Document:

Exhibit 10.1

 

 

COMMON UNIT

PURCHASE AGREEMENT

 

by and among

 

PACIFIC ENERGY PARTNERS, L.P.

 

and

 

THE PURCHASERS NAMED HEREIN

 

 

Table of Contents

 

	
  ARTICLE I DEFINITIONS

  	
   

  
	
   

  	
   

  
	
  Section 1.01

  	
  Definitions

  	
   

  
	
  Section 1.02

  	
  Accounting Procedures and Interpretation

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE II AGREEMENT TO SELL AND PURCHASE

  	
   

  
	
   

  	
   

  
	
  Section 2.01

  	
  Sale and Purchase

  	
   

  
	
  Section 2.02

  	
  Closing

  	
   

  
	
  Section 2.03

  	
  Conditions to the Closing

  	
   

  
	
  Section 2.04

  	
  Pacific Deliveries

  	
   

  
	
  Section 2.05

  	
  Purchaser Deliveries

  	
   

  
	
  Section 2.06

  	
  Price Per Unit

  	
   

  
	
  Section 2.07

  	
  Purchaser Lock-Up

  	
   

  
	
  Section 2.08

  	
  Independent Nature of Purchasers’
  Obligations and Rights

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE III REPRESENTATIONS AND WARRANTIES RELATED TO PACIFIC

  	
   

  
	
   

  	
   

  
	
  Section 3.01

  	
  Partnership Existence

  	
   

  
	
  Section 3.02

  	
  Capitalization and Valid Issuance of
  Purchased Units

  	
   

  
	
  Section 3.03

  	
  Pacific SEC Documents

  	
   

  
	
  Section 3.04

  	
  No Material Adverse Change

  	
   

  
	
  Section 3.05

  	
  Litigation

  	
   

  
	
  Section 3.06

  	
  No Conflicts

  	
   

  
	
  Section 3.07

  	
  Authority

  	
   

  
	
  Section 3.08

  	
  Approvals

  	
   

  
	
  Section 3.09

  	
  Offering

  	
   

  
	
  Section 3.10

  	
  MLP Status

  	
   

  
	
  Section 3.11

  	
  Investment Company Status

  	
   

  
	
  Section 3.12

  	
  Certain Fees

  	
   

  
	
  Section 3.13

  	
  No Side Agreements

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

  	
   

  
	
   

  	
   

  
	
  Section 4.01

  	
  Corporate Existence

  	
   

  
	
  Section 4.02

  	
  No Conflicts

  	
   

  
	
  Section 4.03

  	
  Certain Fees

  	
   

  
	
  Section 4.04

  	
  No Side Agreements

  	
   

  
	
  Section 4.05

  	
  Unregistered Securities

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE V INDEMNIFICATION, COSTS AND EXPENSES

  	
   

  
	
   

  	
   

  
	
  Section 5.01

  	
  Indemnification by Pacific

  	
   

  
	
  Section 5.02

  	
  Indemnification by Purchasers

  	
   

  
	
  Section 5.03

  	
  Indemnification Procedure

  	
   

  
	
  Section 5.04

  	
  Commitment Fee

  	
   

  
	
  Section 5.05

  	
  Payment of Expenses

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI . MISCELLANEOUS

  	
   

  
	
   

  	
   

  
	
  Section 6.01

  	
  Pacific Lock-Up

  	
   

  

 

i

 

	
  Section 6.02

  	
  Interpretation and Survival of Provisions

  	
   

  
	
  Section 6.03

  	
  Survival of Provisions

  	
   

  
	
  Section 6.04

  	
  No Waiver; Modifications in Writing

  	
   

  
	
  Section 6.05

  	
  Binding Effect; Assignment

  	
   

  
	
  Section 6.06

  	
  Communications

  	
   

  
	
  Section 6.07

  	
  Removal of Legend

  	
   

  
	
  Section 6.08

  	
  Entire Agreement

  	
   

  
	
  Section 6.09

  	
  Governing Law

  	
   

  
	
  Section 6.10

  	
  Execution in Counterparts

  	
   

  
	
  Section 6.11

  	
  Termination

  	
   

  

 

ii

 

COMMON UNIT PURCHASE AGREEMENT

 

This COMMON UNIT PURCHASE AGREEMENT, dated as
of August 8, 2005 (this “Agreement”), is by and among PACIFIC
ENERGY PARTNERS, L.P., a Delaware limited partnership (“Pacific”) and
each of the purchasers listed on Schedule 2.02 hereof (each a “Purchaser”
and collectively, the “Purchasers”).

 

In consideration of the mutual covenants and
agreements set forth herein and for good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereby agree as follows:

 

ARTICLE I

DEFINITIONS

 

Section 1.01                                Definitions.  As used in this Agreement, and unless the
context requires a different meaning, the following terms have the meanings
indicated:

 

“Affiliate” means, with respect to a
specified Person, any other Person, whether now in existence or hereinafter
created, directly or indirectly controlling, controlled by or under direct or
indirect common control with such specified Person.  For purposes of this definition, “control”
(including, with correlative meanings, “controlling”, “controlled by”, and
“under common control with”) means the power to direct or cause the direction
of the management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise.

 

“Basic Documents” means, collectively,
this Agreement, the Registration Rights Agreement, and any and all other
agreements or instruments executed and delivered to the Purchasers by Pacific
or any Subsidiary of Pacific hereunder or thereunder.

 

“Business Day” means any day other
than a Saturday, Sunday, or a legal holiday for commercial banks in Long Beach,
California.

 

“Closing” has the meaning specified in
Section 2.02.

 

“Closing Date” has the meaning
specified in Section 2.02.

 

“Commission” means the United States
Securities and Exchange Commission.

 

“Common Unit Price” has the meaning
specified in Section 2.06.

 

“Common Units” means the common units
representing limited partner interests in Pacific.

 

“Delaware LP Act” shall have the meaning
specified in Section 3.02.

 

“Exchange Act” means the Securities
Exchange Act of 1934, as amended from time to time, and the rules and
regulations of the Commission promulgated thereunder.

 

 

“GAAP” means generally accepted
accounting principles in the United States of America in effect from time to
time.

 

“General Partners” means Pacific
Energy GP, LP, a Delaware limited partnership and the general partner of
Pacific, and Pacific Energy Management LLC, a Delaware limited liability
company and the general partner of Pacific Energy GP, LP

 

“Governmental Authority” means, with
respect to a particular Person, the country, state, county, city and political
subdivisions in which such Person or such Person’s Property is located or that
exercises valid jurisdiction over any such Person or such Person’s Property,
and any court, agency, department, commission, board, bureau or instrumentality
of any of them that exercises valid jurisdiction over any such Person or such
Person’s Property.  Unless otherwise
specified, all references to Governmental Authority herein with respect to
Pacific means a Governmental Authority having jurisdiction over Pacific, its
Subsidiaries or any of their respective Properties.

 

“Indemnified Party” has the meaning
specified in Section 5.03.

 

“Indemnifying Party” has the meaning
specified in Section 5.03.

 

“Law” means any federal, state, local
or foreign order, writ, injunction, judgment, settlement, award, decree,
statute, law, rule or regulation.

 

“Lien” means any lien, encumbrance, security,
interest, charge or other interest in Property securing an obligation owed to,
or a claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute or contract, and whether such
obligation or claim is fixed or contingent, and including but not limited to
the lien or security interest arising from a mortgage, encumbrance, pledge,
security agreement, conditional sale or trust receipt or a lease, consignment
or bailment for security purposes.  For
the purpose of this Agreement, a Person shall be deemed to be the owner of any
Property that it has acquired or holds subject to a conditional sale agreement,
or leases under a financing lease or other arrangement pursuant to which title
to the Property has been retained by or vested in some other Person in a
transaction intended to create a financing.

 

“Lockup Date” means the date occurring
180 days after the Closing Date.

 

“NYSE” means the New York Stock
Exchange, Inc.

 

“Pacific” has the meaning set forth in
the introductory paragraph.

 

“Pacific Financial Statements” has the
meaning specified in Section 3.03.

 

“Pacific Form S-3” has the meaning
specified in Section 3.03.

 

“Pacific Material Adverse Effect”
means any material and adverse effect on (a) the assets, liabilities,
financial condition, business, operations or affairs of Pacific and its
Subsidiaries taken as a whole; (b) the ability of Pacific and its
Subsidiaries taken as a whole to carry out their business as such business is
conducted as of the date hereof or to meet their

 

2

 

obligations under the Basic Documents on a
timely basis; or (c) the ability of Pacific to consummate the transactions
under any Basic Document; provided, however, that a Pacific Material Adverse
Effect shall not include any material and adverse effect on the foregoing to
the extent such material and adverse effect results from, arises out of, or
relates to (x) a general deterioration in the economy or changes in the
general state of the industries in which the Pacific Parties operate, except to
the extent that the Pacific Parties, taken as a whole, are adversely affected
in a disproportionate manner as compared to other industry participants or
(y) any change in applicable Law, or the interpretation thereof.

 

“Pacific Parties” means Pacific, the
General Partners, all of Pacific’s Subsidiaries and each of their Affiliates.

 

“Pacific Related Parties” has the
meaning specified in Section 5.02.

 

“Pacific SEC Documents” has the
meaning specified in Section 3.03.

 

“Partnership Agreement” means the
First Amended and Restated Agreement of Limited Partnership of Pacific dated as
of July 26, 2002, as amended.

 

“PEG” means Pacific Energy Group LLC.

 

“Permits” means, with respect to
Pacific or any of its Subsidiaries, any licenses, permits, variances, consents,
authorizations, waivers, grants, franchises, concessions, exemptions, orders,
registrations and approvals of Governmental Authorities or other Persons
necessary for the ownership, leasing, operation, occupancy and use of its
Properties and the conduct of its businesses as currently conducted.

 

“Person” means any individual,
corporation, company, voluntary association, partnership, joint venture, trust,
limited liability company, unincorporated organization or government or any
agency, instrumentality or political subdivision thereof, or any other form of
entity.

 

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

 

“Purchase Price” means, with respect
to a particular Purchaser, the monetary commitment amount equal to the product
of the number of Purchased Units for such Purchaser, multiplied by the Common
Unit Price.

 

“Purchased Units” means, with respect
to a particular Purchaser, the number of Common Units set forth opposite such
Purchaser’s name under the column entitled “Purchased Units” set forth on Schedule 2.02
hereto.  In the event that Pacific
declares a unit split with respect to the Common Units and the record date for
such unit split is prior to the Closing Date, the number of Purchased Units to
be delivered to each Purchaser pursuant to this Agreement and the Common Unit
Price will be appropriately adjusted so that the Purchasers will be in the same
relative economic position as they would be if the Purchased Units would have
been issued and delivered to the Purchasers prior to the record date for any
such unit split.

 

3

 

“Purchaser” and “Purchasers”
have the respective meanings set forth in the introductory paragraph.

 

“Purchaser Material Adverse Effect”
means, with respect to a particular Purchaser, any material and adverse effect
on the ability of such Purchaser to consummate the transactions under any Basic
Document to which it is a party.

 

“Purchaser Related Parties” has the
meaning specified in Section 5.01.

 

“Registration Rights Agreement” means
the Registration Rights Agreement, to be entered into at the Closing, between
Pacific and the Purchasers in the form attached hereto as Exhibit A.

 

“Representatives” of any Person means
the officers, directors, employees, agents, counsel, accountants, investment
bankers and other representatives of such Person.

 

“Securities Act” means the Securities
Act of 1933, as amended from time to time, and the rules and regulations of the
Commission promulgated thereunder.

 

“Subordinated Units” means the
subordinated units representing subordinated limited partner interests in
Pacific.

 

“Subsidiary” means, as to any Person,
any corporation or other entity of which: (i) such Person or a Subsidiary
of such Person is a general partner or manager; or (ii) at least a
majority of the outstanding equity interest having by the terms thereof
ordinary voting power to elect a majority of the board of directors or similar
governing body of such corporation or other entity (irrespective of whether or
not at the time any equity interest of any other class or classes of such
corporation or other entity shall have or might have voting power by reason of
the happening of any contingency) is at the time directly or indirectly owned
or controlled by such Person or one or more of its Subsidiaries.

 

“Termination Date” has the meaning set
forth in Section 6.11.

 

“Valero Asset Acquisition” means the
acquisition of certain pipeline and terminal assets from Support Terminals
Operating Partnership, L.P., Kaneb Pipe Line Operating Partnership, L.P., and
Shore Terminals LLC pursuant to the Valero Purchase Agreement.

 

“Valero Purchase Agreement” means that
certain Sale and Purchase Agreement, dated as of July 1, 2005, by and
among PEG, Support Terminals Operating Partnership, L.P., Kaneb Pipe Line
Operating Partnership, L.P., and Shore Terminals LLC,.

 

Section 1.02                                Accounting
Procedures and Interpretation. 
Unless otherwise specified herein, all accounting terms used herein
shall be interpreted, all determinations with respect to accounting matters
hereunder shall be made, and all Pacific Financial Statements and certificates
and reports as to financial matters required to be furnished to the Purchasers
hereunder shall be prepared, in accordance with GAAP applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto or, in the case of unaudited statements, as permitted by Form 10-Q
promulgated by the Commission) and in compliance as to form in all

 

4

 

material respects with applicable accounting
requirements and with the published rules and regulations of the Commission
with respect thereto.

 

ARTICLE II

AGREEMENT TO SELL AND PURCHASE

 

Section 2.01                                Sale and
Purchase.  Upon the terms and
subject to the conditions hereof, Pacific hereby agrees to issue and sell to
each Purchaser, and each Purchaser hereby agrees, severally and not jointly, to
purchase from Pacific, its respective Purchased Units, and each Purchaser
agrees to pay Pacific its respective Purchase Price.  The failure of performance by any Purchaser
does not excuse performance by any other Purchaser or by Pacific.

 

Section 2.02                                Closing.  Upon the terms and subject to the conditions
hereof, the consummation of the purchase and sale of the Purchased Units
hereunder (the “Closing”) shall take place at the offices of Vinson
& Elkins L.L.P., 666 Fifth Avenue, 26th Floor, New York, New York
concurrently with the closing of the Valero Asset Acquisition (the date of such
closing, the “Closing Date”).

 

Section 2.03                                Conditions
to the Closing.

 

(a)                                  Mutual
Conditions.  The respective
obligations of each party to consummate the purchase and issuance and sale of
the Purchased Units shall be subject to the satisfaction on or prior to the
Closing Date of each of the following conditions (any or all of which may be
waived by a particular party on behalf of itself in writing, in whole or in
part, to the extent permitted by applicable Law):

 

(i)                                     no
statute, rule, order, decree or regulation shall have been enacted or
promulgated, and no action shall have been taken, by any Governmental Authority
of competent jurisdiction that temporarily, preliminarily or permanently
restrains, precludes, enjoins or otherwise prohibits the consummation of the
transactions contemplated hereby or makes the transactions contemplated hereby
illegal;

 

(ii)                                  there
shall not be pending any suit, action or proceeding by any Governmental
Authority seeking to restrain, preclude, enjoin or prohibit the transactions
contemplated by this Agreement; and

 

(iii)                               all
conditions set forth in Section 7.1 (Conditions to Purchaser’s
Obligations) of the Valero Purchase Agreement, shall have been satisfied in all
material respects or the fulfillment of any such conditions to PEG’s
obligations shall have been waived, except for those conditions which, by their
nature, will be satisfied concurrently with the Closing.

 

(b)                                 Each
Purchaser’s Conditions.  The
respective obligation of each Purchaser to consummate the purchase of its
Purchased Units shall be subject to the satisfaction on or prior to the Closing
Date of each of the following conditions (any or all of which may be waived by
a particular Purchaser on behalf of itself in writing with respect to its
Purchased Units, in whole or in part, to the extent permitted by applicable
Law):

 

5

 

(i)                                     Pacific
shall have performed and complied with the covenants and agreements contained
in this Agreement that are required to be performed and complied with by
Pacific on or prior to the Closing Date;

 

(ii)                                  The
representations and warranties of Pacific contained in this Agreement that are
qualified by materiality or a Pacific Material Adverse Effect shall be true and
correct when made and as of the Closing Date and all other representations and
warranties of Pacific shall be true and correct in all material respects when
made and as of the Closing Date, in each case as though made at and as of the
Closing Date (except that representations made as of a specific date shall be
required to be true and correct as of such date only);

 

(iii)                               Such
Purchaser shall have received its commitment fee as contemplated by
Section 5.04 hereof;

 

(iv)                              Pacific
shall have delivered, or caused to be delivered, to the Purchasers at the
Closing, Pacific’s closing deliveries described in Section 2.04; and

 

(v)                                 Since
the date of this Agreement, no Pacific Material Adverse Effect shall have
occurred.

 

(c)                                  Pacific’s
Conditions.  The obligation of
Pacific to consummate the sale of the Purchased Units to each Purchaser shall
be subject to the satisfaction on or prior to the Closing Date of each of the
following conditions with respect to each Purchaser individually and not
jointly (any or all of which may be waived by Pacific in writing, in whole or
in part, to the extent permitted by applicable Law):

 

(i)                                     the
representations and warranties of such Purchaser contained in this Agreement that
are qualified by materiality or a Purchaser Material Adverse Effect shall be
true and correct when made and as of the Closing Date and all other
representations and warranties of such Purchaser shall be true and correct in
all material respects when made and as of the Closing Date, in each case as
though made at and as of the Closing Date (except that representations of such
Purchaser made as of a specific date shall be required to be true and correct
as of such date only), and

 

(ii)                                  such
Purchaser shall have delivered, or caused to be delivered, to Pacific at the
Closing such Purchaser’s closing deliveries described in Section 2.05.

 

Section 2.04                                Pacific
Deliveries.  At the Closing, upon the terms and
subject to the conditions hereof, Pacific will deliver, or cause to be
delivered, to the Purchasers:

 

(a)                                  Certificates
representing the Purchased Units in the names of the Purchasers (bearing the
legend set forth in Section 4.05(e)) and meeting the requirements of the
Partnership Agreement, free and clear of any Liens of any other Person;

 

(b)                                 Copies
of the Certificate of Limited Partnership of (i) Pacific and
(ii) Pacific Energy GP, LP, and of the Certificate of Formation of Pacific
Energy Management

 

6

 

LLC, each
certified by the Secretary of State of the jurisdiction of its formation as of
a recent date;

 

(c)                                  A
certificate of the Secretary of State of the State of Delaware, dated a recent
date, to the effect that Pacific is in good standing;

 

(d)                                 A
certificate of the Secretary or Assistant Secretary of Pacific Energy
Management LLC, on behalf of Pacific, certifying as to (1) the Partnership
Agreement, (2) board resolutions authorizing the execution and delivery of
this Agreement and all of the agreements and instruments to be executed and
delivered by Pacific in connection herewith, and the consummation of the
transactions contemplated hereby and (3) its incumbent officers authorized
to execute and deliver this Agreement and the other agreements and instruments
contemplated hereby, setting forth the name and title and bearing the
signatures of such officers;

 

(e)                                  A
certificate, dated the Closing Date and signed by (x) the Chief Executive
Officer and (y) the Chief Financial Officer of Pacific Energy Management LLC,
in their capacities as such, stating that:

 

(i)                                     Pacific
has performed and complied with the covenants and agreements contained in this
Agreement that are required to be performed and complied with by Pacific on or
prior to the Closing Date;

 

(ii)                                  The
representations and warranties of Pacific contained in this Agreement that are
qualified by materiality or Pacific Material Adverse Effect were true and
correct when made and as of the Closing Date and all other representations and
warranties were true and correct in all material respects when made and are
true and correct as of the Closing Date, in each case as though made at and as
of the Closing Date (except that representations made as of a specific date
shall be required to be true and correct as of such date only); and

 

(iii)                               all
conditions set forth in Section 7.1 (Conditions to Purchaser’s
Obligations) of the Valero Purchase Agreement, shall have been satisfied in all
material respects or the fulfillment of any such conditions to PEG’s
obligations shall have been waived, except for those conditions which, by their
nature, will be satisfied concurrently with the Closing.

 

(f)                                    An
opinion addressed to the Purchasers from legal counsel to Pacific, dated as of
the Closing, substantially the form attached hereto as Exhibit B; and

 

(g)                                 The
Registration Rights Agreement in substantially the form attached hereto as
Exhibit A, which shall have been duly executed by Pacific.

 

Section 2.05                                Purchaser
Deliveries.  At the Closing, upon the terms and
subject to the conditions hereof, each Purchaser will deliver, or cause to be
delivered, to Pacific:

 

(a)                                  Payment
to Pacific of the Purchase Price set forth opposite such Purchaser’s name under
the column entitled “Total Purchase Price” on Schedule 2.02 hereto
by wire transfer of immediately available funds to the account specified on Schedule 2.06;

 

7

 

(b)                                 A
certificate, dated the Closing Date and signed by an authorized officer of such
Purchaser, in their capacity as such, stating that:

 

(i)                                     Such
Purchaser has performed and complied with the covenants and agreements
contained in this Agreement which are required to be performed and complied
with by such Purchaser on or prior to the Closing Date; and

 

(ii)                                  The
representations and warranties of such Purchaser contained in this Agreement
that are qualified by materiality or Purchaser Material Adverse Effect shall be
true and correct when made and as of the Closing Date and all other
representations and warranties of such Purchaser shall be true and correct in
all material respects when made and as of the Closing Date, in each case as
though made at and as of the Closing Date (except that representations made as
of a specific date shall be required to be true and correct as of such date
only).

 

(c)                                  The
Registration Rights Agreement in substantially the form attached hereto as
Exhibit A, which shall have been duly executed by such Purchaser; and

 

(d)                                 A
cross-receipt executed by such Purchaser and delivered to Pacific certifying
that such Purchaser has received its Purchased Units as of the Closing Date.

 

Section 2.06                                Price Per
Unit.  The amount per Common Unit each Purchaser
will pay to Pacific to purchase the Purchased Units (the “Common Unit Price”)
hereunder shall be $30.75; provided, however, that if the Closing Date is after
the record date for the distribution to unitholders with respect to the quarter
ending September 30, 2005, the Common Unit Price shall be reduced by the
amount per unit of such distribution.

 

Section 2.07                                Purchaser
Lock-Up.  Each Purchaser agrees that from and after
the Closing Date through and including the Lockup Date it will not directly or
indirectly, sell, offer to sell, contract to sell, hedge, pledge, grant an
option to purchase, issue any instrument convertible or exchangeable for or
representing the right to receive, or otherwise dispose of its Purchased Units,
or enter into any derivative transaction with similar effect as a sale of its
Purchased Units, without the prior written consent of Pacific; provided,
however, any Purchaser may enter into a total return swap transaction or
similar transaction with respect to the Purchased Units purchased by it.

 

Section 2.08                                Independent
Nature of Purchasers’ Obligations and Rights.  The
obligations of each Purchaser under any Basic Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Basic Document. 
Nothing contained herein or in any other Basic Document, and no action
taken by any Purchaser pursuant thereto, shall be deemed to constitute the
Purchasers as a partnership, an association, a joint venture or any other kind
of entity, or create a presumption that the Purchasers are in any way acting in
concert or as a group with respect to such obligations or the transactions
contemplated by the Basic Documents. 
Each Purchaser shall be entitled to independently protect and enforce
its rights, including without limitation, the rights arising out of this
Agreement or out of the other

 

8

 

Basic Documents, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES RELATED TO PACIFIC

 

Pacific represents and warrants to the
Purchasers as follows:

 

Section 3.01                                Partnership
Existence.  Pacific (a) is a limited partnership
duly formed, validly existing and in good standing under the laws of the State
of Delaware; and (b) has all requisite power and authority, and has all
governmental licenses, authorizations, consents and approvals necessary, to
own, lease, use and operate its Properties and carry on its business as its business
is now being conducted, except where the failure to obtain such licenses,
authorizations, consents and approvals would not  reasonably be expected to have a Pacific
Material Adverse Effect.  Each of
Pacific’s Subsidiaries that is a corporation is a corporation duly
incorporated, validly existing and in good standing under the laws of the state
or other jurisdiction of its incorporation and has all requisite power and
authority, and has all governmental licenses, authorizations, consents and
approvals necessary, to own, lease, use or operate its respective Properties
and carry on its business as now being conducted, except where the failure to
obtain such licenses, authorizations, consents and approvals would not
reasonably be expected to have a Pacific Material Adverse Effect.  Each of Pacific’s Subsidiaries that is not a
corporation has been duly formed, is validly existing and in good standing
under the laws of the state or other jurisdiction of its organization and has
all requisite power and authority, and has all governmental licenses,
authorizations, consents and approvals necessary, to own, lease, use or operate
its respective Properties and carry on its business as now being conducted,
except where the failure to obtain such licenses, authorizations, consents and
approvals would not reasonably be expected to have a Pacific Material Adverse
Effect.  None of Pacific or any of its
Subsidiaries are in default in the performance, observance or fulfillment of
any provision of, in the case of Pacific, the Partnership Agreement or its
Certificate of Limited Partnership or, in the case of any Subsidiary of
Pacific, its respective certificate of incorporation, certification of
formation, bylaws, limited liability company agreement or other similar
organizational documents.  Each of
Pacific and its Subsidiaries is duly qualified or licensed and in good standing
as a foreign limited partnership, limited liability company or corporation, as
applicable, and is authorized to do business in each jurisdiction in which the
ownership or leasing of its respective Properties or the character of its
respective operations makes such qualification necessary, except where the
failure to obtain such qualification, license, authorization or good standing
would not reasonably be expected to have a Pacific Material Adverse Effect.

 

Section 3.02                                Capitalization
and Valid Issuance of Purchased Units.

 

(a)                                  As
of the date of this Agreement, the issued and outstanding limited partner
interests of Pacific consist of 19,300,181 Common Units and 10,465,000
Subordinated Units and the Incentive Distribution Rights, as defined in the
Partnership Agreement.  The only issued
and outstanding general partner interests of Pacific are the interests of
Pacific Energy GP, LP described in the Partnership Agreement.  All outstanding Common Units, Subordinated
Units and Incentive Distribution Rights and the limited partner interests
represented thereby have been

 

9

 

duly
authorized and validly issued in accordance with the Partnership Agreement and
are fully paid (to the extent required under the Partnership Agreement) and
nonassessable (except as such nonassessability may be affected by matters
described in Sections 17-303, 17-607 and 17-804 of the Delaware Revised Uniform
Limited Partnership Act (the “Delaware LP Act”) and otherwise by matters described in
Pacific’s Registration Statement on Form S-3 (Registration Statement
No. 333-107609), as amended (the “Pacific
Form S-3”), under the caption “Description of our Common
Units—Limited Liability”).

 

(b)                                 Pacific
has no equity compensation plans that contemplate the issuance of Common Units
(or securities convertible into or exchangeable for Common Units) other than
the Amended and Restated Pacific Energy GP, LP Long-Term Incentive Plan.  No indebtedness having the right to vote (or
convertible into or exchangeable for securities having the right to vote) on
any matters on which Pacific’s unitholders may vote are issued or outstanding.  Except as contemplated by this Agreement,
there are no outstanding or authorized (i) options, warrants, preemptive
rights, subscriptions, calls, or other rights, convertible securities,
agreements, claims or commitments of any character obligating Pacific or any of
its Subsidiaries to issue, transfer or sell any partnership interests or other
equity interest in, Pacific or any of its Subsidiaries or securities
convertible into or exchangeable for such partnership interests or equity
interests, other than those of the General Partners and their Affiliates
pursuant to the Partnership Agreement and those that may have been issued
pursuant to the Amended and Restated Pacific Energy GP, LP Long-Term Incentive
Plan, (ii) obligations of Pacific or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any partnership interests or equity interests of
Pacific or any of its Subsidiaries or any such securities or agreements listed
in clause (i) of this sentence or (iii) voting trusts or similar agreements to
which Pacific or any of its Subsidiaries is a party with respect to the voting
of the equity interests of Pacific or any of its Subsidiaries.  Neither the offering or sale of the Purchased
Units or the registration of the Purchased Units pursuant to the Registration
Rights Agreement, gives rise to any rights for or relating to the registration
of any Common Units or other securities of Pacific, other than those of the
General Partners and their Affiliates pursuant Section 7.12(b) to the
Partnership Agreement.

 

(c)                                  The
Common Units being purchased by the Purchasers hereunder and the limited
partner interests represented thereby, will be duly authorized by Pacific
pursuant to the Partnership Agreement prior to the Closing and, when issued and
delivered to the Purchasers against payment therefor in accordance with the
terms of this Agreement, will be validly issued, fully paid (to the extent
required by the Partnership Agreement) and nonassessable (except as such
nonassessability may be affected by matters described in Sections 17-303, 17-607
and 17-804 of the Delaware LP Act) and will be free of any and all Liens and
restrictions on transfer, other than restrictions on transfer under the
Partnership Agreement or this Agreement and under applicable state and federal
securities laws and other than such Liens as are created by the Purchasers.

 

(d)                                 The
Common Units are listed for trading on the NYSE.  Prior to the Closing, the Purchased Units
will have been approved for listing on the NYSE.

 

Section 3.03                                Pacific SEC
Documents.  Pacific’s forms, registration statements,
reports, schedules and statements required to be filed by it under the Exchange
Act or the Securities Act (all such documents, collectively the “Pacific SEC
Documents”) have been filed with the

 

10

 

Commission on a timely basis.  Except as set forth in Schedule 3.03,
the Pacific SEC Documents, including, without limitation, any audited or
unaudited financial statements and any notes thereto or schedules included
therein (the “Pacific Financial Statements”), at the time filed (or in
the case of registration statements, solely on the dates of effectiveness)
(except to the extent corrected by a subsequently filed Pacific SEC Document
filed prior to the date hereof) (a) did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, (b) complied in
all material respects with the applicable requirements of the Exchange Act and
the Securities Act, as the case may be, (c) complied as to form in all
material respects with applicable accounting requirements and with the
published rules and regulations of the Commission with respect thereto,
(d) were prepared in accordance with GAAP applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto
or, in the case of unaudited statements, as permitted by Form 10-Q of the
Commission), and (e) fairly present (subject in the case of unaudited
statements to normal and recurring audit adjustments) in all material respects
the consolidated financial position as of the dates thereof and the
consolidated results of its operations and cash flows for the periods then
ended.  KPMG LLP is an independent
registered public accounting firm with respect to Pacific and the General
Partners and has not resigned or been dismissed as independent registered
public accountants of Pacific as a result of or in connection with any
disagreement with Pacific on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures.

