agreement unless it shall first have received such advice or
concurrence of the Required Lenders as it reasonably deems appropriate or it
shall first be indemnified to its reasonable satisfaction by the Revolving
Credit Lenders against any and all liability and expense which may be incurred
by it by reason of taking or continuing to take any such action.  The Letter of Credit Issuer and the Agent
shall in all cases be fully protected in acting, or in refraining from acting,
under this Agreement in accordance with a request of the Required Lenders, and
such request and any action taken or failure to act pursuant thereto shall be
binding upon the Lenders and all future holders of the Revolving Credit Notes
or of a Letter of Credit Participation. 
Unless otherwise agreed to, in the particular instance, the Borrowers
hereby authorize any Letter of Credit Issuer to select an advising bank, if
any, select a paying bank, if any and select a negotiating bank.

 

4.6.                              LETTER OF CREDIT FEE.  The Borrowers shall, monthly in arrears on the first day of each
month and on the Maturity Date, pay a fee (in each case, a “LETTER OF CREDIT
FEE”) to the Agent (a) in respect of each standby Letter of Credit an amount
equal to the Applicable Margin for Eurodollar Rate Loans per annum of the face
amount of such standby Letter of Credit for the accounts of the Revolving
Credit Lenders in accordance with their respective Commitment Percentages and
(b) in respect of each documentary Letter of Credit an amount equal to the
Applicable Margin for Eurodollar Rate Loans per annum of the face amount of
such documentary Letter of Credit shall be for the accounts of the Revolving
Credit Lenders in accordance with their respective Commitment Percentages.  Following the occurrence of any Event of
Default, the Letter of Credit Fees shall be increased by 200 basis points per
annum.  In respect of each Letter of Credit,
the Borrowers shall also pay to the Letter of Credit Issuer for the Letter of
Credit Issuer’s own account, at such other time or times as such charges are
customarily made by the Letter of Credit Issuer, the Letter of Credit Issuer’s
customary issuance, amendment, negotiation or document examination and other
reasonable and customary administrative fees as in effect from time to time.

 

5.                                       CERTAIN GENERAL PROVISIONS.

 

5.1.                              AGENT FEES.  The
Borrowers jointly and severally agree to pay to the Agent, for the Agent’s own
account, the fees as set forth in the Agent Fee Letter (the “AGENT FEES”).

 

51

 

5.2.                              TRANCHE B LENDER FEES.  The Borrowers jointly and severally agree to pay to the Tranche B
Lender, for the Tranche B Lender’s own account, the fees as set forth in the
Tranche B Fee Letter (the “TRANCHE B LENDER FEES”).

 

5.3.                              FUNDS FOR PAYMENTS.

 

5.3.1.                     PAYMENTS
TO AGENT.  All payments of principal,
interest, Reimbursement Obligations, Fees and any other amounts due hereunder
or under any of the other Loan Documents shall be made on the due date thereof
to the Agent in Dollars, for the respective accounts of the Lenders and the
Agent, at the Agent’s Office or at such other place that the Agent may from
time to time designate, in each case at or about 12:00 noon (Boston time or
other local time at the place of payment) and in immediately available funds.

 

5.3.2.                     NO
OFFSET, ETC.  All payments by the
Borrowers hereunder and under any of the other Loan Documents shall be made
without recoupment, setoff or counterclaim and free and clear of and without
deduction for any taxes, levies, imposts, duties, charges, reasonable fees,
deductions, withholdings, compulsory loans, restrictions or conditions of any
nature now or hereafter imposed or levied by any jurisdiction or any political
subdivision thereof or taxing or other authority therein unless the Borrowers
are compelled by law to make such deduction or withholding.  If any such obligation is imposed upon the
Borrowers with respect to any amount payable by it hereunder or under any of
the other Loan Documents, the Borrowers will pay to the Agent, for the account
of the Lenders or (as the case may be) the Agent, on the date on which such
amount is due and payable hereunder or under such other Loan Document, such
additional amount in Dollars as shall be necessary to enable the Lenders or the
Agent to receive the same net amount which the Lenders or the Agent would have
received on such due date had no such obligation been imposed upon the
Borrowers.  Where taxes, deductions or
withholdings are imposed upon the Borrowers with respect to any amount payable
by the Borrowers hereunder or under any of the other Loan Documents as a result
of characteristics of the Agent, a Lender or a Participant, no payment of
additional amounts is required under this Section 5.3.2, in respect of such
taxes, deductions or withholdings to the extent that such Agent, Lender or
Participant (as the case may be) was subject to such taxes, deductions or
withholdings under the law in effect at the time that it became an Agent, Lender
or Participant or subsequently became subject to such taxes, deductions or
withholdings other than as a result of a change in law or any actions of the
Borrowers.  In addition, no payment of
additional amounts is required under this Section 5.3.2 in respect of taxes,
deductions or withholdings to the extent that such taxes, deductions or
withholdings are imposed as a result of a failure by the Agent, a Lender, a
Participant or any person in the chain of payment between the Borrowers and the
Agent, Lender or Participant, as the case may be, to provide, in accordance
with applicable procedures, properly completed and executed tax forms that they
are legally permitted to provide.  The
Borrowers will deliver promptly to the Agent certificates or other valid vouchers
reasonably available to them for all taxes or other charges deducted from or
paid with respect to payments made by the Borrowers hereunder or under such
other Loan Document.

 

52

 

5.4.                              COMPUTATIONS.  All
computations of interest on the Loans and of Fees shall be based on a 360-day
year (except interest on Base Rate Loans prior to a Default which will be based
on a 365-day year) and paid for the actual number of days elapsed.  Except as otherwise provided in the
definition of the term “INTEREST PERIOD” with respect to Eurodollar Rate Loans,
whenever a payment hereunder or under any of the other Loan Documents becomes
due on a day that is not a Business Day, the due date for such payment shall be
extended to the next succeeding Business Day, and interest shall accrue during
such extension.  The outstanding amount
of the Loans as reflected on the Revolving Credit Note Records and the Tranche
B Lender’s records from time to time shall be considered correct and binding on
the Borrowers unless within five (5) Business Days after receipt of any notice
by the Agent or any of the Lenders of such outstanding amount, the Agent or
such Lender shall notify the Borrowers’ Representative to the contrary.

 

5.5.                              INABILITY TO DETERMINE EURODOLLAR RATE.  In the event, prior to the commencement of
any Interest Period relating to any Eurodollar Rate Loan, the Agent shall in
good faith determine that (a) adequate and reasonable methods do not exist for
ascertaining the Eurodollar Rate that would otherwise determine the rate of
interest to be applicable to any Eurodollar Rate Loan during any Interest
Period or (b) the Eurodollar Rate determined or to be determined for such
Interest Period will not adequately and fairly reflect the cost to the
Revolving Credit Lenders of making or maintaining their Eurodollar Rate Loans
during such period, the Agent shall forthwith give notice of such determination
(which shall be conclusive and binding on the Borrowers and the Revolving
Credit Lenders) to the Borrowers’ Representative and the Revolving Credit
Lenders.  In such event (i) any Loan
Request or Conversion Request with respect to Eurodollar Rate Loans shall be
automatically withdrawn and shall be deemed a request for Base Rate Loans, (ii)
each Eurodollar Rate Loan will automatically, on the last day of the then
current Interest Period relating thereto, become a Base Rate Loan, and (iii)
the obligations of the Revolving Credit Lenders to make Eurodollar Rate Loans
shall be suspended until the Agent determines that the circumstances giving
rise to such suspension no longer exist, whereupon the Agent shall so notify
the Borrowers’ Representative and the Revolving Credit Lenders.

 

5.6.                              ILLEGALITY. 
Notwithstanding any other provisions herein, if any future law,
regulation, treaty or directive or the interpretation or application thereof
shall make it unlawful for any Revolving Credit Lender to make or maintain
Eurodollar Rate Loans, such Revolving Credit Lender shall forthwith give notice
of such circumstances to the Borrowers’ Representative and the other Revolving
Credit Lenders and thereupon (a) the commitment of such Revolving Credit Lender
to make Eurodollar Rate Loans or convert Base Rate Loans to Eurodollar Rate
Loans shall forthwith be suspended and (b) such Revolving Credit Lender’s
Revolving Credit Loans then outstanding as Eurodollar Rate Loans, if any, shall
be converted automatically to Base Rate Loans on the last day of each Interest
Period applicable to such Eurodollar Rate Loans or within such earlier period
as may be required by law.  The
Borrowers hereby agree promptly to pay the Agent for the account of such
Revolving Credit Lender, upon demand by such Revolving Credit Lender, any
additional amounts reasonably necessary to compensate such Revolving Credit
Lender for any costs incurred by such Revolving Credit Lender in making any
conversion in accordance with this Section 5.6, including any interest or
reasonable fees payable

 

53

 

by such Revolving Credit Lender
to lenders of funds obtained by it in order to make or maintain its Eurodollar
Rate Loans hereunder.

 

5.7.                              ADDITIONAL COSTS, ETC.  If any future applicable law, which expression, as used herein,
includes statutes, rules and regulations thereunder and interpretations thereof
after the date hereof by any competent court or by any governmental or other
regulatory body or official charged with the administration or the
interpretation thereof and requests, directives, instructions and notices at
any time or from time to time hereafter made upon or otherwise issued to any
Lender or the Agent by any central bank or other fiscal, monetary or other
authority (whether or not having the force of law), shall:

 

(a)                                  subject
any Lender or the Agent to any tax, levy, impost, duty, charge, fee, deduction
or withholding of any nature with respect to this Agreement, the other Loan
Documents, any Letters of Credit, such Lender’s Commitment or the Loans (other
than taxes based upon or measured by the income or profits of such Lender or
the Agent), or

 

(b)                                 materially
change the basis of taxation (except for changes in taxes on income or profits
or taxes referred to in the first sentence of Section 5.3.2, which shall be
taken into account in the manner provided by Section 5.3.2) of payments to any
Lender of the principal of or the interest on any Loans or any other amounts
payable to any Lender or the Agent under this Agreement or any of the other
Loan Documents, or

 

(c)                                  impose
or increase or render applicable (other than to the extent specifically
provided for elsewhere in this Agreement) any special deposit, reserve,
assessment, liquidity, capital adequacy or other similar requirements (whether
or not having the force of law) against assets held by, or deposits in or for
the account of, or loans by, or letters of credit issued by, or commitments of
an office of any Lender, or

 

(d)                                 impose
on any Lender or the Agent any other conditions or requirements with respect to
this Agreement, the other Loan Documents, any Letters of Credit, the Loans,
such Lender’s Commitment, or any class of loans, letters of credit or
commitments of which any of the Loans or such Lender’s Commitment forms a part,
and the result of any of the foregoing is:

 

(i)                                     to
increase the cost to any Lender of making, funding, issuing, renewing,
extending or maintaining any of the Loans or such Lender’s Commitment or any
Letter of Credit, or

 

(ii)                                  to
reduce the amount of principal, interest, Reimbursement Obligation or other
amount payable to such Lender or the Agent hereunder on account of such
Lender’s Commitment, any Letter of Credit or any of the Loans, or

 

(iii)                               to
require such Lender or the Agent to make any payment or to forego any interest
or Reimbursement Obligation or other sum payable hereunder, the amount of which
payment or foregone interest or Reimbursement Obligation

 

54

 

or other sum is
calculated by reference to the gross amount of any sum receivable or deemed
received by such Lender or the Agent from the Borrowers hereunder,

 

then, and in each such case, the
Borrowers will, upon demand made by such Lender or (as the case may be) the
Agent at any time and from time to time and as often as the occasion therefor
may arise, pay to such Lender or the Agent such additional amounts as will be
sufficient to compensate such Lender or the Agent for such additional cost,
reduction, payment or foregone interest or Reimbursement Obligation or other
sum.

 

5.8.                              CERTIFICATE.  A
certificate setting forth any additional amounts payable pursuant to Section
5.7 and a brief explanation of such amounts which are due, submitted by any
Lender or the Agent to the Borrowers’ Representative, shall be conclusive,
absent manifest error, that such amounts are due and owing.

 

5.9.                              INDEMNITY.  The
Borrowers agree to indemnify each Revolving Credit Lender and to hold each
Lender harmless from and against any loss, cost or expense or other “breakage
fees” (so-called) (including loss of anticipated profits) that such Revolving
Credit Lender may sustain or incur as a consequence of (a) default by the
Borrowers in payment of the principal amount of or any interest on any
Eurodollar Rate Loans as and when due and payable, including any such loss or
expense arising from interest or reasonable fees payable by such Revolving
Credit Lender to banks of funds obtained by it in order to maintain its
Eurodollar Rate Loans, (b) default by the Borrowers in making a borrowing or
conversion after the Borrowers’ Representative has given (or is deemed to have
given) a Loan Request or a Conversion Request relating thereto in accordance
with Section 2.9 or Section 2.10 or (c) the making of any payment of a
Eurodollar Rate Loan or the making of any conversion of any such Loan to a Base
Rate Loan on a day that is not the last day of the applicable Interest Period
with respect thereto, including interest or reasonable fees payable by such
Lender to lenders of funds obtained by it in order to maintain any such Loans.

 

5.10.                        INTEREST AFTER DEFAULT.  Following the occurrence and during the continuance of a Default
(and whether or not the Agent exercises the Agent’s rights on account thereof)
the principal of the Revolving Credit Loans shall, at the option of the Agent
or at the instruction of the SuperMajority Revolving Credit Lenders, until such
Default has been cured or remedied or such Default has been waived by the
Required Lenders pursuant to this Agreement, bear interest at a rate per annum
equal to two percent (2%) above the rate of interest otherwise applicable to
such Revolving Credit Loans pursuant to Section 2.8.

 

5.11.                        FEES NON-REFUNDABLE.  The Borrowers shall not be entitled to any credit, rebate or
repayment of any fee earned by the Agent or any Lender pursuant to this
Agreement or any Loan Document notwithstanding any termination of this
Agreement or suspension or termination of the Agent’s and any Lender’s
respective obligations to make loans and advances hereunder.

 

55

 

5.12.                        CONCERNING JOINT AND SEVERAL LIABILITY
OF THE BORROWERS.

 

(a)                                  Each
of the Borrowers is accepting joint and several liability hereunder in
consideration of the financial accommodations to be provided by the Agent, the
Letter of Credit Issuer and the Lenders under this Agreement, for the mutual
benefit, directly and indirectly, of each of the Borrowers and in consideration
of the undertakings of each of the Borrowers to accept joint and several
liability for the obligations of each of them.

 

(b)                                 Each
of the Borrowers, jointly and severally, hereby irrevocably and unconditionally
accepts, not merely as a surety but also as a co-debtor, joint and several
liability with each other Borrower, with respect to the payment and performance
of all of the Obligations, it being the intention of the parties hereto that
all the Obligations shall be the joint and several obligations of all of the
Borrowers without preferences or distinction among them.

 

(c)                                  If
and to the extent that any of the Borrowers shall fail to make any payment with
respect to any of the Obligations as and when due or to perform any of such
Obligations in accordance with the terms thereof, then in each such event each
other Borrower will make such payment with respect to, or perform, such
Obligation.

 

(d)                                 The
obligations of each Borrower under the provisions of this Section 5.12
constitute the absolute and unconditional obligations of such Borrower
enforceable against it to the full extent permitted under the terms hereof,
irrespective of the validity, regularity or enforceability of this Agreement or
any other circumstance whatsoever.

 

(e)                                  Except
as otherwise expressly provided for herein, each Borrower hereby waives notice
of acceptance of its joint and several liability, notice of the Loans made
under this Agreement, notice of the occurrence of any Default, or of any demand
for any payment under this Agreement, notice of any action at any time taken or
omitted by the Agent, the Letter of Credit Issuer or the Lenders under or in
respect of any of the Obligations, any requirement of diligence or to mitigate
damages and, generally, all demands, notices and other formalities of every
kind in connection with this Agreement. 
Each Borrower hereby assents to, and waives notice of, any extension or
postponement of the time for the payment of any of the Obligations, the
acceptance of any partial payment thereon, any waiver, consent or other action
or acquiescence by the Agent, the Letter of Credit Issuer or the Lenders at any
time or times in respect of any default by any Borrowers in the performance or
satisfaction of any term, covenant, condition or provision of this Agreement,
any and all other indulgences whatsoever by the Agent, the Letter of Credit
Issuer or the Lenders in respect of any of the Obligations hereunder, and the
taking, addition, substitution or release, in whole or in part, at any time or
times, of any security for any of such Obligations or the addition,
substitution or release, in whole or in part, of any Borrower.  Without limiting the generality of the
foregoing, each Borrower assents to any other action or delay in acting or
failure to act on the part of the Agent, the Letter of Credit Issuer or the
Lenders including, without limitation, any failure strictly or diligently to
assert any right or to pursue any remedy or to comply fully with Applicable
Laws thereunder, which might, but for the provisions of this Section 5.12,
afford grounds for terminating, discharging or relieving such Borrower, in
whole or in part, from any of its Obligations under this Section 5.12, it being
the intention of each

 

56

 

Borrower that,
so long as any of the Obligations remain unsatisfied, the Obligations of such
Borrower under this Section 5.12 shall not be discharged except by performance
and then only to the extent of such performance.  Except as otherwise expressly provided for herein, the joint and
several liability of the Borrowers hereunder shall continue in full force and
effect notwithstanding any absorption, merger, amalgamation or any other change
whatsoever in the name, membership, constitution or place of formation of any
Borrower or the Agent, the Letter of Credit Issuer or the Lenders.  If at any time, any payment, or any part
thereof, made in respect of any of the Obligations, is rescinded or must
otherwise be restored or returned by the Agent, the Letter of Credit Issuer or
the Lenders upon the insolvency, bankruptcy or reorganization of any of the
Borrowers, or otherwise, the provisions of this Section 5.12 will forthwith be
reinstated in effect, as though such payment had not been made.

 

(f)                                    Each
Borrower appoints the Borrowers’ Representative as its authorized
representative to make loan requests, receive funds and notice and to take all
other actions under this Agreement and the other Loan Documents on its behalf.

 

6.                                       COLLATERAL SECURITY.

 

6.1.                              GRANT OF SECURITY INTEREST.  The Borrowers each hereby grant to the
Agent, for the benefit of the Lenders, the Letter of Credit Issuer and the
Agent, to secure the payment and performance in full of all of the Obligations,
a security interest in and so pledges and assigns to the Agent, for the benefit
of the Lenders, the Letter of Credit Issuer and the Agent, the following
properties, assets and rights of each of the Borrowers, wherever located,
whether now owned or hereafter acquired or arising, and all proceeds and
products thereof (all of the same along with any other property, rights and
interests of each of the Borrowers that are or are intended to be subject to the
Liens created by the Security Documents being hereinafter called the
“COLLATERAL”): all personal property and fixtures of each of the Borrowers of
every kind and nature, and wherever located, including without limitation all
goods (including inventory, equipment and any accessions thereto), instruments
(including promissory notes), documents, accounts (including
health-care-insurance receivables), chattel paper (whether tangible or
electronic), deposit accounts, drafts, acceptances, certificates of deposit,
deposits, cash, letter-of-credit rights (whether or not the letter of credit is
evidenced by a writing) and supporting obligations, commercial tort claims,
securities and all other investment property, supporting obligations, any other
contract rights or rights to the payment of money, insurance policies,
certificates, claims and proceeds, and all general intangibles (including all
payment intangibles, software, trademarks and applications therefor, patents
and applications therefor, copyrights and applications therefor) and all books,
records and information relating to the foregoing and to the business of each
of the Borrowers and all rights of access to such books, records and
information, and all proceeds and products of all of the foregoing.  The Agent acknowledges that the attachment
of its security interest in any commercial tort claim as original collateral is
subject to the Borrowers’ compliance with Section 6.3.7.

 

6.2.                              AUTHORIZATION TO FILE FINANCING
STATEMENTS.  The Borrowers hereby
irrevocably authorize the Agent at any time and from time to time to file in
any filing office in any jurisdiction any initial financing statements and
amendments thereto that

 

57

 

(a) indicate the Collateral (i)
as all assets of the Borrowers or words of similar effect, regardless of
whether any particular asset comprised in the Collateral falls within the scope
of Article 9 of the Uniform Commercial Code of such jurisdiction, or (ii) as
being of an equal or lesser scope or with greater detail, and (b) provide any
other information required by part 5 of Article 9 of the Uniform Commercial
Code of such jurisdiction for the sufficiency or filing office acceptance of
any financing statement or amendment, including (i) whether the Borrowers are
an organization, the type of organization and any organizational identification
number issued to the Borrowers and, (ii) in the case of a financing statement
filed as a fixture filing or indicating Collateral as as-extracted collateral
or timber to be cut, a sufficient description of real property to which the
Collateral relates.  The Borrowers agree
to furnish any such information to the Agent promptly upon the Agent’s request.  The Borrowers also ratify their
authorization for the Agent to have filed in any jurisdiction any like initial
financing statements or amendments thereto if filed prior to the date hereof.

 

6.3.                              OTHER ACTIONS. 
Further to insure the attachment, perfection and first priority of, and
the ability of the Agent to enforce, the Agent’s security interest in the
Collateral, the Borrowers agree, in each case at the Borrowers’ expense, to
take the following actions with respect to the following Collateral and without
limitation on the Borrowers’ other obligations contained in this Agreement:

 

6.3.1.                     PROMISSORY
NOTES AND TANGIBLE CHATTEL PAPER.  If
the Borrowers shall, now or at any time hereafter, hold or acquire any
promissory notes or tangible chattel paper, the Borrowers shall forthwith
endorse, assign and deliver the same to the Agent, accompanied by such
instruments of transfer or assignment duly executed in blank as the Agent may
from time to time specify.

 

6.3.2.                     DEPOSIT
ACCOUNTS.  For each deposit account that
any Borrower, now or at any time hereafter, opens or maintains (each a “DEPOSIT
ACCOUNT”), the Borrowers shall (other than with respect to a Local Account)
pursuant to an agreement in form and substance satisfactory to the Agent (each
a “BLOCKED ACCOUNT AGREEMENT”), either (a) cause the depositary bank to agree to
comply, without further consent of the Borrowers, at any time with instructions
from the Agent to such depositary bank directing the disposition of funds from
time to time credited to such Deposit Account, or (b) arrange for the Agent to
become the customer of the depositary bank with respect to the Deposit Account,
with the Borrowers being permitted, only with the consent of the Agent, to
exercise rights to withdraw funds from such Deposit Account.  The provisions of this paragraph shall not
apply to a Deposit Account for which the Agent is the depositary bank and is in
automatic control thereof.  For each
Local Account that any Borrower now or at any time hereafter opens or
maintains, the Borrowers shall deliver to each depository bank with a Local
Account, a DDA Notification (each a “DDA NOTIFICATION”) in the form attached
hereto as SCHEDULE 6.3.

 

6.3.3.                     INVESTMENT
PROPERTY.  If the Borrowers shall, now
or at any time hereafter, hold or acquire any certificated securities, the
Borrowers shall forthwith endorse, assign and deliver the same to the Agent,
accompanied by such instruments of transfer or assignment duly executed in
blank as the Agent may from time to time

 

58

 

specify.  If any securities now or hereafter acquired
by the Borrowers are uncertificated and are issued to the Borrowers or their
nominee directly by the issuer thereof, the Borrowers shall immediately notify
the Agent thereof and, at the Agent’s request and option, pursuant to an agreement
in form and substance satisfactory to the Agent, either (a) cause the issuer to
agree to comply without further consent of the Borrowers or such nominee, at
any time with instructions from the Agent as to such securities, or (b) arrange
for the Agent to become the registered owner of the securities.  If any securities, whether certificated or
uncertificated, or other investment property now or hereafter acquired by the
Borrowers are held by the Borrowers or their nominee through a securities
intermediary or commodity intermediary, the Borrowers shall immediately notify
the Agent thereof and, at the Agent’s request and option, pursuant to an
agreement in form and substance satisfactory to the Agent, either (i) cause
such securities intermediary or (as the case may be) commodity intermediary to
agree to comply, in each case without further consent of the Borrowers or such
nominee, at any time with entitlement orders or other instructions from the
Agent to such securities intermediary as to such securities or other investment
property, or (as the case may be) to apply any value distributed on account of
any commodity contract as directed by the Agent to such commodity intermediary,
or (ii) in the case of financial assets or other investment property held through
a securities intermediary, arrange for the Agent to become the entitlement
holder with respect to such investment property, with the Borrowers being
permitted, only with the consent of the Agent, to exercise rights to withdraw
or otherwise deal with such investment property.  The provisions of this paragraph shall not apply to any financial
assets credited to a securities account for which the Agent is the securities
intermediary.

 

6.3.4.                     COLLATERAL
IN THE POSSESSION OF A BAILEE.  If any
Collateral is, now or at any time hereafter, in the possession of a bailee, the
Borrowers shall promptly notify the Agent thereof and, at the Agent’s request
and option, shall promptly obtain an acknowledgement from the bailee, in form
and substance reasonably satisfactory to the Agent, that the bailee holds such
Collateral for the benefit of the Agent and such bailee’s agreement to comply,
without further consent of the Borrowers, at any time with instructions of the
Agent as to such Collateral.

 

6.3.5.                     ELECTRONIC
CHATTEL PAPER AND TRANSFERABLE RECORDS. 
If the Borrowers, now or at any time hereafter, hold or acquire an
interest in any electronic chattel paper or any “transferable record,” as that
term is defined in Section 201 of the federal Electronic Signatures in Global
and National Commerce Act, or in Section 16 of the Uniform Electronic
Transactions Act as in effect in any relevant jurisdiction, the Borrowers shall
promptly notify the Agent thereof and, at the request and option of the Agent,
shall take such action as the Agent may reasonably request to vest in the Agent
control, under Section 9-105 of the Uniform Commercial Code, of such electronic
chattel paper or control under Section 201 of the federal Electronic Signatures
in Global and National Commerce Act or, as the case may be, Section 16 of the
Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of
such transferable record.

 

59

 

6.3.6.                     LETTER-OF-CREDIT
RIGHTS.  If the Borrowers are, now or at
any time hereafter, a beneficiary under a letter of credit now or hereafter,
the Borrowers shall promptly notify the Agent thereof and, at the request and
option of the Agent, the Borrowers shall, pursuant to an agreement in form and
substance reasonably satisfactory to the Agent, either (a) arrange for the
issuer and any confirmer or other nominated person of such letter of credit to
consent to an assignment to the Agent of the proceeds of the letter of credit
or (b) arrange for the Agent to become the transferee beneficiary of the letter
of credit, with the Agent agreeing, in each case, that the proceeds of the
letter of credit are to be applied in accordance with Sections 2.14 and 2.15.