 

Section 3.04                                No Material
Adverse Change.  Except as set forth in or contemplated by
the Pacific SEC Documents filed with the Commission on or prior to the date
hereof, since the date of Pacific’s most recent Form 10-K filing with the
Commission, there has been no (a) change, event, occurrence, effect, fact,
circumstance or condition that has had or would reasonably be expected to have
a Pacific Material Adverse Effect, (b) acquisition or disposition of any
material asset by Pacific or any of its Subsidiaries or any contract or
arrangement therefor, otherwise than for fair value in the ordinary course of
business or as disclosed in the Pacific SEC Documents, (c) material change
in Pacific’s accounting principles, practices or methods or (d) incurrence of
material indebtedness for borrowed money other than in accordance with
Schedule 3.04.

 

Section 3.05                                Litigation.  There is no
action, suit, or proceeding pending (including any investigation, litigation or
inquiry) or, to Pacific’s knowledge, threatened against any of the Pacific
Parties or any of their respective officers, directors or Properties that
questions the validity of this Agreement or the Registration Rights Agreement
or the right of Pacific to enter into this Agreement or the Registration Rights
Agreement or to consummate the transactions contemplated hereby and thereby.  Except as set forth in the Pacific SEC
Documents there is no action, suit, or proceeding pending (including any
investigation, litigation or inquiry) or, to Pacific’s knowledge, threatened
against any of the Pacific Parties or any of their respective officers, directors
or Properties that would reasonably be expected to result in a Pacific Material
Adverse Effect.

 

Section 3.06                                No Conflicts.  The
execution, delivery and performance by Pacific and its subsidiaries of the
Basic Documents, the Valero Purchase Agreement and all other agreements and
instruments to be executed and delivered by Pacific in connection hereto or
thereto, and

 

11

 

compliance by Pacific with the terms and
provisions hereof and thereof, and the issuance and sale by Pacific of the
Purchased Units, do not and will not (a) violate any provision of any Law
or Permit having applicability to Pacific or any of its Subsidiaries or any of
their respective Properties, (b) conflict with or result in a violation or
breach of any provision of the Certificate of Limited Partnership or other
organizational documents of Pacific, or the Partnership Agreement, or any
organizational documents of any of Pacific’s Subsidiaries, (c)  constitute
(with or without due notice or lapse of time or both) a default (or give rise
to any right of termination, cancellation or acceleration) under any indenture,
mortgage, deed of trust, loan agreement lease or other agreement or instrument
to which Pacific or any of its Subsidiaries is a party or by which Pacific or
any of its Subsidiaries or any of their respective Properties may be bound, or
(d) result in or require the creation or imposition of any Lien upon or
with respect to any of the Properties now owned or hereafter acquired by Pacific
or any of its Subsidiaries; with the exception of the conflicts stated in
clause (b) of this Section 3.06, except where such conflict, violation,
default, breach, termination, cancellation, failure to receive consent or
approval, or acceleration with respect to the foregoing provisions of this
Section 3.06 would not, individually or in the aggregate, reasonably be
expected to have a Pacific Material Adverse Effect.

 

Section 3.07                                Authority.  Pacific has
all necessary partnership power and authority to execute, deliver and perform
its obligations under the Basic Documents and the Valero Purchase Agreement;
and the execution, delivery and performance by Pacific of the Basic Documents
and the Valero Purchase Agreement have been duly authorized by all necessary
action on its part; and the Basic Documents and the Valero Purchase Agreement
constitute the legal, valid and binding obligations of Pacific, enforceable in
accordance with their terms, except as such enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer and similar laws affecting
creditors’ rights generally or by general principles of equity.  No approval from the holders of the Common
Units is required in connection with Pacific’s issuance and sale of the
Purchased Units to the Purchasers.

 

Section 3.08                                Approvals.  Except for
the approvals required by the Commission in connection with Pacific’s
obligations under the Registration Rights Agreement, no authorization, consent,
approval, waiver, license, qualification or written exemption from, nor any
filing, declaration, qualification or registration with, any Governmental
Authority or any other Person is required in connection with the execution,
delivery or performance by Pacific of any of the Basic Documents, except (i)
for such authorizations, consents, approvals, waivers, licenses, qualifications
or written exemptions required under federal or state securities laws or (ii)
where the failure to receive such authorization, consent, approval, waiver,
license, qualification or written exemption from, or to make such filing,
declaration, qualification or registration would not, individually or in the
aggregate, reasonably be expected to have a Pacific Material Adverse Effect.

 

Section 3.09                                Offering.  Assuming the
accuracy of the representations and warranties of each Purchaser contained in
this Agreement, the sale and issuance of the Purchased Units to the Purchasers
pursuant to this Agreement is exempt from the registration requirements of the
Securities Act and neither Pacific nor any authorized agent acting on its
behalf has taken or will take any action hereafter that would cause the loss of
such exemption.

 

12

 

Section 3.10                                MLP Status.  Pacific has, for each taxable year beginning
after December 31, 2003, during which Pacific was in existence, met the
gross income requirements of Section 7704(c)(2) of the Internal Revenue
Code of 1986, as amended.

 

Section 3.11                                Investment
Company Status.  Pacific is not an “investment company”
within the meaning of the Investment Company Act of 1940, as amended.

 

Section 3.12                                Certain Fees.  Except for
the fees payable by Pacific to the Purchasers hereunder and fees payable to
Lehman Brothers, no fees or commissions are or will be payable by Pacific to
brokers, finders, or investment bankers with respect to the sale of any of the
Purchased Units or the consummation of the transaction contemplated by this
Agreement.  Pacific agrees that it will
indemnify and hold harmless each Purchaser from and against any and all claims,
demands, or liabilities for broker’s, finder’s, placement, or other similar
fees or commissions incurred by Pacific or alleged to have been incurred by
Pacific in connection with the sale of Purchased Units or the consummation of
the transactions contemplated by this Agreement.

 

Section 3.13                                No Side
Agreements.  There are no agreements by, among or
between Pacific or any of its Affiliates, on the one hand, and any Purchaser or
any of its respective Affiliates, on the other hand, with respect to the
transactions contemplated hereby nor promises or inducements for future
transactions between or among any of such parties.

 

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

 

Each Purchaser, severally and not jointly,
represents and warrants to Pacific that:

 

Section 4.01                                Corporate
Existence.  Such Purchaser (a) is duly formed,
legally existing and in good standing under the laws of its jurisdiction of
organization; and (b) has all requisite power and authority, and has all
governmental licenses, authorizations, consents and approvals necessary, to
own, lease, use and operate its Properties and carry on its business as its
business is now being conducted, except where the failure to obtain such
licenses, authorizations, consents and approvals would not have or would not
reasonably be expected to have a Purchaser Material Adverse Effect.  Such Purchaser is not in default in the
performance, observance or fulfillment of any provision of its organizational documents,
except where such default would not have or would not reasonably be expected to
have a Purchaser Material Adverse Effect.

 

Section 4.02                                No Conflicts.  The
execution, delivery and performance by such Purchaser of this Agreement, the
Registration Rights Agreement and all other agreements and instruments to be
executed and delivered by such Purchaser pursuant hereto or thereto or in
connection with the transactions contemplated by this Agreement, the
Registration Rights Agreement or any such other agreements and instruments, and
compliance by such Purchaser with the terms and provisions hereof and thereof,
and the purchase of such Purchaser’s Purchased Units by such Purchaser do not
and will not (a) violate any provision of any Law or Permit having
applicability to such Purchaser or any of its Properties, (b) conflict
with or result in a violation or breach of any provision of the organizational
documents of such Purchaser or (c) constitute (with or without due notice
or lapse of time or both) a default (or give rise to any right of termination,

 

13

 

cancellation or acceleration) under any
contract, agreement, instrument, obligation, note, bond, mortgage, license,
loan or credit agreement to which such Purchaser is a party or by which such
Purchaser or any of its Properties may be bound; with the exception of the
conflicts stated in clause (b) of this Section 4.02, except where
such conflict, violation, default, breach, termination, cancellation, failure
to receive consent or approval, or acceleration with respect to the foregoing
provisions of this Section 4.02 would not, individually or in the
aggregate, be reasonably likely to have a Purchaser Material Adverse Effect.

 

Section 4.03                                Certain Fees.  No fees or
commissions are or will be payable by such Purchaser to brokers, finders, or
investment bankers with respect to the purchase of any of its Purchased Units
or the consummation of the transaction contemplated by this Agreement.  Such Purchaser agrees that it will indemnify
and hold harmless Pacific from and against any and all claims, demands, or
liabilities for broker’s, finder’s, placement, or other similar fees or
commissions incurred by such Purchaser or alleged to have been incurred by such
Purchaser in connection with the purchase of such Purchaser’s Purchased Units
or the consummation of the transactions contemplated by this Agreement.

 

Section 4.04                                No Side
Agreements.  There are no other agreements by, among
or between such Purchaser and any of its Affiliates, on the one hand, and
Pacific or any of its Affiliates, on the other hand, with respect to the
transactions contemplated hereby nor promises or inducements for future
transactions between or among any of such parties.

 

Section 4.05                                Unregistered
Securities.

 

(a)                                  Investment.  Its Purchased Units are being acquired for
its own account, not as a nominee or agent, and with no intention of
distributing its Purchased Units or any part thereof, and such Purchaser has no
present intention of selling or otherwise distributing the same in any transaction
in violation of the securities laws of the United States of America or any
State, without prejudice, however, to such Purchaser’s right at all times to
sell or otherwise dispose of all or any part of its Purchased Units under a
registration statement under the Securities Act and applicable state securities
laws or under an exemption from such registration available thereunder
(including, without limitation, if available, Rule 144 promulgated
thereunder).  If such Purchaser should in
the future decide to dispose of any of its Purchased Units, such Purchaser
understands and agrees (a) that it may do so only (i) in compliance
with the Securities Act and applicable state securities law, as then in effect,
or (ii) in the manner contemplated by any registration statement pursuant
to which such securities are being offered, and (b) that stop-transfer
instructions to that effect will be in effect with respect to such
securities.  Notwithstanding the
foregoing, a Purchaser may enter into a derivative transaction with respect to
its Purchased Units with a third party provided that such transaction is exempt
from registration under the Securities Act.

 

(b)                                 Nature
of Purchaser.  Such Purchaser
represents and warrants to Pacific that, (a) it is an “accredited investor”
within the meaning of Rule 501 of Regulation D promulgated by the
Securities and Exchange Commission pursuant to the Securities Act and
(b) by reason of its business and financial experience it has such
knowledge, sophistication and experience in making similar investments and in
business and financial matters generally so as to be capable of evaluating the
merits and risks of the prospective investment in the Purchased

 

14

 

Units, is able
to bear the economic risk of such investment and, at the present time, would be
able to afford a complete loss of such investment.

 

(c)                                  Receipt
of Information; Authorization.  Such
Purchaser acknowledges that it has (a) had access to Pacific’s periodic
filings with the Commission, including Pacific’s Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on
Form 8-K, and (b) been provided a reasonable opportunity to ask
questions of and receive answers from Representatives of Pacific regarding such
matters.

 

(d)                                 Restricted
Securities.  Such Purchaser
understands that the Purchased Units it is purchasing are characterized as
“restricted securities” under the federal securities laws inasmuch as they are
being acquired from Pacific in a transaction not involving a public offering
and that under such laws and applicable regulations such securities may be
resold without registration under the Securities Act only in certain limited
circumstances.  In this connection, such
Purchaser represents that it is knowledgeable with respect to Rule 144 of
the Commission promulgated under the Securities Act.

 

(e)                                  Legend.  It is understood that the certificates
evidencing the Purchased Units will bear the following legend:  “These securities have not been registered under
the Securities Act of 1933, as amended. 
They may not be sold, offered for sale, pledged or hypothecated in the
absence of a registration statement in effect with respect to the securities
under such Act or an opinion of counsel satisfactory to the Company that such
registration is not required or unless sold pursuant to Rule 144 of such
Act.”

 

ARTICLE V

INDEMNIFICATION, COSTS AND EXPENSES

 

Section 5.01                                Indemnification
by Pacific.  Pacific agrees to indemnify each
Purchaser and its Representatives (collectively, the “Purchaser Related
Parties”) from, and hold each of them harmless against, any and all
actions, suits, proceedings (including any investigations, litigation or
inquiries), demands, and causes of action, and, in connection therewith, and
promptly upon demand, pay or reimburse each of them for all reasonable costs,
losses, liabilities, damages, or expenses of any kind or nature whatsoever,
including, without limitation, the reasonable fees and disbursements of counsel
and all other reasonable expenses incurred in connection with investigating,
defending or preparing to defend any such matter that may be incurred by them
or asserted against or involve any of them as a result of, arising out of, or
in any way related to the breach of any of the representations, warranties or
covenants of Pacific contained herein, provided such claim for indemnification
relating to a breach of a representation or warranty is made prior to the
expiration of such representation or warranty.

 

Section 5.02                                Indemnification
by Purchasers.  Each Purchaser agrees, severally and not
jointly, to indemnify Pacific, the General Partners and their respective
Representatives (collectively, the “Pacific Related Parties”) from, and
hold each of them harmless against, any and all actions, suits, proceedings
(including any investigations, litigation or inquiries), demands, and causes of
action, and, in connection therewith, and promptly upon demand, pay or
reimburse each of them for all reasonable costs, losses, liabilities, damages, or
expenses of any kind or

 

15

 

nature whatsoever, including, without
limitation, the reasonable fees and disbursements of counsel and all other
reasonable expenses incurred in connection with investigating, defending or
preparing to defend any such matter that may be incurred by them or asserted
against or involve any of them as a result of, arising out of, or in any way
related to the breach of any of the representations, warranties or covenants of
such Purchaser contained herein, provided such claim for indemnification
relating to a breach of the representations and warranties is made prior to the
expiration of such representations and warranties.

 

Section 5.03                                Indemnification
Procedure.  Promptly after any Pacific Related Party
or Purchaser Related Party (hereinafter, the “Indemnified Party”) has
received notice of any indemnifiable claim hereunder, or the commencement of
any action, suit or proceeding by a third person, which the Indemnified Party
believes in good faith is an indemnifiable claim under this Agreement, the
Indemnified Party shall give the indemnitor hereunder (the “Indemnifying
Party”) written notice of such claim or the commencement of such action,
suit or proceeding, but failure to so notify the Indemnifying Party will not
relieve the Indemnifying Party from any liability it may have to such
Indemnified Party hereunder except to the extent that the Indemnifying Party is
materially prejudiced by such failure. Such notice shall state the nature and
the basis of such claim to the extent then known.  The Indemnifying Party shall have the right
to defend and settle, at its own expense and by its own counsel, any such
matter as long as the Indemnifying Party pursues the same diligently and in
good faith. If the Indemnifying Party undertakes to defend or settle, it shall
promptly notify the Indemnified Party of its intention to do so, and the
Indemnified Party shall cooperate with the Indemnifying Party and its counsel
in all commercially reasonable respects in the defense thereof and the
settlement thereof. Such cooperation shall include, but shall not be limited
to, furnishing the Indemnifying Party with any books, records and other
information reasonably requested by the Indemnifying Party and in the
Indemnified Party’s possession or control. 
Such cooperation of the Indemnified Party shall be at the cost of the
Indemnifying Party.  After the
Indemnifying Party has notified the Indemnified Party of its intention to
undertake to defend or settle any such asserted liability, and for so long as
the Indemnifying Party diligently pursues such defense, the Indemnifying Party
shall not be liable for any additional legal expenses incurred by the
Indemnified Party in connection with any defense or settlement of such asserted
liability; provided, however, that the Indemnified Party shall be entitled
(i) at its expense, to participate in the defense of such asserted
liability and the negotiations of the settlement thereof and (ii) if
(A) the Indemnifying Party has failed to assume the defense and employ
counsel or (B) if the defendants in any such action include both the
Indemnified Party and the Indemnifying Party and counsel to the Indemnified
Party shall have concluded that there may be reasonable defenses available to
the Indemnified Party that are different from or in addition to those available
to the Indemnifying Party or if the interests of the Indemnified Party
reasonably may be deemed to conflict with the interests of the Indemnifying
Party, then the Indemnified Party shall have the right to select a separate
counsel and to assume such legal defense and otherwise to participate in the
defense of such action, with the expenses and fees of such separate counsel
(including any local counsel) and other expenses related to such participation
to be reimbursed by the Indemnifying Party as incurred.  Notwithstanding any other provision of this
Agreement, the Indemnifying Party shall not settle any indemnified claim
without the consent of the Indemnified Party, unless the settlement thereof
imposes no liability or obligation on, and includes a complete release from
liability of, and does not include any admission of wrongdoing or illegal
conduct by, the Indemnified Party.

 

16

 

Section 5.04                                Commitment
Fee.  Pacific hereby agrees to pay each Purchaser
on the date hereof a commitment fee equal to 1% of such Purchaser’s respective
Purchase Price by wire transfer of immediately available funds to the account
specified for such Purchaser on Schedule 5.04.  Once paid, the commitment fees or any part
thereof shall not be refundable under any circumstances, regardless of whether
the transactions contemplated hereby are consummated.

 

Section 5.05                                Payment of Expenses.  Pacific
hereby agrees to reimburse the Purchasers, upon demand, for up to $30,000, in
the aggregate, of their reasonable out-of-pocket expenses (including travel
expenses and reasonable fees, charges and disbursements of Andrews Kurth LLP)
incurred in connection with transactions contemplated by the Basic Documents or
the administration, amendment, modification or waiver thereof.

 

ARTICLE VI.

MISCELLANEOUS

 

Section 6.01                                Pacific
Lock-Up.  Except as provided in this Agreement,
from and after the date hereof through and including the date 90 days after the
Closing Date, Pacific will not, and will not permit any other Pacific Parties
to, issue, offer, sell, contract to sell or otherwise dispose of or hedge any
Common Units or any securities substantially similar to, convertible into or
exercisable or exchangeable for Common Units, or grant any options or warrants
to purchase any Common Units or any such securities; provided, however, the
foregoing restriction shall not apply to (i) sales of up to 5,500,000 Common
Units or (ii) transactions pursuant to the Amended and Restated Pacific Energy
GP, LP Long-Term Incentive Plan.  The
provisions of this Section 6.01 may be waived in writing by the holders of
at least a majority of the Purchased Units.

 

Section 6.02                                Interpretation
and Survival of Provisions.  Article, Section, Schedule, and Exhibit
references are to this Agreement, unless otherwise specified. All references to
instruments, documents, contracts, and agreements are references to such
instruments, documents, contracts, and agreements as the same may be amended,
supplemented, and otherwise modified from time to time, unless otherwise
specified. The word “including” shall mean “including but not limited to.”
Whenever any party has an obligation under the Basic Documents, the expense of
complying with that obligation shall be an expense of such party unless
otherwise specified. Whenever any determination, consent, or approval is to be
made or given by any Purchaser, such action shall be in such Purchaser’s sole
discretion unless otherwise specified in this Agreement.  If any provision in the Basic Documents is
held to be illegal, invalid, not binding, or unenforceable, such provision
shall be fully severable and the Basic Documents shall be construed and
enforced as if such illegal, invalid, not binding, or unenforceable provision
had never comprised a part of the Basic Documents, and the remaining provisions
shall remain in full force and effect.

 

Section 6.03                                Survival of
Provisions.  The representations and warranties set
forth in sections 3.01, 3.02, 3.06, 3.07, 3.08, 3.09, 3.12, 3.13, 4.03, 4.04
and 4.05 hereunder shall survive the execution and delivery of this Agreement
indefinitely, and the other representations and warranties set forth herein
shall survive for a period of twelve (12) months following the Closing Date
regardless of any investigation made by or on behalf of Pacific or any
Purchaser.  The covenants made in this
Agreement or any other Basic Document shall survive the Closing of the

 

17

 

transactions described herein and remain
operative and in full force and effect regardless of acceptance of any of the
Purchased Units and payment therefor and repayment, conversion, exercise or
repurchase thereof.  All indemnification
obligations of Pacific and the Purchasers and the provisions of Article V
shall remain operative and in full force and effect regardless of any purported
general termination of this Agreement.

 

Section 6.04                                No
Waiver; Modifications in Writing.

 

(a)                                  Delay.  No failure or delay on the part of any party
in exercising any right, power, or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power, or
remedy preclude any other or further exercise thereof or the exercise of any
right, power, or remedy. The remedies provided for herein are cumulative and
are not exclusive of any remedies that may be available to a party at law or in
equity or otherwise.

 

(b)                                 Specific
Waiver.  Except as otherwise provided
herein, no amendment, waiver, consent, modification, or termination of any
provision of this Agreement or any other Basic Document shall be effective
unless signed by each of the parties hereto or thereto affected by such
amendment, waiver, consent, modification, or termination.  Any amendment, supplement or modification of
or to any provision of this Agreement or any other Basic Document, any waiver
of any provision of this Agreement or any other Basic Document, and any consent
to any departure by Pacific from the terms of any provision of this Agreement
or any other Basic Document shall be effective only in the specific instance
and for the specific purpose for which made or given. Except where notice is
specifically required by this Agreement, no notice to or demand on Pacific in
any case shall entitle Pacific to any other or further notice or demand in
similar or other circumstances.

 

Section 6.05                                Binding
Effect; Assignment.

 

(a)                                  Binding
Effect.  This Agreement shall be
binding upon Pacific, the Purchasers, and their respective successors and
permitted assigns. Except as expressly provided in this Agreement, this
Agreement shall not be construed so as to confer any right or benefit upon any
Person other than the parties to this Agreement and their respective successors
and permitted assigns.

 

(b)                                 Assignment
of Purchased Units.  All or any
portion of Purchased Units purchased pursuant to this Agreement may be sold,
assigned or pledged by each Purchaser, subject to compliance with applicable
securities laws, Section 2.07 herein and the Registration Rights
Agreement.

 

(c)                                  Assignment.  No portion of the rights and obligations of
each Purchaser under this Agreement may be transferred by such Purchaser
without the written consent of Pacific. 
Notwithstanding the foregoing, each Purchaser may assign all or any
portion of its rights under this Agreement to an Affiliate of such Purchaser.

 

Section 6.06                                Communications.  All notices
and demands provided for hereunder shall be in writing and shall be given by
registered or certified mail, return receipt requested, telecopy, air courier
guaranteeing overnight delivery or personal delivery to the following
addresses:

 

18

 

(a)                                  If
to any Purchaser:

 

To the respective address listed on Schedule 6.06
hereof

 

with a copy to:

 

Andrews Kurth LLP

600 Travis

Suite 4200

Houston, Texas 77002

Attention: 
William Cooper

Facsimile: 
713.220.4285

 

(b)                                 If
to Pacific:

 

Pacific Energy Partners, L.P.

5900 Cherry Avenue

Long Beach, CA 90805-4408

Attention: Lynn T. Wood

Facsimile: 562.728.2823

 

with a copy to:

 

Vinson & Elkins L.L.P.

666 Fifth Avenue, 26th Floor

New York, NY 10103

Attention: Alan Baden

Facsimile: 212-237-0100

 

or to such other address as Pacific or such
Purchaser may designate in writing. All notices and communications shall be
deemed to have been duly given: at the time delivered by hand, if personally
delivered; upon actual receipt if sent by certified mail, return receipt
requested, or regular mail, if mailed; when receipt acknowledged, if sent via
facsimile; and upon actual receipt when delivered to an air courier
guaranteeing overnight delivery.

 

Section 6.07                                Removal of
Legend.  Each Purchaser may request Pacific to
remove the legend described in Section 4.05(e) from the certificates
evidencing the Purchased Units by submitting to Pacific such certificates,
together with an opinion of counsel to the effect that such legend is no longer
required under the Securities Act or applicable state laws, as the case may be;
provided, however, that no such opinion shall be required in the event a
Purchaser is effecting a sale of such Purchased Units pursuant to Rule 144 or
an effective registration statement.

 

Section 6.08                                Entire
Agreement.  This Agreement, the other Basic Documents
and the other agreements and documents referred to herein are intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties
hereto in respect of the subject matter contained herein and therein. There are
no restrictions, promises, warranties or undertakings, other than

 

19

 

those set forth or referred to herein or
therein with respect to the rights granted by Pacific or any of its Affiliates
or the Purchasers or any of their Affiliates set forth herein or therein.  This Agreement, the other Basic Documents and
the other agreements and documents referred to herein supersede all prior
agreements and understandings between the parties with respect to such subject
matter.

 

Section 6.09                                Governing
Law.  This Agreement will be
construed in accordance with and governed by the laws of the State of New York.

 

Section 6.10                                Execution in
Counterparts.  This Agreement may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed to be an original and all of which counterparts, taken together,
shall constitute but one and the same Agreement.

 

Section 6.11                                Termination.

 

(a)                                  Notwithstanding
anything herein to the contrary, this Agreement will automatically terminate if
the Closing shall not have occurred on or before January 15, 2006 (the “Termination Date”), unless (i) the
Valero Asset Acquisition shall have closed prior to the Termination Date or
(ii) the term hereof is extended by agreement of the parties hereto.  This Agreement may be terminated by Pacific
if it or Valero elects not to consummate the Valero Acquisition.

 

(b)                                 In
the event of the termination of this Agreement as provided in
Section 6.11(a), this Agreement shall forthwith become null and void as
between any Purchaser or Purchasers not agreeing to extend the term hereof and
there shall be no liability on the part of any such parties among themselves,
except with respect to Article V of this Agreement, this Section 6.11
and except with respect to the requirement to comply with any confidentiality
agreement in favor of Pacific, provided that nothing herein shall relieve any
such party from any liability or obligation with respect to any willful breach
of this Agreement.  For the avoidance of
doubt, no termination as against one or more individual Purchasers pursuant to
Section 6.11(a) shall serve to terminate this Agreement as among any
Purchaser agreeing to extend the term hereof with Pacific.  In the event of the termination of this
Agreement by Pacific or termination of this Agreement as provided in
Section 6.11(a) in circumstances where Pacific does not agree to extend of
the term hereof, this Agreement shall forthwith become null and void and there
shall be no liability or obligation on the part of any party hereto or their
respective Representatives, except with respect to Article V of this Agreement,
this Section 6.11 and except with respect to the requirement to comply
with any confidentiality agreement in favor of Pacific, provided that nothing
herein shall relieve any party from any liability or obligation with respect to
any willful breach of this Agreement.

 

[The remainder of this page is intentionally left blank.]

 

20

 

IN WITNESS WHEREOF, the parties hereto
execute this Agreement, effective as of the date first above written.

 

 

	
   

  	
  PACIFIC ENERGY PARTNERS, L.P.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Pacific
  Energy GP, LP,

  	
   

  
	
   

  	
  its General
  Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Pacific
  Energy Management LLC,

  	
   

  
	
   

  	
   

  	
  its General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Irvin
  Toole, Jr.

  	
   

  
	
   

  	
  Name:

  	
  Irvin Toole,
  Jr.

  
	
   

  	
  Title:

  	
  President
  and Chief Executive Officer

  
							

 

[Common
Unit Purchase Agreement]

 

 

	
   

  	
  TORTOISE ENERGY INFRASTRUCTURE

  CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David J. Shulte

  	
   

  	
   

  
	
   

  	
  Name:

  	
  David J.
  Schulte

  
	
   

  	
  Title:

  	
  CEO/President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  TORTOISE ENERGY CAPITAL

  CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David J. Shulte

  	
   

  	
   

  
	
   

  	
  Name:

  	
  David J.
  Schulte

  
	
   

  	
  Title:

  	
  CEO/President

  
						

 

[Common Unit Purchase Agreement]

 

 

	
   

  	
  STRUCTURED FINANCE AMERICAS LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ Richard
  Kennedy

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Richard
  Kennedy

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ John
  Cipriani

  	
   

  	
   

  
	
   

  	
  Name:

  	
  John
  Cipriani

  
	
   

  	
  Title:

  	
   

  	
   

  
								

 

[Common Unit Purchase Agreement]

 

 

	
   

  	
  The Cushing Fund, LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jerry Swank

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Jerry Swank

  
	
   

  	
  Title:

  	
  General
  Partner

  	
   

  
						

 

[Common Unit Purchase Agreement]

 

 

	
   

  	
  STROME MLP FUND, LP

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Strome
  Investment Management, LP, its

  general partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael Achterberg

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Michael
  Achterberg

  
	
   

  	
  Title:

  	
  Chief
  Financial Officer

  	
   

  
						

 

[Common Unit Purchase Agreement]

 

 

	
   

  	
  KAYNE ANDERSON
  ENERGY TOTAL

  RETURN FUND, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kevin S. McCarthy

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Kevin S.
  McCarthy

  
	
   

  	
  Title:

  	
  President
  and Chief Executive Officer

  	
   

  
						

 

[Common Unit Purchase Agreement]

 

 

	
   

  	
  FIDUCIARY/CLAYMORE MLP

  OPPORTUNITY FUND

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ James J. Cunnane, Jr.

  	
   

  	
   

  
	
   

  	
  Name:

  	
  James J.
  Cunnane, Jr.

  
	
   

  	
  Title:

  	
  Managing
  Director and Senior Portfolio

  Manager

  	
   

  
						

 

[Common Unit Purchase Agreement]

 

 

	
   

  	
  ENERGY INCOME AND GROWTH FUND

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jim Bowen

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Jim Bowen

  
	
   

  	
  Title:

  	
  President

  	
   

  
						

 

[Common Unit Purchase Agreement]

 

 

Schedule 2.02

 

	
  Purchaser

  	
   

  	
  Purchased Units

  (subject to adjustment

  as provided in the

  definition of

  “Purchased Units”)

  	
   

  	
  Total Purchase

  Price (prior to

  any adjustment

  set forth in

  Section 2.06)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Tortoise
  Energy Capital Corporation

  	
   

  	
  1,584,800

  	
   

  	
  $

  	
  48,732,600

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Tortoise
  Energy Infrastructure Corporation

  	
   

  	
  325,200

  	
   

  	
  $

  	
  9,999,900

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Kayne
  Anderson Energy Total Return Fund, Inc.