 

6.3.7.                     COMMERCIAL
TORT CLAIMS.  If the Borrowers shall,
now or at any time hereafter, hold or acquire a commercial tort claim, the
Borrowers shall immediately notify the Agent in a writing signed by the
Borrowers’ Representative of the particulars thereof and grant to the Agent,
for the benefit of the Lenders and the Agent, in such writing a security
interest therein and in the proceeds thereof, all upon the terms of this
Agreement, with such writing to be in form and substance reasonably
satisfactory to the Agent.

 

6.3.8.                     OTHER
ACTIONS AS TO ANY AND ALL COLLATERAL. 
The Borrowers further agrees, upon the request of the Agent and at the
Agent’s option, to take any and all other actions as the Agent may reasonably
determine to be necessary or useful for the attachment, perfection and first
priority of, and the ability of the Agent to enforce, the Agent’s security
interest in any and all of the Collateral, including, without limitation, (a)
executing, delivering and, where appropriate, filing financing statements and
amendments relating thereto under the Uniform Commercial Code, to the extent,
if any, that the Borrowers’ signature thereon is required therefor, (b) causing
the Agent’s name to be noted as secured party on any certificate of title for a
titled good if such notation is a condition to attachment, perfection or priority
of, or ability of the Agent to enforce, the Agent’s security interest in such
Collateral, (c) complying with any provision of any statute, regulation or
treaty of the United States as to any Collateral if compliance with such
provision is a condition to attachment, perfection or priority of, or ability
of the Agent to enforce, the Agent’s security interest in such Collateral, (d)
obtaining governmental and other third party waivers, consents and approvals,
in form and substance satisfactory to the Agent, including, without limitation,
any consent of any licensor, lessor or other person obligated on Collateral,
(e) obtaining waivers from mortgagees and landlords in form and substance
reasonably satisfactory to the Agent and (f) taking all actions under any
earlier versions of the Uniform Commercial Code or under any other law, as
reasonably determined by the Agent to be applicable in any relevant Uniform
Commercial Code or other jurisdiction, including any foreign jurisdiction.

 

6.4.                        RELATION TO OTHER SECURITY DOCUMENTS.  The provisions of this Agreement supplement
the provisions of any Security Document granted by the Borrowers to the Agent,
for the benefit of the Lenders, the Letter of Credit Issuer and the Agent, and
which secures the payment or performance of any of the Obligations.  Nothing contained in any such Security
Document shall derogate from any of the rights or remedies of the Agent or any
of the

 

60

 

Lenders hereunder.  In addition, to the provisions of this
Agreement being so read and construed with any such Security Document, the
provisions of this Agreement shall be read and construed with the other
Security Documents referred to below in the manner so indicated.

 

6.4.1.         PLEDGE
AGREEMENT.  Concurrently herewith
certain of the Borrowers are executing and delivering to the Agent, for the
benefit of the Lenders, the Letter of Credit Issuer and the Agent, the Pledge
Agreement pursuant to which the Borrowers are pledging to the Agent all of the shares
of Capital Stock of the Subsidiaries of each of the Borrowers.  Such pledge(s) shall be governed by the
terms of such pledge agreement(s) and not by the terms of this Agreement.

 

6.4.2.         TRADEMARK
SECURITY AGREEMENT.  Concurrently
herewith the Borrowers are executing and delivering to the Agent, for the
benefit of the Lenders, the Letter of Credit Issuer and the Agent, the
Trademark Security Agreement pursuant to which the Borrowers are pledging and
granting a security interest to the Agent, for the benefit of the Lenders, the
Letter of Credit Issuer and the Agent, certain Collateral consisting of
trademarks, service marks and trademark and service mark rights and
applications, together with the goodwill appurtenant thereto.  The provisions of the Trademark Security
Agreement are supplemental to the provisions of this Agreement, and nothing
contained in the Trademark Security Agreement shall derogate from any of the
rights or remedies of the Agent or any of the Lenders hereunder.  Neither the delivery of, nor anything
contained in, the Trademark Security Agreement shall be deemed to prevent or
postpone the time of attachment or perfection of any security interest in such
Collateral created hereby.

 

6.4.3.         COPYRIGHT
SECURITY AGREEMENT.  Concurrently
herewith the Borrowers are executing and delivering to the Agent, for the
benefit of the Lenders, the Letter of Credit Issuer and the Agent, the
Copyright Security Agreement pursuant to which the Borrowers are pledging and
granting a security interest to the Agent, for the benefit of the Lenders, the
Letter of Credit Issuer and the Agent, certain Collateral consisting of
copyrights and related rights.  The
provisions of the Copyright Security Agreement are supplemental to the
provisions of this Agreement, and nothing contained in the Copyright Security
Agreement shall derogate from any of the rights or remedies of the Agent or any
of the Lenders hereunder.  Neither the
delivery of, nor anything contained in, the Copyright Security Agreement shall
be deemed to prevent or postpone the time of attachment or perfection of any
security interest in such Collateral created hereby.

 

7.                                       REPRESENTATIONS AND WARRANTIES.  The Borrowers represent and warrant to the
Lenders, the Letter of Credit Issuer and the Agent as follows:

 

7.1.                              CORPORATE AUTHORITY.

 

7.1.1.                     INCORPORATION;
GOOD STANDING.  Each of the Borrowers
and their Subsidiaries (a) is a corporation (or similar business entity) duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or

 

61

 

formation, (b)
has all requisite corporate (or the equivalent company) power to own its
property and conduct its business as now conducted and as presently
contemplated, and (c) is in good standing as a foreign corporation (or similar
business entity) and is duly authorized to do business in each jurisdiction
where such qualification is necessary except where a failure to be so qualified
would not have a Material Adverse Effect. 
The Right Start Subsidiary I, Inc. is and will remain, unless dissolved
by Right Start, a dormant corporation with no active business, no assets and no
Indebtedness or other Liabilities.

 

7.1.2.                     AUTHORIZATION.  The execution, delivery and performance of
this Agreement and the other Loan Documents to which each Borrower or any of
its Subsidiaries is or is to become a party and the transactions contemplated
hereby and thereby (a) are within the corporate (or the equivalent company)
authority of such Person, (b) have been duly authorized by all necessary
proceedings, (c) do not and will not conflict with or result in any breach or
contravention of any provision of law, statute, rule or regulation to which the
Borrowers or any of their Subsidiaries is subject or any judgment, order, writ,
injunction, license or permit applicable to the Borrowers or any of their
Subsidiaries and (d) do not conflict with any provision of the Governing
Documents of, or any material agreement or other material instrument binding
upon, the Borrowers or any of their Subsidiaries.

 

7.1.3.                     ENFORCEABILITY.  The execution and delivery of this Agreement
and the other Loan Documents to which each Borrower or any of its Subsidiaries
is or is to become a party will result in valid and legally binding obligations
of such Person enforceable against it in accordance with the respective terms
and provisions hereof and thereof, except as enforceability is limited by
bankruptcy, insolvency, reorganization, moratorium or other laws relating to or
affecting generally the enforcement of creditors’ rights and except to the
extent that availability of the remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding
therefor may be brought.

 

7.2.                              GOVERNMENTAL APPROVALS.  The execution, delivery and performance by
each Borrower and each of its Subsidiaries of this Agreement and the other Loan
Documents to which such Borrower or any of its Subsidiaries is or is to become
a party and the transactions contemplated hereby and thereby do not require the
approval or consent of, or filing with, any governmental agency or authority
other than those already obtained.

 

7.3.                              TITLE TO PROPERTIES; LEASES.  Except as indicated on SCHEDULE 7.3 hereto,
each Borrower and its Subsidiaries own all of the assets reflected in the
consolidated balance sheet of FAO and its Subsidiaries as at the Balance Sheet
Date or acquired since that date (except property and assets sold or otherwise
disposed of in the ordinary course of business since that date), subject to no
Liens or other rights of others, except Permitted Liens.  Except as set forth on SCHEDULE 7.3 hereto,
each of such Leases and Capitalized Leases listed in the Perfection Certificate
is in full force and effect.  No party
to any such Lease or Capitalized Lease is in default or material violation of
any such Lease or Capitalized Lease, except for violations that would not have
a Material Adverse Effect.  The
Borrowers have not received any notice or

 

62

 

threat of cancellation of any
such Lease or Capitalized Lease.  The
Borrowers hereby authorize the Agent at any time and from time to time to
contact any of the Borrowers’ landlords in order to confirm the Borrowers’
continued compliance with the terms and conditions of the Lease(s) between the
Borrowers and that landlord and to discuss such issues, concerning the
Borrowers’ occupancy under such Lease(s), as the Agent may determine.

 

7.4.                              FINANCIAL STATEMENTS AND PROJECTIONS.

 

7.4.1.                     FISCAL
YEAR.  Each of the Borrowers and each of
their Subsidiaries has a fiscal year which is the twelve months ending on the
Saturday closest to January 31.

 

7.4.2.                     FINANCIAL
STATEMENTS.  There has been furnished to
each of the Lenders a consolidated balance sheet of FAO and its Subsidiaries as
at the Balance Sheet Date, and a consolidated statement of income of FAO and
its Subsidiaries for the fiscal year then ended, certified by the chief
financial officer of the Borrowers. 
Such balance sheet and statement of income have been prepared in
accordance with GAAP and fairly present the financial condition of the
Borrowers as at the close of business on the date thereof and the results of
operations for the fiscal year then ended. 
After giving effect to the Plan of Reorganization and the Plan
Confirmation Order, there are no contingent liabilities of FAO or any of its
Subsidiaries as of such date involving material amounts known to any Designated
Borrower Officer which were not disclosed in such balance sheet and the notes
related thereto.

 

7.4.3.                     PROJECTIONS.  The Business Plan attached as Schedule
1.1(a) and projections of the annual operating budgets of FAO and its
Subsidiaries on a consolidated basis, balance sheets, income statements and
cash flow statements, copies of which have been delivered to each Lender,
disclose all assumptions made with respect to general economic, financial and
market conditions used in formulating such projections.  As of the Closing Date, to the knowledge of
the Borrowers or any of their Subsidiaries, no facts exist that (individually
or in the aggregate) would result in any material change in any of such
projections.  The projections are based
upon reasonable estimates and assumptions, have been prepared on the basis of
the assumptions stated therein and reflect the reasonable estimates of the
Borrowers and their Subsidiaries of the results of operations and other
information projected therein.

 

7.5.                              NO MATERIAL ADVERSE CHANGES, ETC.  Except as set forth on SCHEDULE 7.5 hereto,
since the Balance Sheet Date and after giving effect to the Plan of
Reorganization there has been no event or occurrence which has had a Material
Adverse Effect.  Since the Balance Sheet
Date, the Borrowers have not made any Restricted Payment except to the extent
permitted under Section 9.4.

 

7.6.                              FRANCHISES, PATENTS, COPYRIGHTS, ETC.  Each of the Borrowers possesses all
franchises, patents, copyrights, trademarks, trade names, licenses and permits,
and rights in respect of the foregoing, adequate for the conduct of its
business substantially as now conducted without known material conflict with
any rights of others, including without limitation the license to use the
trademark “FAO Schwarz” and related marks set forth in and pursuant to

 

63

 

the terms of the Amended and
Restated Schwarz Trademark Agreement, dated as of January 7, 2002 among FAO
(f/k/a The Right Start, Inc.), FAO Schwarz, Inc. (f/k/a Toy Soldier, Inc.) and
the F.A.O. Schwarz Family Foundation (as in effect on the Closing Date and as
thereafter amended with the prior written consent of the Agent, the “FAO
TRADEMARK LICENSE”), a true and complete copy of which has been delivered to
the Agent.  The FAO Trademark License is
a valid and binding agreement in full force and effect and no default or breach
exists thereunder, after giving effect to the Plan of Reorganization.

 

7.7.                              LITIGATION.  Except
as set forth on SCHEDULE 7.7, there are no actions, suits, proceedings or
investigations of any kind pending or threatened against the Borrowers or any
of their Subsidiaries before any Governmental Authority, that, (a) if adversely
determined, would, either in any case or in the aggregate, have a Material
Adverse Effect, or (b) which question the validity of this Agreement or any of
the other Loan Documents, or any action taken or to be taken pursuant hereto or
thereto.  The Borrowers do not
reasonably believe that any of the litigation set forth on SCHEDULE 7.7 would be
likely to result in a Material Adverse Effect, in any case or in the aggregate.

 

7.8.                              NO MATERIALLY ADVERSE CONTRACTS,
ETC.  Neither the Borrowers nor any of
their Subsidiaries is subject to any Governing Document or other legal
restriction, or any judgment, decree, order, law, statute, rule or regulation
that has or is expected in the future to have a Material Adverse Effect.  Except as set forth on SCHEDULE 7.8 hereto,
neither the Borrowers nor any of their Subsidiaries is a party to any contract
or agreement that has or is expected, in the judgment of any Designated
Borrower Officer, to have any Material Adverse Effect.

 

7.9.                              COMPLIANCE WITH OTHER INSTRUMENTS,
LAWS, ETC.  Neither the Borrowers nor
any of their Subsidiaries is in violation of (a) any provision of its Governing
Documents or its agreement with Saks or any other Host Store, or (b) any
agreement or instrument to which it may be subject or by which it or any of its
properties may be bound or any decree, order, judgment, statute, license, rule
or regulation, in any of the foregoing cases as to (b) in a manner that could
reasonably be expected to result in the imposition of substantial penalties or
could reasonably be expected to have a Material Adverse Effect.

 

7.10.                        TAX STATUS.  Upon
payment of the amounts set forth on SCHEDULE 7.10 hereto in accordance with the
Plan of Reorganization, the Borrowers and their Subsidiaries (a) have made or
filed all federal, state and foreign income and all other tax returns, reports
and declarations required by any jurisdiction to which any of them is subject,
(b) have paid all taxes and other governmental assessments and charges shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and by appropriate proceedings and (c) have set
aside on their books provisions reasonably adequate for the payment of all
taxes for periods subsequent to the periods to which such returns, reports or
declarations apply.  There are no unpaid
taxes in any material amount claimed to be due by the taxing authority of any
jurisdiction, and none of the officers of the Borrowers knows of any basis for
any such claim.  The Borrowing Base
Report most recently delivered to the Agent sets forth the amount of reserves
established by the Borrowers and each of their Subsidiaries to cover the
Borrowers’ or such Subsidiary’s sales or use tax obligations in each
jurisdiction where the

 

64

 

Borrowers or such Subsidiary is
required to pay such taxes.  Such
reserves are adequate for the payment of all of such obligations.

 

7.11.                        NO DEFAULT.  No
Default exists.

 

7.12.                        HOLDING COMPANY AND INVESTMENT COMPANY
ACTS.  Neither the Borrowers nor any
of their Subsidiaries is a “HOLDING COMPANY”, or a “SUBSIDIARY COMPANY” of a
“HOLDING COMPANY”, or an “AFFILIATE” of a “HOLDING COMPANY”, as such terms are
defined in the Public Utility Holding Company Act of 1935; nor is it an
“INVESTMENT COMPANY”, or an “AFFILIATED COMPANY” or a “PRINCIPAL UNDERWRITER”
of an “INVESTMENT COMPANY”, as such terms are defined in the Investment Company
Act of 1940.

 

7.13.                        ABSENCE OF FINANCING STATEMENTS,
ETC.  Except with respect to Permitted
Liens, there is no financing statement, security agreement, chattel mortgage,
real estate mortgage or other document filed or recorded with any filing
records, registry or other public office, that purports to cover, affect or
give notice of any present or possible future Lien on any assets or property of
the Borrowers or any of their Subsidiaries or any rights relating thereto.

 

7.14.                        COLLATERAL .

 

7.14.1.               PERFECTION
CERTIFICATE.  The Borrowers have
previously delivered to the Agent a certificate signed by the Borrowers and
entitled “Perfection Certificate” (as updated from time to time to the extent
permitted and required hereunder, the “PERFECTION CERTIFICATE”).  The Borrowers represent and warrant to the
Lenders and the Agent as follows: (a) each Borrower’s exact legal name is that
indicated on the Perfection Certificate and on the signature page hereof, (b)
each Borrower is an organization of the type, and is organized in the
jurisdiction, set forth in the Perfection Certificate, (c) the Perfection
Certificate accurately sets forth each Borrower’s organizational identification
number or accurately states that such Borrower has none, (d) the Perfection
Certificate accurately sets forth each Borrower’s place of business or, if more
than one, its chief executive office, as well as each Borrower’s mailing
address, if different, (e) all other information set forth on the Perfection
Certificate pertaining to the Borrowers is accurate and complete in all
material respects and (f) there has been no change in any of such information
since the date on which the Perfection Certificate was signed by the Borrowers.

 

7.14.2.               NATURE
OF COLLATERAL.  The Borrowers are the
owners of the Collateral, free from any right or claim of any person or any
adverse Lien, except for the security interest created by this Agreement and
Permitted Liens, (b) none of the Collateral constitutes, or is the proceeds of,
“farm products” as defined in Section 9-102(a)(34) of the Uniform Commercial
Code, (c) none of the account debtors or other persons obligated on any of the
Collateral is a governmental authority covered by the Federal Assignment of
Claims Act or like federal, state or local statute or rule in respect of such
Collateral, (d) the Borrowers hold no material commercial tort claim except as
indicated on the Perfection Certificate, (e) the Borrowers have at all times
operated their

 

65

 

business in
compliance with all applicable provisions of the federal Fair Labor Standards
Act, as amended, and with all applicable provisions of federal, state and local
statutes and ordinances dealing with the control, shipment, storage or disposal
of hazardous materials or substances, (f) all other information set forth on
the Perfection Certificate pertaining to the Collateral is accurate and
complete in all material respects, and (g) there has been no change in any of
such information since the date on which the Perfection Certificate was signed
by the Borrowers.

 

7.14.3.               PERFECTION
OF SECURITY INTEREST.  All filings,
assignments, pledges and deposits of documents or instruments have been made
and all other actions have been taken that are necessary or advisable, under
applicable law, to establish and perfect the Agent’s security interest in the
Collateral.  The Collateral and the
Agent’s rights with respect to the Collateral are not subject to any setoff,
claims, withholdings or other defenses. 
The Borrowers are the owners of the Collateral free from any Lien,
except for Permitted Liens.

 

7.14.4.     INVENTORY.  The Inventory of the Borrowers is purchased
from third parties by FAO for the Borrowers and is located at the distribution
centers of FAO located in Swedesboro, New Jersey or Ontario, California (or any
other distribution center within the continental United States for which the
Agent has received an appropriate waiver in form and substance satisfactory to
it) until shipped to retail locations of the Borrowers or is directly drop
shipped from such third parties directly to such retail locations.

 

7.15.                        CERTAIN TRANSACTIONS.  Except as described in SCHEDULE 7.15, none of the officers,
directors, or employees of the Borrowers or any of their Subsidiaries is
presently a party to any transaction with the Borrowers or any of their
Subsidiaries (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Borrowers, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner.

 

7.16.                        EMPLOYEE BENEFIT PLANS.

 

7.16.1.               IN
GENERAL.  Each Employee Benefit Plan and
each Guaranteed Pension Plan has been maintained and operated in compliance in
all material respects with the provisions of ERISA and all Applicable Pension
Legislation and, to the extent applicable, the Code, including but not limited
to the provisions thereunder respecting prohibited transactions and the bonding
of fiduciaries and other persons handling plan funds as required by Section 412
of ERISA, except where such failure could not reasonably be expected to result
in a Lien on a material portion of the Borrowers’ assets or have any Material Adverse
Effect.  The Borrowers have heretofore
delivered to the Agent the most recently completed annual report, Form 5500,
with all required

 

66

 

attachments,
and actuarial statement required to be submitted under Section 103(d) of ERISA,
with respect to each Guaranteed Pension Plan.

 

7.16.2.               TERMINABILITY
OF WELFARE PLANS.  No Employee Benefit
Plan, which is an employee welfare benefit plan within the meaning of Section
3(1) or Section 3(2)(B) of ERISA, provides benefit coverage subsequent to
termination of employment, except as required by Title I, Part 6 of ERISA or
the applicable state insurance laws. 
The Borrowers may terminate each such Employee Benefit Plan at any time
(or at any time subsequent to the expiration of any applicable bargaining
agreement) in the reasonable discretion of the Borrowers without liability to
any Person other than for claims arising prior to termination.

 

7.16.3.               GUARANTEED
PENSION PLANS.  Each contribution
required to be made to a Guaranteed Pension Plan, whether required to be made
to avoid the incurrence of an accumulated funding deficiency, the notice or
lien provisions of Section 302(f) of ERISA, or otherwise, has been timely
made.  No waiver of an accumulated
funding deficiency or extension of amortization periods has been received with
respect to any Guaranteed Pension Plan, and neither the Borrowers nor any ERISA
Affiliate is obligated to or has posted security in connection with an
amendment to a Guaranteed Pension Plan pursuant to Section 307 of ERISA or
Section 401(a)(29) of the Code.  No
liability to the PBGC (other than required insurance premiums, all of which
have been timely paid) has been incurred by the Borrowers or any ERISA
Affiliate with respect to any Guaranteed Pension Plan and there has not been
any ERISA Reportable Event (other than an ERISA Reportable Event as to which
the requirement of 30 days notice has been waived under PBGC Section 4043), or
any other event or condition, in each case, which presents a material risk of
termination of any Guaranteed Pension Plan by the PBGC.  Based on the latest valuation of each
Guaranteed Pension Plan (which in each case occurred within twelve months of
the date of this representation), and on the actuarial methods and assumptions
employed for that valuation, the aggregate current liabilities of all such
Guaranteed Pension Plans within the meaning of Section 412(1)(7) of the Code
did not exceed the aggregate actuarial value of the assets of all such
Guaranteed Pension Plans determined in accordance with Section 412(c)(2) of the
Code, disregarding for this purpose the benefit liabilities and assets of any
Guaranteed Pension Plan with assets in excess of benefit liabilities, by more
than $500,000.

 

7.16.4.               MULTIEMPLOYER
PLANS.  Neither the Borrowers nor any
ERISA Affiliate has incurred any material liability (including secondary
liability) to any Multiemployer Plan as a result of a complete or partial
withdrawal from such Multiemployer Plan under Section 4201 of ERISA or as a
result of a sale of assets described in Section 4204 of ERISA.  Neither the Borrowers nor any ERISA
Affiliate has been notified that any Multiemployer Plan is in reorganization or
insolvent under and within the meaning of Section 4241 or Section 4245 of ERISA
or is at risk of entering reorganization or becoming insolvent, or that any
Multiemployer Plan intends to terminate or has been terminated under Section
4041A of ERISA.

 

67

 

7.17.                        USE OF PROCEEDS.

 

7.17.1.               GENERAL.  The proceeds of the Loans shall be used to
finance the Borrowers’ emergence in accordance with their Plan of
Reorganization and for inventory purchase and other working capital purposes of
the Borrowers in accordance with the projections described in Section
7.4.3.  The Borrowers will obtain
Letters of Credit solely in the ordinary course of business.  No proceeds of the Loans may be used, nor
shall any be requested, with a view towards the accumulation of any general
fund or funded reserve of the Borrowers other than in the ordinary course of
the Borrowers’ business and consistent with the provisions of this Agreement.

 

7.17.2.               REGULATIONS
U AND X.  No portion of any Loan is to
be used, and no portion of any Letter of Credit is to be obtained, for the
purpose of purchasing or carrying any “MARGIN SECURITY” or “MARGIN STOCK” as
such terms are used in Regulations U and X of the Board of Governors of the
Federal Reserve System, 12 C.F.R. Parts 221 and 224.

 

7.18.                        ENVIRONMENTAL COMPLIANCE.  None of the Borrowers or their Subsidiaries
is in violation, or alleged violation, of any Environmental Laws, which
violation would have a material adverse effect on the environment or a Material
Adverse Effect; or none of the Borrowers nor any of their Subsidiaries has
received notice from any third party including, without limitation, any
Governmental Authority, that any one of them has been identified by the United
States Environmental Protection Agency (“EPA”) as a potentially responsible
party under CERCLA with respect to a site listed on the National Priorities
List, 40 C.F.R. Part 300 Appendix B. 
None of the Borrowers or their Subsidiaries has been legally responsible
for any release or threat of release of Hazardous Substances or received
notification of the incurrence of any expense in connection with the
assessment, containment, or removal of any Hazardous Substances for which it
would be responsible, except where such release or threat of release or
incurrence of such expense would not have a Material Adverse Effect.  Each of the Borrowers and their Subsidiaries
shall dispose of any Hazardous Substances only in compliance with all
Environmental Laws and have possession of any Hazardous Substances only in the
ordinary course of its business and in compliance with all Environmental Laws,
except, in each case, where the failure to do so would not have a Material
Adverse Effect.

 

7.19.                        SUBSIDIARIES, ETC. 
FAO has no Subsidiaries other than the other Borrowers hereunder.  Except as set forth on SCHEDULE 7.19 hereto,
none of the Borrowers nor any Subsidiary of the Borrowers is engaged in any
joint venture or partnership with any other Person.  The jurisdiction of incorporation/formation and principal place
of business of each Subsidiary of FAO is listed on SCHEDULE 7.19 hereto (or
with respect to Subsidiaries formed after the Closing Date, as listed in
written notice provided to the Agent and its counsel).  FAO has caused all of its direct or indirect
Subsidiaries to become Borrowers hereunder and to otherwise comply with the
provisions of Section 8.13.  The Kayne
Group owns 41% or more of the combined voting power of all Capital Stock of FAO
(on a fully diluted basis) on the Closing Date.

 

7.20.                        BANK ACCOUNTS; CREDIT CARD ARRANGEMENTS.  SCHEDULE 7.20(a) (as updated with respect to
Deposit Accounts opened after the Closing Date for which the Agent and its
counsel have received written notice) sets forth the account numbers and
location

 

68

 

of all Deposit Accounts and
classifies such Deposit Accounts as Local Accounts and Interim Concentration
Accounts.  SCHEDULE 7.20(b) (as updated
with respect to arrangements entered into after the Closing Date for which the
Agent and its counsel have received written notice) sets forth all arrangements
to which the Borrowers are a party with respect to the payment to the Borrowers
of the proceeds of credit card charges for sales by the Borrowers.