  	
   

  	
  1,000,000

  	
   

  	
  $

  	
  30,750,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Structured
  Finance Americas LLC

  	
   

  	
  690,000

  	
   

  	
  $

  	
  21,217,500

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Fiduciary/Claymore
  MLP Opportunity Fund

  	
   

  	
  413,700

  	
   

  	
  $

  	
  12,721,275

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Energy
  Income and Growth Fund

  	
   

  	
  81,300

  	
   

  	
  $

  	
  2,499,975

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  The Cushing
  Fund, LP

  	
   

  	
  165,000

  	
   

  	
  $

  	
  5,073,750

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Strome MLP
  Fund, LP

  	
   

  	
  40,000

  	
   

  	
  $

  	
  1,230,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
  4,300,000

  	
   

  	
  $

  	
  132,225,000

  	
   

  

 

[Common Unit Purchase Agreement]

 

 

Exhibit A –
Form of Registration Rights Agreement

 

See Attached

 

 

Exhibit A

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “Agreement”) is entered
into as of August       , 2005, by and among
Pacific Energy Partners, L.P., a Delaware limited partnership (the “Partnership”),
each of the parties set forth on Exhibit A hereto (each, a “Purchaser”)
and, solely with respect to the provisions of 2.2(c), Pacific Energy GP, LP.  Capitalized terms used herein without
definition shall have the meanings given to them in the Purchase Agreement (as
hereinafter defined).

 

RECITALS

 

This Agreement
is made in connection with the Closing of the issuance and sale of 4,300,000
Common Units (the “Purchased Units”), pursuant to the Common Unit
Purchase Agreement (the “Purchase Agreement”), dated as of
August      , 2005, by and among the Partnership
and the Purchasers named therein. 
Pursuant to Section 2.04(g) of the Purchase Agreement, the
Partnership has agreed to provide the registration and other rights set forth
in this Agreement for the benefit of the Purchasers. In consideration of the
mutual covenants and agreements set forth herein and for good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged by
each party hereto, the parties hereby agree as follows:

 

ARTICLE VII.

DEFINITIONS

 

Section 7.01                                Definitions.  Capitalized terms used herein without
definition shall have the meanings given to them in the Purchase
Agreement.  The terms set forth below are
used herein as so defined:

 

“Affiliate” means, with respect to a
specified Person, any other Person, whether now in existence or hereinafter
created, directly or indirectly controlling, controlled by or under direct or
indirect common control with such specified Person.  For purposes of this definition, “control”
(including, with correlative meanings, “controlling”, “controlled by”, and
“under common control with”) means the power to direct or cause the direction
of the management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise.

 

“Agreement” has the meaning set forth
in the introductory paragraph of this Agreement.

 

“Business Day” means any day other
than a Saturday, Sunday, or a legal holiday for commercial banks in Long Beach,
California.

 

“Closing” shall have the meaning set
forth in the Purchase Agreement.

 

“Closing Date” shall have the meaning
set forth in the Purchase Agreement.

 

“Commission” means the United States
Securities and Exchange Commission.

 

 

“Common Units” means the common units
representing limited partner interests in the Partnership, including the
Purchased Units.

 

“Exchange Act” shall mean the
Securities Exchange Act of 1934, as amended, and the rules and regulations of
the Commission promulgated thereunder.

 

“Holder” means (i) each Purchaser and
(ii) any Person to whom rights hereunder are transferred or assigned pursuant
to Section 2.11 of this Agreement.

 

“Included Registrable Securities” has
the meaning set forth in Section 2.2(a) of this Agreement.

 

“Lock-up Period” has the meaning set
forth in Section 2.7.

 

“Losses” has the meaning set forth in Section 2.9(a)
of this Agreement.

 

“Managing Underwriter” means, with
respect to any Underwritten Offering, the book-running lead manager or managers
of such Underwritten Offering.

 

“Market Value” means with respect to
Common Units, the closing price on the New York Stock Exchange, or other
principal exchange or quotation service where the Common Units are listed, on
the last trading day preceding the date of determination.

 

“Offering Notice” has the meaning set
forth in Section 2.2(a) of this Agreement.

 

“Opt Out Notice” has the meaning set
forth in Section 2.2(b) of this Agreement.

 

“Partnership” has the meaning set
forth in the introductory paragraph of this Agreement.

 

“Person” means any individual,
corporation, company, voluntary association, partnership, joint venture, trust,
limited liability company, unincorporated organization, government or any
agency, instrumentality or political subdivision thereof, or any other form of
entity.

 

“Piggyback Inclusion Notice” has the
meaning set forth in Section 2.2(a) of this Agreement.

 

“Piggyback Offering” has the meaning
set forth in Section 2.2(c) of this Agreement.

 

“Purchase Agreement” has the meaning
set froth in the Recitals of this Agreement.

 

“Purchased Units” shall have the
meaning set forth in the Recitals of this Agreement.

 

“Purchaser” has the meaning set forth
in the introductory paragraph of this Agreement.

 

“Registrable Securities” means the
Purchased Units.

 

“Registration Expenses” has the
meaning set forth in Section 2.8(a) of this Agreement.

 

2

 

“Registration Inclusion Notice” has
the meaning set forth in Section 2.1 of this Agreement.

 

“Required Out Notice” has the meaning
set forth in Section 2.2(b) of this Agreement.

 

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

 

“Selling Expenses” has the meaning set
forth in Section 2.8(a) of this Agreement.

 

“Selling Holder” has the meaning set
forth in Section 2.2(c) of this Agreement.

 

“Shelf Registration Statement” has the
meaning set forth in Section 2.1(a) of this Agreement.

 

“Termination Date” has the meaning set
forth in Section 3.12.

 

“Underwritten Offering” means an
offering (including an offering pursuant to the Shelf Registration Statement)
in which Common Units are sold to an underwriter on a firm commitment basis for
reoffering to the public or an offering that is a “bought deal” with one or
more investment banks.

 

Section 7.02                                Registrable
Securities.   Any Registrable Security will cease to be a
Registrable Security when (a) a registration statement covering such
Registrable Security becomes or is declared effective by the Commission and
such Registrable Security has been sold or disposed of pursuant to such
effective registration statement; (b) such Registrable Security has been
disposed of pursuant to any section of Rule 144 (or any similar provision
then in force under the Securities Act); (c) such Registrable Security is held
by the Partnership or one of its subsidiaries; or (d) such Registrable Security
has been sold in a private transaction in which the transferor’s rights under
this Agreement are not assigned to the transferee of such securities.

 

ARTICLE VIII.

REGISTRATION AND PIGGYBACK RIGHTS

 

Section 8.01                                Shelf
Registration Statement.

 

(a)                                  As
soon as practicable following the Closing, but in any event within 90 days of
the Closing, the Partnership shall prepare and file a shelf registration
statement (including information deemed to be a part of and included in the
registration statement, the “Shelf Registration Statement”) providing
for the resale from time to time, as permitted by Rule 415 of the Securities
Act (or any similar provision then in force under the Securities Act), by each
Holder (as of the date of such filing), of all of each such Holder’s Registrable
Securities.  The Partnership shall use
its commercially reasonable efforts to cause such Shelf Registration Statement
to become effective no later than 180 days from the Closing Date.  Such Shelf Registration Statement (including
the documents incorporated therein by reference), when it becomes effective,
will comply as to form with all applicable requirements of the Securities Act
and the Exchange Act and will not contain an untrue statement of a material
fact or omit to state

 

3

 

a material
fact required to be stated therein or necessary to make the statements therein
not misleading (and, in the case of the prospectus contained in such Shelf
Registration Statement, in the light of the circumstances under which a
statement is made).  If the Shelf
Registration Statement does not become effective or is not declared effective
by the Commission within 210 days after the Closing Date, then each Purchaser
shall be entitled to a payment, as liquidated damages and not as a penalty, of
0.25% of such Purchaser’s respective Purchase Price per 30-day period for the
first sixty (60) days following the 210th day after Closing, with such payment
amount increasing by an additional 0.25% of such Purchaser’s respective Purchase
Price per 30-day period for each subsequent 60 days, up to a maximum of 1.0% of
such Purchaser’s respective Purchase Price per 30-day period (the “Liquidated
Damages”), until such time as the Shelf Registration Statement becomes
effective or there are no longer any Registrable Securities outstanding.  Liquidated Damages for any period of less
than 30-days shall be prorated by multiplying the total Liquidated Damages to
be paid in a full 30-day period by a fraction, the numerator of which is the
number of days for which Liquidated Damages are owed, and the denominator of
which is 30.  The Liquidated Damages
shall be paid to each Purchaser in cash within ten (10) Business Days of the
end of each such 30-day period. The Purchasers’ rights (and any transferee’s
rights pursuant to Section 2.11) under this Section 2.1 shall
terminate when such Registrable Securities become eligible for resale under
Rule 144(k) (or any similar provision then in force under the Securities Act).

 

(b)                                 Suspension
Rights.  The Partnership will use its
commercially reasonable efforts to cause such Shelf Registration Statement to
remain continuously effective under the Securities Act until the Termination
Date (as hereinafter defined); provided,
that the Partnership may, upon written notice to each Holder,
suspend each such Holder’s use of any prospectus that is a part of the Shelf
Registration Statement (in which event each Holder shall discontinue sales of
the Registrable Securities pursuant to the Shelf Registration Statement) if (i)
the Partnership is pursuing an acquisition, merger, reorganization, disposition
or other similar transaction and the Partnership determines in good faith that
the Partnership’s ability to pursue or consummate such a transaction would be
materially adversely affected by any required disclosure of such transaction in
the Shelf Registration Statement or (ii) the Partnership has experienced some
other material non-public event the disclosure of which at such time, in the
good faith judgment of the Partnership, would materially adversely affect the
Partnership; provided, further, in
no event shall the Purchasers be suspended for a period exceeding an aggregate
of 90 days in any 365 day period.  Upon
disclosure of such information or the termination of the condition described
above, the Partnership shall provide prompt notice to each Holder, and shall
promptly terminate any suspension of sales it has put into effect and shall
take such other actions to permit registered sales of Registrable Securities as
contemplated in this Agreement.

 

Section 8.02                                Piggyback
Rights.

 

(a)                                  Participation.  If, at any time during the period beginning
on the Closing Date and ending on the Termination Date, the Partnership
proposes to file (i) a prospectus supplement to an effective shelf registration
statement, including the Shelf Registration Statement, or (ii) a registration
statement, other than a shelf registration statement, in either case, for the
sale of Common Units to the public in an Underwritten Offering for the account
of the Partnership and/or another Person, then, as soon as practicable but not
less than three (3) Business Days prior to the filing of (x) any preliminary
prospectus supplement relating to such

 

4

 

Underwritten
Offering pursuant to Rule 424(b), (y) the prospectus supplement relating to
such Underwritten Offering pursuant to Rule 424(b) (if no preliminary
prospectus supplement is used) or (z) such registration statement, as the case
may be, the Partnership shall provide written notice (an “Offering Notice”)
of such proposed Underwritten Offering to each Holder.  The Offering Notice shall offer each Holder
the opportunity to include all or a portion of such Holder’s Registrable
Securities in such Underwritten Offering. 
Upon receipt of such Offering Notice, each Holder that owned, or any two
or more Holders that are Affiliates that together owned, directly or
indirectly, Registrable Securities having an aggregate Market Value in excess
of $15 million as of the Closing Date may elect to include all or a portion of
its, or their, Registrable Securities in such proposed Underwritten Offering by
delivering written notice (a “Piggyback Inclusion Notice”) specifying
the number of such Registrable Securities (the “Included Registrable
Securities”) to the Partnership and certifying that such Holder (and, if
applicable, its Affiliates) hold Registrable Securities with the requisite
aggregate Market Value within one (1) Business Day after receipt of such
Offering Notice. Any Holder that does not deliver a Piggyback Inclusion Notice
to the Partnership within such specified time shall have no further right to
participate in such Underwritten Offering. 
If, at any time after delivering Offering Notices to the Holders and
prior to the closing of such Underwritten Offering, the Partnership shall
determine for any reason not to undertake or to delay such Underwritten
Offering, the Partnership may, at its election, give written notice of such
determination to each Holder and shall be relieved of its obligation to sell
any Included Registrable Securities in connection therewith; provided, however, in the case of a
termination of such Underwritten Offering or a delay lasting more than thirty
(30) days from the date of notice of such delay, the Partnership shall provide
each Holder with another Offering Notice pursuant to the above provisions of
this Section 2.2(a) prior to undertaking such delayed Underwritten
Offering or any subsequent Underwritten Offering.  Each Holder shall have the right to withdraw
its request for inclusion of its Included Registrable Securities in an
Underwritten Offering by giving written notice to the Partnership of such
withdrawal at any time up to and including the time of pricing of such
Underwritten Offering.

 

(b)                                 Opt
Out and Required Out Notices. At any time after the Market Value of the
Registrable Securities owned by a Holder, directly or indirectly, is $5 million
or less, such Holder may deliver written notice (an “Opt Out Notice”) to
the Partnership instructing the Partnership not to deliver any Offering Notices
to such Holder.  If upon receipt of an
Offering Notice from the Partnership pursuant to Section 2.2(a), a
Holder owns Registrable Securities with a Market Value of $5 million or less,
such Holder shall promptly deliver written notice (a “Required Out Notice”)
thereof to the Partnership; provided,
in the case of a Holder with Affiliates that are also Holders, such Holder
shall only be required to deliver a Required Out Notice to the Partnership if
the aggregate Market Value of Registrable Securities owned by such Holder and
all Affiliates that are Holders is $5 million or less.  After receipt of an Opt Out Notice or a
Required Out Notice from a Holder, the Partnership shall have no further
obligation under Section 2.2(a) to deliver an Offering Notice to
such Holder and such Holder shall have no further rights under Section 2.2(a)
to have any Registrable Securities included in any Underwritten Offerings.

 

(c)                                  Priority
in a Piggyback Offering.  If the
Managing Underwriter of any proposed Underwritten Offering involving Included
Registrable Securities (a “Piggyback Offering”) advises the Partnership
that the total amount of Common Units that the Holders and

 

5

 

any other
Persons, including the General Partners and their affiliates pursuant to
Section 7.12(b) of the Partnership Agreement (each, a “Selling Holder”)
intend to include in such Piggyback Offering exceeds the number that can be
sold in such offering without being likely to have an adverse effect on the
price, timing or distribution of the Common Units offered or the market for the
Common Units, then the Common Units to be included in such Underwritten
Offering shall include the greatest number of Common Units that such Managing
Underwriter advises the Partnership can be sold without having such adverse
effect, with such number to be allocated (i) first, all Common Units that the
Partnership proposes to sell and (ii) second, if there remains availability for
additional Common Units to be included in such Piggyback Offering, pro rata among the Selling Holders and any
other Persons who have been or are granted registration rights on or after the
date of this Agreement (“Other Holders”) who have requested participation
in the Piggyback Offering (based, for each such Selling Holder or Other Holder,
on the percentage derived by dividing (A) the number of Common Units proposed
to be sold by such Selling Holder or such Other Holder in such Underwritten
Offering by (B) the aggregate number of Common Units proposed to be sold by all
Selling Holders and Other Holders in the Piggyback Offering.

 

Section 8.03                                Underwritten
Offering. In the event that a Selling Holder (together with any Affiliate
that is a Selling Holder) elects to dispose of Registrable Securities under the
Shelf Registration Statement pursuant to an Underwritten Offering of at least
fifteen million dollars ($15,000,000) of Common Units, the Partnership shall,
at the request of such Selling Holder, enter into an underwriting agreement in
customary form with the Managing Underwriter or Underwriters, which shall
include, among other provisions, indemnities to the effect and to the extent
provided in Section 2.8, and shall take all such other reasonable actions
as are requested by the Managing Underwriter in order to expedite or facilitate
the disposition of the Registrable Securities; provided, however, that the
Partnership management will not be required to participate in a roadshow or
similar marketing effort unless the Underwritten Offering is of at least forty
million dollars ($40,000,000) of Common Units.

 

Section 8.04                                Underwriting
Procedures. In connection with any Piggyback Offering or other Underwritten
Offering under this Agreement, the Partnership shall be entitled to select the
Managing Underwriter.  In connection with
a Piggyback Offering, each participating Holder and the Partnership shall be obligated to enter into an
underwriting agreement that contains such representations, covenants,
indemnities and other rights and obligations as are customary in underwriting
agreements for firm commitment offerings of securities.  No Holder may participate in a Piggyback
Offering unless it agrees to sell its Registrable Securities on the basis
provided in such underwriting agreement and completes and executes all
questionnaires, powers of attorney, indemnities and other documents reasonably
required under the terms of such underwriting agreement.  Each such Holder may, at its option, require
that any or all of the representations and warranties by, and the other
agreements on the part of, the Partnership, to the extent customarily made by
issuers in secondary Underwritten Offerings, to and for the benefit of such
underwriters also be made to and for such Holder’s benefit and that any or all
of the conditions precedent to the obligations of such underwriters under such
underwriting agreement also be conditions precedent to its obligations. No
Holder shall be required to make any representations or warranties to or agreements
with the Partnership or the underwriters other than representations, warranties
or agreements regarding such Holder itself and its ownership of the Included
Registrable Securities and its intended method of distribution and any other

 

6

 

representation required by
law.  If any such Holder disapproves of
the terms of an underwriting agreement, such Holder may elect to withdraw
therefrom by notice to the Partnership and the Managing Underwriter; provided, however, that such withdrawal
must be made no later than the time of pricing of such Piggyback Offering to be
effective.  No such withdrawal or
abandonment by a Holder shall affect the Partnership’s obligation to pay Registration
Expenses.

 

Section 8.05                                General
Procedures.  In connection with its
obligations herein, the Partnership will, as expeditiously as possible:

 

(a)                                  prepare
and file with the Commission such amendments and supplements to the Shelf
Registration Statement and the prospectus used in connection therewith as may
be necessary to keep the Shelf Registration Statement effective until the
Termination Date and as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities covered
by the Shelf Registration Statement;

 

(b)                                 furnish
to each Holder (i) as far in advance as reasonably practicable before filing
the Shelf Registration Statement or any other registration statement
contemplated by this Agreement or any supplement or amendment thereto, upon
request, copies of reasonably complete drafts of all such documents proposed to
be filed (including exhibits and each document incorporated by reference
therein to the extent then required by the rules and regulations of the
Commission, to the extent not otherwise publicly available in Pacific’s filings
with the Commission), and provide each Holder the opportunity to object to any
information pertaining to such Holder and its plan of distribution that is
contained therein and make the corrections reasonably requested by such Holder
with respect to such information prior to filing the Shelf Registration
Statement or such other registration statement or supplement or amendment
thereto, and (ii) such number of copies of the Shelf Registration Statement or
such other registration statement and the prospectus included therein and any
supplements and amendments thereto as each such Holder may reasonably request
in order to facilitate the public sale or other disposition of the Registrable
Securities covered by such Shelf Registration Statement or other registration
statement;

 

(c)                                  if
applicable, use its commercially reasonable efforts to register or qualify the
Registrable Securities covered by the Shelf Registration Statement or any other
registration statement contemplated by this Agreement under the securities or
blue sky laws of such jurisdictions as each Holder and the Managing
Underwriter, if applicable, shall reasonably request, provided that the
Partnership will not be required to qualify generally to transact business in
any jurisdiction where it is not then required to so qualify or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not then so subject;

 

(d)                                 promptly
notify each Holder and each underwriter at any time when a prospectus is
required to be delivered under the Securities Act, of (i) the filing of the
Shelf Registration Statement or any other registration statement contemplated
by this Agreement or any prospectus or prospectus supplement to be used in
connection therewith that relates to Registrable Securities, or any amendment
or supplement thereto, and, with respect to such Shelf Registration Statement
or any other registration statement or any post-effective amendment thereto,
when the same has become effective and (ii) any written comments from the

 

7

 

Commission
with respect to any filing referred to in clause (i) and any written
request by the Commission for amendments or supplements to the Shelf
Registration Statement or any other registration statement or any prospectus or
prospectus supplement thereto;

 

(e)                                  immediately
notify each Holder and each underwriter at any time when a prospectus is
required to be delivered under the Securities Act, of (i) the happening of any
event as a result of which the prospectus or prospectus supplement contained in
the Shelf Registration Statement or any other registration statement
contemplated by this Agreement that relates to Registrable Securities, as then
in effect, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading (in the case of the prospectus contained
therein, in the light of the circumstances under which a statement is made),
(ii) the issuance or threat of issuance by the Commission of any stop order
suspending the effectiveness of the Shelf Registration Statement or any other
registration statement contemplated by this Agreement that relates to
Registrable Securities, or the initiation of any proceedings for that purpose
or (iii) the receipt by the Partnership of any notification with respect to the
suspension of the qualification of any Registrable Securities for sale under
the applicable securities or blue sky laws of any jurisdiction.  Following the provision of such notice, the
Partnership agrees to as promptly as practicable amend or supplement the
prospectus or prospectus supplement or take other appropriate action so that
the prospectus or prospectus supplement does not include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances then existing and to take such other reasonable action as is
necessary to remove a stop order, suspension, threat thereof or proceedings
related thereto;

 

(f)                                    upon
request and subject to appropriate confidentiality obligations, furnish to each
Selling Holder copies of any and all transmittal letters or other
correspondence with the Commission or any other governmental agency or
self-regulatory body or other body having jurisdiction (including any domestic
or foreign securities exchange) relating to such offering of Registrable
Securities;

 

(g)                                 in
the case of an Underwritten Offering in which a Selling Holder is selling
Purchased Units, furnish upon request of such Selling Holder, (i) an opinion of
counsel for the Partnership dated the date of the closing under the
underwriting agreement, and (ii) a “comfort” letter, dated the effective date
of the applicable registration statement or the date of any amendment or
supplement thereto and a letter of like kind dated the date of the closing
under the underwriting agreement, in each case, signed by the independent
public accountants who have certified the Partnership’s financial statements
included or incorporated by reference into the applicable registration
statement, and each of the opinion and the “comfort” letter shall be in
customary form and covering substantially the same matters with respect to such
registration statement (and the prospectus and any prospectus supplement
included therein) as are customarily covered in opinions of issuer’s counsel
and in accountants’ letters delivered to the underwriters in Underwritten
Offerings of securities and such other matters as such underwriters may
reasonably request;

 

(h)                                 otherwise
use its commercially reasonable efforts to comply with all applicable rules and
regulations of the Commission, and make available to its security holders, as

 

8

 

soon as
reasonably practicable, an earnings statement covering the period of at least
12 months, but not more than 18 months, beginning with the first full calendar
month after the effective date of the Shelf Registration Statement or such
other registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 promulgated
thereunder;

 

(i)                                     make
available to the appropriate representatives of (i) the Managing Underwriter
such information and the Partnership personnel as is reasonable and customary
to enable the underwriters to establish a due diligence defense under the
Securities Act and (ii) each Holder such information, if any, as such Holder
may reasonably request; provided
that the Partnership need not disclose any information to any such
representative unless and until such representative has entered into a
confidentiality agreement with the Partnership;

 

(j)                                     cause
all Registrable Securities registered pursuant to this Agreement to be listed
on the New York Stock Exchange or such other securities exchange(s) or
nationally recognized quotation system(s) on which similar securities issued by
the Partnership are then listed;

 

(k)                                  use
its commercially reasonable efforts to cause the Registrable Securities to be
registered with or approved by such other governmental agencies or authorities
as may be necessary by virtue of the business and operations of the Partnership
to enable each Holder to consummate the disposition of its Registrable
Securities;

 

(l)                                     provide
a transfer agent and registrar for all Registrable Securities covered by the
Shelf Registration Statement or such other registration statement not later
than the effective date thereof; and

 

(m)                               enter
into customary agreements and take such other actions as are reasonably
requested by each Holder or the underwriters, if any, in order to expedite or
facilitate the disposition of each Holder’s Registrable Securities.

 

Each Holder, upon receipt of notice from the
Partnership of the happening of any event of the kind described in subsection (e)
of this Section 2.5, shall forthwith discontinue disposition of Registrable
Securities until such Holder’s receipt of the copies of the supplemented or
amended prospectus contemplated by subsection (e) of this Section 2.5
or until it is advised in writing by the Partnership that the use of the
prospectus may be resumed, and has received copies of any additional or
supplemental filings incorporated by reference in the prospectus, and, if so
directed by the Partnership, each Holder will, or will request the Managing
Underwriter, if any, to deliver to the Partnership (at the Partnership’s
expense) all copies in their possession or control, other than permanent file
copies then in each such Holder’s possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.

 

Section 8.06                                Cooperation
by the Holder. 
The Partnership shall have no obligation to include any Holder’s
Registrable Securities in the Shelf Registration Statement or in a Piggyback
Offering if such Holder has failed to timely furnish such information that, in
the opinion of counsel to the Partnership, is reasonably required in order for
the Shelf Registration Statement or prospectus supplement, as applicable, to
comply with the Securities Act.

 

9

 

Section 8.07                                Lock-up
of Registrable Securities.  For the period beginning on the date
that the Shelf Registration Statement becomes effective and ending on the
Termination Date, each Holder agrees not to effect any public sale or
distribution of the Registrable Securities during the thirty (30) calendar day
period (the “Lock-up Period”) beginning on the date of the pricing of an
Underwritten Offering; provided,
that the duration of the foregoing Lock-up Period shall be no longer than the
duration of the shortest restriction generally imposed by the underwriters on
the officers or directors or any other unitholder of the Partnership on whom a
restriction is imposed; provided, further,
that the foregoing restrictions shall not apply (i) to the sale or distribution
of Registrable Securities in such Underwritten Offering pursuant to an election
under Section 2.2(a), (ii) in the case of an Underwritten Offering in
which a Holder elected to sell Included Registrable Securities pursuant to Section 2.2(a)
but was not able to include any of such Included Registrable Securities as a
result of the application of priority provisions contained in Section 2.2(c),
(iii) to a Holder that has delivered an Opt Out Notice or a Required Out Notice
to the Company pursuant to Section 2.2(b), or (iv) to a Holder that
is not otherewise entitled to participate in such Underwritten Offering
pursuant to the provisions of Section 2.2(a).

 

Section 8.08                                Expenses.

 

(a)                                  Definitions.  “Registration Expenses” means all
expenses incident to the Partnership’s performance under or compliance with
this Agreement to effect the registration of Registrable Securities pursuant to
this Agreement, and the disposition of such securities, including, without
limitation, all registration and filing fees of the Commission, all New York
Stock Exchange listing or other securities exchange or quotation service
listing fees, all registration, filing, qualification and other fees and
expenses of complying with securities or blue sky laws, all fees of the
National Association of Securities Dealers, Inc., all transfer taxes and fees
of transfer agents and registrars, all messenger and delivery expenses, all
word processing, duplicating and printing expenses, the fees and disbursements
of counsel and independent public accountants for the Partnership, including
the expenses of any special audits or “comfort” letters required by or incident
to such performance and compliance. The Partnership shall not be responsible
for any “Selling Expenses,” which means all underwriting fees, discounts
and selling commissions allocable to the sale of the Registrable Securities.

 

(b)                                 Payment
of Expenses.  The Partnership shall
pay all reasonable Registration Expenses in connection with the preparation and
filing of the Shelf Registration Statement and any Piggyback Offering, whether
or not any sale is made by a Holder pursuant to the Piggyback Offering; provided, that, except as otherwise
provided in Section 2.9 hereof, the Partnership shall not be
responsible for legal fees incurred by any Holder in connection with such
Holder’s exercise of its rights hereunder. 
Each Holder shall pay all Selling Expenses and all other expenses (other
than Registration Expenses) in connection with any sale of its Registrable
Securities hereunder.

 

Section 8.09                                Indemnification.

 

(a)                                  By
the Partnership.  In the event of a
registration of any Registrable Securities under the Securities Act pursuant to
this Agreement, the Partnership will indemnify and hold harmless each Holder,
its directors and officers, and each underwriter, pursuant to the

 

10

 

applicable
underwriting agreement with such underwriter, of Registrable Securities and
each Person, if any, who controls each such Holder or underwriter within the
meaning of the Securities Act or the Exchange Act, against any losses, claims,
damages, expenses or liabilities (including reasonable attorneys’ fees and
expenses) (collectively, “Losses”), joint or several, to which such
Holder or underwriter or controlling Person may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such Losses (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Shelf Registration Statement, any
preliminary prospectus supplement or prospectus supplement thereto, or any
amendment or supplement thereof or any other registration statement
contemplated by this Agreement, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
(in the case of a prospectus, in light of the circumstances under which they
were made) not misleading, and will reimburse such Holder, its directors and
officers, each such underwriter and each such controlling Person for any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such Loss or actions or proceedings as such expenses are
incurred; provided, however, that
the Partnership will not be liable in any such case if and to the extent that
any such Loss arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
information furnished by such Holder, such underwriter or such controlling
Person in writing specifically for use in the Shelf Registration Statement,
prospectus supplement thereto or such other registration statement or
prospectus, as applicable.  Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such Holder or any such director, officer or
controlling Person, and shall survive the transfer of such securities by such
Holder

 

(b)                                 By
each Holder.  Each Holder, severally
and not jointly, agrees to indemnify and hold harmless the Partnership, its
directors and officers, and each Person, if any, who controls the Partnership
within the meaning of the Securities Act or of the Exchange Act to the same
extent as the foregoing indemnity from the Partnership to the Holders, but only
with respect to information regarding such Holder furnished in writing by or on
behalf of such Holder expressly for inclusion in the Shelf Registration
Statement or prospectus supplement relating to the Registrable Securities, or
any amendment or supplement thereto; provided,
however, that the liability of each Holder shall not be greater in
amount than the dollar amount of the proceeds (net of Selling Expenses)
received by such Holder from the sale of the Registrable Securities giving rise
to such indemnification.