 

7.21.                        LABOR RELATIONS. 
The Borrowers have not been and are not presently a party to any
collective bargaining or other labor contract (except with respect to the FAO
Schwarz retail store located in San Francisco, California and now closed).  No event has occurred or circumstance exists
which is likely to provide the basis for any work stoppage or other labor
dispute.  The Borrowers have complied in
all material respects with all applicable laws relating to employment, equal
employment opportunity, nondiscrimination, immigration, wages, hours, benefits,
collective bargaining, the payment of social security and similar taxes,
occupational safety and health, and plant closing, except where such failures
could not in the aggregate reasonably be expected to result in a Material
Adverse Effect.  There is not presently
pending and, to the Borrowers’ knowledge, there is not threatened any of the
following:

 

(a)                                  Any
strike, slowdown, picketing, work stoppage, or employee grievance process.

 

(b)                                 Any
proceeding against or affecting the Borrowers relating to the alleged violation
of any Applicable Law pertaining to labor relations or before National Labor
Relations Board, the Equal Employment Opportunity Commission, or any comparable
governmental body, organizational activity, or other labor or employment
dispute against or affecting the Borrowers, which, if determined adversely to
the Borrowers would have a Material Adverse Effect on the Borrowers.

 

(c)                                  Any
lockout of any employees by the Borrowers (and no such action is contemplated
by the Borrowers).

 

(d)                                 Any
application for the certification of a collective bargaining agent.

 

7.22.                        DISCLOSURE.  None of
this Agreement or any of the other Loan Documents contains any untrue statement
of a material fact or omits to state a material fact (known to the Borrowers or
any of their Subsidiaries in the case of any document or information not
furnished by it or any of their Subsidiaries) necessary in order to make the
statements herein or therein not misleading. 
There is no fact known to the Borrowers or any of their Subsidiaries
which has a Material Adverse Effect, or which is reasonably likely in the
future to have a Material Adverse Effect, exclusive of effects resulting from
changes in general economic conditions, legal standards or regulatory
conditions.

 

8.                                       CERTAIN AFFIRMATIVE COVENANTS.  The Borrowers covenant and agree that, so
long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit or Note is
outstanding or any Lender has any obligation to make any Loan or the Agent or
Letter of Credit Issuer has any obligation to issue, extend or renew any Letter
of Credit:

 

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8.1.                              PUNCTUAL PAYMENT. 
The Borrowers will duly and punctually pay or cause to be paid the
principal and interest on the Loans, all Reimbursement Obligations, the Fees,
and all other amounts provided for in this Agreement and the other Loan
Documents to which the Borrowers or any of their Subsidiaries is a party, all
in accordance with the terms of this Agreement and such other Loan Documents.

 

8.2.                              NOTICE OF CHANGE OF
ORGANIZATION/MAINTENANCE OF OFFICE. 
The Borrowers will maintain their chief executive offices in King of
Prussia, Pennsylvania, or at such other place in the United States of America
as the Borrowers’ Representative shall designate upon written notice to the
Agent, where notices, presentations and demands to or upon the Borrowers in
respect of the Loan Documents to which the Borrowers is a party may be given or
made.  Each Borrower will provide the
Agent at least thirty (30) days prior written notice of such Borrower changing
its name, its place of business or, if more than one, chief executive office,
or its mailing address or organizational identification number if it has
one.  If any Borrower does not have an
organizational identification number and later obtains one, such Borrower will
forthwith notify the Agent of such organizational identification number.  No Borrower will change its type of
organization, jurisdiction of organization or other legal structure.

 

8.3.                              RECORDS AND ACCOUNTS.  The Borrowers will (a) keep, and cause each of their Subsidiaries
to keep, true and accurate records and books of account in which full, true and
correct entries will be made in accordance with GAAP, (b) maintain adequate
accounts and reserves for all taxes (including income taxes), depreciation,
depletion, obsolescence and amortization of its properties and the properties
of its Subsidiaries, contingencies, and other reserves, and (c) at all times
engage KPMG LLP or other independent certified public accountants satisfactory
to the Agent as the independent certified public accountants of the Borrowers
and their Subsidiaries and will not permit more than thirty (30) days to elapse
between the cessation of such firm’s (or any successor firm’s) engagement as
the independent certified public accountants of the Borrowers and their
Subsidiaries and the appointment in such capacity of a successor firm as shall
be satisfactory to the Agent.

 

8.4.                              FINANCIAL STATEMENTS, CERTIFICATES AND
INFORMATION.  The Borrowers will deliver
to each of the Lenders:

(a)                                  as
soon as practicable, but in any event not later than ninety (90) days after the
end of each fiscal year of the Borrowers, the consolidated balance sheets of
FAO and its Subsidiaries as at the end of such year, and the related
consolidated statements of income and consolidated statements of cash flow for
such year, each setting forth in comparative form the figures for the previous
fiscal year and all such consolidated statements to be in reasonable detail,
prepared in accordance with GAAP, and certified, without qualification (except
with respect to the fiscal year ended February 1, 2003, solely by reason of the
bankruptcy filing in January, 2003) and without an expression of uncertainty as
to the ability of FAO or any of its Subsidiaries to continue as going concerns,
by KPMG LLP or by other independent certified public accountants satisfactory
to the Agent, together with a written statement from such accountants to the
effect that they have read a copy of this Agreement, and that, in making the
examination necessary to said certification, they have obtained no knowledge of
any Default, or, if such accountants shall have obtained knowledge of any then
existing Default they shall

 

70

 

disclose in
such statement any such Default; PROVIDED that such accountants shall not be
liable to the Lenders for failure to obtain knowledge of any Default;

 

(b)                                 as
soon as practicable, but in any event not later than forty-five (45) days after
the end of each of the fiscal quarters of the Borrowers, copies of the
unaudited consolidated balance sheets of FAO and its Subsidiaries as at the end
of such quarter, and the related consolidated statements of income and of cash
flow for the portion of the Borrowers’ fiscal year then elapsed, all in
reasonable detail and prepared in accordance with GAAP, together with a
certification by the principal financial or accounting officer of the Borrowers
that the information contained in such financial statements fairly presents the
financial position of FAO and its Subsidiaries on the date thereof (subject to
year-end adjustments);

 

(c)                                  as
soon as practicable, but in any event within thirty (30) days after the end of
each month in each fiscal year of the Borrowers, unaudited monthly consolidated
balance sheet and statement of cash flow and consolidated and consolidating
income statements of FAO and its Subsidiaries for such month prepared in
accordance with GAAP, together with a certification by the principal financial
or accounting officer of the Borrowers that the information contained in such
financial statements fairly presents the financial condition of FAO and its
Subsidiaries on the date thereof (subject to year-end adjustments);

 

(d)                                 simultaneously
with the delivery of the financial statements referred to in subsection (c)
above, a statement certified by the principal financial or accounting officer
of FAO in substantially the form of EXHIBIT E hereto (a “COMPLIANCE
CERTIFICATE”) and setting forth in reasonable detail computations evidencing
compliance with the covenants contained in Section 10 and (if applicable)
reconciliations to reflect changes in GAAP since the Balance Sheet Date;

 

(e)                                  promptly
after the filing or mailing thereof, copies of all material of a financial
nature filed with the Securities and Exchange Commission or sent to the
stockholders of FAO.  Further, the
Borrowers shall add the Agent as an addressee on all mailing lists maintained
by or for the Borrowers;

 

(f)                                    by
1:00 p.m. (Boston time) daily on each Business Day a Borrowing Base Report
setting forth the Borrowing Base and the Tranche B Borrowing Base as at the end
of the preceding day;

 

(g)                                 from
time to time upon request of the Agent, and not later than January 31 in
each year, updated, consolidated projections of FAO and its Subsidiaries for
the succeeding fiscal year and updating those projections delivered to the
Lenders and referred to in Section 7.4.3 in form of SCHEDULE 1.1(a) or, if
applicable, updating any later such projections delivered in response to a request
pursuant to this Section 8.4(g);

 

(h)                                 such
other reports listed on SCHEDULE 8.4(h) hereto;

 

71

 

(i)                                     from
time to time such other financial data, information (including accountants,
management letters) and copies of advertising (including copies of all print
advertising and duplicate tapes of all video and radio advertising) as the
Agent or any Lender may reasonably request.

 

8.5.                              NOTICES.

 

8.5.1.                     DEFAULTS.  The Borrowers will promptly notify the Agent
and each of the Lenders if the Borrowers are in Default, together with a
reasonably detailed description thereof, and the actions the Borrowers propose
to take with respect thereto.  If any
Person shall give any notice or take any other action in respect of a claimed
default (whether or not constituting a Default) under this Agreement or any
other note, evidence of indebtedness, indenture or other material obligation to
which or with respect to which the Borrowers or any of their Subsidiaries is a
party or obligor, whether as principal, guarantor, surety or otherwise, the
Borrowers shall forthwith give written notice thereof to the Agent and each of
the Lenders, describing the notice or action and the nature of the claimed
default.

 

8.5.2.                     ENVIRONMENTAL
EVENTS.  The Borrowers will promptly
give notice to the Agent and each of the Lenders (a) of any violation of any
Environmental Law that the Borrowers or any of their Subsidiaries reports in
writing or is reportable by such Person in writing (or for which any written
report supplemental to any oral report is made) to any Governmental Authority
and (b) upon any Designated Borrower Officer becoming aware thereof, of any
inquiry, proceeding, investigation, or other action, including a notice from
any agency of potential environmental liability, of any Governmental Authority
that could reasonably have a Material Adverse Effect.

 

8.5.3.                     NOTIFICATION
OF CLAIM AGAINST COLLATERAL.  The
Borrowers will, immediately upon any Designated Borrower Officer becoming aware
thereof, notify the Agent and each of the Lenders in writing of any material
setoff, claims (including, with respect to any real estate, environmental
claims), withholdings or other defenses to which any of the Collateral, or the
Agent’s rights with respect to the Collateral, are subject.

 

8.5.4.                     NOTICE
OF LITIGATION AND JUDGMENTS.  The
Borrowers will, and will cause each of their Subsidiaries to, give notice to
the Agent and each of the Lenders in writing within fifteen (15) days of any
Designated Borrower Officer becoming aware of any litigation or proceedings
threatened in writing or any pending litigation and proceedings affecting the
Borrowers or any of their Subsidiaries or to which the Borrowers or any of
their Subsidiaries is or becomes a party involving an uninsured claim against
the Borrowers or any of their Subsidiaries that, in each case or in the
aggregate, could reasonably be expected to have a Material Adverse Effect and
stating the nature and status of such litigation or proceedings.  The Borrowers will, and will cause each of
their Subsidiaries to, give notice to the Agent and each of the Lenders, in
writing, in form and detail satisfactory to the Agent, within ten (10) days of
any judgment not covered by

 

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insurance,
final or otherwise, against the Borrowers or any of their Subsidiaries in an
amount in excess of $500,000.

 

8.5.5.                     NOTICES
CONCERNING INVENTORY COLLATERAL.  The
Borrowers shall provide to the Agent and the Tranche B Lender prompt notice of
(a) any physical count of the Borrowers’ or any of their Subsidiaries’
inventory, together with a copy of the results thereof certified by the
Borrowers or such Subsidiary, (b) any determination by the Borrowers or any of
their Subsidiaries that the inventory levels of the Borrowers or such
Subsidiary are not adequate to meet the sales projections of the Borrowers or
such Subsidiary, (c) initial details of and changes to all credit card
processor agreements to which the Borrowers or any of their Subsidiaries is
from time to time a party, including details from time to time relating to the
Borrowers’ or such Subsidiary’s compliance with the terms of payment to the
Fleet Concentration Account of the proceeds of all credit card charges for
sales by the Borrowers or such Subsidiary, and (d) any failure of the Borrowers
or any of their Subsidiaries to pay rent at any location, which failure
continues for more than three (3) days following the day on which such rent is
due and payable by the Borrowers or such Subsidiary.  If so requested by the Agent or any Lender, the Borrowers shall
provide to the Agent or such Lender copies of all advertising by the Borrowers
or any of their Subsidiaries including copies of all print advertising and
duplicate tapes of all video and radio advertising.

 

8.5.6.                     CHANGE
IN OFFICERS OR ACCOUNTANTS.  The
Borrowers shall provide to the Agent prompt notice of any change in the
Borrowers’ President, chief executive officer, chief operating officer, and
chief financial officer (without regard to the title(s) actually given to the
Persons discharging the duties customarily discharged by officers with those
titles) or any intention on the part of the Borrowers to discharge the
Borrowers’ present independent accountants or any withdrawal or resignation by
such independent accountants from their acting in such capacity.

 

8.6.                              LEGAL EXISTENCE; MAINTENANCE OF PROPERTIES.  The Borrowers will do or cause to be done
all things commercially reasonable to preserve and keep in full force and
effect their legal existence, rights and franchises and those of their
Subsidiaries and will not, and will not cause or permit any of their
Subsidiaries (other than Targoff) to, convert to a limited liability company or
a limited liability partnership.  The
Borrowers (i) will cause all of their properties and those of their
Subsidiaries used or useful in the conduct of their business or the business of
their Subsidiaries to be maintained and kept in good condition, repair and
working order and supplied with all necessary equipment, (ii) will cause to be
made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the judgment of the Borrowers may be necessary
so that the business carried on in connection therewith may be properly and
advantageously conducted at all times, and (iii) will, and will cause each of
their Subsidiaries to, continue to engage primarily in the businesses now
conducted by them and in related businesses; PROVIDED that (x) nothing in this
Section 8.6 shall prevent the Borrowers from discontinuing the operation and
maintenance of any of their properties or any of those of their Subsidiaries if
such discontinuance is, in the judgment of the Borrowers, desirable in the
conduct of its or their business and that do not in the aggregate have a
Material Adverse Effect,

 

73

 

and (y) so long as no Default or
Event of Default then exists, The Right Start Subsidiary I, Inc. may be
dissolved.

 

8.7.                              INSURANCE.

 

8.7.1.                     MAINTENANCE
OF INSURANCE.  SCHEDULE 8.7.1 hereto, is
a schedule of all insurance policies owned by the Borrowers or under which the
Borrowers are the named insured.  Each
of such policies is in full force and effect. 
The Borrowers will maintain with financially sound and reputable
insurers insurance with respect to its properties and business against such
casualties and contingencies as shall be in accordance with general practices
of businesses engaged in similar activities in similar geographic areas.  Such insurance shall be in such minimum
amounts that the Borrowers will not be deemed a co-insurer under applicable
insurance laws, regulations and policies and otherwise shall be in such
amounts, contain such terms, be in such forms and be for such periods as may be
reasonably satisfactory to the Agent. 
In addition, all such insurance shall be payable to the Agent as loss
payee under a “standard” or “New York” loss payee clause for the benefit of the
Lenders and the Agent and shall not include any “loss payee” or similar  endorsement in favor of any other Person, or
any endorsement adversely affecting the Agent’s rights in any of the Collateral
or any proceeds thereof.  Without limiting
the foregoing, the Borrowers will (a) keep all of their physical property insured
with casualty or physical hazard insurance on an “all risks” basis, with broad
form flood and earthquake coverages and electronic data processing coverage,
with a full replacement cost endorsement and an “agreed amount” clause in an
amount equal to 100% of the full replacement cost of such property, (b)
maintain all such workers’ compensation or similar insurance as may be required
by law and (c) maintain, in amounts and with deductibles equal to those
generally maintained by businesses engaged in similar activities in similar
geographic areas, general public liability insurance against claims of bodily
injury, death or property damage occurring, on, in or about the properties of
the Borrowers; business interruption insurance; and product liability insurance.

 

8.7.2.                     INSURANCE
PROCEEDS.  The proceeds of any casualty
insurance in respect of any casualty loss of any of the Collateral shall,
subject to the rights, if any, of other parties with an interest having
priority in the property covered thereby, (a) so long as no Default exists and
to the extent that the amount of such proceeds is less than $100,000, be
disbursed to the Borrowers for direct application by the Borrowers solely to
the repair or replacement of the Borrowers’ property so damaged or destroyed
and (b) in all other circumstances, be held by the Agent as cash collateral for
the Obligations.  The Agent may, at its
sole option, disburse from time to time all or any part of such proceeds so
held as cash collateral, upon such terms and conditions as the Agent may
reasonably prescribe, for direct application by the Borrowers solely to the
repair or replacement of the Borrowers’ property so damaged or destroyed, or
the Agent may apply all or any part of such proceeds to the Obligations with
the Commitment (if not then terminated) being reduced by the amount so applied
to the Obligations.

 

74

 

8.7.3.                     CONTINUATION
OF INSURANCE.  All policies of insurance
required hereunder shall provide for at least sixty (60) days prior written
cancellation notice to the Agent.  In
the event of failure by the Borrowers to provide and maintain insurance as
herein provided, the Agent may, at its option, provide such insurance and charge
the amount thereof to the Borrowers. 
The Borrowers shall furnish the Agent with certificates of insurance and
policies evidencing compliance with the foregoing insurance provision.

 

8.8.                              TAXES.  The Borrowers
will, and will cause each of their Subsidiaries to, duly pay and discharge, or
cause to be paid and discharged, before the same shall become overdue, all
taxes, assessments and other governmental charges imposed upon it and its real
estate, sales and activities, or any part thereof, or upon the income or
profits therefrom, as well as all claims for labor, materials, or supplies that
if unpaid would by law become a Lien or charge upon any of its property;
PROVIDED that any such tax, assessment, charge, levy or claim need not be paid
if the validity or amount thereof shall currently be contested in good faith by
appropriate proceedings and if the Borrowers or such Subsidiary shall have set
aside on its books adequate reserves with respect thereto; and PROVIDED FURTHER
that the Borrowers and each Subsidiary of the Borrowers will pay all such
taxes, assessments, charges, levies or claims forthwith upon the commencement
of proceedings to foreclose any Lien that may have attached as security
therefor.

 

8.9.                              INSPECTION OF PROPERTIES AND BOOKS,
ETC.

 

8.9.1.                     GENERAL.  The Borrowers shall permit the Lenders,
through the Agent or any of the Lenders’ other designated representatives, to
visit and inspect any of the properties of the Borrowers or any of their
Subsidiaries, to examine the books of account of the Borrowers and their
Subsidiaries (and to make copies thereof and extracts therefrom, duplicate,
cause to be reduced to hard copy, run off, draw off, and otherwise use any and
all computer or electronically stored information or data which relates to the
Borrowers, or any service bureau, contractor, accountant, or other person), and
to discuss the affairs, finances and accounts of the Borrowers and their
Subsidiaries with, and to be advised as to the same by, its and their officers,
and to conduct examinations and verifications (whether by internal commercial
finance examiners or independent auditors) of all components included in the
Borrowing Base, all at such reasonable times and intervals as the Agent or any
Lender may reasonably request.  The
Agent may, at the Borrowers’ expense, participate in or observe any physical
count of inventory included in the Collateral without unreasonable
interference.

 

8.9.2                        COLLATERAL
REPORTS; PHYSICAL INVENTORIES.

 

(a)                                  Not
less frequent than four (4) times during each calendar year (or more in the
discretion and upon the request of the Agent), the Borrowers will obtain and
deliver to the Agent, or, if the Agent so elects, will cooperate with the Agent
in the Agent’s obtaining, a report of an independent collateral auditor
reasonably satisfactory to the Agent (which may be affiliated with one of the
Lenders) with respect to the Accounts Receivable and inventory components
included in the Borrowing Base, which report shall indicate whether or not the
information set forth in the Borrowing Base Report most recently delivered is

 

75

 

accurate and
complete in all material respects based upon a review by such auditors of the
Accounts Receivable (including verification with respect to the amount, aging,
identity and credit of the respective account debtors and the billing practices
of the Borrowers or their applicable Subsidiary) and inventory (including
verification as to the value, location and respective types).  All such collateral value reports shall be
conducted and made at the expense of the Borrowers; PROVIDED so long as no
Default has occurred and is continuing and the Borrowers have been cooperative
in providing information in a timely manner, the Borrowers shall only be liable
for amounts in respect of up to and including six (6) such collateral value
reports in each calendar year, conducted while no Default exists, in an
aggregate amount not exceeding $48,000 plus all out-of-pocket expenses
in any calendar year.

 

(b)                                 The
Borrowers, at their own expense, shall cause not less than two (2) physical
inventories to be undertaken in each twelve (12) month period during which this
Agreement is in effect (the spacing of the scheduling of which inventories
shall be subject to the Agent’s reasonable discretion) conducted by such
inventory takers as are satisfactory to the Agent and following such
methodology as may be reasonably satisfactory to the Agent.  The Borrowers shall provide the Agent with a
copy of the preliminary results of each such inventory (as well as of any other
physical inventory undertaken by the Borrowers) within ten (10) days following
the completion of such inventory.  The
Borrowers, within thirty (30) days following the completion of such inventory,
shall provide the Agent with a reconciliation of the results of each such
inventory (as well as of any other physical inventory undertaken by the
Borrowers) and shall post such results to the Borrowers’ stock ledger and, as
applicable to the Borrowers’ other financial books and records.  The Agent, in its reasonable discretion, if
a Default exists, may cause such additional inventories to be taken as the
Agent determines (each, at the expense of the Borrowers).

 

8.9.3.                     APPRAISALS.  Not less frequently than four (4) times
during each calendar year, in the discretion and upon the request of the Agent,
the Borrowers will obtain and deliver to the Agent appraisal reports in form
and substance reasonably satisfactory to the Agent stating the then current
fair market orderly liquidation and forced liquidation values of all or any
portion of the Inventory.  Upon the
request of the Agent or the Tranche B Lender, the Borrowers will obtain and
deliver to the Agent appraisal reports in form and substance and from
appraisers reasonably satisfactory to the Agent, stating (a) the then current
fair market, orderly liquidation and forced liquidation values of all or any
portion of the Inventory, Accounts Receivable, the equipment or other assets
owned by the Borrowers or any of their Subsidiaries and (b) the then current
business value of each of the Borrowers and their Subsidiaries.  All such appraisals shall be conducted and
made at the expense of the Borrowers; PROVIDED so long as no Default has
occurred and is continuing and the Borrowers have been cooperative in providing
information in a timely manner, the Borrowers shall only be liable for amounts
in respect of up to and including six (6) such appraisals in each calendar
year, conducted

 

76

 

while no
Default exists, in an aggregate amount not exceeding $270,000 plus all
out-of-pocket expenses in any calendar year.

 

8.9.4.                     COMMUNICATIONS
WITH ACCOUNTANTS AND OTHER PERSONS. 
Upon reasonable prior notice to the Borrowers’ Representative, the
Borrowers authorize the Agent and, if accompanied by the Agent, the Lenders to
communicate directly with the Borrowers’ independent certified public
accountants, service bureau, contractors and other Persons, and authorizes such
accountants, service bureaus, contractors and other Persons to disclose to the
Agent and the Lenders any and all financial statements and other supporting
financial documents and schedules including copies of any management letter
with respect to the business, financial condition and other affairs of the
Borrowers or any of their Subsidiaries, subject to existing obligations of
confidentiality.  At the request of the
Agent, the Borrowers shall deliver a letter addressed to such accountants,
service bureaus, contractors and other Persons instructing them to comply with
the provisions of this Section 8.9.5.

 

8.10.                        COMPLIANCE WITH LAWS, CONTRACTS, LICENSES, AND
PERMITS.  Except as set forth on
SCHEDULE 8.10 hereto, the Borrowers will, and will cause each of their
Subsidiaries to, comply with (a) the applicable laws and regulations wherever
its business is conducted, including all Environmental Laws except where the
failure to so comply could not reasonably be expected to have a Material
Adverse Effect, (b) the provisions of its Governing Documents or the FAO
Trademark License, (c) any and all agreements and instruments by which it or
any of its properties may be bound, except where the failure to so comply could
not reasonably be expected in the aggregate to have a Material Adverse Effect,
(d) all material terms and conditions of any and all agreements with Host
Stores, except where the failure to do so does not result in the Host Store
asserting monetary claim or asserting the right to terminate such Host Store
agreement, and (e) all applicable decrees, orders, and judgments.  If any authorization, consent, approval,
permit or license from any officer, agency or instrumentality of any government
shall become necessary or required in order that the Borrowers or any of their
Subsidiaries may fulfill any of its obligations hereunder or any of the other
Loan Documents to which the Borrowers or such Subsidiary is a party, the
Borrowers will, or (as the case may be) will cause such Subsidiary to,
immediately take or cause to be taken all reasonable steps within the power of
the Borrowers or such Subsidiary to obtain such authorization, consent,
approval, permit or license and furnish the Agent and the Lenders with evidence
thereof.

 

8.11.                        EMPLOYEE BENEFIT PLANS.  The Borrowers will (a) promptly upon request of the Agent,
furnish to the Agent a copy of the most recent actuarial statement required to
be submitted under Section 103(d) of ERISA and Annual Report, Form 5500, with
all required attachments, and a copy of the most recent annual report filed
with the PBGC under Section 4065 of ERISA, in respect of each Guaranteed
Pension Plan, and (b) promptly upon receipt or dispatch, furnish to the Agent
any notice, report or demand sent or received in respect of a Guaranteed
Pension Plan under Sections 302(f)(4), 4041, 4042, 4043, 4063, 4066 and 4068 of
ERISA, or in respect of a Multiemployer Plan under Section 4041A, 4202, 4219,
4242, or 4245 of ERISA.

 

77

 

8.12.                        USE OF PROCEEDS.  The
Borrowers will use the proceeds of the Loans and obtain Letters of Credit
solely for the purposes set forth in Section 7.17.1.

 

8.13.                        ADDITIONAL SUBSIDIARIES.  If any Subsidiary is formed or acquired by
any of the existing or future Borrowers after the Closing Date, the Borrower’s
Representative will notify the Agent thereof and (a) the Borrowers will cause
such Subsidiary to be wholly-owned by one of the Borrowers and to become a
Borrower hereunder and a party to each applicable Security Document in the
manner provided therein within ten (10) days after such Subsidiary is formed or
acquired and promptly take such actions to create and perfect Liens on such
Subsidiary’s assets to secure the Obligations as the Agent shall reasonably
request and (b) the Borrower will cause all shares of Capital Stock of such
Subsidiary and Indebtedness of such Subsidiary owed to any Borrower to be
pledged within ten (10) days after such Subsidiary is formed or acquired.