 

(c)                                  Notice.  Promptly after receipt by an indemnified
party hereunder of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party hereunder, notify the indemnifying party in writing thereof,
but the omission so to notify the indemnifying party shall not relieve it from
any liability that it may have to any indemnified party other than under this Section 2.9.  In any action brought against any indemnified
party, it shall notify the indemnifying party of the commencement thereof.  The indemnifying party shall be entitled to
participate in and, to the extent it shall wish, to assume and undertake the
defense thereof with counsel reasonably satisfactory to such indemnified party
and, after notice from the indemnifying party to such indemnified party of its
election so to assume and undertake the defense thereof, the

 

11

 

indemnifying
party shall not be liable to such indemnified party under this Section 2.9
for any legal expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation and of liaison with counsel so selected; provided, however, that, (i) if the
indemnifying party has failed to assume the defense and employ counsel or (ii)
if the defendants in any such action include both the indemnified party and the
indemnifying party and counsel to the indemnified party shall have concluded
that there may be reasonable defenses available to the indemnified party that
are different from or additional to those available to the indemnifying party,
or if the interests of the indemnified party reasonably may be deemed to
conflict with the interests of the indemnifying party, then the indemnified
party shall have the right to select a separate counsel and to assume such
legal defense and otherwise to participate in the defense of such action, with
the reasonable expenses and fees of one such separate counsel (plus one local
counsel if necessary) and other reasonable expenses related to such
participation to be reimbursed by the indemnifying party as incurred.  Notwithstanding any other provision of this
Agreement, no indemnified party shall settle any action brought against it with
respect to which it is entitled to indemnification hereunder without the
consent of the indemnifying party, unless the settlement thereof imposes no
liability or obligation on, and includes a complete and unconditional release
from all liability of, the indemnifying party.

 

(d)                                 Contribution.  If the indemnification provided for in this Section 2.9
is held by a court or government agency of competent jurisdiction to be
unavailable to the Partnership or any Holder or is insufficient to hold them
harmless in respect of any Losses, then each such indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such Losses in such proportion
as is appropriate to reflect the relative fault of the indemnifying party on
the one hand and of such indemnified party on the other in connection with the
statements or omissions that resulted in such Losses, as well as any other
relevant equitable considerations; provided,
however, that in no event shall such Holder be required to
contribute an aggregate amount in excess of the dollar amount of proceeds (net
of Selling Expenses) received by such Holder from the sale of Registrable
Securities giving rise to such indemnification. 
The relative fault of the Partnership on the one hand and such Holder
(or other indemnified party) on the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact has
been made by, or relates to, information supplied by such party, and the
parties’ relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. 
The parties hereto agree that it would not be just and equitable if
contributions pursuant to this paragraph were to be determined by pro rata allocation or by any other method
of allocation that does not take account of the equitable considerations
referred to in the first sentence of this paragraph.  The amount paid by an indemnified party as a
result of the Losses referred to in the first sentence of this paragraph shall
be deemed to include any legal and other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any Loss that is the
subject of this paragraph. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any Person who is not guilty of such fraudulent
misrepresentation.

 

(e)                                  Conflicts.  To the extent that any Holder shall enter
into an underwriting or similar agreement that contains provisions that
conflict with any provision of Section 2.9

 

12

 

hereof, as
between the Partnership and such Holder, the provisions contained in Section 2.9
hereof shall control.

 

(f)                                    Other
Indemnification.  The provisions of
this Section 2.9 shall be in addition to any other rights to
indemnification or contribution that an indemnified party may have pursuant to
law, equity, contract or otherwise.

 

Section 8.10                                Rule
144 Reporting.  With a view to making
available the benefits of certain rules and regulations of the Commission that
may permit the sale of the Registrable Securities to the public without
registration, the Partnership agrees to use its commercially reasonable efforts
to:

 

(a)                                  Make
and keep public information regarding the Partnership available, as those terms
are understood and defined in Rule 144 of the Securities Act, at all times from
and after the date hereof;

 

(b)                                 File
with the Commission in a timely manner all reports and other documents required
of the Partnership under the Securities Act and the Exchange Act at all times
from and after the date hereof; and

 

(c)                                  Furnish
to each Holder forthwith upon request a copy of the most recent annual or
quarterly report of the Partnership, and such other reports and documents so
filed as such Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing such Holder to sell any such securities
without registration.

 

Section 8.11                                Transfer
or Assignment of Registration Rights. 
The rights granted under this Agreement may be transferred or assigned
by each Holder to one or more Persons, concurrently with the transfer of
Registrable Securities by such Holder to any such Person, (a) if such Person is
an Affiliate of such transferring Holder or (b) if such Person, together with
any Affiliates of such Person, acquires Registrable Securities from such Holder
having an aggregate Market Value in excess of $20 million as of the date of
such transfer or assignment and, in each case, (x) the Partnership is given
written notice prior to any such transfer or assignment, stating the name and address
of each such Person to which such rights are transferred and identifying the
Registrable Securities with respect to which such rights are being transferred
or assigned, and (y) each such Person assumes in writing the obligations of a
Holder under this Agreement.

 

Section 8.12                                Limitation
on Subsequent Registration Rights. From and after the date hereof, the
Partnership shall not, without the prior written consent of the Holders of a
majority of the outstanding Registrable Securities, enter into any agreement
with any current or future holder of any equity securities of the Partnership
that would allow such current or future holder to require the Partnership to
include securities in any registration statement filed by the Partnership on a
basis that is superior in any way to the piggyback rights granted to the
Holders hereunder.

 

13

 

ARTICLE IX.

MISCELLANEOUS

 

Section 9.01                                Communications.  All notices and other communications provided
for or permitted hereunder shall be made in writing by facsimile, courier
service or personal delivery:

 

(a)                                  if
to the Purchasers:

 

to the respective addresses set forth on
Schedule 6.06 of the Purchase Agreement

 

with a copy to:

 

Andrews Kurth LLP

600 Travis, Suite 4200

Houston, Texas 77002

Attention:

Facsimile:

 

(b)                                 if
to subsequent Holders of Registrable Securities, to such Holder at the address
provided pursuant to Section 2.11 above; and

 

(c)                                  if
to the Partnership:

 

Pacific Energy Partners, L.P.

5900 Cherry Avenue

Long Beach, CA 90805-4408

Attention: Lynn T. Wood

Facsimile: 562.728.2823

 

with a copy to:

 

Vinson & Elkins L.L.P.

666 Fifth Avenue, 26th Floor

New York, NY 10103

Attention: Alan Baden

Facsimile: 212-237-0100

 

All such notices and communications shall be
deemed to have been received at the time delivered by hand, if personally
delivered; when receipt acknowledged, if sent via facsimile or sent via
Internet electronic mail; and when actually received, if sent by any other
means.

 

Section 9.02                                Successor
and Assigns; Assignment of Rights. 
This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties, including subsequent Holders of
Registrable Securities to the extent permitted herein. All or any portion of
the rights and obligations of a Holder under this Agreement may only be
transferred or assigned by such Holder in accordance with Section 2.11
hereof.

 

14

 

Section 9.03                                Recapitalization,
Exchanges, etc. Affecting the Common Units. 
The provisions of this Agreement shall apply to the full extent set
forth herein with respect to any and all units of the Partnership or any
successor or assign of the Partnership (whether by merger, consolidation, sale
of assets or otherwise) that may be issued in respect of, in exchange for or in
substitution of, the Registrable Securities, and shall be appropriately
adjusted for combinations, recapitalizations and the like occurring after the
date of this Agreement.

 

Section 9.04                                Aggregation
of Registrable Securities.  All
Registrable Securities held or acquired by Persons who are Affiliates of one
another shall be aggregated together for the purpose of determining the
availability of any rights under this Agreement.  In addition, all Registrable Securities held
or acquired by Fiduciary / Claymore MLP Opportunity Fund and its Affiliates, on
the one hand, and Energy Income and Growth Fund and its Affiliates, on the
other hand, shall be aggregated together for the purpose of determining the availability
of any rights under this Agreement.

 

Section 9.05                                Specific
Performance.  Damages in the event of
breach of this Agreement by a party hereto may be difficult, if not impossible,
to ascertain, and it is therefore agreed that each such Person, in addition to
and without limiting any other remedy or right it may have, will have the right
to an injunction or other equitable relief in any court of competent
jurisdiction, enjoining any such breach, and enforcing specifically the terms
and provisions hereof, and each of the parties hereto hereby waives any and all
defenses it may have on the ground of lack of jurisdiction or competence of the
court to grant such an injunction or other equitable relief.  The existence of this right will not preclude
any such Person from pursuing any other rights and remedies at law or in equity
that such Person may have.

 

Section 9.06                                Counterparts.  This Agreement may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which counterparts, when so executed and delivered, shall be deemed to be an
original and all of which counterparts, taken together, shall constitute but
one and the same Agreement.

 

Section 9.07                                Headings.  The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

 

Section 9.08                                Governing Law.  This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York.

 

Section 9.09                                Severability
of Provisions.  Any provision of this
Agreement that is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or affecting
or impairing the validity or enforceability of such provision in any other
jurisdiction.

 

Section 9.10                                Entire
Agreement.  This Agreement and the
Purchase Agreement are intended by the parties as a final expression of their
agreement and intended to be a complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject
matter contained herein or therein. 
There are no restrictions, promises, warranties or undertakings, other
than those set forth or referred to herein or therein with respect to the
rights

 

15

 

granted by the Partnership set
forth herein or therein.  This Agreement
and the Purchase Agreement supersede all prior agreements and understandings
between the parties with respect to such subject matter.

 

Section 9.11                                Amendment.
This Agreement may be amended only by means of a written amendment signed by
the Partnership and the Holders of a majority of the then outstanding
Registrable Securities; provided, however,
that no such amendment shall materially and adversely affect the rights of any
Holder hereunder without the consent of such Holder.

 

Section 9.12                                No
Presumption. In the event any claim is made by a party relating to any
conflict, omission, or ambiguity in this Agreement, no presumption or burden of
proof or persuasion shall be implied by virtue of the fact that this Agreement
was prepared by or at the request of a particular party or its counsel.

 

Section 9.13                                Termination.  The obligations of the Purchasers and Pacific
pursuant to Sections 2.1, 2.2 and 2.3 of this Agreement shall terminate and be
of no further force or effect immediately following the earliest to occur of:
(i) the date as of which all Registrable Securities have ceased to be Registrable
Securities in accordance with Section 1.2 or (ii) the date two years from
the Closing Date (such date, the “Termination Date”); provided, that termination of
Section 2.1 pursuant to this Section 3.13 shall in no way prejudice
the right of the Purchasers to receive Liquidated Damages that have accrued
prior to the Termination Date but which have not been paid.

 

[The remainder of this page is intentionally
left blank.]

 

16Exhibit
10.1

 

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

 

by and between

 

IMAGE ENTERTAINMENT, INC.

 

and

 

WELLS FARGO FOOTHILL, INC.

 

Dated as of August 10, 2005

 

 

TABLE OF
CONTENTS

 

	
  1.

  	
  DEFINITIONS AND CONSTRUCTION

  	
   

  
	
   

  	
  1.1

  	
  Definitions

  	
   

  
	
   

  	
  1.2

  	
  Accounting Terms

  	
   

  
	
   

  	
  1.3

  	
  Code

  	
   

  
	
   

  	
  1.4

  	
  Construction

  	
   

  
	
   

  	
  1.5

  	
  Schedules and Exhibits

  	
   

  
	
  2.

  	
  LOAN AND TERMS OF PAYMENT

  	
   

  
	
   

  	
  2.1

  	
  Revolving Advances

  	
   

  
	
   

  	
  2.2

  	
  Letters of Credit and Letter
  of Credit Guarantees

  	
   

  
	
   

  	
  2.3

  	
  Capital Expenditure Loan

  	
   

  
	
   

  	
  2.4

  	
  Overadvances

  	
   

  
	
   

  	
  2.5

  	
  Interest: Rates, Payments,
  and Calculations

  	
   

  
	
   

  	
  2.6

  	
  Collection of Accounts

  	
   

  
	
   

  	
  2.7

  	
  Crediting Payments;
  Application of Collections

  	
   

  
	
   

  	
  2.8

  	
  Maintenance of Loan Account;
  Statements of Obligations

  	
   

  
	
   

  	
  2.9

  	
  Designated Account

  	
   

  
	
   

  	
  2.10

  	
  Fees

  	
   

  
	
   

  	
  2.11

  	
  Intentionally Omitted

  	
   

  
	
   

  	
  2.12

  	
  LIBOR Option

  	
   

  
	
   

  	
  2.13

  	
  Payments on the Capital
  Expenditure Loan Note

  	
   

  
	
  3.

  	
  CONDITIONS; TERM
  OF AGREEMENT

  	
   

  
	
   

  	
  3.1

  	
  Conditions
  Precedent to Initial Advance, Capital Expenditure Loan, L/C, L/C Guaranty

  	
   

  
	
   

  	
  3.2

  	
  Conditions
  Precedent to All Advances, Capital Expenditure Loans, L/Cs, or L/C Guarantees;
  Conditions Subsequent

  	
   

  
	
   

  	
  3.3

  	
  Term;
  Automatic Renewal

  	
   

  
	
   

  	
  3.4

  	
  Effect of
  Termination

  	
   

  
	
   

  	
  3.5

  	
  Early
  Termination by Borrower

  	
   

  
	
   

  	
  3.6

  	
  Termination
  Upon Event of Default

  	
   

  
	
   

  	
  3.7

  	
   

  	
   

  
	
  4.

  	
  CREATION OF
  SECURITY INTEREST

  	
   

  
	
   

  	
  4.1

  	
  Grant of
  Security Interest

  	
   

  
	
   

  	
  4.2

  	
  Negotiable
  Collateral

  	
   

  
	
   

  	
  4.3

  	
  Collection
  of Accounts, General Intangibles, Negotiable Collateral

  	
   

  
	
   

  	
  4.4

  	
  Commercial
  Tort Claims; Delivery of Additional Documentation Required

  	
   

  
	
   

  	
  4.5

  	
  Power of
  Attorney

  	
   

  
	
   

  	
  4.6

  	
  Right to
  Inspect

  	
   

  
	
   

  	
  4.7

  	
  Filing
  Authorization

  	
   

  
	
   

  	
  4.8

  	
  Control
  Agreements

  	
   

  
	
  5.

  	
  REPRESENTATIONS
  AND WARRANTIES

  	
   

  

 

i

 

	
   

  	
  5.1

  	
  No Prior
  Encumbrances

  	
   

  
	
   

  	
  5.2

  	
  Eligible
  Accounts

  	
   

  
	
   

  	
  5.3

  	
  Eligible
  Inventory

  	
   

  
	
   

  	
  5.4

  	
  Location of
  Inventory and Equipment

  	
   

  
	
   

  	
  5.5

  	
  Inventory
  Records

  	
   

  
	
   

  	
  5.6

  	
  State of
  Incorporation; Location of Chief Executive Office; Organizational
  Identification Number; Commercial Tort Claims

  	
   

  
	
   

  	
  5.7

  	
  Due
  Organization and Qualification; Subsidiaries

  	
   

  
	
   

  	
  5.8

  	
  Due
  Authorization; No Conflict

  	
   

  
	
   

  	
  5.9

  	
  Litigation

  	
   

  
	
   

  	
  5.10

  	
  No Material
  Adverse Change in Financial Condition

  	
   

  
	
   

  	
  5.11

  	
  Solvency

  	
   

  
	
   

  	
  5.12

  	
  Employee
  Benefits

  	
   

  
	
   

  	
  5.13

  	
  Environmental
  Condition

  	
   

  
	
   

  	
  5.14

  	
  Reliance by
  Foothill; Cumulative

  	
   

  
	
   

  	
  5.15

  	
  Lender’s
  Liens

  	
   

  
	
   

  	
  5.16

  	
  Brokerage
  Fees

  	
   

  
	
   

  	
  5.17

  	
  License
  Agreements

  	
   

  
	
   

  	
  5.18

  	
  Reaffirmation

  	
   

  
	
   

  	
  5.19

  	
  Indebtedness

  	
   

  
	
   

  	
  5.20

  	
  Deposit
  Accounts and Securities Accounts

  	
   

  
	
  6.

  	
  AFFIRMATIVE
  COVENANTS

  	
   

  
	
   

  	
  6.1

  	
  Accounting
  System

  	
   

  
	
   

  	
  6.2

  	
  Collateral
  Reports

  	
   

  
	
   

  	
  6.3

  	
  Schedules of
  Accounts

  	
   

  
	
   

  	
  6.4

  	
  Financial
  Statements, Reports, Certificates

  	
   

  
	
   

  	
  6.5

  	
  Tax Returns

  	
   

  
	
   

  	
  6.6

  	
  Designation
  of Inventory

  	
   

  
	
   

  	
  6.7

  	
  Returns

  	
   

  
	
   

  	
  6.8

  	
  Title to
  Equipment

  	
   

  
	
   

  	
  6.9

  	
  Maintenance
  of Equipment

  	
   

  
	
   

  	
  6.10

  	
  Taxes

  	
   

  
	
   

  	
  6.11

  	
  Insurance

  	
   

  
	
   

  	
  6.12

  	
  Financial
  Covenants

  	
   

  
	
   

  	
  6.13

  	
  No Setoffs
  or Counterclaims

  	
   

  
	
   

  	
  6.14

  	
  Location of
  Inventory and Equipment

  	
   

  
	
   

  	
  6.15

  	
  Compliance
  with Laws

  	
   

  
	
   

  	
  6.16

  	
  Leases

  	
   

  
	
   

  	
  6.17

  	
  License
  Agreements

  	
   

  
	
   

  	
  6.18

  	
  Formation
  of Subsidiaries

  	
   

  
	
  7.

  	
  NEGATIVE COVENANTS

  	
   

  

 

ii

 

	
   

  	
  7.1

  	
  Indebtedness

  	
   

  
	
   

  	
  7.2

  	
  Liens

  	
   

  
	
   

  	
  7.3

  	
  Restrictions
  on Fundamental Changes

  	
   

  
	
   

  	
  7.4

  	
  Change Name

  	
   

  
	
   

  	
  7.5

  	
  Guarantee

  	
   

  
	
   

  	
  7.6

  	
  Restructure

  	
   

  
	
   

  	
  7.7

  	
  Prepayments

  	
   

  
	
   

  	
  7.8

  	
  Change of
  Control

  	
   

  
	
   

  	
  7.9

  	
  Capital
  Expenditures

  	
   

  
	
   

  	
  7.10

  	
  Consignments

  	
   

  
	
   

  	
  7.11

  	
  Distributions

  	
   

  
	
   

  	
  7.12

  	
  Accounting
  Methods

  	
   

  
	
   

  	
  7.13

  	
  Investments

  	
   

  
	
   

  	
  7.14

  	
  Transactions
  with Affiliates

  	
   

  
	
   

  	
  7.15

  	
  Suspension

  	
   

  
	
   

  	
  7.16

  	
  Use of
  Proceeds

  	
   

  
	
   

  	
  7.17

  	
  Change in
  Location of Chief Executive Office; Inventory and Equipment with Bailees

  	
   

  
	
   

  	
  7.18

  	
  Amendment
  or Termination of License Agreements

  	
   

  
	
   

  	
  7.19

  	
  Securities
  Accounts

  	
   

  
	
  8.

  	
  EVENTS OF DEFAULT

  	
   

  
	
  9.

  	
  FOOTHILL’S
  RIGHTS AND REMEDIES

  	
   

  
	
   

  	
  9.1

  	
  Rights and
  Remedies

  	
   

  
	
   

  	
  9.2

  	
  Remedies
  Cumulative

  	
   

  
	
  10.

  	
  TAXES AND EXPENSES

  	
   

  
	
  11.

  	
  WAIVERS;
  INDEMNIFICATION

  	
   

  
	
   

  	
  11.1

  	
  Demand;
  Protest; etc

  	
   

  
	
   

  	
  11.2

  	
  Foothill’s
  Liability for Collateral

  	
   

  
	
   

  	
  11.3

  	
  Indemnification

  	
   

  
	
  12.

  	
  NOTICES

  	
   

  
	
  13.

  	
  CHOICE OF
  LAW AND VENUE; JURY TRIAL WAIVER

  	
   

  
	
  14.

  	
  DESTRUCTION
  OF BORROWER’S DOCUMENTS

  	
   

  
	
  15.

  	
  GENERAL PROVISIONS

  	
   

  
	
   

  	
  15.1

  	
  Effectiveness

  	
   

  
	
   

  	
  15.2

  	
  Successors
  and Assigns

  	
   

  
	
   

  	
  15.3

  	
  Confidentiality

  	
   

  
	
   

  	
  15.4

  	
  Section Headings

  	
   

  
	
   

  	
  15.5

  	
  Interpretation

  	
   

  

 

iii

 

	
   

  	
  15.6

  	
  Severability
  of Provisions

  	
   

  
	
   

  	
  15.7

  	
  Amendments
  in Writing

  	
   

  
	
   

  	
  15.8

  	
  Counterparts;
  Telefacsimile Execution

  	
   

  
	
   

  	
  15.9

  	
  Revival and
  Reinstatement of Obligations

  	
   

  
	
   

  	
  15.10

  	
  Integration

  	
   

  
	
   

  	
  15.11

  	
  Borrower
  Acknowledgment of Prior Obligations and Continuation Thereof

  	
   

  
	
   

  	
  15.12

  	
  No
  Novation

  	
   

  

 

iv

 

SCHEDULES AND EXHIBITS

 

	
  Schedule E-1

  	
  Eligible Inventory Locations

  	
   

  
	
  Schedule P-1

  	
  Permitted Liens

  	
   

  
	
  Schedule 2.6

  	
  Lockbox Banks

  	
   

  
	
  Schedule 5.6

  	
  State of Incorporation; Location of Chief Executive
  Office; Organizational Identification Number; Commercial Tort Claims

  	
   

  
	
  Schedule 5.7

  	
  Subsidiaries

  	
   

  
	
  Schedule 5.9

  	
  Litigation

  	
   

  
	
  Schedule 5.17

  	
  License Agreements

  	
   

  
	
  Schedule 5.19

  	
  Indebtedness

  	
   

  
	
  Schedule 5.20

  	
  Deposit Accounts; Securities Accounts

  	
   

  
	
  Schedule 6.14

  	
  Location of Inventory and Equipment

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit C-1

  	
  Form of Capital Expenditure Note

  	
   

  
	
  Exhibit C-2

  	
  Form of Compliance Certificate

  	
   

  

 

1

 

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

 

This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT,
is entered into as of August 10, 2005, between WELLS FARGO
FOOTHILL, INC., a California corporation formerly known as Foothill
Capital Corporation (“Foothill”), with a place of business located at
2450 Colorado Avenue, Suite 3000 West, Santa Monica, California 90404, and
IMAGE ENTERTAINMENT, INC., a California
corporation (“Borrower”), with its chief executive office located at
20525 Nordhoff St., Suite 200, Chatsworth, California 91311.

 

WHEREAS, Borrower and Foothill are parties to that
certain Loan and Security Agreement, dated as of December 28, 1998 (as
amended, supplemented, and otherwise modified from time to time prior to the
Restatement Effective Date, the “Existing Loan Agreement”);

 

WHEREAS, subject to the terms and conditions set forth
herein, Borrower and Foothill desire to amend and restate the Existing Loan
Agreement in its entirety as provided in this Agreement, it being understood
that except as set forth in Section 3.1(a)(l)(i), no repayment of the
obligations under the Existing Loan Agreement is being effected hereby, but
merely an amendment and restatement in accordance with the terms hereof.

 

The parties agree as
follows:

 

1.                                      DEFINITIONS
AND CONSTRUCTION.

 

1.1                                 Definitions.  As used
in this Agreement, the following terms shall have the following definitions:

 

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

 

“Accounts” means an account (as that term is
defined in the Code).

 

“Additional Documents” has the meaning set
forth in Section 4.4.

 

“Advances” has the meaning set forth in Section 2.1(a).

 

“Affiliate” means, as applied to any Person,
any other Person directly or indirectly controlling, controlled by, or under
common control with, that Person.  For
purposes of this definition, “control” as applied to any Person means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of that Person, whether through the
ownership of voting securities, by contract, or otherwise.

 

“Agreement” means this Amended and Restated
Loan and Security Agreement and any extensions, riders, supplements, notes,
amendments, or modifications to or in connection with this Amended and Restated
Loan and Security Agreement.

 

“Applicable Margin” means as of any date of
determination, the per annum percentage determined by the matrix set forth
below, based upon the average Excess Availability for the calendar month
immediately preceding such date of determination:

 

1

 

	
  Average Excess Availability

  	
   

  	
  Applicable Margin

  	
   

  
	
  Greater than
  $15,000,000

  	
   

  	
  0.00

  	
  %

  
	
  Greater than
  $7,500,000 but less than or equal to $15,000,000

  	
   

  	
  0.25

  	
  %

  
	
  Less than or
  equal to $7,500,000

  	
   

  	
  0.50

  	
  %

  

 

“Asset Purchase Agreement” means that certain
Asset Purchase Agreement dated August 20, 1998 between Crane and Image
Newco, Inc.

 

“Authorized Officer” means any officer or
employee of Borrower.

 

“Average Unused Portion of Maximum Revolving Credit
Amount” means (a) the Maximum Revolving Credit Amount; less (b) the
sum of:  (i) the average Daily
Balance of advances made by Foothill under Section 2.1 that were
outstanding during the immediately preceding month, plus (ii) the average
Daily Balance of the undrawn L/Cs and L/C Guarantees issued by Foothill under Section 2.2
that were outstanding during the immediately preceding month.

 

“BA Leasing” means BankAmerica Leasing &
Capital Corporation.

 

“BofA” means Bank of America National Trust and
Savings Association in Nevada.

 

“BofA Mortgagee Waiver” means a collateral
access and personal property subordination agreement entered into between
Foothill and BofA, the terms of which are acceptable to Foothill.

 

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

 

“Base LIBOR Rate” means the rate per annum,
determined by Foothill in accordance with its customary procedures, and
utilizing such electronic or other quotation sources as it considers
appropriate (rounded upwards, if necessary, to the next 1/100°/a), to be the
rate at which Dollar deposits (for delivery on the first day of the requested
Interest Period) are offered to major banks in the London interbank market 2
Business Days prior to the commencement of the requested Interest Period, for a
term and in an amount comparable to the Interest Period and the amount of the
LIBOR Rate Loan requested (whether as an initial LIBOR Rate Loan or as a
continuation of a LIBOR Rate Loan or as a conversion of a Reference Rate Loan
to a LIBOR Rate Loan) by Borrower in accordance with this Agreement, which
determination shall be conclusive in the absence of manifest error.

 

2

 

“Benefit Plan” means a “defined benefit plan”
(as defined in Section  3(35) of ERISA) for which Borrower, any Subsidiary
of Borrower, or any ERISA Affiliate of Borrower, has been an “employer” (as
defined in Section 3(5) of ERISA) within the past six years.

 

“Borrower” has the meaning set forth in the
preamble to this Agreement.

 

“Borrower’s Books” means all of Borrower’s and
its Subsidiaries’ books and records including: 
ledgers; records indicating, summarizing, or evidencing Borrower’s or
its Subsidiaries’ properties or assets (including the Collateral or the Real
Property) or liabilities; all information relating to Borrower’s or its
Subsidiaries’ business operations or financial condition; and all computer
programs, disc or tape files, printouts, runs, or other computer prepared
information.

 

“Borrower Collateral” means all of Borrower’s
now owned or hereafter acquired right, title, and interest in and to each of
the following:

 

(a)                                  all
of its Accounts,

 

(b)                                 all
of its Borrower’s Books,

 

(c)                                  all
of its commercial tort claims described on Schedule 5.6(d),

 

(d)                                 all
of its Deposit Accounts,

 

(e)                                  all
of its Equipment,

 

(f)                                    all
of its General Intangibles,

 

(g)                                 all
of its Inventory,

 

(h)                                 all
of its Investment Property (including all of its securities and Securities
Accounts),

 

(i)                                     all
of its Negotiable Collateral,

 

(j)                                     all
of its Supporting Obligations,

 

(k)                                  money
or other assets of Borrower that now or hereafter come into the possession,
custody, or control of Foothill, and

 

(l)                                     the
proceeds and products, whether tangible or intangible, of any of the foregoing,
including proceeds of insurance covering any or all of the foregoing, and any
and all Accounts, Borrower’s Books, Deposit Accounts, Equipment, General
Intangibles, Inventory, Investment Property, Negotiable Collateral, Real
Property, Supporting Obligations, money, or other tangible or intangible property
resulting from the sale, exchange, collection, or other disposition of any of
the foregoing, or any portion thereof or interest therein, and the proceeds
thereof.

 

“Borrowing Base” has the meaning set forth in Section 2.1.

 

3

 

“Borrowing Base Parties” means, collectively,
Borrower and, subject to the following terms and conditions, HVE: (i) Foothill
shall have conducted a field audit, and, if necessary, an appraisal, of the
Accounts of HVE, each of which audit or appraisal shall be satisfactory to
Foothill in its sole discretion and (ii) Foothill shall have given written
notice to Borrower confirming Foothill’s approval of HVE as a Borrowing Base
Party.  Each of Borrower and, subject to
the satisfaction of the foregoing conditions, HVE is a “Borrowing Base Party”.

 

“Business Day” means any day that is not a
Saturday, Sunday, or other day on which banks are authorized or required to
close in the State of California, except that, if a determination of a Business
Day shall relate to a LIBOR Rate Loan, the term “Business Day” also shall
exclude any day on which banks are closed for dealings in Dollar deposits in
the London interbank market.

 

“Capital Expenditure Loan” means one or more of
the term loans made, or to be made, by Foothill to Borrower pursuant to the
terms of Section 2.3 hereof.

 

“Capital Expenditure Loan Commitment” has the
meaning set forth in Section 2.3 hereof.

 

“Capital Expenditure Loan Note” has the meaning
set forth in Section 2.3 hereof, which note shall be in the form of
Exhibit C-1 attached hereto.

 

“Cash Equivalents” shall mean, as to any
Person, (a) securities issued or directly and fully guarantied or insured
by the United States or any agency or instrumentality thereof (provided that
the full faith and credit of the United States is pledged in support thereof)
having maturities of not more than one year from the date of acquisition, (b) certificates
of deposit of any commercial bank incorporated under the laws of the United
States or any state thereof, of recognized standing having capital and
unimpaired surplus in excess of $200,000,000 and whose short-term commercial
paper rating at the time of acquisition is at least A-2 or the equivalent
thereof by Standard & Poor’s Corporation (‘S&P’) or at least P-2
or the equivalent thereof by Moody’s Investors Services, Inc. (‘Moody’s’)
(any such bank, an ‘Approved Bank’), with such deposits or certificates having
maturities of not more than one year from the date of acquisition, (c) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (a) and (b) above entered into with
any Approved Bank, (d) commercial paper or finance company paper issued by
any Person incorporated under the laws of the United States or any state
thereof and rated at least A-2 or the equivalent thereof by S&P or at least
P-2 or the equivalent thereof by Moody’s and in each case maturing not more
than one year after the date of acquisition, and (e) investments in money
market funds that are registered under the Investment Company Act of 1940,
which have net assets of at least $200,000,000 and at least eighty-five percent
(85%) of whose assets consist of securities and other obligations of the type
described in clause (a) through (d) above.  All such Cash Equivalents must be denominated
solely for payment in U.S.  Dollars.

 

“CD” means compact disc digital format.

 

“Change of Control” shall be deemed to have
occurred at such time as (i) a “person” or “group” (within the meaning of
Sections 13(d) and 14(d)(2) of the Securities

 

4

 

Exchange Act of 1934, but exclusive of IIC, so long as
it continues to be owned and controlled by Messrs. John W. Kluge and
Stuart Subotnick, or their respective heirs) becomes the “beneficial owner” (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly
or indirectly, of more than 35% of the total voting power of all classes of
stock then outstanding of Borrower normally entitled to vote in the election of
directors, or (ii) Borrower ceases to own 100% of the outstanding Stock of
each of its Subsidiaries.

 

“Code” means the California Uniform Commercial
Code, as in effect from time to time; provided, however, that in
the event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection, priority, or remedies with respect to Lender’s Lien on
any Collateral is governed by the Uniform Commercial Code as enacted and in
effect in a jurisdiction other than the State of California, the term “Code”
shall mean the Uniform Commercial Code as enacted and in effect in such other
jurisdiction solely for purposes of the provisions thereof relating to such
attachment, perfection, priority, or remedies.

 

“Collateral” means all assets and interests in
assets and proceeds thereof now owned or hereafter acquired by Borrower or its
Subsidiaries in or upon which a Lien is granted under any of the Loan
Documents.

 

“Collateral Access Agreement” means a landlord
waiver, mortgagee waiver, bailee letter, or acknowledgement agreement of any
warehouseman, processor, lessor, consignee, or other Person in possession of,
having a lien upon, or having rights or interests in the Borrower’s Books, or
the Equipment or Inventory of Borrower or its Subsidiaries, in each case, in
form and substance satisfactory to Foothill.

 

“Collections” means all cash, checks, notes,
instruments, and other items of payment (including, insurance proceeds,
proceeds of cash sales, rental proceeds, and tax refunds).

 

“Commercial Tort Claim Assignment” has the
meaning set forth in Section 4.4.

 

“Compliance Certificate” means a certificate
substantially in the form of Exhibit C-2 and delivered by the chief
accounting officer of Borrower to Foothill.

 

“Control Agreement” means a control agreement,
in form and substance satisfactory to Foothill, executed and delivered by
Borrower or any of its Subsidiaries, Foothill, and the applicable securities
intermediary with respect to a Securities Account or bank with respect to a
Deposit Account.

 

“Crane” means Ken Crane’s Magnavox City, Inc.
d/b/a Ken Crane’s Home Entertainment, a California corporation.

 

“Daily Balance” means the amount of an
Obligation owed at the end of a given day.

 

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

 

5

 

“Designated Account” means account number
3030148974 of Borrower maintained with Borrower’s Designated Account Bank, or
such other Deposit Account of Borrower (located within the United States) that
has been designated, in writing and from time to time, by Borrower to Foothill.

 

“Designated Account Bank” means Union Bank of
California, N.A., whose office is located at 5855 Topanga Canyon Boulevard, Suite 200,
Woodland Hills, California, 91367, and whose ABA number is 122-000-496.

 

“Dilution Reserve” means, as of the date of any
determination, an amount equal to (a) the amount of Eligible Accounts,
multiplied by (b) the amount (expressed as a percentage and calculated
based upon the prior twelve month period) of Accounts of the Borrowing Base
Parties which were the subject of credit memoranda and other dilution in excess
of twelve percent (12%); provided, however, that if (i) the
average Excess Availability (for the six calendar month period immediately
preceding such date of determination) is at least $7,500,000 and (ii) no
Event of Default has occurred and is continuing, then the “Dilution Reserve”
shall mean the amount of Eligible Accounts, multiplied by the amount (expressed
as a percentage and calculated based upon the prior twelve month period) of
Accounts of the Borrowing Base Parties which were the subject of credit
memoranda and other dilution in excess of fifteen percent (15%).

 

“Dollars” or “$” means United States
dollars.

 

“DVD” means digital video disc optical format.

 

“Early Termination Premium” has the meaning set
forth in Section 3.5.

 

“EBITDA” means, with respect to any fiscal
period, consolidated earnings of the Borrower and its Subsidiaries before all
interest, taxes, depreciation and amortization expenses (excluding Borrower’s
or its subsidiaries amortized production costs) for such period, determined in
accordance with GAAP.

 

“Eligible Accounts” means those Accounts, net
of finance charges, created by any Borrowing Base Party in the ordinary course
of business that arise out of such Borrowing Base Party sale of goods or
rendition of services, that strictly comply with each and all of the
representations and warranties respecting Accounts made in the Loan Documents,
and that are and at all times continue to be acceptable to Foothill in all
respects; provided, however, that standards of eligibility may be
fixed and revised from time to time by Foothill in Foothill’s reasonable credit
judgment.  Eligible Accounts shall not
include the following:

 

(a)                                  Accounts
that the Account Debtor has failed to pay within sixty (60) to eighty-nine
(89) days of the due date set forth in the invoice to the extent of that amount
by which the total of Accounts in such category of past-due Accounts would
exceed ten percent (10%) of the total of Eligible Accounts as of the date of
the determination thereof, or Accounts that the Account Debtor has failed to
pay within ninety (90) days of the due date set forth in the invoice, or
Accounts with selling terms of more than ninety (90) days, and all
Accounts owed by an Account Debtor that has failed to pay fifty percent (50%)
or more of its Accounts owed to Borrower within ninety (90) days of the
due date set forth in the invoice;

 

6

 

(b)                                 Accounts
with respect to which the Account Debtor is an officer, employee, Affiliate, or
agent of Borrower;

 

(c)                                  Accounts
with respect to which goods are placed on consignment, guaranteed sale, sale or
return, sale on approval, or bill and hold, are C.O.D. or subject to conditional sale
contracts, or other terms by reason of which the payment by the
Account Debtor may be conditional;

 

(d)                                 Accounts
with respect to which the Account Debtor is not resident of the United States
or Canada, and which are not either (i) covered by credit insurance in
form and amount, and by an insurer, satisfactory to Foothill, or (ii) supported
by one or more letters of credit that are assignable by their terms and have
been delivered to Foothill in an amount, of a tenor, and issued by a financial
institution, acceptable to Foothill;

 

(e)                                  Accounts
with respect to which the Account Debtor is either (i) the United States
or any department, agency, or instrumentality of the United States (exclusive,
however, of Accounts with respect to which Borrower has complied, to the
satisfaction of Foothill, with the Assignment of Claims Act, 31 U.S.C. § 3727),
or (ii) any State of the United States;

 

(f)                                    Accounts
with respect to which Borrower or any of its Subsidiaries is or may become
liable to the Account Debtor for goods sold or services rendered by the Account
Debtor to such Person (exclusive, however, of Accounts with respect to which
Borrower shall have obtained an agreement, in form and substance satisfactory
to Foothill, from the Account Debtor agreeing to waive its rights of offset as
against Foothill);

 

(g)                                 Accounts
with respect to an Account Debtor (including Musicland Group, Inc. (“Musicland”))
whose total obligations owing to the Borrowing Base Parties exceed fifteen
percent (15%) of all Eligible Accounts, to the extent of the obligations owing
by such Account Debtor in excess of such percentage; provided, however,
(i) in the case of Accounts with respect to which Anderson Merchandisers (“Anderson”)
is the Account Debtor, Eligible Accounts shall not include Accounts thereof
owing to Borrowing Base Parties to the extent that the total obligations of
Anderson owing to the Borrower and its Subsidiaries exceed thirty percent (30%)
of all Eligible Accounts, it being understood that such percentage threshold
for Accounts owing by Anderson is subject to downward modification in Foothill’s
sole discretion based on Foothill’s continuing review, from time to time, of
the performance of such Accounts, and (ii) in the case of Accounts with
respect to which Best Buy, Inc. (“Best Buy”) is the Account Debtor,
Eligible Accounts shall not include Accounts thereof owing to the Borrowing
Base Parties to the extent that the total obligations of Best Buy owing to the
Borrower and its Subsidiaries exceed twenty-five percent (25%) of all Eligible
Accounts; provided, however, that in no event shall Eligible
Accounts include Accounts of Musicland or Best Buy to the extent that the
aggregate amount of total obligations of Musicland and Best Buy owing to
Borrower and its Subsidiaries exceed forty percent (40%) of all Eligible
Accounts; and provided further, however, that in no event shall Eligible
Accounts include Accounts of Anderson or Best Buy to the extent that the
aggregate amount of total obligations of Anderson and Best Buy owing to
Borrower and its Subsidiaries exceed forty-five percent (45%) of all Eligible
Accounts;

 

7

 

(h)                                 Accounts
arising from rebilling or chargebacks with respect to short billing on prior
invoices;

 

(i)                                     Accounts
with respect to which the Account Debtor disputes liability or makes any claim
with respect thereto (to the extent of the amount of the dispute or claim), or
is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business;

 

(j)                                     Accounts
the collection of which Foothill, in its reasonable credit judgment, believes
to be doubtful by reason of the Account Debtor’s financial condition;

 

(k)                                  Accounts
that are payable in other than United States Dollars;

 

(1)                                  Accounts
with respect to which the goods giving rise to such Account have not been
shipped and billed to the Account Debtor, the services giving rise to such
Account have not been performed and accepted by the Account Debtor, or the
Account otherwise does not represent a final sale;

 

(m)                               Accounts
that represent progress payments or other advance billings that are due prior
to the completion of performance by Borrower of the subject contract for goods
or services; and

 

(n)                                 Accounts
that are not subject to a valid and perfected first priority security interest
in favor of Foothill.

 

 “Eligible
Inventory” means Inventory consisting of first quality DVD or CD finished
goods held for sale in the ordinary course of any Borrowing Base Party’s
business, net of any variance between the amounts thereof as determined by such
Borrower’s perpetual inventory as compared to the amounts thereof recorded in
such Borrower’s general ledger, that are located at such Borrowing Base Party’s
premises identified on Schedule E-1, are acceptable to Foothill in
the exercise of its reasonable credit judgment, and strictly comply with all
representations and warranties made to Foothill. Eligible Inventory shall not
include Exclusive DVD or CD Inventory, Inventory consisting of laserdiscs or
any other format other than DVD or CD, slow moving or obsolete items,
restrictive or custom items, work-in-process, components, packaging (including
DVD “jewel cases”) and shipping materials, supplies used or consumed in any
Borrowing Base Party’s business, Inventory at any location in the continental
United States other than those set forth on Schedule E-1, Inventory
subject to a security interest or lien in favor of any third Person, bill and
hold goods, Inventory that is not subject to Foothill’s valid and perfected
first priority security interest, defective goods, “seconds,” Inventory
acquired on consignment, and Inventory located on real property leased by
Borrower or any of its Subsidiaries or in a contract warehouse, in each case,
unless it is subject to a Collateral Access Agreement executed by the lessor or
warehouseman, as the case may be, and unless it is segregated or otherwise
separately identifiable from goods of others, if any stored on the premises.
Eligible Inventory shall be valued at the lower of Borrower’s cost (computed on
an average cost basis according to GAAP) or market value; provided, however,
that the value of any and all Eligible Inventory consisting of Inventory
constituting CD’s shall at all times be subject to Foothill’s satisfaction, in
its sole discretion, based on appraisals of such Inventory conducted

 

8

 

from time to time; provided, further,
that Foothill, in its sole discretion, may exclude the value of such CD
Inventory from Eligible Inventory based on such appraisals of such Inventory.

 

“Equipment” means equipment (as that term is
defined in the Code) and includes machinery, machine tools, motors, equipment,
furniture, furnishings, fixtures, vehicles (including motor vehicles and
trailers), computer hardware, tools, parts, dies, jigs, goods (other than
consumer goods, farm products, or Inventory), wherever located, including, (a) any
assets acquired by Borrower with the proceeds of a Capital Expenditure Loan, (b) any
interest of Borrower or its Subsidiaries in any of the foregoing, and (c) all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing.

 

“ERISA” means the Employee Retirement Income
Security Act of 1974, as amended, and any successor statute.

 

“ERISA Affiliate” means (a) any Person
subject to ERISA whose employees are treated as employed by the same employer
as the employees of Borrower or its Subsidiaries under IRC Section 414(b),
(b) any trade or business subject to ERISA whose employees are treated as
employed by the same employer as the employees of Borrower or its Subsidiaries
under IRC Section 414(c), (c) solely for purposes of Section 302
of ERISA and Section 412 of the IRC, any organization subject to ERISA
that is a member of an affiliated service group of which Borrower or any of its
Subsidiaries is a member under IRC Section 414(m), or (d) solely for
purposes of Section 302 of ERISA and Section 412 of the IRC, any
party subject to ERISA that is a party to an arrangement with Borrower or any
of its Subsidiaries and whose employees are aggregated with the employees of
Borrower or its Subsidiaries under IRC Section 414(o).

 

“Event of Default” has the meaning set forth in
Section 8.

 

“Excess Availability” means the amount, as of
the date any determination thereof is to be made, equal to:

 

(a)                                  the
lesser of (i) the aggregate amount of Advances available to Borrower as of
such time (based on the applicable advance rates set forth in Section 2.1
hereof and calculated as if no Advances are outstanding), subject to the
sublimits and availability reserves established by Foothill under the terms of
the Agreement less the Letter of Credit Usage, and (ii) the Maximum
Revolving Credit Amount less the Letter of Credit Usage, minus.

 

(b)                                 the
sum of (i) the amount of all then outstanding Advances, (ii) the
amount (not less than $0) by which Borrower’s and its Subsidiaries’ past due
trade payables has increased during the period from the initial prospect audit
through such date of determination, and (iii) the aggregate amount of
Borrower’s and its Subsidiaries’ book overdrafts.

 

“Exchange Act” means the Securities Exchange
Act of 1934, as in effect from time to time.

 

“Exclusive CD Inventory” means CD Inventory
that Borrower or any of its Subsidiaries has the exclusive right to manufacture
or distribute wholesale.

 

9

 

“Exclusive DVD Inventory” means DVD Inventory
that Borrower or any of its Subsidiaries has the exclusive right to manufacture
or distribute wholesale.

 

“Existing Loan Agreement” has the meaning set
forth in the recitals to this Agreement.

 

“FEIN” means Federal Employer Identification
Number.

 

“Foothill” has the meaning set forth in the
preamble to this Agreement.

 

“Foothill Account” has the meaning set forth in
Section 2.6.

 

“Foothill Expenses” means all reasonable:  costs or expenses (including taxes,
photocopying, notarization, telecommunication and insurance premiums) required
to be paid by any Obligor under any of the Loan Documents that are paid or
advanced by Foothill; documentation, filing, recording, publication, appraisal
(including periodic Collateral appraisals), and search fees assessed, paid, or incurred
by Foothill in connection with Foothill’s transactions with any of the
Obligors; costs and expenses incurred by Foothill in the disbursement of funds
to Borrower or its Subsidiaries (by wire transfer or otherwise); charges paid
or incurred by Foothill resulting from the dishonor of checks; costs and
expenses paid or incurred by Foothill to correct any default or enforce any
provision of the Loan Documents, or in gaining possession of, maintaining,
handling, preserving, storing, shipping, selling, preparing for sale, or
advertising to sell the Collateral, or any portion thereof, irrespective of
whether a sale is consummated; costs and expenses paid or incurred by Foothill
in examining Borrower’s Books; costs and expenses of third party claims or any
other suit paid or incurred by Foothill in enforcing or defending the Loan
Documents; and attorneys fees and expenses incurred in advising, structuring,
drafting, reviewing, administering, amending, terminating, enforcing (including
attorneys fees and expenses incurred in connection with a “workout,” a “restructuring,”
or an Insolvency Proceeding concerning any Obligor), defending, or concerning
the Loan Documents, irrespective of whether suit is brought.

 

“Funding Losses” has the meaning set forth in Section 2.12(b)(ii).

 

“GAAP” means generally accepted accounting
principles as in effect from time to time in the United States, consistently
applied.

 

“General Intangibles” means general intangibles
(as that term is defined in the Code), including payment intangibles, contract
rights, rights to payment, rights arising under common law, statutes, or
regulations, choses or things in action, goodwill, patents, trade names, trade
secrets, trademarks, servicemarks, copyrights, blueprints, drawings, purchase
orders, customer lists, monies due or recoverable from pension funds, route
lists, rights to payment and other rights under any royalty or licensing
agreements, infringement claims, computer programs, information contained on
computer discs or tapes, software, literature, reports, catalogs, insurance
premium rebates, tax refunds, and tax refund claims) and any other personal
property other than goods, Accounts, Deposit Accounts, Investment Property and
Negotiable Collateral.

 

“Guarantors” means, each Subsidiary of Borrower,
excluding Image Entertainment (UK), and “Guarantor” means any one of them.

 

10

 

“Guarantor Security Agreement” means that
certain Security Agreement dated as of August 1, 2002, by and between the
Guarantors and Foothill previously delivered to Foothill.

 

“Guaranty” means that certain General
Continuing Guaranty dated as of August 1, 2002, by the Guarantors in favor
of Foothill previously delivered to Foothill.

 

“Hazardous Materials” means all or any of the
following:  (a) substances that are
defined or listed in, or otherwise classified pursuant to, any applicable laws
or regulations as “hazardous substances,” “hazardous materials,” “hazardous
wastes,” “toxic substances,” or any other formulation intended to define, list,
or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity,
or “EP toxicity”; (b) oil, petroleum, or petroleum derived substances,
natural gas, natural gas liquids, synthetic gas, drilling fluids, produced
waters, and other wastes associated with the exploration, development, or
production of crude oil, natural gas, or geothermal resources; (c) any
flammable substances or explosives or any radioactive materials; and (d) asbestos
in any form or electrical equipment which contains any oil or dielectric fluid
containing levels of polychlorinated biphenyls in excess of fifty (50) parts
per million.

 

“HVE” means Home Vision Entertainment, Inc.
(formerly known as Public Media, Inc.), a Delaware corporation and a
Subsidiary of Borrower.

 

“IIC” means Image Investors Co., a Delaware
corporation.

 

“IIC Subordination” means a subordination
agreement entered into among Foothill, Borrower and IIC, the terms of which are
satisfactory to Foothill.

 

“Indebtedness” means:  (a) all obligations for borrowed money; (b) all
obligations evidenced by bonds, debentures, notes, or other similar instruments
and all reimbursement or other obligations of Borrower in respect of letters of
credit, letter of credit guaranties, bankers acceptances, interest rate swaps,
controlled disbursement accounts, or other financial products; (c) all
obligations under capital leases; (d) all obligations or liabilities of
others of like kind and nature to those described in clauses (a) through (c) above
that are secured by a lien or security interest on any property or asset of any
Obligor, irrespective of whether such obligation or liability is assumed; and (e) any
obligation guaranteeing or intended to guarantee (whether guaranteed, endorsed,
co-made, discounted, or sold with recourse to any Obligor) any indebtedness,
lease, dividend, letter of credit, or other obligation of any other Person.

 

“Initial Closing Date” means December 28,
1998.

 

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

 

“Intercompany Subordination Agreement” means a
subordination agreement executed and delivered by Borrower and each of its
Subsidiaries and Foothill, the form and substance of which is satisfactory to
Foothill.

 

11

 

“Interest Period” means, with respect to each
LIBOR Rate Loan, a period commencing on the date of the making of such LIBOR
Rate Loan (or the continuation of a LIBOR Rate Loan or the conversion of a
Reference Rate Loan to a LIBOR Rate Loan) and ending 1, 2, or 3 months
thereafter; provided, however, that (a) if any Interest
Period would end on a day that is not a Business Day, such Interest Period
shall be extended (subject to clauses (c)-(e) below) to the next
succeeding Business Day, (b) interest shall accrue at the applicable rate
based upon the LIBOR Rate from and including the first day of each Interest
Period to, but excluding, the day on which any Interest Period expires, (c) any
Interest Period that would end on a day that is not a Business Day shall be
extended to the next succeeding Business Day unless such Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Business Day, (d) with respect to an Interest Period that
begins on the last 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), the Interest Period shall end on the last Business Day
of the calendar month that is 1, 2, or 3 months after the date on which the
Interest Period began, as applicable, and (e) Borrower may not elect an
Interest Period which will end after the Renewal Date.

 

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

 

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

 

“IRC” means the Internal Revenue Code of 1986,
as amended, and the regulations thereunder.

 

“Las Vegas Facility” means that 76,000 square
foot warehouse and automated distribution facility located on approximately
8.4 acres of Borrower’s real property adjacent to McCarren International
Airport in Las Vegas, Nevada, with a street address of 6650 South Spencer
Street, Las Vegas, NV 89119.

 

“L/C” has the meaning set forth in Section 2.2(a).

 

“L/C Guaranty” has the meaning set forth in Section 2.2(a).

 

“Lender’s Liens” means the Liens granted by
Borrower and its Subsidiaries to Foothill under this Agreement or the other
Loan Documents.

 

“Letter of Credit” means an L/C or an L/C
Guaranty, as the context requires.

 

“Letter of Credit Usage” means the sum of (a) the
undrawn amount of Letter of Credit, plus (b) the amount of unreimbursed drawings
under Letters of Credit.

 

“LIBOR Deadline” has the meaning set forth in Section 2.12(b)(i).

 

“LIBOR Notice” means a written notice in the
form of Exhibit L-1 to the Twelfth Amendment.

 

“LIBOR Option” has the meaning set forth in Section 2.12(a).

 

12

 

“LIBOR Rate” means, for each Interest Period
for each LIBOR Rate Loan, the rate per annum determined by Foothill (rounded
upwards, if necessary, to the next 1/100%) by dividing (a) the
Base LIBOR Rate for such Interest Period, by (b) 100% minus the
Reserve Percentage. The LIBOR Rate shall be adjusted on and as of the effective
day of any change in the Reserve Percentage.

 

“LIBOR Rate Loan” means each portion of an
Advance that bears interest at a rate determined by reference to the LIBOR
Rate.

 

“LIBOR Rate Margin” means as of any date of
determination, the per annum percentage determined by the matrix set forth
below, based upon the average Excess Availability for the calendar month
immediately preceding such date of determination:

 

	
  Average Excess Availability

  for the preceding month

  	
   

  	
  LIBOR Rate Margin

  	
   

  
	
  Greater than
  $15,000,000

  	
   

  	
  2.50

  	
  %

  
	
  Greater than
  $7,500,000 but less than or equal to $15,000,000

  	
   

  	
  2.75

  	
  %

  
	
  Less than or
  equal to $7,500,000

  	
   

  	
  3.00

  	
  %

  

 

“License Agreements” means, collectively, the
distribution and license agreements, each as amended from time to time,
pursuant to which licensors have granted Borrower the right, whether exclusive
or non-exclusive, to manufacture or distribute wholesale laserdisc, DVD or
other formatted programming.

 

“Lien” means any interest in an asset securing
an obligation owed to, or a claim by, any Person other than the owner of the
asset, irrespective of whether (a) such interest is based on the common
law, statute, or contract, (b) such interest is recorded or perfected, and
(c) such interest is contingent upon the occurrence of some future event
or events or the existence of some future circumstance or circumstances.  Without limiting the generality of the
foregoing, the term “Lien” includes the lien or security interest arising from
a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment,
deposit arrangement, security agreement, conditional sale or trust receipt, or
from a lease, consignment, or bailment for security purposes and also includes
reservations, exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases, and other title exceptions and encumbrances
affecting Real Property.

 

“Lien Creditor” means any creditor that holds a
lien or other security interest in the Eligible Accounts of any Borrowing Base
Party.

 

13

 

“Loan Account” has the meaning set forth in Section 2.8.

 

“Loan Documents” means this Agreement, the Lockbox
Agreements, the Capital Expenditure Loan Note, the Disbursement Letter, the
Letters of Credit, the Trademark Security Agreement, the Guaranty, the
Guarantor Security Agreement, the Stock Pledge Agreement, the Intercompany
Subordination Agreement, any Collateral Access Agreements and depository account, blocked account, lockbox
account or similar agreements, or 
note or notes executed by Borrower or its Subsidiaries and payable to
Foothill, any agreement whereby any Person is joined as a party to any Loan
Document or made a continuing guaranty of the Obligations, and any other
agreement entered into, now or in the future, in connection with this
Agreement.

 

“Lockbox Account” shall mean a depositary
account established pursuant to one of the Lockbox Agreements.

 

“Lockbox Agreements” means those certain
Lockbox Operating Procedural Agreements and those certain Depository Account
Agreements, in form and substance satisfactory to Foothill, each of which is
among Borrower, Foothill, and one of the Lockbox Banks.

 

“Lockbox Banks” means, collectively, the
financial institutions set forth in Schedule 2.6.

 

“Lockboxes” has the meaning set forth in Section 2.6.

 

“Material Adverse Effect” means a material
adverse effect upon (a) the business, operations, properties, assets,
prospects, or financial condition of Borrower and its Subsidiaries, taken as a
whole, (b) the value of the Eligible Accounts or Eligible Inventory or the
validity or priority of Foothill’s Lender’s Lien therein, or (c) the
ability of Borrower or its Subsidiaries to perform, or of Foothill to enforce,
the Obligations.

 

“Maximum Amount” means the Maximum Revolving
Credit Amount plus One Million Dollars ($1,000,000).

 

“Maximum Revolving Credit Amount” means
Twenty-One Million Dollars ($21,000,000).

 

“Multiemployer Plan” means a multiemployer plan
as defined in Sections 3(37) or 4001(a)(3) of ERISA or Section 414 of
the IRC in which employees of Borrower or an ERISA Affiliate participate or to
which Borrower or any ERISA Affiliate contribute or are required to contribute.

 

“Negotiable Collateral” means letters of
credit, letter-of-credit rights, notes, drafts, instruments, Investment
Property, documents, personal property leases (wherein Borrower is the lessor),
chattel paper (including electronic chattel paper and tangible chattel paper),
and Borrower’s Books relating to any of the foregoing.

 

“Obligations” means all loans, Advances, debts,
principal, interest (including any interest that, but for the provisions of the
Bankruptcy Code, would have accrued), contingent

 

14

 

reimbursement obligations owing to Foothill under any
outstanding L/Cs or L/C Guarantees, premiums (including Early Termination
Premiums), liabilities (including all amounts charged to Borrower’s Loan
Account pursuant to any agreement authorizing Foothill to charge Borrower’s
Loan Account), obligations, fees, charges, costs or Foothill Expenses
(including any fees or expenses that, but for the provisions of the Bankruptcy
Code, would have accrued), lease payments, guaranties, covenants, and duties
owing any Obligor to Foothill of any kind and description (whether pursuant to
or evidenced by the Loan Documents, by any note or other instrument (including
the Capital Expenditure Loan Note), or pursuant to any other agreement between
Foothill and any Obligor regarding the financing that is the subject hereof),
whether direct or indirect, absolute or contingent, due or to become due, now
existing or hereafter arising, and including any debt, liability, or obligation
owing from any Obligors to others that Foothill may have obtained by assignment
or otherwise, and further including all interest not paid when due and all
Foothill Expenses that any Obligor is required to pay or reimburse by the Loan
Documents, by law, or otherwise.

 

“Obligors” means collectively, Borrower, each
of its Subsidiaries, each Guarantor, and each other Person which guarantees all
or any part of the Obligations, and “Obligor” means any one of them.

 

“Offering” means the primary offering of
2,400,000 shares of the capital stock of Borrower.

 

 “OLV”
shall mean, as of the date of determination thereof, the appraised orderly
liquidation value (expressed as a percentage of the value of the Inventory of
the Borrowing Base Parties (the lower of cost, computed on an average cost
basis according to GAAP, or market value), net of all associated costs and
expenses of such liquidation, as determined from time to time by a qualified
appraisal company selected by Foothill in its discretion, on such basis and
applying such criteria as Foothill shall require, such appraisals to be
conducted with such frequency as determined by Foothill in its reasonable
credit judgment.

 

“Original Loan Documents” has the meaning set
forth in Section 15.11.

 

“Overadvance” has the meaning set forth in Section 2.4.

 

“PBGC” means the Pension Benefit Guaranty
Corporation as defined in Title IV of ERISA, or any successor thereto.

 

“Permitted Investments” means:  (a) cash or Cash Equivalents, (b) interest
bearing demand or time deposits (including certificates of deposit) that are
insured by the Federal Deposit Insurance Corporation or a similar federal
insurance program, and (c) such other investments as Foothill may approve
in its sole discretion.