 

8.14.                        BANK ACCOUNTS.

 

8.14.1.               GENERAL.  On or prior to the Closing Date, the
Borrowers will, and will cause each of its Subsidiaries to, (a) establish a
depository account (the “FLEET CONCENTRATION ACCOUNT”) under the control of the
Agent for the benefit of the Lenders and the Agent, in the name of the
Borrowers, (b) cause all Receipts or cash proceeds of Accounts Receivable to be
deposited only into Local Accounts or Interim Concentration Accounts and, if
applicable, lock box agreements or the Fleet Concentration Account; PROVIDED
that monies may continue to be deposited into existing deposit accounts at Bank
of America, N.A. for up to ninety (90) days after the date hereof if all monies
therein are swept and wired each Business Day to the Fleet Concentration
Account, and within such 90-day period the Borrowers shall close such deposit
accounts and transfer such depositary relationship (and the monies in such
deposit accounts) to an Interim Concentration Account, (c) direct all
depository institutions with Local Accounts to cause all funds held in each
such Local Account to be transferred no less frequently than two (2) times per
week to, and only to, an Interim Concentration Account or the Fleet
Concentration Account pursuant to an irrevocable DDA Notification, (d) direct
all depository institutions with Interim Concentration Accounts to cause all
funds of the Borrowers and their Subsidiaries held in such Interim
Concentration Accounts to be transferred daily to, and only to, the Fleet
Concentration Account, and (e) at all times ensure that immediately upon the
Borrowers’ or any of their Subsidiaries’ receipt of any funds constituting or
cash proceeds of any Collateral, all such amounts shall have been deposited in
a Local Account (subject to the limitations in the definition thereof), an
Interim Concentration Account or the Fleet Concentration Account.

 

8.14.2.               ACKNOWLEDGMENT
OF APPLICATION.  The Borrowers hereby
agree that all amounts received by the Agent in the Fleet Concentration Account
will be the sole and exclusive property of the Agent, for the accounts of the
Lenders and the Agent, to be applied in accordance Section 2.14 or Section 2.15
as applicable.

 

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8.15.                        COVENANTS CONCERNING COLLATERAL,
ETC.  The Borrowers further covenant
with the Lenders and the Agent as follows: (a) the Collateral, to the extent
not delivered to the Agent pursuant to Section 6, will be kept at those
locations listed on the Perfection Certificate and the Borrowers will not
remove the Collateral from such locations, without providing at least thirty
(30) days prior written notice to the Agent, (b) except for the security
interest herein granted and other Permitted Liens, the Borrowers shall be the
owners of the Collateral free from any right or claim of any other person or
any Lien, and the Borrowers shall defend the same against all claims and demands
of all persons at any time claiming the same or any interests therein adverse
to the Agent or any of the Lenders, (c) the Borrowers shall not pledge,
mortgage or create, or suffer to exist any right of any person in or claim by
any person to the Collateral, or any Lien in the Collateral in favor of any
person, other than the Agent and the Permitted Liens, (d) the Borrowers will
keep the Collateral in good order and repair and will not use the same in
violation of law or any policy of insurance thereon, (e) the Borrowers will pay
promptly when due all taxes, assessments, governmental charges and levies upon
the Collateral or incurred in connection with the use or operation of the
Collateral or incurred in connection with this Agreement and (f) the Borrowers
will continue to operate, their business in compliance with all applicable
provisions of the federal Fair Labor Standards Act, as amended, and with all
applicable provisions of federal, state and local statutes and ordinances
dealing with the control, shipment, storage or disposal of hazardous materials
or substances, in each case as to (f) where their failure to do so could
reasonably be expected to result in a Material Adverse Effect.  No sale of Inventory shall be on
consignment, approval, or under any other circumstances such that, with the
exception of the Borrowers’ customary return policy applicable to the return of
inventory purchased by the Borrowers’ retail customers in the ordinary course,
such Inventory may be returned to the Borrowers without the consent of the
Agent.  The Borrowers may grant such
allowances or other adjustments to the Borrowers’ account debtors as the
Borrowers may reasonably deem to accord with sound business practice, PROVIDED,
HOWEVER, the authority granted the Borrowers pursuant to this Section 8.15 may
be limited or terminated by the Agent at any time in the Agent’s reasonable
discretion.

 

8.16.                        FURTHER ASSURANCES.

 

(a)                                  The
Borrowers will, and will cause each of their Subsidiaries to, cooperate with
the Lenders and the Agent and execute such further instruments and documents as
the Lenders or the Agent shall reasonably request to carry out to their
reasonable satisfaction the transactions contemplated by this Agreement and the
other Loan Documents.

 

(b)                                 The
Borrowers will within sixty (60) days after the date hereof either (i) obtain a
waiver or subordination agreement in favor of the Agent from Chase Merchant
Services LLC with respect to any Lien in its or any affiliate’s favor relating
to its arrangements with the Borrowers in form and substance reasonably
satisfactory to the Agent and the Tranche B Lender, or (ii) terminate such
arrangements and enter into another Visa and Mastercard merchant services
bankcard agreement with another Person in form and substance reasonably
acceptable to the Agent.

 

79

 

(c)                                  The
Borrowers will within ninety (90) days after the date hereof close its deposit
accounts at Bank of America, N.A. and transfer such deposit relationships (and
the remaining monies  therein) to
Interim Concentration Accounts.

 

9.                                       CERTAIN NEGATIVE COVENANTS.  The Borrowers covenant and agree that, so
long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit or Note is
outstanding or any Lender has any obligation to make any Loan or the Agent or
Letter of Credit Issuer has any obligation to issue, extend or renew any Letter
of Credit:

 

9.1.                              RESTRICTIONS ON INDEBTEDNESS.  The Borrowers will not, and will not permit
any of their Subsidiaries to, create, incur, assume, guarantee or be or remain
liable, contingently or otherwise, with respect to any Indebtedness other than:

 

(a)                                  Indebtedness
to the Lenders, the Letter of Credit Issuer and the Agent arising under any of
the Loan Documents;

 

(b)                                 endorsements
for collection, deposit or negotiation and warranties of products or services,
in each case incurred in the ordinary course of business;

 

(c)                                  Indebtedness
incurred in connection with the acquisition after the date hereof (or purchase
money indebtedness assumed in connection with an acquisition after the date
hereof consented to in writing by the Required Revolving Credit Lenders and the
Tranche B Lender, which consent shall not be unreasonably withheld) of any
personal property (other than Inventory) by the Borrowers or such Subsidiary or
under any Capitalized Lease entered into after the date hereof and any
Refinancing of the foregoing, PROVIDED that the aggregate principal amount of
such Indebtedness of the Borrowers and their Subsidiaries shall not exceed the
aggregate amount of $2,000,000 at any one time;

 

(d)                                 the
KBB Existing Indebtedness and the Kayne Existing Indebtedness, and any
Refinancings thereof, in each case subject to an intercreditor and
subordination agreement acceptable in form and substance to the Agent and the
Tranche B Lender, and the PNC Existing Indebtedness, and any Refinancing
thereof, subject to an intercreditor agreement acceptable in form and substance
to the Agent and the Tranche B Lender;

 

(e)                                  Indebtedness
of a Borrower to another Borrower, evidenced by promissory notes, in form and
substance acceptable to the Agent, pledged and delivered to the Agent pursuant
to the Security Documents (the “INTERCOMPANY NOTES”);

 

(f)                                    the
Kayne Credit Support Indebtedness and the Equipment Financing Indebtedness, and
any Refinancings thereof, subject to an intercreditor and subordination
agreement acceptable in form and substance to the Agent and the Tranche B
Lender, PROVIDED the principal amount outstanding of such Indebtedness,
together with the Kayne Existing Indebtedness and the Indebtedness incurred in
connection with sale leasebacks of Equipment permitted under Section 9.6
hereof, does not exceed $20,000,000 in principal amount outstanding at any
time;

 

80

 

(g)                                 surety
bond obligations incurred in the ordinary course of business and not in
connection with the incurrence of Indebtedness in an aggregate principal amount
not exceeding $150,000 at any time;

 

(h)                                 unsecured
Subordinated Debt on terms and conditions acceptable to the Agent and the
Tranche B Lender, in their discretion, including without limitation
subordination terms pursuant to an intercreditor and subordination agreement
acceptable in form and substance to the Agent and the Tranche B Lender, and Refinancings
thereof;

 

(i)                                     guarantees
of Leases of other Borrowers in the ordinary course of business; and

 

(j)                                     obligations
relating to the three existing standby letters of credit issued by Wells Fargo
Bank, N.A. with an aggregate face amount of $1,303,560 and the one existing
standby letter of credit by First Union National Bank, with a face amount of
$230,000, all as more particularly described on SCHEDULE 9.1 hereto.

 

9.2.                              RESTRICTIONS ON LIENS.

 

9.2.1.                     PERMITTED
LIENS.  The Borrowers will not, and will
not permit any of their Subsidiaries to, (a) create or incur or suffer to be
created or incurred or to exist any Lien upon any of their property or assets
of any character whether now owned or hereafter acquired, or upon the income or
profits therefrom; (b) transfer any of such property or assets or the income or
profits therefrom for the purpose of subjecting the same to the payment of
Indebtedness or performance of any other obligation in priority to payment of
its general creditors; (c) acquire, or agree or have an option to acquire, any
property or assets upon conditional sale or other title retention or purchase
money security agreement, device or arrangement; (d) suffer to exist for a
period of more than thirty (30) days after the same shall have been incurred
any Indebtedness or claim or demand against it that if unpaid could by law or
upon bankruptcy or insolvency, or otherwise, be given any priority whatsoever
over its general creditors; or (e) sell, assign, pledge or otherwise transfer
any “RECEIVABLES” as defined in clause (g) of the definition of the term
“INDEBTEDNESS,” with or without recourse; PROVIDED that the Borrowers or any of
their Subsidiaries may create or incur or suffer to be created or incurred or
to exist:

 

(i)                                     Liens
to secure taxes, assessments and other government charges in respect of
obligations not yet due and payable or which are the subject of a Permitted
Protest;

 

(ii)                                  deposits
or pledges made in connection with, or to secure payment of, workmen’s
compensation, unemployment insurance, old age pensions or other social security
obligations;

 

81

 

(iii)                               Liens
on properties in respect of judgments or awards that have been in force for
less than the applicable period for taking an appeal so long as execution is
not levied thereunder or in respect of which the Borrowers or such Subsidiary
shall at the time in good faith be prosecuting an appeal or proceedings for
review and in respect of which a stay of execution shall have been obtained pending
such appeal or review;

 

(iv)                              Liens
arising by operation of law in favor of carriers, warehousemen, mechanics and
materialmen, and other like Liens on properties, in existence less than one
hundred twenty (120) days from the date of creation thereof in respect of
obligations not overdue incurred in the ordinary course of business and not in
connection with the incurrence of Indebtedness;

 

(v)                                 Liens
arising from deposits made in connection with obtaining workers compensation or
other unemployment insurance or other social security legislation;

 

(vi)                              Liens
or deposits to secure performance of bids, tenders, utility contracts or Leases
(to the extent not prohibited under this Agreement) incurred in the ordinary
course of business of the Borrowers and not in connection with the incurrence
of Indebtedness;

 

(vii)                           A
Lien on the existing and hereafter acquired assets of FAO and Schwarz in favor
of the KBB Existing Indebtedness Holders to secure the KBB Existing
Indebtedness, to the extent allowed under and pursuant to the Plan of
Reorganization, in favor of the KBB Existing Indebtedness Holders, subordinated
to the Agent pursuant to an intercreditor and subordination agreement
acceptable to the Agent and the Tranche B Lender;

 

(viii)                        A
Lien on the existing Equipment (as of the Closing Date), other than Equipment
subject to the PNC Existing Lien, of FAO, Schwarz and ZB in favor of the Kayne
Existing Indebtedness Holders, securing the Kayne Existing Indebtedness, to the
extent allowed under and pursuant to the Plan of Reorganization, and securing,
if hereafter incurred, the Kayne Credit Support Indebtedness and the Equipment
Financing Indebtedness to the extent permitted hereunder, superior to the Lien
of the Agent in such Equipment, but subject in each case to an intercreditor
and subordination agreement in form and substance acceptable to the Agent and
the Tranche B Lender;

 

(ix)                                The
PNC Existing Lien securing the PNC Existing Indebtedness, to the extent allowed
under and pursuant to the Plan of Reorganization, subject to an intercreditor
agreement in form and substance acceptable to the Agent and the Tranche B
Lender;

 

(x)                                   purchase
money security interests in personal property (other than Inventory) acquired
after the date hereof to secure purchase money Indebtedness

 

82

 

of the type and
amount permitted by Section 9.1(c) (including without limitation Capitalized
Leases), incurred in connection with the acquisition of such personal property,
which security interests cover only the personal property so acquired;

 

(xi)                                Liens
in favor of the Agent for the benefit of the Lenders and the Agent under the
Loan Documents;

 

(xii)                             Liens
of a bank or financial institution with respect to funds deposited with such
institution;

 

(xiii)                          Liens
replacing existing Liens pursuant to a Refinancing permitted hereunder (if such
original Lien was permitted hereunder to secure the Indebtedness refinanced
thereby);

 

(xiv)                         Liens
on specific assets (and not Inventory, Accounts or so-called “blanket” Liens)
arising by reason of security for the surety bond obligations permitted under
Section 9.1(g);

 

(xv)                            Liens
in favor of customs brokers in the ordinary course of business, provided the
Agent has received from such customs brokers customs broker agreements in favor
of the Agent, reasonably satisfactory in form and substance to the Agent and
the Tranche B Lender;

 

(xvi)                         Liens
of credit card processors to secure credit card processing services, provided
such Lien is subordinated to the Lien of the Agent on written terms reasonably
satisfactory to the Agent and the Tranche B Lender; and

 

(xvii)                      cash
collateral in the amount of $230,000 in favor of First Union National Bank,
securing its standby letter of credit described in SCHEDULE 9.1.

 

9.2.2.                     RESTRICTIONS
ON NEGATIVE PLEDGES AND UPSTREAM LIMITATIONS. 
The Borrowers will not, nor will it permit any of their Subsidiaries to
(a) enter into or permit to exist any arrangement or agreement (excluding the
Agreement and the other Loan Documents) which directly or indirectly prohibits
the Borrowers or any of their Subsidiaries from creating, assuming or incurring
any Lien upon its properties, revenues or assets or those of any of their
Subsidiaries whether now owned or hereafter acquired, or (b) enter into any
agreement, contract or arrangement (excluding the Agreement and the other Loan
Documents) restricting the ability of any Subsidiary of the Borrowers to pay or
make dividends or distributions in cash or kind to the Borrowers, to make
loans, advances or other payments of whatsoever nature to the Borrowers, or to
make transfers or distributions of all or any part of its assets to the
Borrowers; in each case other than (i) restrictions on specific assets and
agreements which assets and agreements are the subject of purchase money
security interests to the extent permitted under Section 9.2.1, and (ii)
customary anti-assignment provisions contained in leases and licensing and
ordinary course agreements entered into by the Borrowers or such Subsidiary in
the ordinary course of its business.

 

83

 

9.3.                              RESTRICTIONS ON INVESTMENTS.  The Borrowers will not, and will not permit
any of their Subsidiaries to, make or permit to exist or to remain outstanding
any Investment except Investments in:

 

(a)                                  Cash
Equivalents;

 

(b)                                 Investments
existing on the date hereof and listed on SCHEDULE 9.3 hereto;

 

(c)                                  The
existing Investment of Right Start in its Subsidiary, The Right Start
Subsidiary I, Inc. as of the Closing Date;

 

(d)                                 Investments
by the Borrowers in each other;

 

(e)                                  Investments
consisting of promissory notes received as proceeds of asset dispositions
permitted by Section 9.5.2;

 

(f)                                    Investments
with respect to Indebtedness permitted under Section 9.1(e) provided such Borrowers
remain Borrowers and remain Subsidiaries hereunder;

 

(g)                                 Investments
consisting of loans and advances to employees for moving, entertainment, travel
and other similar expenses in the ordinary course of business not to exceed
$500,000 in the aggregate at any time outstanding; and

 

(h)                                 guarantees
permitted under Section 9.1(i).

 

PROVIDED, HOWEVER, that, such
Investments will be considered Investments permitted by this Section 9.3 only
if all actions have been taken to the satisfaction of the Agent to provide to
the Agent, for the benefit of the Lenders and the Agent, a first priority
perfected security interest in all of such Investments free of all Liens other
than Permitted Liens.

 

9.4.                              RESTRICTED PAYMENTS; PAYMENTS ON OTHER
INDEBTEDNESS.  (a) The Borrowers will
not make any Restricted Payments; PROVIDED THAT the Borrowers which are
wholly-owned Subsidiaries may make Distributions to their parents who are
Borrowers and, so long as no Default or Event of Default then exists or could
reasonably be expected to result therefrom, the Borrowers may make the
following other Restricted Payments:

 

(i)                                     (1)
regularly scheduled payments of interest when due (beginning on January 11,
2005 and quarterly thereafter) on the KBB Existing Indebtedness evidenced by
the “New KBB Subordinated Note”, and (2) when due pursuant to the Plan of
Reorganization, the $500,000 cash payment to KBB; PROVIDED the Borrowers’
obligations owed with respect to the Emergence Vendor Liabilities are current
as required by the Plan of Reorganization;

 

84

 

(ii)                                  regularly
scheduled payments when due in accordance with and pursuant to the Plan of
Reorganization on the Emergence Vendor Liabilities;

 

(iii)                               when
due in accordance with and pursuant to the Plan of Reorganization, the interest
and principal payment due on the Kayne Existing Indebtedness; PROVIDED the
Borrowers’ obligations owed with respect to the Emergence Vendor Liabilities
are current as required by the Plan of Reorganization.

 

(b)                                 The
Borrowers will not prepay the PNC Existing Indebtedness, without the prior
written consent of the Required Lenders.

 

9.5.                              MERGER, CONSOLIDATION AND DISPOSITION OF ASSETS.

 

9.5.1.                     MERGERS
AND ACQUISITIONS.  The Borrowers will
not, and will not permit any of their Subsidiaries to, become a party to any
merger, amalgamation or consolidation, or agree to or effect any asset
acquisition or stock acquisition (other than the acquisition of assets in the
ordinary course of business consistent with past practices) except the merger
or consolidation of one or more of the Subsidiaries of the Borrowers with and
into one of the Borrowers, or the merger or consolidation of two or more
Subsidiaries of the Borrowers.

 

9.5.2.                     DISPOSITION
OF ASSETS.  The Borrowers will not, and will
not permit any of their Subsidiaries to, become a party to or agree to or
effect any disposition of assets, other than (a) the sale of inventory, the
licensing of intellectual property and the disposition of obsolete assets, in
each case in the ordinary course of business consistent with past practices,
and (b) the Borrowers may sell Inventory and other assets outside the ordinary
course of business in connection with Permitted Store Closings so long as the
liquidation is conducted by a liquidator and is otherwise on terms and
conditions acceptable to the Agent.

 

9.6.                              SALE AND LEASEBACK. 
The Borrowers will not, and will not permit any of their Subsidiaries
to, enter into any arrangement, directly or indirectly, whereby the Borrowers
or any Subsidiary of the Borrowers shall sell or transfer any property owned by
it in order then or thereafter to lease such property or lease other property
that the Borrowers or any Subsidiary of the Borrowers intends to use for
substantially the same purpose as the property being sold or transferred;
PROVIDED that so long as no Default or Event of Default then exists hereunder
or would reasonably be expected to result therefrom, the Borrowers may enter
into sale-leaseback transactions on terms reasonably acceptable to the Agent
with respect to specific Equipment reasonably acceptable to the Agent so long
as the principal amount of the Indebtedness incurred in connection therewith,
together with the Kayne Existing Indebtedness, the Equipment Financing
Indebtedness and Kayne Credit Support Indebtedness does not exceed $20,000,000
in principal amount at any time; and PROVIDED further that there shall be no
required payments on such Indebtedness prior to one hundred twenty (120) days
after the Maturity Date.

 

9.7.                              COMPLIANCE WITH ENVIRONMENTAL LAWS.  The Borrowers will not, and will not permit
any of their Subsidiaries to, (a) use any real estate for the handling,

 

85

 

processing, storage or disposal
of Hazardous Substances (except in the ordinary course of business in
accordance with applicable Environmental Laws), (b) cause or permit to be
located on any real estate any underground tank or other underground storage
receptacle for Hazardous Substances, (c) generate any Hazardous Substances
(except the use of cleaning solvents used in the ordinary course of business in
accordance with applicable Environmental Laws), (d) conduct any activity so as
to cause a release (i.e., releasing, spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, disposing or
dumping) or threatened release of Hazardous Substances (except the use of
cleaning solvents used in the ordinary course of business in accordance with
applicable Environmental Laws), or (e) otherwise conduct any activity that
would violate any Environmental Law.

 

9.8.                              EMPLOYEE BENEFIT PLANS. 
Neither the Borrowers nor any ERISA Affiliate will:

 

(a)                                  engage
in any “PROHIBITED TRANSACTION” within the meaning of Section 406 of ERISA or
Section 4975 of the Code which could result in a material liability for the
Borrower or any of its Subsidiaries; or

 

(b)                                 permit
any Guaranteed Pension Plan to incur an “ACCUMULATED FUNDING DEFICIENCY”, as
such term is defined in Section 302 of ERISA, whether or not such deficiency is
or may be waived; or

 

(c)                                  fail
to contribute to any Guaranteed Pension Plan to an extent which, or terminate
any Guaranteed Pension Plan in a manner which, could result in the imposition
of a lien or encumbrance on the assets of the Borrowers or any of their
Subsidiaries pursuant to Section 302(f) or Section 4068 of ERISA; or

 

(d)                                 amend
any Guaranteed Pension Plan in circumstances requiring the posting of security
pursuant to Section 307 of ERISA or Section 401(a)(29) of the Code;

 

(e)                                  permit
or take any action which would result in the aggregate benefit liabilities
(with the meaning of Section 4001 of ERISA) of all Guaranteed Pension Plans
exceeding the value of the aggregate assets of such Plans, disregarding for
this purpose the benefit liabilities and assets of any such Plan with assets in
excess of benefit liabilities, by more than the amount set forth in Section
7.16.3; or

 

(f)                                    permit
or take any action which would contravene any Applicable Pension Legislation.

 

9.9.                              BUSINESS ACTIVITIES; PERMITTED STORE CLOSINGS.  The Borrowers will not, and will not permit
any of their Subsidiaries to, (a) engage directly or indirectly (whether
through Subsidiaries or otherwise) in any type of business other than the
businesses conducted by them on the Closing Date and, in connection with their
existing businesses, in related businesses, (b) execute, alter, modify, or
amend any real estate Lease in any material adverse way; PROVIDED, HOWEVER, the
Borrowers may terminate the Leases on the retail locations listed on SCHEDULE
9.9 hereto and in connection with other Permitted Store Closings, (c) except as
provided in part (b) hereof, commit to, or open or close any location at

 

86

 

which any Borrower maintains, offers
for sales, or stores any of the Collateral, (d) possess inventory on
consignment or (e) enter into any host store arrangements with any Host Store
without the prior written consent of the Agent and, then, only if such Host
Store has entered into a Host Store Acknowledgement.  The Borrowers will not permit The Right Start Subsidiary I, Inc.
to engage in any business or to hold any assets (other than Right Start’s
Investment therein as of the Closing Date) or to incur any Indebtedness or
other Liabilities, including without limitation any trade liabilities.  Without the Agent’s prior written consent,
the Borrowers will not; and will not permit any Subsidiary to, amend, modify or
waive any of its rights under (a) its Governing Documents, (b) the Kayne Existing
Indebtedness, the KBB Existing Indebtedness, any other Subordinated Debt, the
PNC Existing Indebtedness or the Plan of Reorganization, or (c) any agreement
with any Host Store, unless such amendment, modification or waiver to such Host
Store agreement does not materially adversely affect the Borrowers taken as a
whole or materially adversely affect the interests of the Lenders under the
Loan Documents.

 

9.10.                        FISCAL YEAR.  The
Borrowers will not, and will not permit any of their Subsidiaries to, change
the date of the end of its fiscal year from that set forth in Section 7.4.1.

 

9.11.                        TRANSACTIONS WITH AFFILIATES.  As of the Closing Date, each Affiliate of
the Borrowers is listed on SCHEDULE 7.19. 
The Borrowers will not, and will not permit any of their Subsidiaries
to, engage in any transaction with any Affiliate (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any such Affiliate or, to the knowledge of the Borrowers, any
corporation, partnership, trust or other entity in which any such Affiliate has
a substantial interest or is an officer, director, trustee or partner, on terms
more favorable to such Person than would have been obtainable on an
arm’s-length basis in the ordinary course of business.

 

9.12.                        BANK ACCOUNTS.  The
Borrowers will not, and will not permit any of their Subsidiaries to, (a)
establish any bank accounts, credit card clearinghouse or processors, other
than those Deposit Accounts, clearinghouses and processors and other accounts,
all listed on SCHEDULE 7.20(a), without the Agent’s prior written consent, (b)
violate directly or indirectly any Blocked Account Agreement or other bank
agency or lock box agreement in favor of the Agent for the benefit of the
Lenders and the Agent with respect to such account, (c) deposit into any of the
payroll accounts listed on SCHEDULE 7.20(a) any amounts in excess of amounts
necessary to pay current payroll obligations from such accounts or (d) change
any direction or designation relating to any credit card clearinghouse or
processor.

 

10.                                 FINANCIAL COVENANTS.  The Borrowers covenant and agree that, so
long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit or Note is
outstanding or any Lender has any obligation to make any Loan or the Agent or
Letter of Credit Issuer has any obligation to issue, extend or renew any Letter
of Credit:

 

10.1                           MINIMUM EXCESS AVAILABILITY.  The Borrowers shall maintain at all times
Excess Availability of not less than $5,000,000.

 

87

 

11.                                 CLOSING CONDITIONS.  The obligations of the Lenders to make the initial Revolving
Credit Loans and the Tranche B Loan and of the Agent and Letter of Credit
Issuer to issue any initial Letter of Credit shall be subject to the
satisfaction of the following conditions precedent on or prior to the Closing
Date:

 

11.1.                        LOAN DOCUMENTS. 
Each of the Loan Documents shall have been duly executed and delivered
by the respective parties thereto, shall be in full force and effect and shall
be in form and substance satisfactory to each of the Lenders.  Each Lender shall have received a fully
executed copy of each such document.

 

11.2.                        CERTIFIED COPIES OF GOVERNING DOCUMENTS.  Each of the Lenders shall have received from
the Borrowers a copy, certified by a duly authorized officer of such Person to
be true and complete on the Closing Date, of each of its Governing Documents as
in effect on such date of certification.

 

11.3.                        CORPORATE OR OTHER ACTION.  All corporate (or other) action necessary
for the valid execution, delivery and performance by each of the Borrowers and
each of their Subsidiaries of this Agreement and the other Loan Documents to
which it is or is to become a party shall have been duly and effectively taken,
and evidence thereof satisfactory to the Lenders shall have been provided to
each of the Lenders.