 

“Permitted Liens” means:  (a) liens for taxes, assessments or
governmental charges or claims the payment of which is not, at the time,
required to paid by this Agreement or the other Loan Documents or does not
constitute an Event of Default hereunder; (b) statutory liens of landlords
and liens of carriers, warehousemen, mechanics, and materialmen and other liens
imposed by law incurred in the ordinary course of business for sums not yet
delinquent or the subject of a Permitted Protest; (c) liens incurred or
deposits made in the ordinary course of

 

15

 

business in connection with workers’ compensation,
unemployment insurance, and other types of social security, or to secure the
performance of tenders, statutory obligations, surety and appeal bonds, bids,
leases, government contracts, trade contracts, performance and return-of-money
bonds and other similar obligations (exclusive of obligations for the payment
of borrowed money); (d) any attachment or judgment lien not constituting
an Event of Default hereunder; (e) leases or subleases granted to others
not interfering in any material respect with the ordinary conduct of the
business of Borrower and its Subsidiaries; (f) easements, rights-of-way,
restrictions, minor defects, encroachments, or irregularities in title and
other similar charges or encumbrances not interfering in any material respect
with the ordinary conduct of the business of Borrower and its Subsidiaries; (g) any
interest or title of a lessor or sublessor under any lease permitted by this
Agreement; (h) liens arising from UCC financing statements relating solely
to leases permitted by this Agreement; (i) liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties that are not delinquent in connection with the importation of goods;
(j) any interest (exclusive of security interests or other consensual
lien) or title of a licensor under any License Agreement; (k) liens and
security interests held by Foothill; (1) liens and security interests set
forth on Schedule P-1 attached hereto; and (m) purchase money
security interests and liens of lessors under capital leases to the extent that
the acquisition or lease of the underlying asset was permitted under Section 7.9,
and so long as the security interest or lien only secures the purchase price of
the asset.

 

“Permitted Protest” means the right of Borrower
or any of its Subsidiary to protest any lien, tax, rental payment, or other
charge, other than any such lien or charge that secures the Obligations,
provided (i) a reserve with respect to such obligation is established on
the books of Borrower in an amount that is required by GAAP, (ii) any such
protest is instituted and diligently prosecuted by Borrower or its applicable
Subsidiary in good faith, and (iii) Foothill is satisfied that, while any
such protest is pending, there will be no impairment of the enforceability,
validity, or priority of any of the Lender’s Liens.

 

“Person” means and includes natural persons,
corporations, limited liability companies, limited partnerships, general
partnerships, limited liability partnerships, joint ventures, trusts, land
trusts, business trusts, or other organizations, irrespective of whether they
are legal entities, and governments and agencies and political subdivisions
thereof.

 

“Record” means information that is inscribed on
a tangible medium or which is stored in an electronic or other medium and is
retrievable in perceivable form.

 

“Real Property” means any estates or interests
in real property now owned or hereafter acquired by Borrower or any of its
Subsidiaries and the improvements thereto.

 

“Reference Rate” means the variable rate of
interest, per annum, most recently announced by Wells Fargo Bank, National
Association, a national banking association, or any successor thereto, as its “prime
rate,” irrespective of whether such announced rate is the best rate available
from such financial institution.

 

“Renewal Date” has the meaning set forth in Section 3.3.

 

16

 

“Reserve Percentage” means, on any day, for
Foothill, the maximum percentage prescribed by the Board of Governors of the
Federal Reserve System (or any successor governmental authority) for
determining the reserve requirements (including any basic, supplemental,
marginal, or emergency reserves) that are in effect on such date with respect
to eurocurrency finding (currently referred to as “eurocurrency liabilities”)
of Foothill, but so long as Foothill is not required or directed under applicable
regulations to maintain such reserves, the Reserve Percentage shall be zero.

 

“Restatement Effective Date” means the date
that all of the conditions set forth in Section 3.1 of this Agreement
shall be satisfied (or waived by Foothill in its sole discretion).

 

“SEC” means the United States Securities and
Exchange Commission and any successor thereto.

 

“Securities Account” means a “securities
account” (as that term is defined in the Code).

 

“Solvent” means, with respect to any Person on
a particular date, that on such date (a) at fair valuations, all of the
properties and assets of such Person are greater than the sum of the debts,
including contingent liabilities, of such Person, (b) the present fair
salable value of the properties and assets of such Person is not less than the
amount that will be required to pay the probable liability of such Person on
its debts as they become absolute and matured, (c) such Person is able to
realize upon its properties and assets and pay its debts and other liabilities,
contingent obligations and other commitments as they mature in the normal
course of business, (d) such Person does not intend to, and does not
believe that it will, incur debts beyond such Person’s ability to pay as such
debts mature, and (e) such Person is not engaged in business or a
transaction, and is not about to engage in business or a transaction, for which
such Person’s properties and assets would constitute unreasonably small capital
after giving due consideration to the prevailing practices in the industry in
which such Person is engaged.  In
computing the amount of contingent liabilities at any time, it is intended that
such liabilities will be computed at the amount that, in light of all the facts
and circumstances existing at such time, represents the amount that reasonably
can be expected to become an actual or matured liability.

 

“Stock” means all shares, options, warrants,
interests, participations, or other equivalents (regardless of how designated)
of or in a Person, whether voting or nonvoting, including common stock,
preferred stock, or any other “equity security” (as such term is defined in Rule 3a11-1
of the General Rules and Regulations promulgated by the SEC under the
Exchange Act).

 

“Stock Pledge Agreement” means a Stock Pledge Agreement
dated as of August 1, 2002, executed and delivered by Borrower to Foothill
with respect to the pledge of the Stock owned by Borrower.

 

“Subsidiary” of a Person means a corporation,
partnership, limited liability company, or other entity in which that Person
directly or indirectly owns or controls the shares of Stock having ordinary
voting power to elect a majority of the board of directors (or appoint other

 

17

 

comparable managers) of such corporation, partnership,
limited liability company, or other entity.

 

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

 

“Tangible Net Worth” means, as of the date any
determination thereof is to be made, the difference of:  (a) Borrower’s total stockholder’s
equity; minus (b) the sum of: (i) all intangible assets of Borrower; (ii) all
of Borrower’s prepaid expenses; and (iii) all amounts due to Borrower from
Affiliates, calculated on a consolidated basis in accordance with GAAP.

 

“Trademark Security Agreement” has the meaning
set forth in Section 3.2(b) of this Agreement.

 

“Voidable Transfer” has the meaning set forth
in Section 15.9.

 

1.2                                 Accounting Terms.  All
accounting terms not specifically defined herein shall be construed in
accordance with GAAP.  When used herein,
the term “financial statements” shall include the notes and schedules
thereto.  Whenever the term “Borrower” is
used in respect of a financial covenant or a related definition, it shall be
understood to mean Borrower and its Subsidiaries on a consolidated basis unless
the context clearly requires otherwise.

 

1.3                                 Code.  Any terms used
in this Agreement that are defined in the Code shall be construed and defined
as set forth in the Code unless otherwise defined herein; provided, however,
that to the extent that the Code is used to define any term herein and such
term is defined differently in different Articles of the Code, the definition
of such term contained in Article 9 shall govern.

 

1.4                                 Construction.  Unless
the context of this Agreement or any other Loan Document clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, the term “including” is not limiting, and the term
“or” has, except where otherwise indicated, the inclusive meaning represented
by the phrase “and/or.”  The words “hereof,”
“herein,” “hereby,” “hereunder,” and similar terms in this Agreement or any
other Loan Document refer to this Agreement or such other Loan document, as the
case may be, as a whole and not to any particular provision of this Agreement
or such other Loan Document, as the case may be.  Section, subsection, clause, schedule, and
exhibit references are to this Agreement unless otherwise specified.  Any reference in this Agreement or in the
Loan Documents to this Agreement or any of the Loan Documents shall include all
alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions, and supplements thereto and thereof, as applicable
(subject to any restrictions on such alterations, amendments, changes,
extensions, modifications, renewals, replacements, substitutions, and
supplements as set forth herein).  Any
reference herein to any Person shall be construed to include such Person’s
successors and assigns.  Any requirement
of a writing contained herein or in the other Loan Documents shall be satisfied
by the transmission of a Record and any Record transmitted shall constitute a
representation and warranty as to the accuracy and completeness of the
information contained therein.

 

18

 

1.5                                 Schedules and Exhibits. 
All of the schedules and exhibits attached to this Agreement shall be
deemed incorporated herein by reference.

 

2.                                      LOAN
AND TERMS OF PAYMENT.

 

2.1                                 Revolving Advances.

 

(a)                                  Subject
to the terms and conditions of this Agreement, Foothill agrees to make
revolving advances (“Advances”) to Borrower in an amount at any one time
outstanding not to exceed at any one time the lesser of (i) the Maximum
Revolving Credit Amount less the Letter of Credit Usage, or (ii) the
Borrowing Base less the Letter of Credit Usage. 
For purposes of this Agreement, “Borrowing Base,” as of any date
of determination, shall mean an amount equal to the sum of:

 

(i)                             an
amount equal to the lesser of

 

(v)                                 eighty
percent (80%) of the amount of Eligible Accounts less
the amount, if any, of the Dilution Reserve, and

 

(w)                               an
amount equal to Borrowing Base Parties collections with respect to Accounts for
the immediately preceding ninety (90) day period; plus

 

(ii)                          an
amount equal to the lowest of

 

(x)                                   fifty
percent (50%) of the value of Eligible Inventory to the extent that such amount
does not exceed eighty-five percent (85%) of the OLV of Eligible Inventory,

 

(y)                                 fifty
percent (50%) of the amount of credit availability created by Section 2.1(a)(i) (it
being understood that in calculating the credit availability under this clause,
all Obligations shall be deemed to have been advanced or issued against
Eligible Accounts to the maximum extent of availability against Eligible
Accounts), and

 

(z)                                   Five
Million Dollars ($5,000,000).

 

(b)                                 Anything
to the contrary in Section 2.1(a) above notwithstanding, upon
the occurrence and during the continuance of an Event of Default Foothill may
reduce its advance rates based upon Eligible Accounts or Eligible Inventory
without declaring an Event of Default if it determines, in its reasonable
discretion, that there is a material impairment of the prospect of repayment of
all or any portion of the Obligations or a material impairment of the value or
priority of Foothill’s security interests in the Collateral.

 

(c)                                  Foothill
shall have no obligation to make advances under this Section 2.1 to
the extent they would cause the outstanding Obligations under this Section 2.1
and the Obligations outstanding under Section 2.2 to exceed the
Maximum Revolving Credit Amount. 
Foothill shall have no obligation to make advances under this Section 2.1
to the extent they would cause the outstanding Obligations to exceed the
Maximum Amount.

 

19

 

(d)                                 Foothill
is authorized to make advances under this Agreement based upon telephonic or
other instructions received from anyone purporting to be an Authorized Officer
of Borrower, or without instructions if pursuant to Section 2.5(d).  Borrower agrees to establish and maintain a
single designated Deposit Account for the purpose of receiving the proceeds of
the advances requested by Borrower and made by Foothill hereunder.  Unless otherwise agreed by Foothill and
Borrower, any advance requested by Borrower and made by Foothill hereunder
shall be made to such designated Deposit Account.  Amounts borrowed pursuant to this Section 2.1
may be repaid and, subject to the terms and conditions of this Agreement,
reborrowed at any time during the term of this Agreement.

 

2.2                                 Letters
of Credit and Letter of Credit Guarantees.

 

(a)                                  Subject
to the terms and conditions of this Agreement, Foothill agrees to issue
commercial or standby letters of credit for the account of Borrower (each, an “L/C”)
or to issue standby letters of credit or guarantees of payment (each such letter
of credit or guaranty, an “L/C Guaranty”) with respect to commercial or
standby letters of credit issued by another Person for the account of Borrower
in an aggregate face amount not to exceed the lesser of:  (i) the Borrowing Base less the amount of
advances outstanding pursuant to Section 2.1, and (ii) Four
Million Dollars ($4,000,000).  Borrower
expressly understands and agrees that Foothill shall have no obligation to
arrange for the issuance by other financial institutions of letters of credit that
are to be the subject of L/C Guarantees. 
Borrower and Foothill acknowledge and agree that certain of the letters
of credit that are to be the subject of L/C Guarantees may be outstanding on
the Restatement Effective Date.  Each L/C
and each letter of credit that is the subject of an L/C Guaranty shall have an
expiry date no later than thirty (30) days prior to the date on which this
Agreement is scheduled to terminate under Section 3.3 (without
regard to any potential renewal term) and all such L/Cs and letters of credit
(and the applicable L/C Guarantees) shall be in form and substance acceptable
to Foothill in its sole discretion. 
Foothill shall not have any obligation to issue L/Cs or L/C Guarantees
to the extent that the face amount of all outstanding L/Cs and L/C Guarantees,
plus the amount of advances outstanding pursuant to Section 2.1,
would exceed the Maximum Revolving Credit Amount.  The L/Cs and the L/C Guarantees issued under
this Section 2.2 shall be used by Borrower, consistent with this Agreement,
for its general working capital purposes or to support its obligations with
respect to workers’ compensation premiums or other similar obligations.  If Foothill is obligated to advance funds
under an L/C or L/C Guaranty, the amount so advanced immediately shall be
deemed to be an advance made by Foothill to Borrower pursuant to Section 2.1
and, thereafter, shall bear interest at the rates then applicable under Section 2.5.

 

(b)                                 Borrower
hereby agrees to indemnify, save, defend, and hold Foothill harmless from any
loss, cost, expense, or liability, including payments made by Foothill,
expenses, and reasonable attorneys fees incurred by Foothill arising out of or
in connection with any L/Cs or L/C Guarantees. 
Borrower agrees to be bound by the issuing bank’s regulations and
interpretations of any letters of credit guarantied by Foothill and opened to
or for Borrower’s account or by Foothill’s interpretations of any L/C issued by
Foothill to or for Borrower’s account, even though this interpretation may be
different from Borrower’s own, and Borrower understands and agrees that
Foothill shall not be liable for any error, negligence, or mistake, whether of
omission or commission (except for gross negligence or willful misconduct), in
following Borrower’s instructions or those contained in the L/Cs or any
modifications,

 

20

 

amendments, or supplements thereto.  Borrower understands that the L/C Guarantees
may require Foothill to indemnify the issuing bank for certain costs or
liabilities arising out of claims by Borrower against such issuing bank.  Borrower hereby agrees to indemnify, save,
defend, and hold Foothill harmless with respect to any loss, cost, expense
(including attorneys fees), or liability incurred by Foothill under any L/C
Guaranty as a result of Foothill’s indemnification of any such issuing bank
other than as a result of Foothill’s gross negligence or willful misconduct.

 

(c)                                  Borrower
hereby authorizes and directs any bank that issues a letter of credit
guaranteed by Foothill to deliver to Foothill all instruments, documents, and
other writings and property received by the issuing bank pursuant to such
letter of credit, and to accept and rely upon Foothill’s instructions and
agreements with respect to all matters arising in connection with such letter
of credit and the related application. 
Borrower may or may not be the “applicant” or “account party” with
respect to such letter of credit.

 

(d)                                 On
the first day of each month, Borrower will pay Foothill a fee equal to (i) one
percent (1.0%) per annum times the average Daily Balance of the L/Cs or L/C
Guarantees that were outstanding during the immediately preceding month, and (ii) the
service charges, commissions, fees, and costs incurred by Foothill relating to
the letters of credit guaranteed by Foothill shall be considered Foothill
Expenses for purposes of this Agreement and immediately shall be reimbursable
by Borrower to Foothill.

 

(e)                                  Immediately
upon the termination of this Agreement, Borrower agrees to either:  (i) provide cash collateral to be held
by Foothill in an amount equal to 105% of the maximum amount of Foothill’s
obligations under L/Cs plus the maximum amount of Foothill’s obligations to any
Person under outstanding L/C Guarantees, or (ii) cause to be delivered to
Foothill releases of all of Foothill’s obligations under its outstanding L/Cs
and L/C Guarantees.  At Foothill’s
discretion, any proceeds of Collateral received by Foothill after the
occurrence and during the continuation of an Event of Default may be held as
the cash collateral required by this Section 2.2(e).

 

(f)                                    If
by reason of (i) any change in any applicable law, treaty, rule, or
regulation or any change in the interpretation or application by any
governmental authority of any such applicable law, treaty, rule, or regulation,
or (ii) compliance by the issuing bank or Foothill with any direction,
request, or requirement (irrespective of whether having the force of law) of
any governmental authority or monetary authority including, without limitation,
Regulation D of the Board of Governors of the Federal Reserve System as from
time to time in effect (and any successor thereto):

 

(A)                              any
reserve, deposit, or similar requirement is or shall be imposed or modified in
respect of any Letters of Credit issued hereunder, or

 

(B)                                there
shall be imposed on the issuing bank or Foothill any other condition regarding
any letter of credit, or Letter of Credit, as applicable, issued pursuant
hereto; and the result of the foregoing is to increase, directly or indirectly,
the cost to the issuing bank or Foothill of issuing, making, guaranteeing, or
maintaining any letter of credit, or Letter of Credit, as applicable, or to
reduce the amount receivable in respect thereof by such issuing bank or
Foothill, then, and in any such case, Foothill may, at any time within a
reasonable period after

 

21

 

the additional cost is incurred or the amount received
is reduced, notify Borrower, and Borrower shall pay on demand such amounts as
the issuing bank or Foothill may specify to be necessary to compensate the
issuing bank or Foothill for such additional cost or reduced receipt, together
with interest on such amount from the date of such demand until payment in full
thereof at the rate set forth in Section 2.5(a) or (b)(i), as
applicable.  The determination by the
issuing bank or Foothill, as the case may be, of any amount due pursuant to
this Section 2.2(f), as set forth in a certificate setting forth
the calculation thereof in reasonable detail, shall, in the absence of manifest
or demonstrable error, be final and conclusive and binding on all of the
parties hereto.

 

2.3                                 Capital Expenditure Loan. 
Subject to the terms and conditions of this Agreement, Foothill agrees
to make a series of term loans to Borrower in an aggregate amount at any one
time outstanding of up to One Million Dollars ($1,000,000) (the “Capital
Expenditure Loan Commitment”), to be evidenced by and repayable in
accordance with the terms and conditions of a single promissory note (the “Capital
Expenditure Loan Note”), substantially in the form of Exhibit C-1
attached hereto, executed by Borrower in favor of Foothill. Each such term loan
shall be made by Foothill at such times and in such amounts as Borrower may
request in writing, shall be advanced directly to the applicable vendor or
Borrower, as the case may be, and once borrowed may be repaid or prepaid
without penalty and then, subject to the terms and conditions of this
Agreement, reborrowed at any time during the term of this Agreement. The
foregoing notwithstanding: (i) each borrowing of a Capital Expenditure
Loan shall be in a minimum principal amount of One Hundred Thousand Dollars
($100,000), or such lesser amount as is the then unfunded balance of the
Capital Expenditure Loan Commitment; (ii) each borrowing of a term loan
shall be in an amount, as determined by Foothill, up to eighty percent (80%) of
Borrower’s invoice cost (net of installation and other so-called ‘soft costs’)
of new Equipment to be purchased by Borrower, that is acceptable to Foothill in
all respects and that is not to be affixed to real property or become installed
in or affixed to other goods; and (iii) the aggregate amount of Capital
Expenditure Loans shall not exceed the lesser of cost or fair market value, at
the time of acquisition or construction, of the Equipment so acquired or
constructed. All amounts evidenced by the Capital Expenditure Loan Note shall
constitute Obligations.

 

2.4                                 Overadvances.  If, at
any time or for any reason, the amount of Obligations owed by Borrower to
Foothill is greater than either the dollar or percentage limitations set forth
in Sections 2.1 or 2.2 (an “Overadvance”), Borrower immediately shall pay to
Foothill, in cash, the amount of such excess to be used by Foothill first, to
repay noncontingent Obligations and, thereafter, to be held by Foothill as cash
collateral to secure Borrower’s obligation to repay Foothill for all amounts
paid pursuant to L/Cs or L/C Guarantees.

 

2.5                                 Interest:  Rates, Payments, and Calculations.

 

(a)                                  Interest
Rate. All Obligations, except for undrawn L/Cs and L/C Guarantees, shall bear
interest, on the average Daily Balance thereof as follows:  (i) if the relevant Obligation is an
Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate
plus the LIBOR Rate Margin for the Interest Period for such Advance and (ii) otherwise,
at a per annum rate equal to the Reference Rate plus the Applicable Margin.

 

(b)                                 Default
Rate.  (i) All Obligations, except
for undrawn L/Cs and L/C Guarantees, shall bear interest, from and after the
occurrence and during the continuance of

 

22

 

an Event of Default, at a per annum rate equal to four
(4.0) percentage points above the Reference Rate.  (ii) From and after the occurrence and
during the continuance of an Event of Default, the fee provided in Section 2.2(d) shall
be increased to a fee equal to four percent (4.0%) per annum times the average
Daily Balance of the undrawn L/Cs and L/C Guarantees that were outstanding
during the immediately preceding month.

 

(c)                                  Minimum
Interest. In no event shall the rate of interest chargeable hereunder be less
than five percent (5.0%) per annum.

 

(d)                                 Payments.  Interest and Letter of Credit fees payable
hereunder shall be due and payable, in arrears, on the first day of each month
during the term hereof.  Borrower hereby
authorizes Foothill, at its option, without prior notice to Borrower, to charge
such interest and Letter of Credit fees, all Foothill Expenses (as and when
incurred), and all installments or other payments due under the Capital
Expenditure Loan Note or any other note or other Loan Document to Borrower’s
Loan Account, which amounts thereafter shall accrue interest at the rate then
applicable hereunder.  Any interest not
paid when due shall be compounded by becoming a part of the Obligations, and
such interest shall thereafter accrue interest at the rate then applicable
hereunder.

 

(e)                                  Computation.  In the event the Reference Rate is changed
from time to time hereafter, the applicable rate of interest hereunder
automatically and immediately shall be increased or decreased by an amount
equal to such change in the Reference Rate. 
All interest and fees chargeable under the Loan Documents shall be
computed on the basis of a three hundred sixty (360) day year for the actual
number of days elapsed.

 

(f)                                    Intent
to Limit Charges to Maximum Lawful Rate. 
In no event shall the interest rate or rates payable under this
Agreement or the Capital Expenditure Loan Note, plus any other amounts paid in
connection herewith, exceed the highest rate permissible under any law that a
court of competent jurisdiction shall, in a final determination, deem
applicable.  Borrower and Foothill, in executing
this Agreement and the Capital Expenditure Loan Note, intend legally to agree
upon the rate or rates of interest and manner of payment stated within it;
provided, however, that, anything contained herein or in the Capital
Expenditure Loan Note to the contrary notwithstanding, if said rate or rates of
interest or manner of payment exceeds the maximum allowable under applicable
law, then, ipso facto as of the date of this Agreement and the Capital
Expenditure Loan Note, Borrower is and shall be liable only for the payment of
such maximum as allowed by law, and payment received from Borrower in excess of
such legal maximum, whenever received, shall be applied to reduce the principal
balance of the Obligations to the extent of such excess.

 

2.6                                 Collection of Accounts. 
Borrower shall, and shall cause its Subsidiaries to, at all times
maintain Lockboxes (the “Lockboxes”) and, immediately after the
Restatement Effective Date, shall instruct all Account Debtors with respect to
the Accounts, General Intangibles, and Negotiable Collateral of Borrower and
its Subsidiaries to remit all Collections in respect thereof to such
Lockboxes.  Borrower or its applicable
Subsidiary, Foothill, and the Lockbox Banks shall enter into the Lockbox
Agreements, which among other things shall provide for the opening of a Lockbox
Account for the deposit of Collections at a Lockbox Bank.  Borrower agrees that all Collections and
other amounts received by Borrower or its Subsidiaries

 

23

 

from any Account Debtor or any other source
immediately upon receipt shall be deposited into a Lockbox Account.  No Lockbox Agreement or arrangement
contemplated thereby shall be modified by Borrower or any Subsidiary without
the prior written consent of Foothill. 
Upon (a) the terms of and subject to the conditions set forth in
the Lockbox Agreements, (b) the occurrence of an Event of Default that is
continuing, or (c) Borrower’s failure to maintain an average Excess
Availability of at least $7,500,000 (for the three calendar month period
immediately preceding such date of determination), all amounts received in each
Lockbox Account shall be wired each Business Day into an account (the “Foothill
Account”) maintained by Foothill at a depositary selected by Foothill.

 

2.7                                 Crediting Payments; Application of Collections.  Should any Collection item not be honored
when presented for payment, then Borrower shall be deemed not to have made such
payment, and interest shall be recalculated accordingly.  Anything to the contrary contained herein
notwithstanding, any Collection item shall be deemed received by Foothill only
if it is received into the Foothill Account on a Business Day on or before
11:00 a.m.  Los Angeles time.  If any Collection item is received into the
Foothill Account on a non-Business Day or after 11:00 a.m.  Los Angeles time it shall be deemed to have
been received by Foothill as of the opening of business on the immediately
following Business Day.

 

2.8                                 Maintenance of Loan Account; Statements of Obligations.  Foothill shall maintain an account on its
books in the name of Borrower (the “Loan Account”) on which Borrower
will be charged with all Advances and all Capital Expenditure Loans made by
Foothill to Borrower or for Borrower’s account, including, accrued interest,
Foothill Expenses, and any other payment Obligations of the Obligors.  In accordance with Section 2.7,
the Loan Account will be credited with all payments received by Foothill from
Borrower or for Borrower’s account, including all amounts received in the
Foothill Account from any Lockbox Bank. 
Foothill shall render statements regarding the Loan Account to Borrower
of the Obligations, including principal, interest, fees, and including an
itemization of all charges and expenses constituting Foothill Expenses owing,
and such statements shall be conclusively presumed (absent manifest error) to
be correct and accurate and constitute an account stated between Borrower and
Foothill unless, within sixty (60) days after receipt thereof by Borrower,
Borrower shall deliver to Foothill by registered or certified mail at its
address specified in Section 12, written objection thereto
describing the error or errors contained in any such statements.

 

2.9                                 Designated Account. 
Foothill is authorized to make the Advances, the Letters of Credit and
the Capital Expenditure Loans under this Agreement based upon telephonic or
other instructions received from anyone purporting to be an Authorized Officer,
or without instructions if pursuant to Section 2.5(d).  Borrower agrees to establish and maintain the
Designated Account with the Designated Account Bank for the purpose of
receiving the proceeds of the Advances and the Capital Expenditure Loans
requested by Borrower and made by Foothill hereunder.  Unless otherwise agreed by Foothill and
Borrower, any Advance and the Capital Expenditure Loans requested by Borrower
and made by Foothill hereunder shall be made to the Designated Account.

 

24

 

2.10                           Fees.  Borrower shall
pay to Foothill the following fees:

 

(a)                                  Closing
Fee.  A one time closing fee of
Forty-five Thousand Dollars ($45,000) which is earned, in full, on the
Restatement Effective Date;

 

(b)                                 Unused
Line Fee.  On the first day of each month
during the term of this Agreement, a fee in an amount equal to one-eighth of
one percent (0.125%) per annum times the Average Unused Portion of the Maximum
Revolving Credit Amount from and after the Restatement Effective Date;

 

(c)                                  Capital
Expenditure Loan Fee.  On the date of
each funding of a Capital Expenditure Loan, a fee in an amount equal to
one-half of one percent (0.5%) of the amount of such Capital Expenditure Loan;

 

(d)                                 Financial
Examination, Documentation, and Appraisal Fees. 
Foothill’s customary fee of Six Hundred Fifty Dollars ($650) per day per
examiner, plus out-of-pocket expenses for each financial analysis and
examination (i.e., audits) of Borrower performed by Foothill or its agents; the
out-of-pocket expenses for each appraisal of the Collateral performed by
personnel employed by Foothill; and the actual charges paid or incurred by
Foothill if it elects to employ the services of one or more third Persons to
perform such financial analyses and examinations (i.e., audits) of Borrower or
to appraise the Collateral; provided  however, that if the average
Excess Availability (for the six calendar month period ending immediately
preceding such date of determination) is at least $10,000,000, Borrower shall
be obligated to pay such fees and expenses for no more than two financial
audits or examinations, or appraisals, per calendar year; provided, further,
that if the average Excess Availability (for the three calendar month period
ending immediately preceding such date of determination) is at least
$5,000,000, such financial audits and examinations, and appraisals, may be
conducted only as agreed upon by Foothill and Borrower; provided, further,
notwithstanding anything contained in the preceding two provisos, (i) Foothill
may conduct audits, examinations, and appraisals with such frequency as
Foothill shall require and (ii) Borrower shall be required to pay or
otherwise reimburse Foothill the cost of such audits and examinations, and
appraisals if (x) an Event of Default has occurred and is continuing, or (y)
Foothill and Borrower have agreed that an audit or appraisal is appropriate.

 

2.11                           Intentionally
Omitted

 

2.12                           LIBOR
Option.

 

(a)                                  Interest
and Interest Payment Dates. In lieu of having interest charged at the rate
based upon the Reference Rate, Borrower shall have the option (the “LIBOR
Option”) to have interest on all or a portion of the Advances be charged at
a rate of interest based upon the LIBOR Rate. Interest on LIBOR Rate Loans
shall be payable on the earliest of (i) the last day of the Interest
Period applicable thereto (provided, however, that, subject to
the following clauses (ii) and (iii), in the case of any Interest Period
greater than 3 months in duration, interest shall be payable at 3 month
intervals after the commencement of the applicable Interest Period and on the
last day of such Interest Period), (ii) the occurrence of an Event of
Default in consequence of which Foothill has elected to accelerate the maturity
of all or any portion of the Obligations, or (iii) termination of this
Agreement pursuant to the terms hereof. On the last day of each applicable
Interest Period, unless Borrower properly has exercised the

 

25

 

LIBOR Option with respect thereto, the interest rate
applicable to such LIBOR Rate Loan automatically shall convert to the rate of
interest then applicable to Reference Rate Loans of the same type hereunder. At
any time that an Event of Default has occurred and is continuing, Borrower no
longer shall have the option to request that Advances bear interest at a rate
based upon the LIBOR Rate and Foothill shall have the right to convert the
interest rate on all outstanding LIBOR Rate Loans to the rate then applicable
to Reference Rate Loans hereunder.

 

(b)                                 LIBOR
Election.

 

(i)                                     Borrower
may, at any time and from time to time, so long as no Event of Default has
occurred and is continuing, elect to exercise the LIBOR Option by notifying
Foothill prior to 11:00 a.m. (California time) at least 3 Business Days
prior to the commencement of the proposed Interest Period (the “LIBOR
Deadline”).  Notice of Borrower’s
election of the LIBOR Option for a permitted portion of the Advances and an
Interest Period pursuant to this Section shall be made by delivery to
Foothill of a LIBOR Notice received by Foothill before the LIBOR Deadline, or
by telephonic notice received by Foothill before the LIBOR Deadline (to be
confirmed by delivery to Foothill of a LIBOR Notice received by Foothill prior
to 5:00 p.m. (California time) on the same day.

 

(ii)                                  Each
LIBOR Notice shall be irrevocable and binding on Borrower. In connection with
each LIBOR Rate Loan, Borrower shall indemnify, defend, and hold Foothill
harmless against any loss, cost, or expense incurred by Foothill as a result of
(a) the payment of any principal of any LIBOR Rate Loan other than on the
last day of an Interest Period applicable thereto (including as a result of an
Event of Default), (b) the conversion of any LIBOR Rate Loan other than on
the last day of the Interest Period applicable thereto, or (c) the failure
to borrow, convert, continue or prepay any LIBOR Rate Loan on the date
specified in any LIBOR Notice delivered pursuant hereto (such losses, costs,
and expenses, collectively, “Funding Losses”). Funding Losses shall be
deemed to equal the amount determined by Foothill to be the excess, if any, of (i) the
amount of interest that would have accrued on the principal amount of such
LIBOR Rate Loan had such event not occurred, at the LIBOR Rate that would have
been applicable thereto, for the period from the date of such event to the last
day of the then current Interest Period therefor (or, in the case of a failure
to borrow, convert, or continue, for the period that would have been the
Interest Period therefor), minus (ii) the amount of interest that would
accrue on such principal amount for such period at the interest rate which
Foothill would be offered were it to be offered, at the commencement of such
period, Dollar deposits of a comparable amount and period in the London
interbank market. A certificate of Foothill delivered to Borrower setting forth
any amount or amounts that Foothill is entitled to receive pursuant to this Section 2.12
shall be conclusive absent manifest error.

 

(iii)                               Borrower
shall have not more than 5 LIBOR Rate Loans in effect at any given time.
Borrower only may exercise the LIBOR Option for LIBOR Rate Loans of at least
$1,000,000 and integral multiples of $500,000 in excess thereof.

 

(c)                                  Prepayments.
Borrower may prepay LIBOR Rate Loans at any time; provided, however,
that in the event that LIBOR Rate Loans are prepaid on any date that is not the
last day of the Interest Period applicable thereto, including as a result of
any automatic prepayment through the required application by Foothill of
proceeds of Borrower’s and its

 

26

 

Subsidiaries’ Collections under this Agreement or for
any other reason, including early termination of the term of this Agreement or
acceleration of all or any portion of the Obligations pursuant to the terms
hereof, Borrower shall indemnify, defend, and hold Foothill and its
participants harmless against any and all Funding Losses in accordance with
clause (b)(ii) above.

 

(d)                                 Special
Provisions Applicable to LIBOR Rate.

 

(i)                                     The
LIBOR Rate may be adjusted by Foothill on a prospective basis to take into
account any additional or increased costs to Foothill of maintaining or
obtaining any eurodollar deposits or increased costs due to changes in
applicable law occurring subsequent to the commencement of the then applicable
Interest Period, including changes in tax laws (except changes of general
applicability in corporate income tax laws) and changes in the reserve
requirements imposed by the Board of Governors of the Federal Reserve System
(or any successor), excluding the Reserve Percentage, which additional or
increased costs would increase the cost of funding loans bearing interest at
the LIBOR Rate. In any such event, Foothill shall give Borrower notice of such
a determination and adjustment and, upon its receipt of the notice from
Foothill, Borrower may, by notice to Foothill (y) require Foothill to
furnish to Borrower a statement setting forth the basis for adjusting such
LIBOR Rate and the method for determining the amount of such adjustment, or (z) repay
the LIBOR Rate Loans with respect to which such adjustment is made (together
with any amounts due under clause (b)(ii) above).

 

(ii)                                  In
the event that any change in market conditions or any law, regulation, treaty,
or directive, or any change therein or in the interpretation of application
thereof, shall at any time after the date hereof, in the reasonable opinion of
Foothill, make it unlawful or impractical for Foothill to fund or maintain
LIBOR Rate Loans or to continue such funding or maintaining, or to determine or
charge ‘interest rates at the LIBOR Rate, Foothill shall give notice of such
changed circumstances to Borrower and (y) in the case of any LIBOR Rate
Loans that are outstanding, the date specified in Foothill’s notice shall be
deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and
interest upon the LIBOR Rate Loans thereafter shall accrue interest at the rate
then applicable to Reference Rate Loans, and (z) Borrower shall not be
entitled to elect the LIBOR Option until Foothill determines that it would no
longer be unlawful or impractical to do so.

 

(e)                                  No
Requirement of Matched Funding. Anything to the contrary contained herein
notwithstanding, neither Foothill, nor any of its participants, is required
actually to acquire eurodollar deposits to fund or otherwise match fund any
Obligation as to which interest accrues at the LIBOR Rate. The provisions of
this Section shall apply as if Foothill or its participants had match
funded any Obligation as to which interest is accruing at the LIBOR Rate by
acquiring eurodollar deposits for each Interest Period in the amount of the
LIBOR Rate Loans.

 

2.13                           Payments on the Capital Expenditure Loan Note.  Borrower shall pay the principal
of the outstanding Capital Expenditure Loan, and interest accrued from the date
of the Capital Expenditure Loan Note, at such times, and in such amounts, as
set forth in the Capital Expenditure Loan Note.

 

27

 

3.                                      CONDITIONS; TERM OF AGREEMENT.

 

3.1                                 Conditions Precedent to Initial Advance, Capital Expenditure Loan, L/C,
L/C Guaranty.  The obligation
of Foothill to make the initial Advance or provide any Capital Expenditure Loan
under this Agreement is subject to the fulfillment, to the satisfaction of
Foothill and its counsel, of each of the following conditions:

 

(a)                                  the
Restatement Effective Date shall occur on or before August     ,
2005;

 

(b)                                 Foothill
shall have received searches reflecting the filing of its financing statements
and fixture filings;

 

(c)                                  Foothill
shall have received each of the following documents, duly executed, and each
such document shall be in full force and effect:

 

i)                                         the
Guarantor Reaffirmation Agreement;

 

ii)                                      the Capital Expenditure Loan Note; and

 

iii)                                   Foothill
shall have received a certificate from the Secretary of Borrower (i) attaching
and attesting to the resolutions of Borrower’s Board of Directors authorizing
its execution, delivery, and performance of this Agreement and the other Loan
Documents to which Borrower is a party, and authorizing specific officers of
Borrower to execute same, and (ii) attesting to the incumbency and
signatures of such specific officers of such Borrower;;

 

(d)                                 Foothill
shall have received copies of Borrower’s By-laws and Articles or Certificate of
Incorporation, as amended, modified, or supplemented to the Restatement
Effective Date, certified by the Secretary of Borrower; or, alternatively, a
certificate from the Secretary of the Borrower certifying that the Borrower’s
By-laws and Articles or Certificate of Incorporation have not been amended,
modified, or supplemented since the Initial Closing Date;

 

(e)                                  Foothill
shall have received a certificate of corporate status with respect to Borrower,
dated within thirty (30) days of the Restatement Effective Date, by the
Secretary of State of the state of incorporation of Borrower, which certificate
shall indicate that Borrower is in good standing in such state;

 

(f)                                    Foothill
shall have received a certificate from the Secretary of  each Guarantor (i) attaching and
attesting to the resolutions of such Guarantor’s Board of Directors authorizing
its execution, delivery, and performance of the Loan Documents to which such
Guarantor is a party, and authorizing specific officers of such Guarantor to
execute the same, and (ii) attesting to the incumbency and signatures of
such specific officers of such Guarantor;

 

(g)                                 Foothill
shall have received copies of each Guarantor’s By-laws and Articles or
Certificate of Incorporation, as amended, modified, or supplemented to the

 

28

 

Restatement Effective Date, certified by the Secretary
of Guarantor, or, alternatively, a certificate from the Secretary of such
Guarantor certifying that there have been no amendments, modifications, or
supplements to such Guarantor’s By-laws and Articles or Certificate of
Incorporation since the Initial Closing Date;

 

(h)                                 Foothill
shall have received a certificate of status with respect to each Guarantor,
dated within 10 days of the Restatement Effective Date, such certificate to be
issued by the appropriate officer of the jurisdiction of organization of such
Guarantor, which certificate shall indicate that such Guarantor is in good
standing in such jurisdiction;

 

(i)                                     Foothill
shall have received certificates of status with respect to each Guarantor, each
dated within 30 days of the Restatement Effective Date, such certificates to be
issued by the appropriate officer of the jurisdictions (other than the
jurisdiction of organization of such Guarantor) in which its failure to be duly
qualified or licensed would constitute a Material Adverse Effect, which
certificates shall indicate that such Guarantor is in good standing in such
jurisdictions;

 

(j)                                     Foothill
shall have received $45,000 in immediately available funds, constituting the
fee specified in Section 2.10(a).

 

(k)                                  after
giving effect to the payment of fees due to Foothill on or before the
Restatement Effective Date, the sum of Borrower’s Excess Availability plus
Borrower’s unrestricted cash and cash equivalents shall not be less than One
Million Dollars ($1,000,000);

 

(l)                                     Foothill
shall have reviewed the License Agreements, and such License Agreements shall
be acceptable to Foothill in its reasonable credit judgment;

 

(m)                               Foothill
shall have received satisfactory evidence that all tax returns required to be
filed by Borrower and its Subsidiaries have been timely filed and all taxes
upon Borrower and its Subsidiaries or their properties, assets, income and
franchises (including real property taxes and payroll taxes) have been paid
prior to delinquency; and

 

(n)                                 all
other documents and legal matters in connection with the transactions
contemplated by this Agreement shall have been delivered or executed or
recorded and shall be in form and substance satisfactory to Foothill and its
counsel.

 

3.2                                 Conditions Precedent to All Advances, Capital Expenditure Loans, L/Cs,
or L/C Guarantees; Conditions Subsequent.

 

(a)                                  The
following shall be conditions precedent to all Advances, Capital Expenditure
Loans, L/Cs, or L/C Guarantees hereunder:

 

i)                                         the
representations and warranties contained in this Agreement and the other Loan
Documents shall be true and correct in all material respects on and as of the
date of such Advance, Capital Expenditure Loan, L/C, or L/C Guaranty, as though
made on and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date);

 

29

 

ii)                                      no
Event of Default or event which with the giving of notice or passage of time
would constitute an Event of Default shall have occurred and be continuing on
the date of such Advance, Capital Expenditure Loan, L/C, or L/C Guaranty, nor
shall either result from the making thereof; and

 

iii)                                   no
injunction, writ, restraining order, or other order of any nature prohibiting,
directly or indirectly, the making of such Advance or Capital Expenditure Loan
or the issuance of such L/C or L/C Guaranty shall have been issued and remain
in force by any governmental authority against Borrower, Foothill, or any of
their Affiliates.

 

(b)                                 The
obligation of Foothill to make any Advance or provide any Capital Expenditure
Loan under this Agreement is subject to the fulfillment, to the satisfaction of
Foothill and its counsel, of each of the following conditions within the time
period therefore specified below (the failure by Borrower to so perform or
cause to be performed constituting an Event of Default):

 

i)                                         Within
10 days after the date hereof, if requested by Foothill, Foothill shall have
received an opinion of Borrower’s and Guarantors’ counsel in form and substance
satisfactory to Foothill in its sole discretion;

 

ii)                                      Within
60 days after the date hereof, Foothill shall have received a trademark
security agreement entered into by and
among HVE and Foothill to effectuate Foothill’s existing security
interests in the trademarks and other general intangibles described therein
(the “Trademark Security Agreement”), duly executed and in form and substance
satisfactory to Foothill in its sole discretion; and

 

iii)                                   Within
60 days after the date hereof, Foothill shall have received the Intercompany
Subordination Agreement, duly executed and in form and substance satisfactory
to Foothill in its sole discretion.

 

3.3                                 Term; Automatic Renewal. 
This Agreement shall become effective upon the execution and delivery
hereof by Borrower and Foothill and shall continue in full force and effect for
a term ending December 29, 2009 (the “Renewal Date”) and
automatically shall be renewed for successive one (1) year periods
thereafter, unless sooner terminated pursuant to the terms hereof. Either party
may terminate this Agreement effective on the Renewal Date or on any one (1) year
anniversary of the Renewal Date by giving the other party at least one hundred
twenty (120) days prior written notice by registered or certified mail,
return receipt requested. The foregoing notwithstanding, Foothill shall have
the right to terminate its obligations under this Agreement immediately and
without notice upon the occurrence and during the continuation of an Event of
Default.

 

3.4                                 Effect of Termination. 
On the date of termination, all Obligations (including contingent
reimbursement obligations under any outstanding L/Cs or L/C Guarantees)
immediately shall become due and payable without notice or demand.  No termination of this Agreement, however,
shall relieve or discharge Borrower of Borrower’s duties, Obligations, or
covenants hereunder, and Foothill’s continuing security interests in the
Collateral shall remain in

 

30

 

effect until all Obligations have been fully and
finally discharged and Foothill’s obligation to provide advances hereunder is
terminated.

 

3.5                                 Early Termination by Borrower.  The provisions of Section 3.3
that allow termination of this Agreement by Borrower only on the Renewal Date
and certain anniversaries thereof notwithstanding, Borrower has the option, at
any time upon one hundred twenty (120) days prior written notice to
Foothill, to terminate this Agreement by paying to Foothill, in full in cash,
the Obligations (including an amount equal to 105% of the undrawn amount of the
L/Cs or L/C Guarantees), together with a premium (the “Early Termination
Premium”) equal to:  (a) during
the period of time from and after the Restatement Effective Date up to the
first anniversary of the Restatement Effective Date, the sum of three-quarters
of one percent (0.75%) times the Maximum Revolving Credit Amount plus three-quarters
of one percent (0.75%) times the principal amount of any Capital Expenditure
Loans outstanding as of the effective date of the termination of this
Agreement; (b) during the period of time from and after the first
anniversary of the Restatement Effective Date up to the second anniversary of
the Restatement Effective Date, the sum of one-half of one percent (0.50%)
times the Maximum Revolving Credit Amount plus one-half of one percent (0.50%)
times the principal amount of any Capital Expenditure Loans outstanding as of
the effective date of the termination of this Agreement; (iii) during the
period of time from and after the second anniversary of the Restatement
Effective Date up to the fourth anniversary of the Restatement Effective Date,
the sum of one-quarter of one percent (0.25%) times the Maximum Revolving
Credit Amount plus one-quarter of one percent (0.25%) times the principal
amount of any Capital Expenditure Loans outstanding as of the effective date of
the termination of this Agreement.

 

3.6                                 Termination Upon Event of Default.  If Foothill terminates this Agreement upon
the occurrence of an Event of Default that intentionally is caused by Borrower
for the purpose, in Foothill’s reasonable judgment, of avoiding payment of the
Early Termination Premium provided in Section 3.5, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Foothill’s
lost profits as a result thereof, Borrower shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal to the Early
Termination Premium.  The Early
Termination Premium shall be presumed to be the amount of damages sustained by
Foothill as the result of the early termination and Borrower agrees that it is
reasonable under the circumstances currently existing.  The Early Termination Premium provided for in
this Section 3.6 shall be deemed included in the Obligations.

 

3.7

 

4.                                      CREATION OF SECURITY INTEREST.

 

4.1                                 Grant of Security Interest. 
Borrower hereby grants to Foothill a continuing security interest in all
of its right, title and interest in all currently existing and hereafter
acquired or arising Borrower Collateral in order to secure prompt repayment of
any and all Obligations in accordance with the terms and conditions of the Loan
Documents and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. 
Lender’s Lien in and to the Borrower Collateral shall attach to all
Borrower

 

31

 

Collateral without further act on the part of Foothill
or Borrower.  Anything contained in this
Agreement or any other Loan Document to the contrary notwithstanding, except
for the sale of Inventory of the Borrower or its Subsidiaries to buyers in the
ordinary course of business, the distribution of promotional Inventory of the
Borrower or its Subsidiaries in the ordinary course of business, or the sale or
other disposition of obsolete or worn-out assets in the ordinary course of
business, neither Borrower nor any of its Subsidiary has any authority, express
or implied, to dispose of any item or portion of the Collateral.

 

4.2                                 Negotiable Collateral. 
In the event that any Borrower Collateral, including proceeds, is
evidenced by or consists of Negotiable Collateral, Borrower shall, immediately
upon the request of Foothill, endorse and assign such Negotiable Collateral to
Foothill and deliver physical possession of such Negotiable Collateral to Foothill.

 

4.3                                 Collection of Accounts, General Intangibles, Negotiable Collateral.  At any time that an Event of Default has
occurred and is continuing, Foothill may: 
(a) notify customers or Account Debtors of Borrower and its
Subsidiaries that the Accounts, General Intangibles, or Negotiable Collateral
of Borrower or such Subsidiaries have been assigned to Foothill or that
Foothill has a security interest therein; and (b) collect the Accounts,
General Intangibles, and Negotiable Collateral of Borrower and its Subsidiaries
directly and charge the collection costs and expenses to Borrower’s Loan
Account.  Borrower agrees that it will,
and Borrower shall cause each of its Subsidiaries to, hold in trust for
Foothill, as Foothill’s trustee, any cash receipts, checks, and other items of
payment (including, insurance proceeds, proceeds of cash sales, rental
proceeds, and tax refunds) that Borrower or any of its Subsidiaries receives
and immediately will deliver said Collections to Foothill in their original
form as so received.

 

4.4                                 Commercial Tort Claims; Delivery of Additional Documentation Required.  If Borrower or its Subsidiaries acquire any
commercial tort claims after the date hereof, Borrower shall promptly (but in
any event within 3 Business Days after such acquisition) deliver to Foothill a
written description of such commercial tort claim and shall deliver a written
agreement, in form and substance satisfactory to Foothill, pursuant to which
Borrower or its Subsidiary, as applicable, shall grant a perfected security
interest in all of its right, title and interest in and to such commercial tort
claim to Foothill, as security for the Obligations (a “Commercial Tort Claim
Assignment”).  At any time upon the
request of Foothill, Borrower shall execute and deliver, and shall cause its
Subsidiaries to execute and deliver, to Foothill all original financing
statements in lieu of continuation statements, continuation financing
statements, amendments to financing statements, fixture filings, security
agreements, chattel mortgages, pledges, assignments, endorsements of
certificates of title, applications for title, affidavits, reports, notices,
pledgeholder agreements, schedules of accounts, letters of authority, and all
other documents (collectively, the “Additional Documents”) that Foothill
may reasonably request, in form sand substance satisfactory to Foothill, to
create and perfect and continue perfected or to better perfect the Lender’s
Liens in the assets of Borrower and its Subsidiaries (whether now owned or hereafter
arising or acquired, tangible or intangible, real or personal), and in order to
fully consummate all of the transactions contemplated hereby and under the
other Loan Documents.  The foregoing
shall be deemed to include and Borrower hereby agrees that it will execute and
deliver appropriate mortgages, deeds of trust, or collateral assignments with
respect to any real property interests or estates acquired after the
Restatement Effective Date.  To the
maximum extent permitted by applicable law, Borrower authorizes Foothill to
execute any

 

32

 

such Additional Documents in Borrower’s name and
authorizes Foothill to file such executed Additional Documents in any
appropriate filing office.  In addition,
on such periodic basis as Foothill shall require, Borrower shall (i) provide
Foothill with a report of all new material patentable, copyrightable, or
trademarkable materials acquired or generated by Borrower or its Subsidiaries
during the prior period, (ii) cause all material patents, copyrights, and
trademarks acquired or generated by Borrower or its Subsidiaries that are not
already the subject of a registration with the appropriate filing office (or an
application therefor diligently prosecuted) to be registered with such
appropriate filing office in a manner sufficient to impart constructive notice
of Borrower’s or the applicable Subsidiary’s ownership thereof, and (iii) cause
to be prepared, executed, and delivered to Foothill supplemental schedules to
the applicable Loan Documents to identify such patents, copyrights, and
trademarks as being subject to the security interests created thereunder; provided,
however, that neither Borrower nor any of its Subsidiaries shall
register with the U.S. Copyright Office any unregistered copyrights (whether in
existence on the Restatement Effective Date or thereafter acquired, arising, or
developed) unless (i) the Borrower provides Foothill with written notice
of its intent to register such copyrights not less than 30 days prior to the
date of the proposed registration, and (ii) prior to such registration,
the applicable Person executes and delivers to Foothill a copyright security
agreement in form and substance satisfactory to Foothill, supplemental
schedules to any existing copyright security agreement, or such other
documentation as Foothill reasonably deems necessary in order to perfect and
continue perfected Lender’s Liens on such copyrights following such
registration.

 

4.5                                 Power of Attorney. 
Borrower hereby irrevocably makes, constitutes, and appoints Foothill
(and any of Foothill’s officers, employees, or agents designated by Foothill)
as Borrower’s true and lawful attorney, with power to:  (a) if Borrower refuses to, or fails
timely to execute and deliver any of the documents described in Section 4.4,
sign the name of Borrower on any of the documents described in Section 4.4;
(b) at any time that an Event of Default has occurred and is continuing,
sign Borrower’s name on any invoice or bill of lading relating to the Borrower
Collateral, drafts against Account Debtors, and notices to Account Debtors; (c) send
requests for verification of Borrower’s and its Subsidiaries’ Accounts; (d) endorse
Borrower’s  or any of its Subsidiaries’
name on any checks, notices, acceptances, money orders, drafts, or other item
of payment (including all Collections) or security that may come into Foothill’s
possession; (e) at any time that an Event of Default has occurred and is
continuing, notify the post office authorities to change the address for
delivery of Borrower’s mail to an address designated by Foothill, to receive
and open all mail addressed to Borrower or any of its Subsidiaries, and to
retain all mail relating to payments with respect to the Collateral and forward
all other mail to Borrower; (f) at any time that an Event of Default has
occurred and is continuing, make, settle, and adjust all claims under Borrower’s  or its Subsidiaries’ policies of insurance
and make all determinations and decisions with respect to such policies of
insurance; and (g) at any time that an Event of Default has occurred and
is continuing, settle and adjust disputes and claims respecting the Accounts of
Borrower or its Subsidiaries directly with Account Debtors, for amounts and
upon terms which Foothill determines to be reasonable, and Foothill may cause
to be executed and delivered any documents and releases which Foothill
determines to be necessary.  The
appointment of Foothill as Borrower’s and Borrower’s Subsidiaries’ attorney,
and each and every one of Foothill’s rights and powers, being coupled with an
interest, is irrevocable until all of the Obligations have been fully and
finally repaid and performed and Foothill’s obligation to extend credit
hereunder is terminated.

 

33

 

4.6                                 Right to Inspect. 
Prior to the time that an Event of Default has occurred and is
continuing or Foothill deems itself insecure (in accordance with Section 1208
of the Code), Foothill (through any of its officers, employees, or agents)
shall have the right, from time to time hereafter upon prior reasonable
notification to Borrower and during normal business hours, to inspect Borrower’s
Books and to check, test, and appraise the Collateral in order to verify
Borrower’s and its Subsidiaries’ financial condition or the amount, quality,
value, condition of, or any other matter relating to, the Collateral.  After the time that an Event of Default has
occurred and is continuing or Foothill deems itself insecure (in accordance
with Section 1208 of the Code), Foothill (through any of its officers,
employees, or agents) shall have the right, from time to time hereafter without
prior notification to Borrower or any of its Subsidiaries and at any time or
times determined by Foothill, to inspect Borrower’s Books and to check, test,
and appraise the Collateral in order to verify Borrower’s and its Subsidiaries’
financial condition or the amount, quality, value, condition of, or any other
matter relating to, the Collateral.

 

4.7                                 Filing Authorization. 
Borrower hereby authorizes Foothill (or its designee) to file UCC
financing statements in any applicable jurisdiction in order to perfect its
security interests in all or any portion of the assets and other property
constituting Collateral of the Borrower or any Subsidiary (including without
limitation any financing statements that (i) indicate the Collateral (A) as
all assets of the Borrower and/or such Subsidiary or words of similar effect,
regardless of whether any particular asset of the Borrower or such Subsidiary
falls within the scope of Article 9 of the Code or whether any portion of
the assets of the Borrower or such Subsidiary constitute part of the
Collateral, or (B) as being of an equal or lesser scope or with greater
detail, and (ii) contain any other information required by part 5 of Article 9
of the Code for the sufficiency or filing office acceptance of any financing
statement or amendment, including (x) whether the Borrower or such
Subsidiary is an organization, the type of organization and any organization
identification number issued to the Borrower or such Subsidiary, and
(y) in the case of a financing statement filed as a fixture filing or
indicating Collateral as as-extracted collateral or timber to be cut, a
sufficient description of real property to which the Collateral relates).  Should the transactions contemplated by the
Loan Documents not be consummated, the undersigned may terminate each such
financing statement without the need for the signature of Foothill.  Borrower hereby ratifies the filing of any
and all financing statements filed with respect to the Collateral prior to the
date hereof.

 

4.8                                 Control Agreements.  Borrower
agrees that it will and will cause its Subsidiaries to take any or all
reasonable steps in order for Foothill to obtain control in accordance with
Sections 8-106, 9-104, 9-105, 9-106, and 9-107 of the Code with respect to all
of its or their Securities Accounts, Deposit Accounts, electronic chattel
paper, Investment Property, and letter-of-credit rights.  Upon the occurrence and during the
continuance of a Event of Default, or any event or condition which, with the
giving of notice, the passage of time or both, would be an Event of Default,
Foothill may notify any bank or securities intermediary to liquidate the
applicable Deposit Account or Securities Account or any related Investment
Property maintained or held thereby and remit the proceeds thereof to the
Foothill’s Account.

 

34

 

5.                                      REPRESENTATIONS AND WARRANTIES.

 

Borrower represents and warrants to Foothill as
follows:

 

5.1                                 No Prior Encumbrances. 
Borrower has good and indefeasible title to the Collateral, free and
clear of liens, claims, security interests, or encumbrances, except for
Permitted Liens.

 

5.2                                 Eligible Accounts. 
The Eligible Accounts are, at the time of the creation thereof and as of
each date on which Borrower includes them in a Borrowing Base calculation or
certification, bona fide existing obligations created by the sale and delivery
of Inventory of the Borrowing Base Parties or the rendition of services to
Account Debtors in the ordinary course of the Borrowing Base Parties’ business,
unconditionally owed to the applicable Borrowing Base Party without defenses,
disputes, offsets, counterclaims, or rights of return or cancellation, except
for rights of return in accordance with Borrower’s return policy as it may
exist from time to time.  The property
giving rise to such Eligible Accounts has been delivered to the Account Debtor,
or to the Account Debtor’s agent for immediate shipment to and unconditional
acceptance by the Account Debtor.  At the
time of the creation of an Eligible Account and as of each date on which
Borrower includes an Eligible Account in a Borrowing Base calculation or certification,
no Borrowing Base party has received notice of actual or imminent bankruptcy,
insolvency, or material impairment of the ability of any applicable Account
Debtor to repay such Eligible Account.

 

5.3                                 Eligible Inventory. 
All Eligible Inventory is now and at all times hereafter shall be of
good and merchantable quality, free from defects.

 

5.4                                 Location of Inventory and Equipment.  The Inventory and Equipment of the Borrower
and its Subsidiaries are not stored with a bailee, warehouseman, or similar
party (other than goods that are in transit in the ordinary course of business
or other than with Foothill’s prior written consent) and are located only at
the locations identified on Schedule 6.14 or otherwise permitted by
Section 6.14.

 

5.5                                 Inventory Records. 
Borrower now keeps, and hereafter at all times shall keep, correct and
accurate records itemizing and describing the kind, type, quality, and quantity
of the Inventory of Borrower and its Subsidiaries, and Borrower’s or such
Subsidiaries’ cost therefor.

 

5.6                                 State
of Incorporation; Location of Chief Executive Office; Organizational
Identification Number; Commercial Tort Claims.

 

(a)                                  The
jurisdiction of organization of Borrower and each of its Subsidiaries is set
forth on Schedule 5.6(a).

 

(b)                                 The
chief executive office of Borrower and each of its Subsidiaries is located at
the address indicated on Schedule 5.6(b) (as such Schedule may
be updated pursuant to Section 6.14).

 

(c)                                  Borrower’s
and each of its Subsidiaries’ organizational identification numbers, if any,
are identified on Schedule 5.6(c).

 

(d)                                 As
of the Restatement Effective Date, Borrower and its Subsidiaries do not hold
any commercial tort claims, except as set forth on Schedule 5.6(d).

 

35

 

5.7                                 Due Organization and Qualification; Subsidiaries.

 

(a)                                  Borrower
is duly organized and existing and in good standing under the laws of the state
of its incorporation and qualified and licensed to do business in, and in good
standing in, any state where the failure to be so licensed or qualified could
reasonably be expected to have a material adverse effect on the business,
operations, condition (financial or otherwise), finances, or prospects of
Borrower or on the value of the Collateral to Foothill.