 

11.4.                        INCUMBENCY CERTIFICATE.  Each of the Lenders shall have received from
each of the Borrowers and each of their Subsidiaries an incumbency certificate,
dated as of the Closing Date, signed by a duly authorized officer of such
Borrower or such Subsidiary, and giving the name and bearing a specimen
signature of each individual who shall be authorized: (a) to sign, in the name
and on behalf of each of the Borrowers and each such Subsidiary, each of the
Loan Documents to which such Borrower or such Subsidiary is or is to become a
party; (b) in the case of the Borrowers’ Representative, to make Loan Requests
and Conversion Requests and to apply for Letters of Credit; and (c) to give
notices and to take other action on its behalf under the Loan Documents.

 

11.5.                        VALIDITY OF LIENS. 
The Security Documents shall be effective to create in favor of the
Agent a legal, valid and enforceable first priority (except for Permitted Liens
entitled to priority hereunder or under applicable law) perfected security
interest in and Lien upon the Collateral. 
All filings, recordings, deliveries of instruments and other actions
necessary or desirable in the opinion of the Agent to perfect, protect and
preserve such security interests shall have been duly effected.  The Agent shall have received evidence
thereof in form and substance satisfactory to the Agent.

 

11.6.                        PERFECTION CERTIFICATES AND UCC SEARCH
RESULTS.  The Agent shall have
received from each of the Borrowers a completed and fully executed Perfection
Certificate and the results of UCC searches (and the equivalent thereof in all
applicable foreign jurisdictions) with respect to the Collateral, indicating no
Liens other than Permitted Liens and otherwise in form and substance
satisfactory to the Agent.

 

88

 

11.7.                        TAXES.  The Agent shall
have received evidence of payment of real estate taxes and municipal charges on
all real estate not delinquent on or before the Closing Date.

 

11.8.                        PLAN OF REORGANIZATION.  The Agent shall have received a copy of the final Plan of
Reorganization, which Plan of Reorganization must be reasonably satisfactory to
the Agent and the Tranche B Lender in form and substance.  All conditions precedent to confirmation of
such Plan of Reorganization shall have been met (or any waiver thereof shall
have been consented to in writing by the Agent and the Tranche B Lender), and a
Plan Confirmation Order, in form and substance reasonably satisfactory to the
Agent and the Tranche B Lender, shall have been issued by the U.S. Bankruptcy
Court, District of Delaware, approving the Plan of Reorganization, which Plan
Confirmation Order shall not have been reversed, modified, amended or stayed
and shall be final, with all appeal periods relating thereto having expired
(unless otherwise consented to in writing by the Agent and the Tranche B
Lender), and no appeals from such Plan Confirmation Order shall be outstanding.

 

11.9.                        CAPITAL STRUCTURE. 
After giving effect to the Plan of Reorganization, the capital structure
of FAO shall be reasonably satisfactory to the Agent and the Tranche B Lender
in all respects and the Agent and the Tranche B Lender shall be reasonably
satisfied that FAO has received no less than $25,000,000 in net cash proceeds
pursuant to the Securities Purchase Agreement available to fund the Plan of
Reorganization and for ongoing operations of the Borrowers from a new issuance
of Capital Stock, with the terms of such Capital Stock and the issuance thereof
being reasonably satisfactory to the Agent and the Tranche B Lender.

 

11.10.                  CERTIFICATES OF INSURANCE.  The Agent shall have received (a) a
certificate of insurance from an independent insurance broker dated within one
(1) week prior to the Closing Date, identifying insurers, types of insurance,
insurance limits, and policy terms, and otherwise describing the insurance
obtained in accordance with this Agreement and (b) certified copies of all
policies evidencing such insurance (or certificates therefore signed by the
insurer or an agent authorized to bind the insurer).

 

11.11.                  BLOCKED ACCOUNT AGREEMENTS; CREDIT CARD
CLEARING HOUSE.  The Borrowers shall
have established the Fleet Concentration Account, and the Agent shall have
received a Blocked Account Agreement executed by each depository institution
with an Interim Concentration Account or Local Account.  The Borrowers shall deliver to the Agent,
notification, executed on behalf of the Borrowers, to each of the Borrowers’
credit card clearinghouses and processors of notice (in the form attached
hereto as EXHIBIT F or such other form reasonably satisfactory to the Agent and
the Tranche B Lender), which notice provides that payment of all credit card
charges submitted by the Borrowers to that clearinghouse or other processor and
any other amount payable to the Borrowers by such clearinghouse or other
processor shall be directed to the Fleet Concentration Account or as otherwise
designated from time to time by the Agent.

 

11.12.                  BORROWING BASE REPORT.  The Agent shall have received from the Borrowers the initial Borrowing
Base Report dated as of the Closing Date.

 

89

 

11.13.                  MINIMUM DAY ONE AVAILABILITY, ETC.  After giving effect to the first funding of
the Revolving Credit Loans and the Tranche B Loan; the payment of all emergence
expenses contemplated by the Plan of Reorganization; all then held checks (if
any); accounts payable which are beyond credit terms then accorded the
Borrowers; overdrafts; any charges to the Loan Account made in connection with
the establishment of the credit facility contemplated hereby; and Letters of
Credit to be issued at, or immediately subsequent to, such establishment,
Availability shall not be less than $14,000,000.  All post petition accounts payable and tax liabilities of the
Borrowers shall be current, excluding liabilities contested in good faith and
liabilities subject to compromise.

 

11.14.                  CREDIT CARD ACCOUNTS RECEIVABLE REPORT.  The Agent shall have received from the
Borrowers the most recent Credit Card Accounts Receivable report of the
Borrowers and their Subsidiaries dated as of a date which shall be no more than
five (5) days prior to the Closing Date and the Borrowers shall have notified
the Agent in writing on the Closing Date of any material deviation from the
Credit Card Accounts Receivable values reflected in such Credit Card Accounts
Receivable report and shall have provided the Agent with such supplementary
documentation as the Agent may reasonably request.

 

11.15.                  INTERCREDITOR/SUBORDINATION AND OTHER
AGREEMENTS.  The Agent shall have
entered into (a) an intercreditor agreement in form and substance satisfactory
to the Agent and the Tranche B Lender relating to the PNC Existing Indebtedness
and the PNC Existing Lien, and (b) intercreditor and subordination agreements relating
to (i) the Kayne Existing Indebtedness and the Kayne Existing Lien, and (ii)
KBB Existing Indebtedness and the KBB Existing Lien.  The agreement between the Borrowers and Saks shall be reasonably
satisfactory to the Agent and the Tranche B Lender and the Agent shall have
entered into a Host Store Acknowledgement with Saks relating thereto, in form
and substance reasonably satisfactory to the Agent and the Tranche B Lender.

 

11.16.                  OPINION OF COUNSEL. 
Each of the Lenders and the Agent shall have received a favorable legal
opinion addressed to the Lenders and the Agent, dated as of the Closing Date,
in form and substance satisfactory to the Lenders and the Agent, from:

 

(a)                                  Fulbright
& Jaworski L.L.P., counsel to the Borrowers;

 

(b)                                 Kendrick
F. Royer, Esq., general counsel of the Borrowers; and

 

(c)                                  Koenig
& Associates, special trademark and copyright counsel to the Borrowers.

 

11.17.                  PAYMENT OF FEES. 
The Borrowers shall have paid to the Lenders or the Agent, as
appropriate, the Fees pursuant to Section 5.1 and 5.2.

 

11.18                     COMMITMENTS.  The
Agent shall have received Revolving Commitments from Revolving Credit Lenders
other than FRFI totalling in the aggregate no less than $37,500,000.

 

90

 

11.19.                  OTHER ITEMS.  The
Borrowers shall have delivered (or cause to be delivered) the items set forth
on the Closing Agenda attached hereto as SCHEDULE 11.18 (unless waived in
writing by the Agent and the Tranche B Lender).

 

12.                                 CONDITIONS TO ALL BORROWINGS.  The obligations of the Lenders to make any
Loan, including the Revolving Credit Loan and the Tranche B Loan, and of the
Agent to issue, extend or renew any Letter of Credit, in each case whether on
or after the Closing Date, shall also be subject to the satisfaction of the
following conditions precedent:

 

12.1.                        REPRESENTATIONS TRUE; NOT IN DEFAULT.  Each of the representations and warranties
of any of the Borrowers and their Subsidiaries contained in this Agreement, the
other Loan Documents or in any document or instrument delivered pursuant to or
in connection with this Agreement shall be true as of the date as of which they
were made and shall also be true at and as of the time of the making of such
Loan or the issuance, extension or renewal of such Letter of Credit, with the
same effect as if made at and as of that time (except to the extent of changes
resulting from transactions contemplated or permitted by this Agreement and the
other Loan Documents and changes occurring in the ordinary course of business
that singly or in the aggregate are not materially adverse, and to the extent
that such representations and warranties relate expressly to an earlier date)
and no Default shall exist.

 

12.2.                        NO LEGAL IMPEDIMENT.  No change shall have occurred in any law or regulations
thereunder or interpretations thereof that in the reasonable opinion of any
Lender would make it illegal for such Lender to make such Loan or to
participate in the issuance, extension or renewal of such Letter of Credit or
in the reasonable opinion of the Agent would make it illegal for the Agent to
issue, extend or renew such Letter of Credit.

 

12.3.                        PROCEEDINGS AND DOCUMENTS.  All proceedings in connection with the
transactions contemplated by this Agreement, the other Loan Documents and all
other documents incident thereto shall be satisfactory in substance and in form
to the Lenders and to the Agent and the Agent’s Special Counsel, and the
Lenders, the Agent and such counsel shall have received all information and
such counterpart originals or certified or other copies of such documents as
the Agent may reasonably request.

 

12.4.                        BORROWING BASE REPORT. 
The Agent shall have received the most recent Borrowing Base Report
required to be delivered to the Agent in accordance with Section 8.4(f).

 

12.5.                        MATERIAL ADVERSE CHANGE.  There shall have been no material adverse
change in the Borrowers’ financial condition from the most recent financial
information furnished to the Agent or any Lender pursuant to this Agreement.

 

12.6.                        SALES TAXES.  If
requested by the Agent all or a portion of any Loan will be set aside by the
Borrowers to cover the Borrowers’ obligations for sales tax on account of sales
since the then most recent borrowing.

 

91

 

13.                                 EVENTS OF DEFAULT; ACCELERATION; ETC.

 

13.1.                        EVENTS OF DEFAULT AND ACCELERATION.  Each of the following events (“EVENTS OF
DEFAULT”) shall constitute an Event of Default hereunder:

 

(a)                                  any
of the Borrowers or any of their Subsidiaries shall fail to pay any principal
of the Loans or any Reimbursement Obligation when the same shall become due and
payable, whether at the stated date of maturity or any accelerated date of
maturity or at any other date fixed for payment;

 

(b)                                 any
of the Borrowers or any of their Subsidiaries shall fail to pay any interest on
the Loans, any Fees, or other sums due hereunder or under any of the other Loan
Documents, when the same shall become due and payable, whether at the stated
date of maturity or any accelerated date of maturity or at any other date fixed
for payment;

 

(c)                                  any
of the Borrowers or any of their Subsidiaries shall fail to promptly,
punctually, faithfully and timely comply with any of their covenants or
liabilities not otherwise described in Section 13.1(a) or 13.1(b) or
13.1(r), and included in any of the following provisions:

 

	
  Section
  Number

  	
   

  	
  Section
  Title

  	
   

  
	
  8.2

  	
   

  	
  Notice of
  Change of Organization/Maintenance of Office

  	
   

  
	
  8.5

  	
   

  	
  Notices

  	
   

  
	
  8.6

  	
   

  	
  Legal
  Existence; Maintenance of Properties

  	
   

  
	
  8.7

  	
   

  	
  Insurance

  	
   

  
	
  8.9

  	
   

  	
  Inspection of
  Properties and Books

  	
   

  
	
  8.12

  	
   

  	
  Use of
  Proceeds

  	
   

  
	
  8.15

  	
   

  	
  Covenants
  Concerning Collateral

  	
   

  
	
  8.16

  	
   

  	
  Further
  Assurances

  	
   

  
	
  9.1

  	
   

  	
  Restrictions
  on Indebtedness

  	
   

  
	
  9.2

  	
   

  	
  Restrictions
  on Liens

  	
   

  
	
  9.3

  	
   

  	
  Restrictions
  on Investments

  	
   

  
	
  9.4

  	
   

  	
  Restricted
  Payments

  	
   

  
	
  9.5

  	
   

  	
  Merger, Consolidation
  and Disposition of Assets

  	
   

  
	
  9.6

  	
   

  	
  Sale and
  Leaseback

  	
   

  
	
  9.9

  	
   

  	
  Business
  Activities, Permitted Store Closings

  	
   

  
	
  9.10

  	
   

  	
  Fiscal Year

  	
   

  
	
  9.11

  	
   

  	
  Transactions
  with Affiliates

  	
   

  
	
  10.1

  	
   

  	
  Minimum
  Excess Availability Covenant

  	
   

  

 

(d)                                 any
of the Borrowers’ failure to promptly, punctually, faithfully and timely
perform, discharge or comply with the financial requirements included in
Section 8.4, subject, however, to the following limited number of grace
periods applicable to certain of these requirements:

 

92

 

	
  REPORT/STATEMENT

  	
   

  	
  REQUIRED

  BY SECTION

  	
   

  	
  GRACE
  PERIOD

  	
   

  	
  NUMBER OF
  GRACE

  PERIODS

  	
   

  
	
  Borrowing Base Report

  	
   

  	
  8.4(f)

  	
   

  	
  One Business
  Day

  	
   

  	
  Three per
  Fiscal Quarter

  	
   

  
	
  Monthly Reports (30 Days)

  	
   

  	
  8.4(c) and
  (d)

  	
   

  	
  Three Business
  Days

  	
   

  	
  Three in any
  12 months

  	
   

  

 

(e)                                  any
of the Borrowers or any of their Subsidiaries shall fail to perform any other
term, covenant or agreement contained herein or in any of the other Loan
Documents (other than those specified elsewhere in this Section 13.1) for
fifteen (15) days after the earlier of the date a Designated Borrower Officer
acquires knowledge of such failure or written notice of such failure has been
given to the Borrowers’ Representative by the Agent;

 

(f)                                    any
representation or warranty of any of the Borrowers or any of their Subsidiaries
in this Agreement or any of the other Loan Documents or in any other document
or instrument delivered pursuant to or in connection with this Agreement shall
prove to have been false in any material respect upon the date when made or
deemed to have been made or repeated;

 

(g)                                 any
of the Borrowers or any of their Subsidiaries shall make an assignment for the
benefit of creditors, or admit in writing its inability to pay or generally
fail to pay its debts as they mature or become due, or shall petition or apply
for the appointment of a trustee or other custodian, liquidator or receiver of
any of the Borrowers or any of their Subsidiaries or of any substantial part of
the assets of any of the Borrowers or any of their Subsidiaries or shall
commence any case or other proceeding relating to any of the Borrowers or any
of their Subsidiaries under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar law of
any jurisdiction, now or hereafter in effect, or shall take any action to
authorize or in furtherance of any of the foregoing, or if any such petition or
application shall be filed or any such case or other proceeding shall be
commenced against any of the Borrowers or any of their Subsidiaries and any of
the Borrowers or any of their Subsidiaries shall indicate its approval thereof,
consent thereto or acquiescence therein or such petition or application shall
not have been dismissed within forty-five (45) days following the filing
thereof;

(h)                                 a
decree or order is entered appointing any such trustee, custodian, liquidator
or receiver or adjudicating any of the Borrowers or any of their Subsidiaries
bankrupt or insolvent, or approving a petition in any such case or other
proceeding, or a decree or order for relief is entered in respect of any of the
Borrowers or any Subsidiary of the Borrowers in an involuntary case under
federal bankruptcy laws as now or hereafter constituted;

 

(i)                                     any
of the Borrowers or any of their Subsidiaries shall (1) fail to pay when due,
or within any applicable period of grace, any payment due with respect to the
KBB Existing Indebtedness, the Kayne Existing Indebtedness, the Kayne Credit
Support Indebtedness, the Emergence Vendor Liabilities in accordance with the
Plan of Reorganization, the Equipment Financing Indebtedness, or the PNC
Existing

 

93

 

Indebtedness or
any other Indebtedness in excess of $500,000 or, in respect of any Capitalized
Leases, or (2) fail to observe or perform any material term, covenant or
agreement contained in any agreement by which it is bound, evidencing or
securing the KBB Existing Indebtedness, the Kayne Existing Indebtedness, the
Kayne Credit Support Indebtedness, the Emergence Vendor Liabilities in
accordance with the Plan of Reorganization, the Equipment Financing
Indebtedness or the PNC Existing Indebtedness or any other Indebtedness in
excess of $500,000 or, in respect of any Capitalized Leases, in each case for
such period of time as would permit (assuming the giving of appropriate notice
if required) the holder or holders thereof or of any obligations issued
thereunder to accelerate the maturity thereof, or any such holder or holders shall
rescind or shall have a right to rescind the purchase of any such obligations;

 

(j)                                     there
shall remain in force, undischarged, unsatisfied and unstayed, for more than
thirty (30) days, whether or not consecutive, any final judgment against any of
the Borrowers or any of their Subsidiaries that, with other outstanding final
judgments, undischarged, against the Borrowers or any of their Subsidiaries
exceeds in the aggregate $500,000;

 

(k)                                  if
any of the Loan Documents shall be cancelled, terminated, revoked or rescinded
by any party (other than the Agent on behalf of the Lenders) or the Agent’s
security interests, mortgages or liens in a substantial portion of the
Collateral shall cease to be perfected, or shall cease to have the priority
contemplated by this Agreement and the Security Documents, in each case
otherwise than in accordance with the terms thereof or with the express prior
written agreement, consent or approval of the Lenders, or any action at law,
suit or in equity or other legal proceeding to cancel, revoke or rescind any of
the Loan Documents shall be commenced by or on behalf of the Borrowers or any
of their Subsidiaries party thereto or any of their respective stockholders, or
any court or any other governmental or regulatory authority or agency of
competent jurisdiction shall make a determination that, or issue a judgment,
order, decree or ruling to the effect that, any one or more of the Loan
Documents is illegal, invalid or unenforceable in accordance with the terms
thereof;

 

(l)                                     any
of the Borrowers or any ERISA Affiliate incurs any liability to the PBGC or a
Guaranteed Pension Plan pursuant to Title IV of ERISA in an aggregate amount
exceeding $100,000, or any of the Borrowers or any ERISA Affiliate is assessed
withdrawal liability pursuant to Title IV of ERISA by a Multiemployer Plan
requiring aggregate annual payments exceeding $100,000, or any of the following
occurs with respect to a Guaranteed Pension Plan: (i) an ERISA Reportable
Event, or a failure to make a required installment or other payment (within the
meaning of Section 302(f)(1) of ERISA), PROVIDED that the Agent determines in
its reasonable discretion that such event (A) reasonably could be expected to
result in liability of any of the Borrowers or any of their Subsidiaries to the
PBGC or such Guaranteed Pension Plan in an aggregate amount exceeding $100,000
and (B) could reasonably be expected to constitute grounds for the termination
of such Guaranteed Pension Plan by the PBGC, for the appointment by the
appropriate United States District Court of a trustee to administer such
Guaranteed Pension Plan or for the imposition of a lien in favor of such
Guaranteed Pension Plan; or (ii) the appointment by a United States District
Court of a trustee to administer such

 

94

 

Guaranteed
Pension Plan; or (iii) the institution by the PBGC of proceedings to terminate
such Guaranteed Pension Plan;

 

(m)                               any
of the Borrowers or any of their Subsidiaries shall be enjoined, restrained or
in any way prevented by the order of any Governmental Authority from conducting
(i) any material part of their business taken as a whole or (ii) business at
more than 10% of all retail locations of the Borrowers at any time or at their
headquarters facility in King of Prussia, Pennsylvania or at any of their
distribution centers (including without limitation the distribution centers in
Swedesboro, New Jersey or Ontario, California), and such order shall continue
in effect for more than fifteen (15) days; or any of the Borrowers or any of
their Subsidiaries shall fail to observe or perform any material term, covenant
or agreement contained in any Lease or Leases by which it is bound relating to
any distribution center, the headquarters facility in King of Prussia, Pennsylvania,
or, as to all of the Borrowers and their Subsidiaries, three (3) or more retail
locations, if such failure would permit the lessor or lessors thereunder to
accelerate payments thereunder and/or terminate such Lease or Leases;

 

(n)                                 there
shall occur any material damage to, or loss, theft or destruction of, any
substantial portion of the Collateral, whether or not insured, or any strike,
lockout, labor dispute, embargo, condemnation, act of God or public enemy, or
other casualty, which in any such case causes, for more than fifteen (15)
consecutive days, the cessation or substantial curtailment of revenue producing
activities at more than five (5) retail locations not covered by business
interruption insurance or at any distribution center;

 

(o)                                 there
shall occur: (i) a default under the FAO Trademark License, or (ii) the loss,
suspension or revocation of, or failure to renew, the FAO Trademark License, or
(iii) the loss, suspension or revocation of, or failure to renew, any other
license or permit now held or hereafter acquired by any of the Borrowers or any
of their Subsidiaries if such loss, suspension, revocation or failure to renew
such other license or permit would have a Material Adverse Effect;

 

(p)                                 any
of the Borrowers or any of their Subsidiaries shall be indicted for a state or
federal crime, or any civil or criminal action shall otherwise have been
brought or threatened against the Borrowers or any of their Subsidiaries, a
punishment for which in any such case could include the forfeiture of any
assets of any of the Borrowers or any such Subsidiary included in the Borrowing
Base or any assets of the Borrowers or such Subsidiary not included in the
Borrowing Base but having an aggregate fair market value in excess of $500,000
(unless fully covered by insurance);

 

(q)                                 unless
subject to the prior written consent of the Agent, the determination of the
Borrowers, whether by vote of the Borrowers’ board of directors or otherwise,
to suspend the operation of any of the Borrowers’ business in the ordinary
course, liquidate all or a material portion of any Borrower’s assets or stores
(other than Permitted Store Closings), or employ an agent or other third party
to conduct any so-called store closing, store liquidation or
“going-out-of-business” sales (other than in connection with a Permitted Store
Closing);

 

95

 

(r)                                    there
shall exist any involuntary Lien on any assets of any of the Borrowers or their
Subsidiaries securing Indebtedness not in excess of $25,000 for more than
fifteen (15) days after the earlier of (a) the date a Designated Borrower
Officer acquires knowledge thereof, (b) written notice thereof from the Agent
to the Borrowers’ Representative, or (c) the commencement of any foreclosure
proceeding relating to such involuntary Lien; or

(s)                                  a
Material Adverse Effect or a Change of Control shall occur.

 

Upon the occurrence of any Event
of Default, and so long as the same may be continuing, the Agent may, and shall
(i) on the issuance of Acceleration Notice(s) requisite to the causing of
Acceleration by the SuperMajority Lenders, or (ii) following the Standstill
Termination Date, upon the request of the Tranche B Lender, by notice in
writing to the Borrowers’ Representative declare all Obligations and amounts
owing with respect to this Agreement, the Loan Account, the Notes and the other
Loan Documents and all Reimbursement Obligations to be, and they shall
thereupon forthwith become, immediately due and payable without presentment,
demand, protest or other notice of any kind, all of which are hereby expressly
waived by the Borrowers; PROVIDED that in the event of any Event of Default
specified in Sections 13.1(g) or 13.1(h), all such amounts shall become
immediately due and payable automatically and without any requirement of notice
from the Agent or any Lender.  Following
the Standstill Termination Date, the Agent will exercise those rights accorded
to the Agent under the Loan Documents as a creditor of the Borrowers looking
towards realization on the Collateral (a “LIQUIDATION”).  Notwithstanding the foregoing, the Agent
shall have the sole authority to determine the procedures to effect a
Liquidation.  The occurrence of any
Event of Default shall also constitute, without notice or demand, a default under
all other Loan Documents.

 

13.2.                        TERMINATION OF COMMITMENTS.  If any one or more of the Events of Default
specified in Section 13.1(g) or Section 13.1(h) shall occur, any unused portion
of the credit hereunder shall forthwith terminate and each of the Lenders shall
be relieved of all further obligations to make Loans to the Borrowers and the
Agent shall be relieved of all further obligations to issue, extend or renew
Letters of Credit.  If any other Event
of Default shall have occurred and be continuing, or if on any Drawdown Date or
other date for issuing, extending or renewing any Letter of Credit, the
conditions precedent to the making of the Loans to be made on such Drawdown
Date or (as the case may be) to issuing, extending or renewing such Letter of
Credit on such other date are not satisfied, the Agent may and, upon the
request of the SuperMajority Revolving Credit Lenders shall, by notice to the
Borrowers’ Representative, terminate the unused portion of the credit
hereunder, and upon such notice being given such unused portion of the credit
hereunder and the Commitments shall terminate immediately and each of the
Lenders shall be relieved of all further obligations to make Loans and the
Agent shall be relieved of all further obligations to issue, extend or renew
Letters of Credit.  No termination of
the credit hereunder shall relieve the Borrowers or any of their Subsidiaries
of any of the Obligations.

 

 

96

 

13.3.                        REMEDIES.

 

13.3.1.  GENERAL

 

(a)                                  In
case any one or more of the Events of Default shall have occurred and be
continuing, and whether or not the Lenders shall have Accelerated the maturity
of the Loans pursuant to Section 13.1, each Lender, if owed any amount with
respect to the Loans or the Reimbursement Obligations, may, with the consent of
the SuperMajority Revolving Credit Lenders or the Agent but not otherwise,
proceed to protect and enforce its rights by suit in equity, action at law or
other appropriate proceeding, whether for the specific performance of any
covenant or agreement contained in this Agreement and the other Loan Documents
or any instrument pursuant to which the Obligations to such Lender are
evidenced, including as permitted by applicable law the obtaining of the EX
PARTE appointment of a receiver, and, if such amount shall have become due, by
declaration or otherwise, proceed to enforce the payment thereof or any other
legal or equitable right of such Lender. 
No remedy herein conferred upon any Lender or the Agent or the holder of
any Note or purchaser of any Letter of Credit Participation is intended to be
exclusive of any other remedy and each and every remedy shall be cumulative and
shall be in addition to every other remedy given hereunder or now or hereafter
existing at law or in equity or by statute or any other provision of law.

 

(b)                                 If
a Default has occurred, the Agent, without any other notice to or demand upon
the Borrowers, shall have in any jurisdiction in which enforcement hereof is
sought, in addition to all other rights and remedies, the rights and remedies
of a secured party under the Uniform Commercial Code of the State and any
additional rights and remedies as may be provided to a secured party in any
jurisdiction in which Collateral is located, including, without limitation, the
right to take possession of the Collateral, and for that purpose the Agent may,
so far as the Borrowers can give authority therefor, enter upon any premises on
which the Collateral may be situated and remove the same therefrom.  The Agent may in its reasonable discretion
require the Borrowers to assemble all or any part of the Collateral at such
location or locations within the jurisdiction(s) of FAO’s principal office(s)
or at such other locations as the Agent may reasonably designate.  Unless the Collateral is perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, the Agent shall give to the Borrowers at least five (5)
Business Days prior written notice of the time and place of any public sale of
Collateral or of the time after which any private sale or any other intended
disposition is to be made.  The
Borrowers hereby acknowledge that five (5) Business Days prior written notice
of such sale or sales shall be reasonable notice.  In addition, the Borrowers waive any and all rights that they may
have to a judicial hearing in advance of the enforcement of any of the Agent’s
rights and remedies hereunder, including, without limitation, its right if a
Default exists to take immediate possession of the Collateral and to exercise
its rights and remedies with respect thereto. 
Each Borrower hereby grants to the Agent a royalty free nonexclusive
irrevocable license to use, apply and affix any trademark, trade name, logo or
the like in which any Borrower now or hereafter has rights, such license being
with respect to the Agent’s exercise of the rights hereunder after a Default has occurred including,
without limitation, in connection

 

97

 

with any
completion of the manufacture, sale, Liquidation or other disposition of
Inventory.

 

13.3.2.               SECURITIES
AND DEPOSITS.  The Agent may at any
time, at its option, transfer to itself or any nominee any securities
constituting Collateral, receive any income thereon and hold such income as
additional Collateral or apply it to the Obligations.  Whether or not any Obligations are due, the Agent, after and
during the continuance of any Event of Default, may demand, sue for, collect,
or make any settlement or compromise which it deems reasonably desirable or
necessary with respect to the Collateral. 
Regardless of the adequacy of Collateral or any other security for the
Obligations, any deposits or other sums at any time credited by or due from the
Agent or any Lender to the Borrowers may at any time be applied to or set off
against any of the Obligations.

 

13.3.3.               NOTIFICATION
TO ACCOUNT DEBTORS AND OTHER PERSONS OBLIGATED ON COLLATERAL.  The Borrowers shall, at the request and
option of the Agent, notify account debtors and other persons obligated on any
of the Collateral of the security interest of the Agent in any account, chattel
paper, general intangible, instrument or other Collateral and that payment
thereof is to be made directly to the Agent or to any financial institution
designated by the Agent as the Agent’s agent therefor, and the Agent may
itself, without notice to or demand upon the Borrowers, so notify account
debtors and other persons obligated on Collateral.  After the making of such a request or the giving of any such
notification, the Borrowers shall hold any proceeds of collection of accounts,
chattel paper, general intangibles, instruments and other Collateral received
by the Borrowers as trustee for the Agent, for the benefit of the Lenders and the
Agent, without commingling the same with other funds of the Borrowers and shall
turn the same over to the Agent in the identical form received, together with
any necessary endorsements or assignments. 
The Agent shall apply the proceeds of collection of accounts, chattel
paper, general intangibles, instruments and other Collateral received by the
Agent to the Obligations, such proceeds to be immediately credited after final
payment in cash or other immediately available funds of the items giving rise to
them.

 

13.3.4.               STANDARDS
FOR EXERCISING RIGHTS AND REMEDIES.  To
the extent that applicable law imposes duties on the Agent to exercise remedies
in a commercially reasonable manner, the Borrowers acknowledge and agree that
it is not commercially unreasonable for the Agent (a) to fail to incur expenses
reasonably deemed significant by the Agent to prepare Collateral for
disposition or otherwise to fail to complete raw material or work in process
into finished goods or other finished products for disposition, (b) to fail to
obtain third party consents for access to Collateral to be disposed of, or to
obtain or, if not required by other law, to fail to obtain governmental or
third party consents for the collection or disposition of Collateral to be
collected or disposed of, (c) to fail to exercise collection remedies against
account debtors or other persons obligated on Collateral or to fail to remove
Liens on or any adverse claims against Collateral, (d) to exercise collection
remedies against account debtors and other persons obligated on Collateral
directly or through the use of collection agencies and

 

98

 

other
collection specialists, (e) to advertise dispositions of Collateral through
publications or media of general circulation, whether or not the Collateral is
of a specialized nature, (f) to contact other persons, whether or not in the
same business as the Borrowers, for expressions of interest in acquiring all or
any portion of the Collateral, (g) to hire one or more professional auctioneers
to assist in the disposition of Collateral, whether or not the collateral is of
a specialized nature, (h) to dispose of Collateral by utilizing internet sites
that provide for the auction of assets of the types included in the Collateral
or that have the reasonable capability of doing so, or that match buyers and
sellers of assets, (i) to dispose of assets in wholesale rather than retail
markets, (j) to disclaim disposition warranties, (k) to purchase insurance or
credit enhancements to insure the Agent against risks of loss, collection or
disposition of Collateral or to provide to the Agent a guaranteed return from
the collection or disposition of Collateral, or (l) to the extent deemed
appropriate by the Agent, to obtain the services of brokers, investment
bankers, consultants and other professionals to assist the Agent in the
collection or disposition of any of the Collateral, or (m) conduct going out of
business sales and otherwise liquidate the inventory.  The Borrowers acknowledge that the purpose of this Section 13.3.4
is to provide non-exhaustive indications of what actions or omissions by the
Agent would fulfill the Agent’s duties under the Uniform Commercial Code of the
State of New York or any other relevant jurisdiction in the Agent’s exercise of
remedies against the Collateral and that other actions or omissions by the
Agent shall not be deemed to fail to fulfill such duties solely on account of
not being indicated in this Section 13.3.4. 
Without limitation upon the foregoing, nothing contained in this Section
13.3.4. shall be construed to grant any rights to the Borrowers or to impose
any duties on the Agent that would not have been granted or imposed by this
Agreement or by applicable law in the absence of this Section 13.3.4.

 

13.4                           ACCELERATION NOTICES.

 

13.4.1                  AGENT.  The Agent may give the Lenders an
Acceleration Notice at any time following and during the occurrence and
continuation of an Event of Default.

 

13.4.2                  SUPERMAJORITY
REVOLVING CREDIT LENDERS.  The
SuperMajority Revolving Credit Lenders may give the Agent an Acceleration
Notice at any time following the occurrence of an Event of Default.  Such notice may be by multiple counterparts,
provided that counterparts executed by the requisite Lenders are received by
the Agent within a period of five (5) consecutive Business Days.

 

13.4.3                  ACCELERATION.  Unless stayed by judicial or statutory
process, the Agent shall Accelerate the Revolving Credit Loans and the
Tranche B Loan within a commercially reasonable time following:

 

(a)                                  The
Agent’s giving of an Acceleration Notice to the Lenders as provided in
Section 13.4.1.

 

(b)                                 The
Agent’s receipt of an Acceleration Notice from the SuperMajority Revolving
Credit Lenders, in compliance with Section 13.4.2.

 

99

 

(c)                                  The
Agent’s receipt of a request from the Tranche B Lender following the
Standstill Termination Date.

 

13.4.4                  INITIATION
OF LIQUIDATION.  Unless stayed by
judicial or statutory process, the Agent shall initiate Liquidation remedies
accorded to the Agent under the Loan Documents and applicable law, within a
commercially reasonable time following Acceleration of the Revolving Credit
Loans and the Tranche B Loan.

 

13.4.5                  ACTIONS
AT AND FOLLOWING INITIATION OF LIQUIDATION.

 

(a)                                  At
the initiation of a Liquidation:

 

(i)                                     The
unpaid principal balance of the Swing Line Loan (if any) shall be converted to
a Revolving Credit Loan in which all Revolving Credit Lenders participate.

 

(ii)                                  The
Agent and the Revolving Credit Lenders shall “net out” each Revolving Credit
Lender’s respective contributions towards the Revolving Credit Loans, so that
each Revolving Credit Lender holds that Revolving Credit Lender’s Commitment
Percentage of the Revolving Credit Loans and advances.

 

(b)                                 Following
the initiation of a Liquidation, each Revolving Credit Lender shall contribute
towards any Letter of Credit thereafter honored and not immediately reimbursed
by the Borrowers, that Revolving Credit Lender’s Commitment Percentage of such
honoring.

 

13.5.                        DISTRIBUTION OF COLLATERAL PROCEEDS.  In the event that, an Event of Default
exists and the Agent or any Lender, as the case may be, receives any monies in
connection with a Liquidation or the enforcement of this Agreement or any the
Security Documents, or otherwise with respect to the realization upon, or
disposition of, any of the Collateral, such monies shall be distributed for
application as follows:

 

(a)                                  First,
to the payment of, or (as the case may be) the reimbursement of the Agent for or
in respect of, or to establish and fund reasonable reserve accounts in
anticipation of, all reasonable costs, expenses, disbursements and losses which
shall have been incurred or sustained by, or which reasonably shall be
anticipated to be incurred, the Agent in connection with the collection of such
monies by the Agent or the Agent’s Special Counsel or Lenders’ Special Counsel
for the exercise, protection or enforcement by the Agent, the Agent’s Special
Counsel or Lenders’ Special Counsel of all or any of the rights, remedies,
powers and privileges of the Agent, the Agent’s Special Counsel or Lenders’
Special Counsel under this Agreement or any of the other Loan Documents or in
respect of the Collateral or in support of any provision of adequate indemnity
to the Agent against any taxes or liens which by law shall have, or may have,
priority over the rights of the Agent to such monies;

 

100

 

(b)                                 Second,
to all Obligations owing to the Revolving Credit Lenders and the Agent
(including the making allowance to take into account for any Obligations not
then due and payable (i.e., to cash collateralize up to 105% of the Maximum
Drawing Amount) and excluding the Revolving Credit Early Termination Fee,
Obligations under Interest Rate Agreements and Obligations pursuant to
subsection (b) of the definition of Obligations to the extent that they do not
relate to cash management or similar services) in such order or preference as
the Required Revolving Credit Lenders may determine; PROVIDED, HOWEVER, that
(i) distributions shall be made (A) PARI PASSU among Obligations with respect
to the Agent Fees and all other Obligations owed to the Revolving Credit
Lenders and (B) with respect to each type of Obligation owing to the Revolving
Credit Lenders, such as interest, principal, reasonable fees and expenses,
among the Revolving Credit Lenders PRO RATA, and (ii) the Agent may in its
reasonable discretion make proper allowance to take into account any
Obligations not then due and payable;

 

(c)                                  Third,
to all Obligations owing to the Tranche B Lender (excluding the Tranche B Early
Termination Fee);

 

(d)                                 Fourth,
to the Agent and the Revolving Credit Lenders on account of Obligations
relating to the Revolving Credit Early Termination Fee;

 

(e)                                  Fifth,
to the Tranche B Lender on account of all other Obligations owing to the
Tranche B Lender;

 

(f)                                    Sixth,
to all other Obligations owing to any of the Agent, any Affiliate thereof or
any of the Revolving Credit Lenders; and

 

(g)                                 Seventh,
upon payment and satisfaction in full or other provisions for payment in full
satisfactory to the Lenders and the Agent of all of the Obligations, to the
payment of any obligations required to be paid pursuant to Section
9-608(a)(1)(C) or 9-615(a)(3) of the Uniform Commercial Code of the State of
New York; and

 

(h)                                 Eighth,
the excess, if any, shall be returned to the Borrowers or to such other Persons
as are entitled thereto.

 

14.                                 THE
AGENT; CONSENTS, AMENDMENTS AND WAIVERS.

 

14.1.                        AUTHORIZATION.

 

(a)                                  The
Agent is authorized to take such action on behalf of each of the Lenders and to
exercise all such powers as are hereunder and under any of the other Loan
Documents and any related documents delegated to the Agent, together with such
powers as are reasonably incident thereto, including the authority, without the
necessity of any notice to or further consent of the Lenders, from time to time
to take any action with respect to any Collateral or the Security Documents
which may be necessary to perfect, maintain perfected or insure the priority of
the security interest in and liens upon the Collateral granted pursuant to the
Security Documents, PROVIDED that no duties or

 

101

 

responsibilities
not expressly assumed herein or therein shall be implied to have been assumed
by the Agent, and the Agent is not under any affirmative obligation to take any
action which is not required by this Agreement or the Loan Documents
specifically to so take.

 

(b)                                 The
relationship between the Agent and each of the Lenders is that of an
independent contractor.  The use of the
term “Agent” is for convenience only and is used to describe, as a form of
convention, the independent contractual relationship between the Agent and each
of the Lenders.  Nothing contained in
this Agreement nor the other Loan Documents shall be construed to create an
agency, trust or other fiduciary relationship between the Agent and any of the
Lenders.

 

(c)                                  As
an independent contractor empowered by the Lenders to exercise certain rights
and perform certain duties and responsibilities hereunder and under the other
Loan Documents, the Agent is nevertheless a “REPRESENTATIVE” of the Lenders, as
that term is defined in Article 1 of the Uniform Commercial Code, for purposes
of actions for the benefit of the Lenders and the Agent with respect to all
collateral security and guaranties contemplated by the Loan Documents.  Such actions include the designation of the
Agent as “SECURED PARTY” or the like on all financing statements and other
documents and instruments, whether recorded or otherwise, relating to the
attachment, perfection, priority or enforcement of any security interests,
mortgages or deeds of trust in collateral security intended to secure the
payment or performance of any of the Obligations, all for the benefit of the
Lenders and the Agent.

 

14.2.                        EMPLOYEES AND AGENT.  The Agent may exercise its powers and execute its duties by or
through employees or agents and shall be entitled to take, and to rely on,
advice of counsel concerning all matters pertaining to its rights and duties
under this Agreement and the other Loan Documents.  The Agent may utilize the services of such Persons as the Agent
in its sole discretion may reasonably determine, and all reasonable fees and
expenses of any such Persons shall be paid by the Borrowers.

 

14.3.                        NO LIABILITY. 
Neither the Agent nor any of its shareholders, directors, officers or
employees nor any other Person assisting them in their duties nor any agent or
employee thereof, shall be liable for any waiver, consent or approval given or
any action taken, or omitted to be taken, in good faith by it or them hereunder
or under any of the other Loan Documents, or in connection herewith or
therewith, or be responsible for the consequences of any oversight or error of
judgment whatsoever, except that the Agent or such other Person, as the case
may be, may be liable for losses due to its willful misconduct or gross
negligence.  The burden of establishing
that the Agent has at any time failed to act in a reasonable manner in the
exercise of its discretion shall be on the Borrowers and may only be made on
clear and convincing evidence.

 

14.4.                        NO REPRESENTATIONS.

 

14.4.1.               GENERAL.  The Agent shall not be responsible for the
execution or validity or enforceability of this Agreement, the Notes, the
Letters of Credit, any of the other Loan Documents or any instrument at any
time constituting, or intended to constitute, collateral security for the
Notes, or for the value of any such collateral security

 

102

 

or for the
validity, enforceability or collectibility of any such amounts owing with
respect to the Notes, or for any recitals or statements, warranties or
representations made herein or in any of the other Loan Documents or in any
certificate or instrument hereafter furnished to it by or on behalf of the
Borrowers or any of their Subsidiaries, or be bound to ascertain or inquire as
to the performance or observance of any of the terms, conditions, covenants or
agreements herein or in any instrument at any time constituting, or intended to
constitute, collateral security for the Notes or to inspect any of the
properties, books or records of the Borrowers or any of their Subsidiaries.  The Agent shall not be bound to ascertain
whether any notice, consent, waiver or request delivered to it by the Borrowers
or any holder of any of the Notes shall have been duly authorized or is true,
accurate and complete.  The Agent has
not made nor does it now make any representations or warranties, express or
implied, nor does it assume any liability to the Lenders, with respect to the
credit worthiness or financial conditions of the Borrowers or any of their
Subsidiaries.  Each Lender acknowledges
that it has, independently and without reliance upon the Agent or any other
Lender, and based upon such information and documents as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement.

 

14.4.2.  CLOSING DOCUMENTATION,
ETC.  For purposes of determining
compliance with the conditions set forth in Section 11, each Lender that has
executed this Agreement shall be deemed to have consented to, approved or
accepted, or to be satisfied with, each document and matter either sent, or made
available, by the Agent to such Lender for consent, approval, acceptance or
satisfaction, or required thereunder to be to be consent to or approved by or
acceptable or satisfactory to such Lender, unless an officer of the Agent
active upon the Borrowers’ account shall have received notice from such Lender
not less than two days prior to the Closing Date specifying such Lender’s
objection thereto and such objection shall not have been withdrawn by notice to
the Agent to such effect on or prior to the Closing Date.

 

14.5.                        PAYMENTS.

 

14.5.1.               PAYMENTS
TO AGENT.  A payment by the Borrowers to
the Agent hereunder or any of the other Loan Documents for the account of any
Lender shall constitute a payment to such Lender.  The Agent agrees promptly to distribute to each Lender such
Lender’s PRO RATA share of payments received by the Agent for the account of
the Lenders except as otherwise expressly provided herein or in any of the
other Loan Documents.

 

14.5.2.               DISTRIBUTION
BY AGENT.  If in the reasonable opinion
of the Agent the distribution of any amount received by it in such capacity
hereunder, under the Notes or under any of the other Loan Documents might
involve it in liability, it may refrain from making distribution until its
right to make distribution shall have been adjudicated by a court of competent
jurisdiction.  If a court of competent
jurisdiction shall adjudge that any amount received and distributed by the
Agent is to be repaid, each Person to whom any such distribution shall have
been made shall either repay to the Agent its

 

103

 

proportionate
share of the amount so adjudged to be repaid or shall pay over the same in such
manner and to such Persons as shall be determined by such court.

 

14.5.3.               DELINQUENT
LENDERS.  (a)  Notwithstanding anything to the contrary contained in this
Agreement or any of the other Loan Documents, any Revolving Credit Lender that
fails (a) to make available to the Agent its PRO RATA share of any Revolving
Credit Loan or to purchase any Letter of Credit Participation or (b) to comply
with the provisions of Section 16.1 with respect to making dispositions and
arrangements with the other Revolving Credit Lenders, where such Revolving
Credit Lender’s share of any payment received, whether by setoff or otherwise,
is in excess of its PRO RATA share of such payments due and payable to all of
the Revolving Credit Lenders, in each case as, when and to the full extent
required by the provisions of this Agreement, shall be deemed delinquent (a
“DELINQUENT LENDER”) and shall be deemed a Delinquent Lender until such time as
such delinquency is satisfied.  A
Delinquent Lender shall be deemed to have assigned any and all payments due to
it from the Borrowers, whether on account of outstanding Loans, Unpaid
Reimbursement Obligations, interest, reasonable fees or otherwise, to the
remaining nondelinquent Revolving Credit Lenders for application to, and
reduction of, their respective PRO RATA shares of all outstanding Loans and
Unpaid Reimbursement Obligations.  The
Delinquent Lender hereby authorizes the Agent to distribute such payments to
the nondelinquent Revolving Credit Lenders in proportion to their respective
PRO RATA shares of all outstanding Revolving Credit Loans and Unpaid
Reimbursement Obligations.  A Delinquent
Lender shall be deemed to have satisfied in full a delinquency when and if, as
a result of application of the assigned payments to all outstanding Loans and
Unpaid Reimbursement Obligations of the nondelinquent Lenders, the Revolving
Credit Lenders’ respective PRO RATA shares of all outstanding Revolving Credit
Loans and Unpaid Reimbursement Obligations have returned to those in effect
immediately prior to such delinquency and without giving effect to the
nonpayment causing such delinquency.

 

(b)                                 If
any Delinquent Lender defaults in its obligation to fund Loans hereunder which
it is objected to fund, then the Borrowers may, at their sole expense and
effort, upon notice to the Lenders and the Agent, require such Delinquent
Lender to assign and delegate, without recourse (in accordance with and subject
to the restrictions contained in Article 15), all its interests, rights and
obligations under this Agreement to an Assignee that shall assume such
obligations (which Assignee may be another Lender, if a Lender accepts such
assignment), provided that (i) the Borrowers shall have received  the prior written consent of the Agent to
such assignee, and (ii) such Delinquent Lender shall have received payment of
an amount equal to the outstanding principal of its Loans, accrued interest
thereon, accrued fees and all other amounts payable to it hereunder, from the
Assignee (to the extent of such outstanding principal and accrued interest and
fees) or the Borrowers (in the case of all other amounts), subject in each case
to adjustments by reason of the operation of Section 14.5.3(a) above.  A Delinquent Lender shall not be required to
make any such assignment and delegation, if, prior thereto, all of the circumstances
entitling the Borrowers to require such assignment and delegation cease to
apply.

 

104

 

14.6.                  HOLDERS OF NOTES. 
The Agent may deem and treat the payee of any Note or the purchaser of
any Letter of Credit Participation as the absolute owner or purchaser thereof
for all purposes hereof until it shall have been furnished in writing with a
different name by such payee or by a subsequent holder, assignee or transferee.

 

14.7.                  INDEMNITY.  The Lenders
ratably agree hereby to indemnify and hold harmless the Agent and its
affiliates from and against any and all claims, actions and suits (whether
groundless or otherwise), losses, damages, costs, expenses (including any
expenses for which the Agent or such affiliate has not been reimbursed by the
Borrowers as required by Section 16.2), and liabilities of every nature and
character arising out of or related to this Agreement, the Notes, or any of the
other Loan Documents or the transactions contemplated or evidenced hereby or
thereby, or the Agent’s actions taken hereunder or thereunder, except to the
extent that any of the same shall be directly caused by the Agent’s willful
misconduct or gross negligence.

 

14.8.                        AGENT AS LENDER. 
In its individual capacity, Agent shall have the same obligations and
the same rights, powers and privileges in respect to its Commitment and the
Loans made by it, and as the holder of any of the Notes and as the purchaser of
any Letter of Credit Participations, as it would have were it not also the
Agent.

 

14.9.                        RESIGNATION.  The
Agent may resign at any time by giving sixty (60) days prior written notice
thereof to the Lenders and the Borrowers’ Representative.  Upon any such resignation, the Required
Lenders and the Tranche B Lender shall have the right to appoint a successor Agent.  Unless a Default or Event of Default shall
have occurred and be continuing, such successor Agent shall be reasonably
acceptable to the Borrowers.  If no
successor Agent shall have been so appointed by the Required Lenders and the
Tranche B Lender and shall have accepted such appointment within thirty (30)
days after the retiring Agent’s giving of notice of resignation, then the
retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which
shall be (a) a financial institution having a rating of not less than A or its
equivalent by S&P or (b) following the exercise of the buyout option set
forth in Section 3.6, the Tranche B Lender or any other Person appointed by the
Tranche B Lender.  Upon the acceptance
of any appointment as Agent hereunder by a successor Agent, such successor
Agent shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Agent, and the retiring Agent shall be
discharged from its duties and obligations hereunder.  After any retiring Agent’s resignation, the
provisions of this Agreement and the other Loan Documents shall continue in
effect for its benefit in respect of any actions taken or omitted to be taken
by it while it was acting as Agent.

 

14.10.                  NOTIFICATION IF DEFAULT EXISTS.  Each Lender hereby agrees that, upon
learning of the existence of a Default or an Event of Default, it shall
promptly notify the Agent thereof.  The
Agent hereby agrees that upon receipt of any notice under this Section 14.10 it
shall promptly notify the other Lenders that the a Default exist.

 

14.11.                  DUTIES IN THE CASE OF ENFORCEMENT.  In case one of more Events of Default have
occurred and shall be continuing, and whether or not acceleration of the
Obligations shall have occurred, the Agent shall, if (a) so requested by the
SuperMajority Revolving Credit Lenders or, following any Standstill Termination
Date, the Tranche B Lender,

 

105

 

and (b) the Lenders have
provided to the Agent such additional indemnities and assurances against
expenses and liabilities as the Agent may reasonably request, proceed to
enforce the provisions of this Agreement and the other Security Documents
authorizing the sale or other disposition of all or any part of the Collateral
and exercise all or any such other legal and equitable and other rights or
remedies as it may have in respect of such Collateral.  The SuperMajority Revolving Credit Lenders
or, following any Standstill Termination Date if the SuperMajority Revolving
Credit Lenders have not already done so, the Tranche B Lender, may direct the
Agent in writing as to the method and the extent of any such sale or other
disposition, the Lenders hereby agreeing to indemnify and hold the Agent,
harmless from all liabilities incurred in respect of all actions taken or
omitted in accordance with such directions, PROVIDED that the Agent need not
comply with any such direction to the extent that the Agent reasonably believes
the Agent’s compliance with such direction to be unlawful or commercially
unreasonable in any applicable jurisdiction.

 

14.12.                  AGENT’S OBLIGATIONS AND DUTIES WITH
REGARD TO COLLATERAL.  Anything
herein to the contrary notwithstanding, the Borrowers shall remain obligated
and liable under each contract or agreement comprised in the Collateral to be
observed or performed by the Borrowers thereunder.  Neither the Agent nor any Lender shall have any obligation or
liability under any such contract or agreement by reason of or arising out of
this Agreement or the receipt by the Agent or any Lender of any payment
relating to any of the Collateral, nor shall the Agent or any Lender be
obligated in any manner to perform any of the obligations of the Borrowers
under or pursuant to any such contract or agreement, to make inquiry as to the
nature or sufficiency of any payment received by the Agent or any Lender in
respect of the Collateral or as to the sufficiency of any performance by any
party under any such contract or agreement, to present or file any claim, to
take any action to enforce any performance or to collect the payment of any
amounts which may have been assigned to the Agent or to which the Agent or any
Lender may be entitled at any time or times. 
The Agent’s sole duty with respect to the custody, safe keeping and
physical preservation of the Collateral in its possession, under Section 9-207
of the Uniform Commercial Code of the State of New York or otherwise, shall be
to deal with such Collateral in the same manner as the Agent deals with similar
property for its own account.  In
connection with any sale of assets permitted by this Agreement, the Agent is
authorized to release the liens granted by the Borrowers to the Agent.

 

14.13.                  CONSENT OF LENDERS. 
Except as specifically provided in the following Sections of this
Agreement, whenever a Loan Document or this Agreement provides that action may
be taken or omitted to be taken in the Agent’s discretion or reasonable
discretion, the Agent shall have the sole right to take, or refrain from
taking, such action without, and notwithstanding, any vote of the Lender:

 

	
  Actions
  Described in Section

  	
   

  	
  Type of
  Consent Required

  	
   

  
	
  14.14

  	
   

  	
  Required
  Lenders

  	
   

  
	
  14.15

  	
   

  	
  SuperMajority
  Revolving Credit Lenders

  	
   

  
	
  14.16

  	
   

  	
  Certain
  Consent

  	
   

  
	
  14.17

  	
   

  	
  Unanimous
  Consent

  	
   

  
	
  14.18

  	
   

  	
  Consent of
  Swing Line Lender

  	
   

  
	
  14.19

  	
   

  	
  Consent of
  Tranche B Lender

  	
   

  

 

106

 

The rights granted to the
Lenders in the above-referenced Sections shall not otherwise limit or impair
the Agent’s exercise of its discretion under the Loan Documents.

 

14.14.                  ACTIONS REQUIRING OR ON DIRECTION OF
REQUIRED LENDERS.  Except as
otherwise provided in this Agreement, the consent or direction of the Required
Lenders is required for any amendment, waiver, or modification of any Loan
Document.

 

14.15.                  ACTIONS REQUIRING OR ON DIRECTION OF
SUPERMAJORITY REVOLVING CREDIT LENDERS. 
The consent or direction of the SuperMajority Revolving Credit Lenders
is required as follows:

 

(a)                                  The
Lenders agree that any loan or advance under the Revolving Credit Loan which
results in a Protective OverAdvance may be made by the Agent in its discretion
without the consent of the Lenders and that each Lender shall be bound thereby;
PROVIDED, however, the consent or direction of the SuperMajority Revolving
Credit Lenders is required to permit a Protective OverAdvance to be outstanding
for more than 45 consecutive Business Days or more than twice in any twelve
month period.  (Any Protective
OverAdvance which is permitted by this Section 14.15 is referred to as a
“PERMITTED PROTECTIVE OVERADVANCE”).

 

(b)                                 If
any Default has occurred and is continuing, the SuperMajority Revolving Credit
Lenders may direct the Agent to suspend the Revolving Credit Loan facility,
whereupon, as long as a Default shall have occurred and be continuing, the only
Revolving Credit Loans which may be made are the following:

 

(i)                                     Revolving
Credit Loans made to “cover” the honoring of Letters of Credit.

 

(ii)                                  Permitted
Protective OverAdvances.

 

(iii)                               Revolving
Credit Loans made with consent of the SuperMajority Revolving Credit Lenders.

 

(c)                                  If
an Event of Default has occurred and not been duly waived, the SuperMajority
Revolving Credit Lenders may:

 

(i)                                     Give
the Agent an Acceleration Notice in accordance with Section 13.4.3(b).

 

(ii)                                  Direct
the Agent to increase the rate of interest to the default rate of interest as
provided in, and to the extent permitted by, this Agreement.

 

14.16.                  ACTIONS REQUIRING CERTAIN CONSENT.  The following consent shall be required for
the following actions:

 

	
  ACTION

  	
   

  	
  REQUIRED CONSENT

  
	
  (a)                                  Any
  change to the dates on which any

  	
   

  	
  SuperMajority Revolving Credit

  

 

107

 

	
  payment of
  principal of the Tranche B Loan shall be due and payable or the amount
  of any such payment

  	
   

  	
  Lenders and
  the Tranche B Lender

  
	
   

  	
   

  	
   

  
	
  (b)                                 Waiver
  or amendment of financial performance covenants in Section 10

  	
   

  	
  SuperMajority
  Revolving Credit Lenders and Tranche B Lender

  
	
   

  	
   

  	
   

  
	
  (c)                                  Increase
  in the Swing Line Ceiling

  	
   

  	
  Swing Line
  Lender and the Required Revolving Credit Lenders

  
	
   

  	
   

  	
   

  
	
  (d)                                 Any
  increase in any Revolving Credit Lender’s Revolving Commitment or Revolving
  Lender’s Commitment Percentage (other than by reason of the application of
  Section 14.22 (which deals with NonConsenting Lenders) or Article 15 (which
  deals with assignments and participations)), it being understood that this
  Section 14.16(d) addresses changes to commitments inter se and not any
  increase in the overall size of the Total Revolving Commitment

  	
   

  	
  All Revolving
  Credit Lenders affected thereby other than any Delinquent Lender

  
	
   

  	
   

  	
   

  
	
  (e)                                  Any
  forgiveness of all or any portion of any payment Obligation

  	
   

  	
  All Lenders
  whose payment Obligation is being so forgiven (other than any Delinquent
  Lender, if otherwise applicable)

  
	
   

  	
   

  	
   

  
	
  (f)                                    Any
  decrease in any interest rate, fee or assessment payable under any of the
  Loan Documents (other than any fees due to the Agent (for which the consent
  of the Agent shall also be required)) and any decrease in any fee provided
  for by the Agent Fee Letter (which may be amended by written agreement
  between the Borrowers’ Representative and the Agent) and the Tranche B Fee
  Letter (which may be amended by written agreement between the Borrowers’
  Representative and the Tranche B Lender)

  	
   

  	
  All Lenders
  adversely affected thereby (other than any Delinquent Lender, if otherwise
  applicable)

  
	
   

  	
   

  	
   

  
	
  (g)                                 Any
  increase in the overall size of the Total Revolving Commitment

  	
   

  	
  Required
  Revolving Credit Lenders and Tranche B Lender

  

 

108

 

14.17.                  ACTIONS REQUIRING OR DIRECTED BY
UNANIMOUS CONSENT.  None of the
following may take place except with consent of all Lenders:

 

(a)                                  Any
extension of the Maturity Date.

 

(b)                                 Any
release of all or substantially all of the Collateral not otherwise required or
provided for in the Loan Documents or to facilitate a Liquidation.

 

(c)                                  Any
amendment of the definition of the terms “Borrowing Base”, “Tranche B
Borrowing Base”, or “Availability” or “Availability Block” or of any definition
of any component thereof, such that more credit would be available to the
Borrowers, based on the same assets, as would have been available to the
Borrowers immediately prior to such amendment, it being understood, however,
that:

 

(i)                                     The
foregoing shall not limit the adjustment by the Agent of any Reserve otherwise
permitted by this Agreement.

 

(ii)                                  The
foregoing shall not prevent the Agent from restoring any component of Borrowing
Base which had been lowered by the Agent back to the value of such component,
as stated in this Agreement or to an intermediate value.

 

(d)                                 Any
release of any Person obligated on account of the Obligations (except in
connection with a sale of such Person approved by the SuperMajority Revolving
Credit Lenders and Tranche B Lender in accordance with the terms of this
Agreement, even though only the approval of the Required Lenders would be
required hereunder for such sale) of such Person.

 

(e)                                  The
making of any Revolving Credit Loan which, when made, exceeds Availability and
is not a Permitted OverAdvance, provided, however,

 

(i)                                     no
consent shall be required in connection with the making of any Revolving Credit
Loan to “cover” any honoring of a drawing under any Letter of Credit; and

 

(ii)                                  each
Lender recognizes that subsequent to the making of a Revolving Credit Loan
which does not constitute a Permitted Protective OverAdvance, the unpaid
principal balance of the Loan Account may exceed the Borrowing Base on account
of changed circumstances beyond the control of the Agent (such as a drop in
Collateral value).

 

(f)                                    The
waiver of the obligation of the Borrowers to reduce the unpaid principal
balance of Revolving Credit Loans to an amount which does not exceed a
Permitted Protective OverAdvance within the time limits included in
Section 14.15(a) (which places time and frequency limits on Permitted
Protective OverAdvances).

 

(g)                                 Any
amendment of Sections 13.5, 14.13, 14.14, 14.15, 14.16, 14.17, 14.18,
14.19, 14.20 or 14.21.

 

109

 

(h)                                 Amendment
of any of the following Definitions:

 

“Appraised
Inventory Liquidation Value”

 

“Permitted
Protective OverAdvance”

 

“Required
Lenders”

 

“Required
Revolving Credit Lenders”

 

“Standstill
Termination Date”

 

“SuperMajority
Lenders”

 

“SuperMajority
Revolving Credit Lenders”

 

14.18.                  ACTIONS REQUIRING SWING LINE LENDER
CONSENT.  No action, amendment, or
waiver of compliance with, any provision of the Loan Documents or of this
Agreement which affects the Swing Line Lender may be undertaken without the
consent of the Swing Line Lender.

 

14.19.                  ACTIONS REQUIRING TRANCHE B LENDER
CONSENT.  None of the following may
be made without the consent of the Tranche B Lender:

 

(a)                                  Any
increase in any interest rate or fee payable to the Revolving Credit Lenders on
account of the Revolving Credit Loans in excess of 150 basis points per annum
in the aggregate from that already provided herein.

 

(b)                                 Any
increase in any interest rate or any additional fee payable to the Revolving
Credit Lenders on account of the Revolving Credit Loans in connection with an amendment,
modification or waiver which did not require the consent of the Tranche B
Lender, unless in connection with such amendment, modification or waiver, the
Borrowers agree to increase such interest rate payable to the Tranche B
Lender contemporaneously therewith by a like amount or agree to pay to the
Tranche B Lender additional fees based on the amount of its Commitment
contemporaneously therewith by an amount equal to one and one half (1 and 1⁄2)
times the proportional amount such additional fees being paid to the Revolving
Credit Lenders bear to the Total Revolving Commitment.

 

(c)                                  Any
amendment, modification, or waiver of any Specified Provision , or any
amendment, modification or waiver of any component definition impacting the
manner in which it is utilized in such Specified Provision.

 

(d)                                 Amendment
of any of the following Definitions:

 

“Change in
Control”

 

“Equipment”

 

110

 

“OverLoan”

 

“Protective
OverAdvances”

 

“Standstill
Termination Date”

 

“Total
Revolving Commitment.”

 

(e)                                  Any
release of Collateral comprised of Equipment except as otherwise required or
provided for in the Loan Documents (including, without limitation, under
Section 9.5.2) and except to facilitate a Liquidation.

 

14.20.                  ACTIONS REQUIRING AGENT’S CONSENT.

 

(a)                                  No
action, amendment, or waiver of compliance with, any provision of the Loan
Documents or of this Agreement which affects the Agent in its capacity as the
Agent may be undertaken without the written consent of the Agent.

 

(b)                                 No
action referenced herein which affects the rights, duties, obligations, or
liabilities of the Agent shall be effective without the written consent of the
Agent.

 

14.21.                  MISCELLANEOUS ACTIONS.

 

(a)                                  Notwithstanding
any other provision of this Agreement, no single Lender independently may
exercise any right of action or enforcement against or with respect to any
Borrower.

 

(b)                                 The
Agent shall be fully justified in failing or refusing to take action under this
Agreement or any Loan Document on behalf of any Lender unless the Agent shall
first:

 

(i)                                     receive
such clear, unambiguous, written instructions as the Agent deems appropriate;
and

 

(ii)                                  be
indemnified to the Agent’s satisfaction by the Lenders against any and all
liability and expense which may be incurred by the Agent by reason of taking or
continuing to take any such action, unless such action had been grossly
negligent, in willful misconduct, or in bad faith.

 

(c)                                  The
Agent may establish reasonable procedures for the providing of direction and
instructions from the Lenders to the Agent, including its reliance on multiple
counterparts, facsimile transmissions, and time limits within which such
direction and instructions must be received in order to be included in a
determination of whether the requisite Lender provided direction, consent, or
instructions.

 

111

 

14.22                     NONCONSENTING REVOLVING CREDIT LENDER.

 

(a)                                  In
the event that a Revolving Credit Lender (in this Section 14.22, a
“NONCONSENTING LENDER”) does not provide its consent to a proposal by the Agent
to take action which requires consent under this Article 14, then one or more
Revolving Credit Lenders who provided consent to such action may require the
assignment, without recourse and in accordance with the procedures outlined in
Article 15 below, of the NonConsenting Lender’s commitment hereunder on five
(5) days written notice to the Agent and to the NonConsenting Lender.

 

(b)                                 At
the end of such five (5) days, and PROVIDED the NonConsenting Lender delivers
the Note held by the NonConsenting Lender to the Agent, the Revolving Credit
Lenders who have given such written notice shall transfer the following to the
NonConsenting Lender:

 

(i)                                     Such
NonConsenting Lender’s Pro-Rata share of the principal and interest of the
Loans to the date of such assignment.

 

(ii)                                  All
fees distributable hereunder to the NonConsenting Lender to the date of such
assignment.

 

(iii)                               Any
out-of-pocket costs and expenses for which the NonConsenting Lender is entitled
to reimbursement from the Borrowers.

 

(c)                                  In
the event that the NonConsenting Lender fails to deliver to the Agent the Note
held by the NonConsenting Lender as provided in Article 14, then:

 

(i)                                     The
amount otherwise to be transferred to the NonConsenting Lender shall be
transferred to the Agent and held by the Agent, without interest, to be turned
over to the NonConsenting Lender upon delivery of the Note held by that
NonConsenting Lender.

 

(ii)                                  The
Note held by the NonConsenting Lender shall have no force or effect whatsoever.

 

(iii)                               The
NonConsenting Lender shall cease to be a “Lender”.

 

(iv)                              The
Revolving Credit Lender(s) which have transferred the amount to the Agent as
described above shall have succeeded to all rights and become subject to all of
the obligations of the NonConsenting Lender as a “Revolving Credit Lender”.

 

(d)                                 In
the event that more than one (1) Revolving Credit Lender wishes to require such
assignment, the NonConsenting Lender’s Commitment hereunder shall be divided
among such Revolving Credit Lenders, pro-rata based upon their respective Loan
Commitments, with the Agent coordinating such transaction.

 

112

 

(e)                                  The
Agent shall coordinate the retirement of the Note held by the NonConsenting
Lender and the issuance of Notes to those Lenders which “take-out” such
NonConsenting Lender, PROVIDED,  no
processing fee otherwise to be paid as provided in Article 14 shall be due
under such circumstances.

 

15.                                 ASSIGNMENT AND PARTICIPATION.

 

15.1.                        CONDITIONS TO ASSIGNMENT.

 

15.1.1                  CONDITIONS
TO ASSIGNMENT BY REVOLVING CREDIT LENDERS. 
Except as provided herein, each Revolving Credit Lender may assign to
one or more commercial banks, other financial institutions or other Persons,
all or a portion of its interests, rights and obligations under this Agreement
(including all or a portion of its Commitment Percentage and Commitment and the
same portion of the Revolving Credit Loans at the time owing to it, the Notes
held by it and its participating interest in the risk relating to any Letters
of Credit); PROVIDED that (a) the Agent and, so long as no Default exists, the
Borrowers’ Representative, shall have given their prior written consent to such
assignment, such consent not to be unreasonably withheld; except that the consent
of the Agent or the Borrowers’ Representative shall not be required in
connection with any assignment by a Lender to (i) an existing Lender or (ii) a
Lender Affiliate of such Lender, (b) each such assignment shall be of a
constant, and not a varying, percentage of all the assigning Revolving Credit
Lender’s rights and obligations under this Agreement, it being understood that
non-PRO RATA assignments of the Commitments and the Revolving Credit Loans are
not permitted, (c) each assignment (or, in the case of assignments by a
Revolving Credit Lender to its Lender Affiliates, the aggregate holdings of
such Revolving Credit Lender and its Lender Affiliates after giving effect to
such assignments), shall be in an amount that is not less than $10,000,000 or a
whole multiple of $1,000,000 in excess thereof (or such lesser amount as shall
constitute the aggregate holdings of such Lender and (d) the parties to such
assignment shall execute and deliver to the Agent, for recording in the
Register (as hereinafter defined), an Assignment and Acceptance, substantially
in the form of EXHIBIT G(i) hereto (an “ASSIGNMENT AND ACCEPTANCE”), together
with any Notes subject to such assignment. 
Upon such execution, delivery, acceptance and recording, from and after
the effective date specified in each Assignment and Acceptance, which effective
date shall be at least five (5) Business Days after the execution thereof, (y)
the assignee thereunder shall be a party hereto and, to the extent provided in
such Assignment and Acceptance, have the rights and obligations of a Revolving
Credit Lender hereunder, and (z) the assigning Revolving Credit Lender shall,
to the extent provided in such assignment and upon payment to the Agent of the
registration fee referred to in this Section 15.1.1, be released from its
obligations under this Agreement.  In
connection with each assignment the Assigning Lender agrees to pay to the Agent
a registration fee in the sum of $3,500.

 

15.1.2.               CONDITIONS
TO ASSIGNMENT BY TRANCHE B LENDER.  The
Tranche B Lender may assign to one or more commercial banks, other financial
institutions or other Persons, all or a portion of its interests, rights and
obligations under this Agreement; PROVIDED that (a) the Agent shall have given
its prior written consent to such assignment, such consent not to be
unreasonably withheld; except that the consent

 

113

 

of the Agent
shall not be required in connection with any assignment by the Tranche B Lender
(i) if an Event of Default exists, (ii) to an existing Lender or (iii) to a
Lender Affiliate of such Tranche B Lender and (b) the parties to such
assignment shall execute and deliver to the Agent for recording in the Register
an Assignment and Acceptance substantially in the form of EXHIBIT G(ii).

 

15.2.                        CERTAIN REPRESENTATIONS AND WARRANTIES;
LIMITATIONS; COVENANTS.  By executing
and delivering an Assignment and Acceptance, the parties to the assignment
thereunder confirm to and agree with each other and the other parties hereto as
follows:

 

(a)                                  other
than the representation and warranty that it is the legal and beneficial owner
of the interest being assigned thereby free and clear of any adverse claim, the
assigning Lender makes no representation or warranty, express or implied, and
assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with this Agreement or the execution,
legality, validity, enforceability, genuineness, sufficiency or value of this
Agreement, the other Loan Documents or any other instrument or document
furnished pursuant hereto or the attachment, perfection or priority of any
security interest or mortgage,

 

(b)                                 the
assigning Lender makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Borrowers and
their Subsidiaries or any other Person primarily or secondarily liable in
respect of any of the Obligations, or the performance or observance by the
Borrowers and their Subsidiaries or any other Person primarily or secondarily
liable in respect of any of the Obligations of any of their obligations under
this Agreement or any of the other Loan Documents or any other instrument or
document furnished pursuant hereto or thereto;

 

(c)                                  such
assignee confirms that it has received a copy of this Agreement, together with
copies of the most recent financial statements referred to in Section 7.4 and
Section 8.4 and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into such
Assignment and Acceptance;

 

(d)                                 such
assignee will, independently and without reliance upon the assigning Lender,
the Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions
in taking or not taking action under this Agreement;

 

(e)                                  such
assignee appoints and authorizes the Agent to take such action as agent on its
behalf and to exercise such powers under this Agreement and the other Loan
Documents as are delegated to the Agent by the terms hereof or thereof,
together with such powers as are reasonably incidental thereto;

 

(f)                                    such
assignee agrees that it will perform in accordance with their terms all of the
obligations that by the terms of this Agreement are required to be performed by
it as a Lender;

 

114

 

(g)                                 such
assignee represents and warrants that it is legally authorized to enter into
such Assignment and Acceptance; and

 

(h)                                 such
assignee acknowledges that it has made arrangements with the assigning
Revolving Credit Lender satisfactory to such assignee with respect to its PRO
RATA share of Letter of Credit Fees in respect of outstanding Letters of
Credit.

 

15.3.                        NEW NOTES.  Upon its
receipt of an Assignment and Acceptance executed by the parties to such
assignment, together with each Note subject to such assignment, the Agent shall
(a) record the information contained therein in the Loan Account and the
Register, and (b) give prompt notice thereof to the Borrowers and the Lenders
(other than the assigning Lender). 
Within five (5) Business Days after receipt of such notice from the
Assignee, the Borrowers, at their own expense, shall execute and deliver to the
Agent, in exchange for each surrendered Note, a new Note to the order of such
Assignee in an amount equal to the amount assumed by such Assignee pursuant to
such Assignment and Acceptance and, if the assigning Revolving Credit Lender
has retained some portion of its obligations hereunder, a new Note to the order
of the assigning Revolving Credit Lender in an amount equal to the amount
retained by it hereunder.  Such new
Notes shall provide that they are replacements for the surrendered Notes, shall
be in an aggregate principal amount equal to the aggregate principal amount of
the surrendered Notes, shall be dated the effective date of such Assignment and
Acceptance and shall otherwise be in substantially the form of the assigned
Notes.  Within five (5) days of issuance
of any new Notes pursuant to this Section 15.3, the Borrowers shall deliver
upon the request of the Lender an opinion of counsel, addressed to the Lenders
and the Agent, relating to the due authorization, execution and delivery of
such new Notes and the legality, validity and binding effect thereof, in form
and substance satisfactory to the Lenders. 
The surrendered Notes shall be cancelled and returned to the Borrowers.

 

15.4.                        PARTICIPATIONS. 
Each Lender may sell participations to one or more Lenders or other
entities in all or a portion of such Lender’s rights and obligations under this
Agreement and the other Loan Documents; PROVIDED that (a) (i) with respect to
Revolving Credit Lenders, each such participation shall be in an amount of not
less than $5,000,000 and (ii) with respect to the Tranche B Lender, each such
participation shall be in an amount of not less than $1,000,000, (b) any such
sale or participation shall not affect the rights and duties of the selling
Lender hereunder to the Borrowers, and (c) the only rights granted to the
participant pursuant to such participation arrangements with respect to
waivers, amendments or modifications of the Loan Documents shall be the rights
to approve waivers, amendments or modifications that (i) with respect to the Revolving
Credit Lenders, would reduce the principal of or the interest rate on any
Loans, extend the term or increase the amount of the Commitment of such Lender
as it relates to such participant, reduce the amount of any Unused Fee or
Letter of Credit Fees to which such participant is entitled or extend any
regularly scheduled payment date for principal or interest and (ii) with
respect to the Tranche B Lender, would reduce the principal, interest or fees
payable on the Tranche B Loan, postpone any scheduled payment of any principal,
interest or fees on account of the Tranche B Loan or release Collateral which
would cause an OverLoan.

 

115

 

15.5.                        ASSIGNEE OR PARTICIPANT AFFILIATED
WITH THE BORROWERS.  If any assignee
Lender is an Affiliate of the Borrowers, then any such assignee Lender shall
have no right to vote as a Lender hereunder or under any of the other Loan
Documents for purposes of granting consents or waivers or for purposes of
agreeing to amendments or other modifications to any of the Loan Documents or
for purposes of making requests to the Agent pursuant to Section 13.1 or
Section 13.2, and the determination of the Required Lenders, Required Revolving
Credit Lenders, SuperMajority Lenders and SuperMajority Revolving Credit
Lenders shall for all purposes of this Agreement and the other Loan Documents
be made without regard to such assignee Lender’s interest in any of the Loans
or Reimbursement Obligations.  If any
Lender sells a participating interest in any of the Loans or Reimbursement
Obligations to a participant, and such participant is a Borrower or an
Affiliate of a Borrower, then such transferor Lender shall promptly notify the
Agent of the sale of such participation. 
A transferor Lender shall have no right to vote as a Lender hereunder or
under any of the other Loan Documents for purposes of granting consents or
waivers or for purposes of agreeing to amendments or modifications to any of
the Loan Documents or for purposes of making requests to the Agent pursuant to
Section 13.1 or Section 13.2 to the extent that such participation is
beneficially owned by the Borrowers or any Affiliate of the Borrowers, and the
determination of the Required Lenders, Required Revolving Credit Lenders,
SuperMajority Lenders and SuperMajority Revolving Credit Lenders shall for all
purposes of this Agreement and the other Loan Documents be made without regard
to the interest of such transferor Lender in the Loans or Reimbursement
Obligations to the extent of such participation.

 

15.6.                        MISCELLANEOUS ASSIGNMENT PROVISIONS.  Any assigning Lender shall retain its rights
to be indemnified pursuant to Section 16.3 with respect to any claims or
actions arising prior to the date of such assignment.  Anything contained in this Section 15 to the contrary
notwithstanding, any Lender may at any time pledge or assign a security
interest in all or any portion of its interest and rights under this Agreement
(including all or any portion of its Notes) to secure obligations of such Lender,
including any pledge or assignment to secure obligations to (a) any of the
twelve Federal Reserve Banks organized under Section 4 of the Federal Reserve
Act, 12 U.S.C. Section 341 and (b) with respect to any Lender that is a fund
that invests in bank loans, to any lender or any trustee for, or any other
representative of, holders of obligations owed or securities issued by such
fund as security for such obligations or securities or any institutional
custodian for such fund or for such lender. 
Any foreclosure or similar action by any Person in respect of such
pledge or assignment shall be subject to the other provisions of this Section
15.  No such pledge or the enforcement
thereof shall release the pledgor Lender from its obligations hereunder or
under any of the other Loan Documents, provide any voting rights hereunder to
the pledgee thereof, or affect any rights or obligations of the Borrowers or
Agent hereunder.

 

15.7.                        ASSIGNMENT BY BORROWERS.  The Borrowers shall not assign or transfer
any of their rights or obligations under any of the Loan Documents without the
prior written consent of each of the Lenders.

 

116

 

16.                                 PROVISIONS OF GENERAL APPLICATION.

 

16.1.                        SETOFF.  The Borrowers
hereby grant to the Agent and each of the Lenders a continuing lien, security
interest and right of setoff as security for all liabilities and obligations to
the Agent and each Lender, whether now existing or hereafter arising, upon and
against all deposits, credits, collateral and property, now or hereafter in the
possession, custody, safekeeping or control of the Agent or such Lender or any
Lender Affiliate and their successors and assigns or in transit to any of
them.  Regardless of the adequacy of any
collateral, if any of the Obligations are due and payable and have not been
paid or any Event of Default shall have occurred, any deposits or other sums
credited by or due from any of the Lenders to the Borrowers and any securities
or other property of the Borrowers in the possession of such Lender may be
applied to or set off by such Lender against the payment of Obligations and any
and all other liabilities, direct, or indirect, absolute or contingent, due or
to become due, now existing or hereafter arising, of the Borrowers to such
Lender.  ANY AND ALL RIGHTS TO REQUIRE
ANY LENDER TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER
COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF
SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE
BORROWERS ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.  Each of the Lenders agree with each other
Lender that (a) if an amount to be set off is to be applied to Indebtedness of
the Borrowers to such Lender, other than Indebtedness constituting Obligations
owed to such Lender, such amount shall be applied ratably to such other
Indebtedness and to the Obligations owed to such Lender, and (b) if such Lender
shall receive from the Borrowers, whether by voluntary payment, exercise of the
right of setoff, counterclaim, cross action, enforcement of the claim
constituting the Obligation owed to such Lender by proceedings against the
Borrowers at law or in equity or by proof thereof in bankruptcy,
reorganization, liquidation, receivership or similar proceedings, or otherwise,
and shall retain and apply to the payment of Obligations owed to such Lender
any amount in excess of its “ratable portion” of the payments received by all
of the Lenders with respect to the Obligations owed to all of the Lenders, such
Lender will make such disposition and arrangements with the other Lenders with
respect to such excess, either by way of distribution, PRO TANTO assignment of
claims, subrogation or otherwise as shall result in each Lender receiving in
respect of the Obligations owed it its “ratable portion” as contemplated by
this Agreement; PROVIDED that if all or any part of such excess payment is
thereafter recovered from such Lender, such disposition and arrangements shall
be rescinded and the amount restored to the extent of such recovery, but
without interest.  As used here in
“ratable portion” shall mean the amounts such Lender would have received if the
amounts had been applied in accordance with Section 13.5.

 

16.2.                        EXPENSES.  The
Borrowers jointly and severally agree to pay (a) the reasonable costs of
producing and reproducing this Agreement, the other Loan Documents and the
other agreements and instruments mentioned herein, (b) any taxes (including any
interest and penalties in respect thereto) payable by the Agent or any of the
Lenders (other than taxes based upon the Agent’s or any Lender’s or any
interestholder in a Lender’s net income or profits and other than any taxes
referred to in the first sentence of Section 5.3.2, which shall be taken into
account in the manner provided by Section 5.3.2) on or with respect to the
transactions contemplated by this Agreement (the Borrowers hereby agreeing to
indemnify the Agent and each Lender with respect thereto), (c) the reasonable
fees, expenses and disbursements of the Agent’s Special Counsel, counsel to the
Tranche B Lender or any local counsel to the Agent incurred in connection with

 

117

 

the preparation, syndication,
administration or interpretation of the Loan Documents and other instruments
mentioned herein, each closing hereunder, any amendments, modifications,
approvals, consents or waivers hereto or hereunder, or the cancellation of any
Loan Document upon payment in full in cash of all of the Obligations or
pursuant to any terms of such Loan Document for providing for such
cancellation, (d) the reasonable fees, expenses and disbursements of the Agent,
the Tranche B Lender or any of their affiliates incurred by the Agent, the
Tranche B Lender or any such affiliate in connection with the preparation,
syndication, administration or interpretation of the Loan Documents and other
instruments mentioned herein, including all title insurance premiums and
surveyor, engineering, appraisal and examination charges, (e) any reasonable
fees, costs, expenses and bank charges, including bank charges for returned
checks, incurred by the Agent in establishing, maintaining or handling agency
accounts, lock box accounts and other accounts for the collection of any of the
Collateral, (f) all reasonable out-of-pocket expenses (including without
limitation the Agent’s and the Tranche B Lender’s travel costs and reasonable
attorneys’ fees and costs, which attorneys may be employees of the Agent or the
Tranche B Lender, and reasonable consulting, accounting, appraisal, investment
bankruptcy and similar professional fees and charges) incurred by the Agent,
the Tranche B Lender, the Agent’s Special Counsel, counsel to the Tranche B
Lender or Lenders’ Special Counsel in connection with (i) the enforcement of or
preservation of rights under any of the Loan Documents against the Borrowers or
any of their Subsidiaries or the administration thereof after a Default exists
and (ii) any litigation, proceeding or dispute whether arising hereunder or
otherwise, in any way related to any Lender’s or the Agent’s relationship with
the Borrowers or any of their Subsidiaries and (g) all reasonable fees,
expenses and disbursements of the Agent incurred in connection with UCC
searches, UCC filings, intellectual property searches, intellectual property
filings or mortgage recordings.  In the
Agent’s reasonable discretion, if the Borrowers fail to do so, the Agent may
discharge taxes and other encumbrances at any time levied or placed on any of
the Collateral, maintain any of the Collateral, make repairs thereto and pay
any necessary filing fees or insurance premiums.  The Borrowers agree to reimburse the Agent on demand for all
expenditures so made.  The Agent shall
have no obligation to the Borrowers to make any such expenditures, nor shall
the making thereof be construed as a waiver or cure if a Default exist.  The covenants contained in this Section 16.2
shall survive payment or satisfaction in full of all other obligations.  As used herein, “LENDERS’ SPECIAL COUNSEL”
shall mean a single counsel, selected by the Required Revolving Credit Lenders
following the occurrence of an Event of Default, to represent the interests of
the Lenders in connection with the enforcement, attempted enforcement, or
preservation of any rights and remedies under this, or any other Loan Document,
as well as in connection with any “workout”, forbearance, or restructuring of
the credit facility contemplated hereby.

 

16.3.                        INDEMNIFICATION. 
The Borrowers agree to indemnify and hold harmless the Agent, its
affiliates and the Lenders from and against any and all claims, actions and
suits whether groundless or otherwise, and from and against any and all
liabilities, losses, damages and reasonable expenses of every nature and
character arising out of this Agreement or any of the other Loan Documents or
the transactions contemplated hereby including, without limitation, (a) any
actual or proposed use by the Borrowers or any of their Subsidiaries of the
proceeds of any of the Loans or Letters of Credit, (b) the reversal or
withdrawal of any provisional credits granted by the Agent upon the transfer of
funds from lock box, bank agency, concentration accounts or otherwise under any
cash management arrangements with the Borrowers or any

 

118

 

Subsidiary or in connection with
the provisional honoring of funds transfers, checks or other items, (c) any
actual or alleged infringement of any trademark, service mark or similar right
of the Borrowers or any of their Subsidiaries comprised in the Collateral, (d)
the Borrowers or any of their Subsidiaries entering into or performing this
Agreement or any of the other Loan Documents or (e) with respect to the
Borrowers and their Subsidiaries and their respective properties and assets,
the violation of any Environmental Law, the presence, disposal, escape,
seepage, leakage, spillage, discharge, emission, release or threatened release
of any Hazardous Substances or any action, suit, proceeding or investigation brought
or threatened with respect to any Hazardous Substances (including, but not
limited to, claims with respect to wrongful death, personal injury or damage to
property), in each case including, without limitation, the reasonable fees and
disbursements of counsel and allocated costs of internal counsel incurred in
connection with any such investigation, litigation or other proceeding.  In litigation, or the preparation therefor,
the Lenders, the Tranche B Lender and the Agent and its affiliates shall be entitled
to select their own counsel and, in addition to the foregoing indemnity, the
Borrowers agree to pay promptly the reasonable fees and expenses of such
counsel.  If, and to the extent that the
obligations of the Borrowers under this Section 16.3 are unenforceable for any
reason, the Borrowers hereby agrees to make the maximum contribution to the
payment in satisfaction of such obligations which is permissible under
applicable law.  The covenants contained
in this Section 16.3 shall survive payment or satisfaction in full of all other
Obligations.

 

16.4.                        TREATMENT OF CERTAIN CONFIDENTIAL
INFORMATION.

 

16.4.1.               CONFIDENTIALITY.  Each of the Lenders and the Agent agrees, on
behalf of itself and each of its affiliates, directors, officers, employees and
representatives, to use reasonable precautions to keep confidential, in
accordance with their customary procedures for handling confidential
information of the same nature and in accordance with safe and sound banking
practices, any non-public information supplied to it by the Borrowers or any of
their Subsidiaries pursuant to this Agreement. 
The Borrowers and each Lender will maintain, as confidential, all of the
following:(i) proprietary approaches, techniques, and methods of analysis which
are applied by the Agent in the administration of the credit facility
contemplated by this Agreement, (ii) proprietary forms and formats utilized by
the Agent in providing reports to the Lenders pursuant hereto, which forms or
formats are not of general currency. 
Notwithstanding the foregoing, nothing herein shall limit the disclosure
of any such information (a) after such information shall have become public
other than through a violation of this Section 16.4, or becomes available to
any of the Lenders or the Agent on a nonconfidential basis from a source other
than the Borrowers, (b) to the extent required by statute, rule, regulation or
judicial process, (c) to counsel for any of the Lenders or the Agent, (d) to
bank examiners or any other regulatory authority having jurisdiction over any
Lender or the Agent, or to auditors or accountants, (e) to the Agent, any
Lender or any Financial Affiliate, (f) in connection with any litigation to
which any one or more of the Lenders, the Agent or any Financial Affiliate is a
party, or in connection with the enforcement of rights or remedies hereunder or
under any other Loan Document, (g) to a Lender Affiliate or a Subsidiary or
affiliate of the Agent, (h) to any actual or prospective assignee or
participant or any actual or prospective counterparty (or its advisors) to any
swap or derivative transactions referenced to credit or other risks or events
arising under this

 

119

 

Agreement or
any other Loan Document so long as such assignee, participant or counterparty,
as the case may be, agrees to be bound by the provisions of Section 16.4 or (i)
with the consent of the Borrowers’ Representative.  Moreover, each of the Agent, the Lenders and any Financial
Affiliate is hereby expressly permitted by the Borrowers to refer to any of the
Borrowers and their Subsidiaries in connection with any advertising, promotion
or marketing undertaken by the Agent, such Lender or such Financial Affiliate
and, for such purpose, the Agent, such Lender or such Financial Affiliate may
utilize any trade name, trademark, logo or other distinctive symbol associated
with the Borrowers or any of their Subsidiaries or any of their businesses.

 

16.4.2.               PRIOR
NOTIFICATION.  Unless specifically
prohibited by applicable law or court order, each of the Lenders and the Agent
shall, prior to disclosure thereof, notify the Borrowers’ Representative of any
request for disclosure of any such non-public information by any governmental
agency or representative thereof (other than any such request in connection
with an examination of the financial condition of such Lender by such
governmental agency) or pursuant to legal process.

 

16.4.3.               OTHER.  In no event shall any Lender or the Agent be
obligated or required to return any materials furnished to it or any Financial
Affiliate by the Borrowers or any of their Subsidiaries.  The obligations of each Lender under this
Section 16.4 shall supersede and replace the obligations of such Lender under any
confidentiality letter in respect of this financing signed and delivered by
such Lender to the Borrowers prior to the date hereof and shall be binding upon
any assignee of, or purchaser of any participation in, any interest in any of
the Loans or Reimbursement Obligations from any Lender.  All appraisals, inventories, analysis,
financial information, and other materials which the Agent and the Lenders may
obtain, develop, or receive with respect to the Borrowers are confidential to
the Agent and the Lenders and that, except as otherwise provided herein, the
Borrowers are not entitled to receipt of any of such appraisals, inventories,
analysis, financial information, and other materials, nor copies or extracts
thereof or therefrom.

 

16.5.                        SURVIVAL OF COVENANTS, ETC.  All covenants, agreements, representations
and warranties made herein, in the Notes, in any of the other Loan Documents or
in any documents or other papers delivered by or on behalf of the Borrowers or
any of their Subsidiaries pursuant hereto shall be deemed to have been relied
upon by the Lenders and the Agent, notwithstanding any investigation heretofore
or hereafter made by any of them, and shall survive the making by the Lenders
of any of the Loans and the issuance, extension or renewal of any Letters of
Credit, as herein contemplated, and shall continue in full force and effect so
long as any Letter of Credit or any amount due under this Agreement or the
Notes or any of the other Loan Documents remains outstanding or any Lender has
any obligation to make any Loans or the Agent has any obligation to issue,
extend or renew any Letter of Credit, and for such further time as may be
otherwise expressly specified in this Agreement.  All statements contained in any certificate or other paper delivered
to any Lender or the Agent at any time by or on behalf of the Borrowers or any
of their Subsidiaries pursuant hereto or in connection with the transactions
contemplated hereby shall constitute representations and warranties by the
Borrowers or such Subsidiary hereunder.

 

120

 

16.6.                        NOTICES.  Except as
otherwise expressly provided in this Agreement, all notices and other
communications made or required to be given pursuant to this Agreement or the
Notes or any Letter of Credit Applications shall be in writing and shall be
delivered in hand, mailed by United States registered or certified first class
mail, postage prepaid, sent by overnight courier, or sent by telegraph,
telecopy, facsimile or telex and confirmed by delivery via courier or postal service,
addressed as follows:

 

(a)                                  if
to the Borrowers, to the Borrowers’ Representative at 2520 Renaissance
Boulevard, King of Prussia, Pennsylvania 19406, Attention: Mr. Raymond
Springer, Chief Financial Officer, or at such other address for notice as the
Borrowers’ Representative shall last have furnished in writing to the Person
giving the notice;

 

(b)                                 if
to the Agent, at 40 Broad Street, Boston, Massachusetts 02109, USA, Attention:
James Dore, Managing Director, or such other address for notice as the Agent
shall last have furnished in writing to the Person giving the notice with a
copy to Susan E. Siebert, Edwards & Angell, LLP, 101 Federal Street,
Boston, Massachusetts 02110; and

 

(c)                                  if
to the Tranche B Lender, at 40 Broad Street, Boston, Massachusetts 02109, USA,
Attention: Michael Pizette, Managing Director, or such other address for notice
as the Agent shall last have furnished in writing to the Person giving the
notice with a copy to Robert A.J. Barry, Bingham McCutchen LLP, 150 Federal
Street, Boston, Massachusetts 02110; and

 

(d)                                 if
to any Lender, at such Lender’s address set forth on SCHEDULE 1.1(b) hereto, or
such other address for notice as such Lender shall have last furnished in
writing to the Person giving the notice.

 

Any such notice or demand shall
be deemed to have been duly given or made and to have become effective (i) if
delivered by hand, overnight courier or facsimile to a responsible officer of
the party to which it is directed, at the time of the receipt thereof by such
officer or the sending of such facsimile and (ii) if sent by registered or
certified first-class mail, postage prepaid, on the third Business Day
following the mailing thereof.  Any
notice or other communication to be made hereunder or under the Notes or any
Letter of Credit Applications, even if otherwise required to be in writing
under other provisions of this Agreement, the Notes or any Letter of Credit
Applications, may alternatively be made in an electronic record transmitted
electronically under such authentication and other procedures as the parties
hereto may from time to time agree in writing (but not an electronic record),
and such electronic transmission shall be effective at the time set forth in
such procedures.  Unless otherwise
expressly provided in such procedures, such an electronic record shall be
equivalent to a writing under the other provisions of this Agreement, the Notes
or any Letter of Credit Applications, and such authentication, if made in
compliance with the procedures so agreed by the parties hereto in writing (but
not an electronic record), shall be equivalent to a signature under the other
provisions of this Agreement, the Notes or any Letter of Credit Applications.

 

121

 

16.7.                     GOVERNING LAW. 
THIS AGREEMENT AND, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED THEREIN,
EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE STATE OF
NEW YORK AND SHALL, PURSUANT TO NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1401
FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF
SAID STATE OF NEW YORK.  THE BORROWERS
AGREE THAT ANY SUIT FOR THE ENFORCEMENT OF THIS AGREEMENT OR ANY OF THE OTHER
LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR ANY
FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF
SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE
BORROWERS BY MAIL AT THE ADDRESS SPECIFIED IN SECTION 16.6.  THE BORROWERS HEREBY WAIVE ANY OBJECTION
THAT THEY MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH
COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.

 

16.8.                        HEADINGS.  The
captions in this Agreement are for convenience of reference only and shall not
define or limit the provisions hereof.

 

16.9.                        COUNTERPARTS. 
This Agreement and any amendment hereof may be executed in several
counterparts and by each party on a separate counterpart, each of which when
executed and delivered shall be an original, and all of which together shall
constitute one instrument.  In proving
this Agreement it shall not be necessary to produce or account for more than
one such counterpart signed by the party against whom enforcement is sought.  Delivery by facsimile by any of the parties
hereto of an executed counterpart hereof or of any amendment or waiver hereto
shall be as effective as an original executed counterpart hereof or of such
amendment or waiver and shall be considered a representation that an original
executed counterpart hereof or such amendment or waiver, as the case may be,
will be delivered.

 

16.10.                  ENTIRE AGREEMENT, ETC.  The Loan Documents and any other documents executed in connection
herewith or therewith express the entire understanding of the parties with
respect to the transactions contemplated hereby.  Neither this Agreement nor any term hereof may be changed,
waived, discharged or terminated, except as provided in Section 14.

 

16.11.              WAIVER OF JURY TRIAL.  THE BORROWERS HEREBY WAIVE THEIR RIGHT TO A JURY TRIAL WITH
RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH
THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR
OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND
OBLIGATIONS OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING ANY COURSE OF CONDUCT,
COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE AGENT OR ANY LENDER RELATING
TO THE ADMINISTRATION OF THE LOANS OR ENFORCEMENT OF THE LOAN DOCUMENTS AND
AGREES THAT IT WILL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER
ACTION IN WHICH A JURY TRIAL CANNOT

 

122

 

BE
OR HAS NOT BEEN WAIVED.  Except as prohibited by law, the Borrowers hereby waive any right
they may have to claim or recover in any litigation referred to in the
preceding sentence any special, exemplary, punitive or consequential damages or
any damages other than, or in addition to, actual damages.  The Borrowers (a) certify that no representative,
agent or attorney of any Lender or the Agent has represented, expressly or
otherwise, that such Lender or the Agent would not, in the event of litigation,
seek to enforce the foregoing waivers and (b) acknowledges that the Agent and
the Lenders have been induced to enter into this Agreement and the other Loan
Documents to which it is a party by, among other things, the waivers and
certifications contained herein.

 

16.12.                  POWER OF ATTORNEY.

 

16.12.1.         APPOINTMENT
AND POWERS OF AGENT.  Each of the Borrowers
hereby irrevocably constitutes and appoints the Agent and any officer or agent
thereof, with full power of substitution, as its true and lawful
attorney-in-fact with full irrevocable power and authority in the place and
stead of the Borrowers or in the Agent’s own name, for the purpose of carrying
out the terms of this Agreement, to take any and all appropriate action and to
execute any and all documents and instruments that may be necessary or useful
to accomplish the purposes of this Agreement and, without limiting the
generality of the foregoing, hereby gives said attorneys the power and right,
on behalf of the Borrowers, without notice to or assent by the Borrowers, to do
the following:

 

(a)                                  if
a Default exist, generally to sell, transfer, pledge, make any agreement with
respect to or otherwise dispose of or deal with any of the Collateral in such
manner as is consistent with the Uniform Commercial Code of the State and as
fully and completely as though the Agent were the absolute owner thereof for
all purposes, and to do, at the Borrowers’ expense, at any time, or from time
to time, all acts and things which the Agent deems necessary or useful to
protect, preserve or realize upon the Collateral and the Agent’s security
interest therein, in order to effect the intent of this Agreement, all no less
fully and effectively as the Borrowers might do, including, without limitation,
(i) the filing and prosecuting of registration and transfer applications with
the appropriate federal, state or local agencies or authorities with respect to
trademarks, copyrights and patentable inventions and processes, (ii) upon
written notice to the Borrower’s Representative, the exercise of voting rights
with respect to voting securities, which rights may be exercised, if the Agent
so elects, with a view to causing the liquidation of assets of the issuer of
any such securities and (iii) the execution, delivery and recording, in
connection with any sale or other disposition of any Collateral, of the
endorsements, assignments or other instruments of conveyance or transfer with
respect to such Collateral; and

 

(b)                                 to
the extent that the Borrowers’ authorization given in Section 6.2 is not
sufficient, to file such financing statements with respect hereto, with or
without the Borrowers’ signature, or a photocopy of this Agreement in
substitution for a financing statement, as the Agent may deem appropriate and
to

 

123

 

execute in the
Borrowers’ name such financing statements and amendments thereto and
continuation statements which may require the Borrowers’ signature.

 

16.12.2.         RATIFICATION
BY BORROWERS.  To the extent permitted
by law, the Borrowers hereby ratify all that said attorneys shall lawfully do
or cause to be done by virtue hereof. 
This power of attorney is a power coupled with an interest and is
irrevocable.

 

16.12.3.         NO
DUTY ON AGENT.  The powers conferred on
the Agent hereunder are solely to protect the interests of the Agent and the
Lenders in the Collateral and shall not impose any duty upon the Agent to
exercise any such powers.  The Agent
shall be accountable only for the amounts that it actually receives as a result
of the exercise of such powers, and neither it nor any of its officers,
directors, employees or agents shall be responsible to the Borrowers for any
act or failure to act, except for the Agent’s own gross negligence or willful
misconduct.

 

16.13.                  SURETYSHIP WAIVERS BY THE BORROWERS.  The Borrowers waive demand, notice, protest,
notice of acceptance of this Agreement, notice of loans made, credit extended,
Collateral received or delivered or other action taken in reliance hereon and
all other demands and notices of any description.  With respect to both the Obligations and the Collateral, the
Borrowers assent to any extension or postponement of the time of payment or any
other indulgence, to any substitution, exchange or release of or failure to
perfect any security interest in any Collateral, to the addition or release of
any party or person primarily or secondarily liable, to the acceptance of
partial payment thereon and the settlement, compromising or adjusting of any
thereof, all in such manner and at such time or times as the Agent may deem
advisable.  The Agent shall have no duty
as to the collection or protection of the Collateral or any income therefrom,
the preservation of rights against prior parties, or the preservation of any
rights pertaining thereto beyond the safe custody thereof as set forth in
Section 14.12.  The Borrowers further
waive any and all other suretyship defenses.

 

16.14.                  MARSHALLING. 
Neither the Agent nor any Lender shall be required to marshal any
present or future collateral security (including but not limited to the
Collateral) for, or other assurances of payment of, the Obligations or any of
them or to resort to such collateral security or other assurances of payment in
any particular order, and all of the rights and remedies of the Agent or any
Lender hereunder and of the Agent or any Lender in respect of such collateral
security and other assurances of payment shall be cumulative and in addition to
all other rights and remedies, however existing or arising.  To the extent that it lawfully may, the
Borrowers hereby agree that they will not invoke any law relating to the
marshalling of collateral which might cause delay in or impede the enforcement
of the Agent’s rights and remedies under this Agreement or under any other
instrument creating or evidencing any of the Obligations or under which any of
the Obligations is outstanding or by which any of the Obligations is secured or
payment thereof is otherwise assured, and, to the extent that it lawfully may,
the Borrowers hereby irrevocably waive the benefits of all such laws.

 

16.15.                  SEVERABILITY.  The
provisions of this Agreement are severable and if any one clause or provision
hereof shall be held invalid or unenforceable in whole or in part in any

 

124

 

jurisdiction, then such
invalidity or unenforceability shall affect only such clause or provision, or
part thereof, in such jurisdiction, and shall not in any manner affect such
clause or provision in any other jurisdiction, or any other clause or provision
of this Agreement in any jurisdiction.

 

125

 

IN WITNESS WHEREOF, the undersigned have duly
executed this Agreement as a sealed instrument as of the date first set forth
above.

 

	
   

  	
  “BORROWERS”

  
	
   

  	
   

  
	
   

  	
  FAO, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jerry R.
  Welch

  	
   

  
	
   

  	
   

  	
  Name: Jerry
  R. Welch

  	
   

  
	
   

  	
   

  	
  Title: Chief
  Executive Officer and President

  
	
   

  	
   

  
	
   

  	
  FAO SCHWARZ, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jerry R.
  Welch

  	
   

  
	
   

  	
   

  	
  Name: Jerry
  R. Welch

  	
   

  
	
   

  	
   

  	
  Title: Chief
  Executive Officer and President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZB COMPANY, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jerry R.
  Welch

  	
   

  
	
   

  	
   

  	
  Name: Jerry
  R. Welch

  	
   

  
	
   

  	
   

  	
  Title: Chief
  Executive Officer and President

  
	
   

  	
   

  
	
   

  	
  THE RIGHT START, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jerry R.
  Welch

  	
   

  
	
   

  	
   

  	
  Name: Jerry
  R. Welch

  	
   

  
	
   

  	
   

  	
  Title: Chief
  Executive Officer and President

  
	
   

  	
   

  
	
   

  	
  TARGOFF-RS, LLC, a New York limited liability

  company

  
	
   

  	
   

  
	
   

  	
  By: FAO, Inc., its sole member

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jerry R.
  Welch

  	
   

  
	
   

  	
   

  	
  Name: Jerry
  R. Welch

  	
   

  
	
   

  	
   

  	
  Title: Chief
  Executive Officer and President

  

 

126

 

	
   

  	
  “ADMINISTRATIVE AGENT, COLLATERAL AGENT AND SYNDICATION AGENT”

  
	
   

  	
   

  
	
   

  	
  FLEET RETAIL FINANCE INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Christine
  M. Scott

  	
   

  
	
   

  	
   

  	
  Name:
  Christine M. Scott

  	
   

  
	
   

  	
   

  	
  Title: Vice
  President

  	
   

  
	
   

  	
   

  
	
   

  	
  “CO-DOCUMENTATION AGENTS”

  
	
   

  	
   

  
	
   

  	
  CONGRESS FINANCIAL CORPORATION (CENTRAL)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Steven
  Linderman

  	
   

  
	
   

  	
   

  	
  Name: Steven
  Linderman

  	
   

  
	
   

  	
   

  	
  Title: Senior
  Vice President

  	
   

  
	
   

  	
   

  
	
   

  	
  WELLS FARGO RETAIL FINANCE II, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David
  Molinario

  	
   

  
	
   

  	
   

  	
  Name: David
  Molinario

  	
   

  
	
   

  	
   

  	
  Title: Vice
  President

  	
   

  

 

127

 

	
   

  	
  “REVOLVING CREDIT LENDERS”

  
	
   

  	
   

  
	
   

  	
  FLEET RETAIL FINANCE INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Christine
  M. Scott

  	
   

  
	
   

  	
   

  	
  Name:
  Christine M. Scott

  	
   

  
	
   

  	
   

  	
  Title: Vice
  President

  	
   

  
	
   

  	
   

  
	
   

  	
  CONGRESS FINANCIAL CORPORATION (CENTRAL)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Steve
  Linderman

  	
   

  
	
   

  	
   

  	
  Name: Steve
  Linderman

  	
   

  
	
   

  	
   

  	
  Title: Senior
  Vice President

  	
   

  
	
   

  	
   

  
	
   

  	
  WELLS FARGO RETAIL FINANCE II, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David
  Molinario

  	
   

  
	
   

  	
   

  	
  Name: David
  Molinario

  	
   

  
	
   

  	
   

  	
  Title: Vice
  President

  	
   

  
	
   

  	
   

  
	
   

  	
  “TRANCHE B LENDER”

  
	
   

  	
   

  
	
   

  	
  BACK BAY CAPITAL FUNDING LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kristan
  M. O'Connor

  	
   

  
	
   

  	
   

  	
  Name: Kristan
  M. O'Connor

  	
   

  
	
   

  	
   

  	
  Title:
  Director

  	
   

  

 

128

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