 

(b)                                 Set
forth on Schedule 5.7(b), is a complete and accurate description of the
authorized capital Stock of Borrower, by class, and, as of the Restatement
Closing Date, a description of the number of shares of each such class that are
issued and outstanding.  Other than as
described on Schedule 5.7(b), there are no subscriptions, options,
warrants, or calls relating to any shares of Borrower’s capital Stock,
including any right of conversion or exchange under any outstanding security or
other instrument.  Borrower is not
subject to any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any shares of its capital Stock or any security convertible
into or exchangeable for any of its capital Stock.

 

(c)                                  Set
forth on Schedule 5.7(c), is a complete and accurate list of
Borrower’s direct and indirect Subsidiaries, showing:  (i) the jurisdiction of their
organization, (ii) the number of shares of each class of common and
preferred Stock authorized for each of such Subsidiaries, and (iii) the
number and the percentage of the outstanding shares of each such class owned
directly or indirectly by Borrower.  All
of the outstanding capital Stock of each such Subsidiary has been validly
issued and is fully paid and non-assessable.

 

(d)                                 Except
as set forth on Schedule 5.7(c), there are no subscriptions, options,
warrants, or calls relating to any shares of Borrower’s Subsidiaries’ capital
Stock, including any right of conversion or exchange under any outstanding
security or other instrument.  Neither
Borrower nor any of its Subsidiaries is subject to any obligation (contingent
or otherwise) to repurchase or otherwise acquire or retire any shares of
Borrower’s Subsidiaries’ capital Stock or any security convertible into or
exchangeable for any such capital Stock.

 

5.8                                 Due Authorization; No Conflict.  The execution, delivery, and performance of
the Loan Documents to which it is a party are within Borrower’s corporate
powers, have been duly authorized, and are not in conflict with nor constitute
a breach of any provision contained in (a) Borrower’s Articles or
Certificate of Incorporation or By-laws, or (b) any material agreement to
which Borrower is a party or by which its properties or assets may be bound
where such conflict or breach has not and reasonably could be expected to have
a Material Adverse Effect.  This
Agreement and the other Loan Documents to which Borrower is a party, and all
other documents contemplated hereby and thereby, when executed and delivered by
Borrower will be the legally valid and binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms, except
as enforcement may be limited by equitable principles or by bankruptcy,
insolvency, reorganization, moratorium, or similar laws

 

36

 

relating to or limiting creditors’ rights
generally.  The execution, delivery, and
performance of the Loan Documents to which it is a party are within each other
Obligor’s corporate powers, have been duly authorized, and are not in conflict
with nor constitute a breach of any provision contained in (a) such
Obligor’s Articles or Certificate of Incorporation or By-laws, or (b) any
material agreement to which such Obligor is a party or by which its properties
or assets may be bound where such conflict or breach has not and reasonably
could be expected to have a Material Adverse Effect.  This Agreement and the other Loan Documents
to which such Obligor is a party, and all other documents contemplated hereby
and thereby, when executed and delivered by such Obligor will be the legally
valid and binding obligations of such Obligor, enforceable against such Obligor
in accordance with their respective terms, except as enforcement may be limited
by equitable principles or by bankruptcy, insolvency, reorganization,
moratorium, or similar laws relating to or limiting creditors’ rights
generally.

 

5.9                                 Litigation.  There are
no actions or proceedings pending by or against Borrower or any of its
Subsidiaries before any court or administrative agency and Borrower does not
have knowledge or belief of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions, or prosecutions
involving Borrower, except for:  (a) ongoing
collection matters in which Borrower is the plaintiff; (b) matters
disclosed on Schedule 5.9; and (c) matters arising after the
date hereof that have not and reasonably could not be expected to have a
Material Adverse Effect.

 

5.10                           No Material Adverse Change in Financial Condition.  All financial statements relating to Borrower
and its Subsidiaries that have been delivered by Borrower to Foothill have been
prepared in accordance with GAAP and fairly present Borrower’s and its
Subsidiaries’ financial condition as of the date thereof and Borrower’s and its
Subsidiaries’ results of operations for the period then ended.  There has not been a material adverse change
in the financial condition of Borrower or its Subsidiaries, taken as a whole,
since the date of the latest financial statements submitted to Foothill on or
before the Restatement Effective Date.

 

5.11                           Solvency.  Borrower
and each of its Subsidiaries are Solvent. 
No transfer of property is being made by Borrower and no obligation is
being incurred by Borrower in connection with the transactions contemplated by
this Agreement or the other Loan Documents with the intent to hinder, delay, or
defraud either present or future creditors of Borrower.

 

5.12                           Employee Benefits. 
None of Borrower, its Subsidiaries, or any of their ERISA Affiliates
maintains or contributes to any Benefit Plan.

 

5.13                           Environmental Condition. 
None of Borrower’s or its Subsidiaries’ properties or assets has ever
been used by Borrower or such Subsidiaries or, to the best of Borrower’s
knowledge, by previous owners or operators in the disposal of, or to produce,
store, handle, treat, release, or transport, any Hazardous Materials other than
in full compliance with all applicable laws, statutes, and regulations
regarding the handling, treatment, and disposal of such Hazardous
Materials.  None of Borrower’s or its
Subsidiaries’ properties or assets has ever been designated or identified in
any manner pursuant to any environmental protection statute as a Hazardous
Materials disposal site, or a candidate for closure pursuant to any
environmental protection statute.  No
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned or operated by Borrower or any
of its

 

37

 

Subsidiaries. 
Neither Borrower nor any of its Subsidiaries has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal or state governmental agency concerning any action or omission by
Borrower or such Subsidiary involving the release or disposal of Hazardous
Materials into the environment, which such action or omission could be expected
to give rise to a liability on the part of Borrower or such Subsidiary that has
had or reasonably could be expected to have a Material Adverse Effect.

 

5.14                           Reliance by Foothill; Cumulative.  Each warranty and representation contained in
this Agreement and the other Loan Documents automatically shall be deemed
repeated with each advance, Capital Expenditure Loan, or issuance of an L/C or
L/C Guaranty and shall be conclusively presumed to have been relied on by
Foothill regardless of any investigation made or information possessed by
Foothill.  The warranties and
representations set forth in the Loan Documents shall be cumulative and in
addition to any and all other warranties and representations that Borrower or
any other Obligor now or hereafter shall give, or cause to be given, to
Foothill.

 

5.15                           Lender’s Liens.  The
Lender’s Liens are validly created, perfected, and first priority Liens,
subject only to Permitted Liens.

 

5.16                           Brokerage Fees.  No
brokerage commission or finders fees has or shall be incurred or payable in
connection with or as a result of Borrower’s obtaining financing from Foothill
under this Agreement, and Borrower has not utilized the services of any broker
or finder in connection with Borrower’s obtaining financing from Foothill under
this Agreement.

 

5.17                           License Agreements. 
Borrower has delivered to Foothill all License Agreements or other
product, purchase, or acquisition agreements and related agreements,
instruments, and documents that Borrower has executed with each Lien Creditor,
and Schedule 5.17 sets forth a complete and accurate listing of each and
every such License Agreement or other product, purchase, or acquisition
agreement and related agreement, instrument, and document in respect thereof.

 

5.18                           Reaffirmation. 
Borrower hereby represents and warrants to Foothill that the execution,
delivery, and performance of this Agreement are within its corporate powers,
have been duly authorized by all necessary corporate action, and are not in
contravention of any law, rule, or regulation, or any order, judgment, decree,
writ, injunction, or award of any arbitrator, court, or governmental authority,
or of the terms of its charter, bylaws, or other governing documents, or of any
contract or undertaking to which it is a party or by which any of its
properties may be bound or affected.

 

5.19                           Indebtedness.  Set forth on Schedule 5.19 is a
true and complete list of all Indebtedness of Borrower and its Subsidiaries
outstanding immediately prior to the Restatement Effective Date that is to
remain outstanding after the Restatement Effective Date and such Schedule accurately
reflects the aggregate principal amount of such Indebtedness and describes the
principal terms thereof.

 

5.20                           Deposit Accounts and Securities Accounts.  Set forth on Schedule 5.20 is
a listing of all of Borrower’s and its Subsidiaries’ Deposit Accounts and
Securities Accounts,

 

38

 

including, with respect to each bank or securities
intermediary (a) the name and address of such Person, and (b) the
account numbers of the Deposit Accounts or Securities Accounts maintained with
such Person.

 

6.                                      AFFIRMATIVE COVENANTS.

 

Borrower covenants and agrees that, so long as any
credit hereunder shall be available and until full and final payment of the
Obligations, and unless Foothill shall otherwise consent in writing, Borrower
shall do, and cause its each of its Subsidiaries to do, all of the following:

 

6.1                                 Accounting System. 
Borrower and its Subsidiaries shall maintain a standard and modern
system of accounting in accordance with GAAP with ledger and account cards or
computer tapes, discs, printouts, and records pertaining to the Collateral
which contain information as from time to time reasonably may be requested by
Foothill.  Borrower and its Subsidiaries
also shall keep proper books of account showing all sales, claims, and allowances
on their Inventory.

 

6.2                                 Collateral Reports. 
If the average Excess Availability (measured on a month-end basis for
the immediately preceding calendar month) is at least $7,500,000 and no Event
of Default has occurred and is continuing, Borrower shall deliver to Foothill,
as soon as they are available, but in no event later than the fifteenth (15th)
day of each month during the term of this Agreement, a detailed aging, by
total, of the Accounts of the Borrower and its Subsidiaries and a reconciliation
statement, and, as soon as they are available, but in no event later than the
thirtieth (30th) day of each month during the term of this Agreement, a summary
aging, by vendor, of all accounts payable, (such summary aging to include a
specific itemization of the amount of accounts payable due and owing to Lien
Creditors with respect to which Borrower or any of its Subsidiaries has
obtained letters of credit to secure the repayment of sums due an owing to such
Lien Creditors from time to time), and any book overdraft.  If the average Excess Availability (measured
on a month-end basis for the immediately preceding calendar month) is less than
$7,500,000 or an Event of Default has occurred and is continuing, Borrower shall
deliver such reports, statements, and summaries to Foothill on a weekly basis,
as soon as they are available, but in no event later than 15 Business Days
after the end of each week to which such reports, statements, and summaries
relate, during the term of this Agreement. 
Original sales invoices evidencing daily sales shall be mailed by
Borrower to each Account Debtor with, at Foothill’s request, a copy to
Foothill, and, at Foothill’s direction from and after and during the
continuation of an Event of Default, the invoices shall indicate on their face
that the Account has been assigned to Foothill and that all payments are to be
made directly to Foothill.  Borrower
shall deliver to Foothill, as Foothill reasonably may from time to time
require, collection reports, sales journals, invoices, original delivery
receipts, customer’s purchase orders, shipping instructions, bills of lading,
and other documentation respecting shipment arrangements.  Absent such a request by Foothill, copies of
all such documentation shall be held by Borrower as custodian for
Foothill.  In addition, from time to
time, Borrower shall deliver to Foothill such other and additional information
or documentation as Foothill reasonably may request.

 

39

 

6.3                                 Schedules of Accounts.  With such regularity as Foothill shall
reasonably require, Borrower shall provide Foothill with schedules describing
all Accounts of Borrower and its Subsidiaries. 
Foothill’s failure to request such schedules or Borrower’s failure to
execute and deliver such schedules shall not affect or limit Foothill’s
security interests or other rights in and to such Accounts.

 

6.4                                 Financial Statements, Reports, Certificates.  Borrower agrees to deliver to Foothill:  (a) as soon as available, but in any
event within thirty (30) days after the end of each month during each of
Borrower’s fiscal years (except for those months that are the end of a fiscal
quarter, in which case Borrower shall deliver such information to Foothill
within forty-five (45) days after the end of such month), a company
prepared balance sheet, income statement, and, in the case of quarter-end
statements, cash flow statement covering Borrower’s and its Subsidiaries’
operations during such period; and (b) as soon as available, but in any
event within ninety (90) days after the end of each of Borrower’s fiscal
years, financial statements of Borrower for each such fiscal year, audited by
independent certified public accountants reasonably acceptable to Foothill and
certified, without any qualifications, by such accountants to have been
prepared in accordance with GAAP.  Such
audited financial statements shall include a balance sheet, profit and loss
statement, and cash flow statement and, if prepared, such accountants’ letter
to management.  Borrower agrees to
deliver financial statements prepared on a consolidating basis so as to present
Borrower and each consolidated entity separately.

 

Together with the above, Borrower also shall deliver
to Foothill Borrower’s Form 10-Q Quarterly Reports, Form 10-K Annual
Reports, and Form 8-K Current Reports, and any other material filings made
by Borrower or its Subsidiaries with the Securities and Exchange Commission, if
any, as soon as the same are filed, or any other information that is provided
by Borrower to its shareholders, and any other report reasonably requested by
Foothill relating to the Collateral, or the financial condition of Borrower and
its Subsidiaries.

 

Each month, together with the financial statements
provided pursuant to Section 6.4(a), Borrower shall deliver to Foothill a
certificate signed by its chief financial officer to the effect that:  (i) all reports, statements, or computer
prepared information of any kind or nature delivered or caused to be delivered
to Foothill hereunder have been prepared in accordance with GAAP and fairly
present the financial condition of Borrower and its Subsidiaries; (ii) Borrower
is in timely compliance with all of its covenants and agreements hereunder; (iii) the
representations and warranties of Borrower and its Subsidiaries contained in
this Agreement and the other Loan Documents are true and correct in all
material respects on and as of the date of such certificate, as though made on
and as of such date (except to the extent that such representations and warranties
relate solely to an earlier date); (iv) for each month that also is the
date on which the financial covenant in Section 6.12 and Section 7.9
are to be tested, a Compliance Certificate demonstrating in reasonable detail
compliance at the end of such period with the financial covenants contained in Section 6.12
and Section 7.9; and (v) on the date of delivery of such
certificate to Foothill there does not exist any condition or event that
constitutes an Event of Default (or, in each case, to the extent of any
noncompliance, describing such non-compliance as to which he or she may have
knowledge and what action Borrower has taken, is taking, or proposes to take
with respect thereto).

 

40

 

Upon the occurrence of and during the continuation of
an Event of Default, Borrower shall issue written instructions to its
independent certified public accountants authorizing them to communicate with
Foothill and to release to Foothill whatever financial information concerning
Borrower that Foothill reasonably may request. 
Borrower hereby irrevocably authorizes and directs all auditors,
accountants, or other third parties to deliver to Foothill, at Borrower’s
expense, copies of Borrower’s and its Subsidiaries financial statements, papers
related thereto, and other accounting records of any nature in their
possession, and to disclose to Foothill any information they may have regarding
Borrower’s and its Subsidiaries business affairs and financial conditions.

 

6.5                                 Tax Returns.  Borrower
agrees to deliver to Foothill copies of Borrower’s future federal income tax
returns, and any amendments thereto, within thirty (30) days of the filing
thereof with the Internal Revenue Service.

 

6.6                                 Designation of Inventory. 
Borrower shall now and from time to time hereafter, but not less
frequently than monthly, deliver to Foothill a designation of Inventory of
Borrower and its Subsidiaries specifying such Person’s value (at the lower of
cost or market) of such Inventory and further specifying such other information
as Foothill may reasonably request. 
Borrower shall deliver to Foothill from time to time hereafter, but not
less frequently than monthly, a report of the aggregate amount of Inventory of
Borrower and its Subsidiaries that has been returned, which report, unless
otherwise requested by Foothill, need only identify the individual purchaser or
sub-distributor if the amount of Inventory returned by them is equal to or
greater than $100,000.

 

6.7                                 Returns.  Returns and
allowances, if any, as between Borrower and its Subsidiaries, on the one hand,
and its Account Debtors, on the other, shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at the
time of the execution and delivery of this Agreement.

 

6.8                                 Title to Equipment. 
Upon Foothill’s request, Borrower immediately shall deliver to Foothill,
properly endorsed, any and all evidences of ownership of, certificates of
title, or applications for title to any items of Equipment of Borrower and its
Subsidiaries.

 

6.9                                 Maintenance of Equipment. 
Borrower and its Subsidiaries shall keep and maintain its respective
Equipment in good operating condition and repair (ordinary wear and tear
excepted), and make all necessary replacements thereto so that the value and
operating efficiency thereof shall at all times be maintained and
preserved.  Borrower and its Subsidiaries
shall not permit any item of its Equipment to become a fixture to real estate
or an accession to other property, and such Equipment is now and shall at all
times remain personal property.

 

6.10                           Taxes.  All
assessments and taxes, whether real, personal, or otherwise, due or payable by,
or imposed, levied, or assessed against Borrower, and of its Subsidiaries or
any of their respective property have been paid, and shall hereafter be paid in
full, before delinquency or before the expiration of any extension period.  Borrower and each of its Subsidiaries shall
make due and timely payment or deposit of all federal, state, and local taxes,
assessments, or contributions required of it by law, and will execute and
deliver to Foothill, on demand, appropriate certificates attesting to the
payment thereof or deposit with respect thereto.

 

41

 

Borrower and each of its Subsidiaries will make timely
payment or deposit of all tax payments and withholding taxes required of it by
applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Foothill with proof satisfactory to Foothill indicating that Borrower
and each of its Subsidiaries have made such payments or deposits.  The foregoing to the contrary
notwithstanding, Borrower and each of its Subsidiaries shall not be required to
pay or discharge any such assessment or tax (other than payroll taxes) so long
as the validity thereof shall be the subject of a Permitted Protest.

 

6.11                           Insurance.

 

(a)                                  Borrower
and each of its Subsidiaries, at their respective expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion,
sprinklers, and all other hazards and risks, and in such amounts, as are
ordinarily insured against by other owners in similar businesses.  Borrower also shall maintain business
interruption, public liability, product liability, and property damage
insurance relating to Borrower’s and each of its Subsidiaries’ ownership and
use of the Collateral, as well as insurance against larceny, embezzlement, and
criminal misappropriation.

 

(b)                                 All
such policies of insurance shall be in such form, with such companies, and in
such amounts as may be reasonably satisfactory to Foothill.  All such policies of insurance (except those
of public liability and property damage) shall contain a 438BFU lender’s loss
payable endorsement, or an equivalent endorsement in a form satisfactory to
Foothill, showing Foothill as sole loss payee thereof, and shall contain a
waiver of warranties, and shall specify that the insurer must give at least
ten (10) days prior written notice to Foothill before canceling its
policy for any reason.  Borrower shall
deliver to Foothill certified copies of such policies of insurance and evidence
of the payment of all premiums therefor. 
All proceeds payable under any such policy shall be payable to Foothill
to be applied on account of the Obligations.

 

6.12                           Financial
Covenants.

 

(a)                                  EBITDA.  (i) Borrower shall not have two
consecutive fiscal quarters of EBITDA losses (exclusive of the quarter ending June 30,
2005) and (ii) Borrower shall maintain EBITDA, for each fiscal period set
forth below, of not less than the amount indicated below opposite such fiscal
period:

 

	
  for the
  immediately preceding twelve-month period ending 06/30/05

  	
   

  	
  $

  	
  4,250,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 09/30/05

  	
   

  	
  $

  	
  4,250,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 12/31/05

  	
   

  	
  $

  	
  4,250,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 03/31/06

  	
   

  	
  $

  	
  4,250,000

  	
   

  

 

42

 

	
  for the
  immediately preceding twelve-month period ending 06/30/06

  	
   

  	
  $

  	
  5,000,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 09/30/06

  	
   

  	
  $

  	
  5,000,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 12/31/06

  	
   

  	
  $

  	
  5,000,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 03/31/07

  	
   

  	
  $

  	
  5,000,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 06/30/07

  	
   

  	
  $

  	
  5,500,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 09/30/07

  	
   

  	
  $

  	
  5,500,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 12/31/07

  	
   

  	
  $

  	
  5,500,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 03/31/08

  	
   

  	
  $

  	
  5,500,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 06/30/08 and for each
  twelve-month period ending at each fiscal quarter end thereafter

  	
   

  	
  $

  	
  6,000,000

  	
   

  

 

6.13                           No Setoffs or Counterclaims. 
All payments hereunder and under the other Loan Documents made by or on
behalf of Borrower or its Subsidiaries shall be made without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes.

 

6.14                           Location of Inventory and Equipment.  Borrower and each of its Subsidiaries shall
keep their respective Inventory and Equipment (other than goods that are in
transit in the ordinary course of business) only at the locations identified on
Schedule 6.14; provided, however, that Borrower may
amend Schedule 6.14 so long as such amendment occurs by written
notice to Foothill not less than thirty (30) days prior to the date on
which the applicable Inventory or Equipment is moved to such new location, so
long as such new location is within the continental United States, and so long
as, at the time of such written notification Borrower provides any financing
statements or fixture filings necessary to perfect and continue perfected
Foothill’s security interests in such assets and also provides to Foothill
Collateral Access Agreements in form and substance satisfactory to Foothill;
provided further, however,

 

43

 

that such notice need only be given contemporaneously
in the event of an earthquake or other emergency.

 

6.15                           Compliance with Laws. 
Borrower and each of its Subsidiaries shall comply with the requirements
of all applicable laws, rules, regulations, and orders of any governmental
authority, including the Fair Labor Standards Act and the Americans With
Disabilities Act, other than laws, rules, regulations, and orders the
non-compliance with which, individually or in the aggregate, have not and
reasonably could not be expected to have a Material Adverse Effect.

 

6.16                           Leases.  Borrower and
each of its Subsidiaries shall pay when due all rents and other material
amounts payable under any leases to which Borrower or such Subsidiary is a
party or by which Borrower’s or such Subsidiary’s properties and assets are
bound, unless such payments are the subject of a Permitted Protest.  To the extent that Borrower or such
Subsidiary fails timely to make payment of such rents and other material
amounts payable when due under its leases (other than those rents or other
amounts payable that are the subject of a Permitted Protest), Foothill shall be
entitled, in its discretion, and without the necessity of declaring an Event of
Default, to reserve an amount equal to such unpaid amounts from the loan
availability created under Section 2.1 hereof.

 

6.17                           License Agreements. 
Borrower and each of its Subsidiaries shall comply with all the material
terms and conditions of all License Agreements, whether now or hereafter
existing, and promptly notify Foothill of the occurrence of any event which
constitutes a default thereunder if such default reasonably could be expected
to have a Material Adverse Effect. 
Foothill may, from time to time, review and make copies of Borrower’s or
such Subsidiary’s then current License Agreements and Borrower and each of its
Subsidiaries agree to make such License Agreements available to Foothill and,
if requested by Foothill, will certify them as being true, correct, and
complete.

 

6.18                           Formation of Subsidiaries.  At the time that Borrower, any of its
Subsidiaries or any Guarantor forms any direct or indirect Subsidiary or
acquires any direct or indirect Subsidiary after the Restatement Effective
Date, Borrower, such Subsidiary or such Guarantor shall (a) cause such new
Subsidiary to provide to Foothill a joinder to this Agreement or the Guaranty,
the Stock Pledge Agreement and the Guarantor Security Agreement, together with
such other security documents (including mortgages with respect to any Real
Property of such new Subsidiary), as well as appropriate financing statements
(and with respect to all property subject to a mortgage, fixture filings), all
in form and substance satisfactory to Foothill (including being sufficient to
grant Foothill a first priority Lien (subject to Permitted Liens) in and to the
assets of such newly formed or acquired Subsidiary), (b) provide to
Foothill a pledge agreement and appropriate certificates and powers or
financing statements, hypothecating all of the direct or beneficial ownership
interest in such new Subsidiary, in form and substance satisfactory to
Foothill, and (c) provide to Foothill all other documentation, including
one or more opinions of counsel satisfactory to Foothill, which in its opinion
is appropriate with respect to the execution and delivery of the applicable
documentation referred to above (including policies of title insurance or other
documentation with respect to all property subject to a mortgage).  Any document, agreement, or instrument
executed or issued pursuant to this Section 6.18 shall be a Loan
Document.

 

44

 

7.                                      NEGATIVE COVENANTS.

 

Borrower covenants and agrees that, so long as any
credit hereunder shall be available and until full and final payment of the
Obligations, Borrower will not, and will not permit any of its Subsidiaries to
do, any of the following without Foothill’s prior written consent:

 

7.1                                 Indebtedness.  Create,
incur, assume, permit, guarantee, or otherwise become or remain, directly or
indirectly, liable with respect to any Indebtedness, except:

 

(a)                                  Indebtedness
evidenced by this Agreement or the Capital Expenditure Loan Note together with
Indebtedness to issuers of letters of credit that are the subject of L/C
Guarantees;

 

(b)                                 Indebtedness
set forth in the latest financial statements of Borrower submitted to Foothill
on or prior to the Initial Closing Date;

 

(c)                                  Indebtedness
secured by Permitted Liens; and

 

(d)                                 refinancings,
renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of
this Section 7.1 (and continuance or renewal of any Permitted Liens
associated therewith) so long as:  (i) the
terms and conditions of such refinancings, renewals, or extensions do not
materially impair the prospects of repayment of the Obligations by Borrower, (ii) the
net cash proceeds of such refinancings, renewals, or extensions do not result
in an increase in the aggregate principal amount of the Indebtedness so refinanced,
renewed, or extended, (iii) such refinancings, renewals, refundings, or
extensions do not result in a shortening of the average weighted maturity of
the Indebtedness so refinanced, renewed, or extended, and (iv) to the
extent that Indebtedness that is refinanced was subordinated in right of
payment to the Obligations, then the subordination terms and conditions of the
refinancing Indebtedness must be at least as favorable to Foothill as those
applicable to the refinanced Indebtedness.

 

7.2                                 Liens.  Create, incur,
assume, or permit to exist, directly or indirectly, any lien on or with respect
to any of its property or assets, of any kind, whether now owned or hereafter
acquired, or any income or profits therefrom, except for Permitted Liens
(including liens that are replacements of Permitted Liens to the extent that
the original Indebtedness is refinanced under Section 7.1(d) and
so long as the replacement liens secure only those assets or property that
secured the original Indebtedness).

 

7.3                                 Restrictions on Fundamental Changes.  Except as otherwise permitted under Section 7.11,
enter into any acquisition, merger, consolidation, reorganization, or
recapitalization, or reclassify its capital stock, or liquidate, wind up, or
dissolve itself (or suffer any liquidation or dissolution), or enter into any
transaction not in the ordinary and usual course of Borrower’s business
including the conveyance, sale, assignment, lease, transfer, or other
disposition of, in one transaction or a series of transactions, all or any
substantial part of its business, property, or assets, whether now owned or
hereafter acquired, or acquire by purchase or otherwise all or substantially
all of the properties, assets, stock, or other evidence of beneficial ownership
of any Person.  Nothing in this Section 7.3
shall be read to otherwise limit or restrict Borrower’s ability to issue its
equity securities for value except in relation to the prohibited transactions
specified above.

 

45

 

7.4                                 Change Name.  Change
Borrower’s  or any of its Subsidiaries’
name, FEIN, corporate structure (within the meaning of Section 9402(7) of
the Code), or identity, or add any new fictitious name; provided, however, that
Borrower or any of its Subsidiaries may change its name or FEIN or add new
fictitious names so long as such changes or addition occurs by written notice
to Foothill not less than thirty (30) days prior to the effectiveness
thereof and so long as at the time of such written notification, Borrower
provides any financing statements or fixture filings necessary to perfect and
continue perfected, as a first priority security interest, the Lender’s Liens.

 

7.5                                 Guarantee.  Guarantee
or otherwise become in any way liable with respect to the obligations of any
third Person except by endorsement of instruments or items of payment for
deposit to the account of Borrower or which are transmitted or turned over to
Foothill; provided, however, notwithstanding the foregoing, Borrower may, in
support of the acquisition of Crane pursuant to the Asset Purchase Agreement,
guarantee or otherwise become in any way liable with respect to the obligations
of Crane in an aggregate amount not to exceed One Million Dollars ($1,000,000)
outstanding at any one time.

 

7.6                                 Restructure.  Make any
change in the principal nature of Borrower’s or any of its Subsidiaries’
business operations or the date of its fiscal year.

 

7.7                                 Prepayments.

 

(a)                                  Except
in connection with a refinancing permitted by Section 7.1(d),
prepay, redeem, retire, defease, purchase, or otherwise acquire any
Indebtedness owing to any third Person, other than the Obligations in
accordance with this Agreement,

 

(b)                                 Directly
or indirectly, amend, modify, alter, increase, or change any of the terms or
conditions of any agreement, instrument, document, indenture, or other writing
evidencing or concerning Indebtedness permitted under

Sections 7.1(b), (c), or (d), and

 

(c)                                  Make
any payments on any Indebtedness owing to any third person that has been
subordinated to the Obligations; provided, however, that Borrower or its
Subsidiaries may make payments on such Indebtedness if Foothill has agreed
thereto pursuant to the terms and conditions of the agreement evidencing such
subordination.

 

The foregoing notwithstanding, and provided that no
Event of Default shall have occurred and is continuing and no Advances under Section 2.1(a) or
Capital Expenditure Loans are then outstanding or would be outstanding after
giving effect to any such prepayment, Borrower may from time to time (i) prepay
amounts then outstanding to BofA with respect to the secured purchase money
financing obtained by Borrower from BofA to finance the acquisition of the Las
Vegas Facility, or (ii) prepay amounts then outstanding to Pioneer
Citizens Bank with respect to the secured purchase money financing obtained by
Borrower from Pioneer Citizens Bank to finance the acquisition of that certain
8.8 acre parcel of real property adjacent to the Las Vegas Facility.

 

7.8                                 Change of Control. 
Cause, permit, or suffer, directly or indirectly, any Change of Control.

 

46

 

7.9                                 Capital Expenditures. 
Make any capital expenditure, or any commitment therefor, (a) with
respect to individual transactions, in excess of Eight Hundred Thousand Dollars
($800,000); (b) with respect to aggregate capital expenditures made or
committed during Borrower’s fiscal year ended March 31, 2005, in an
aggregate amount in excess of Three Million Two Hundred Fifty Thousand Dollars
($3,250,000); or (c) with respect to aggregate capital expenditures made
or committed in any other fiscal year, in an aggregate amount in excess of Two
Million Five Hundred Thousand Dollars ($2,500,000); provided, however, that if
the amount available under this covenant is not expended in any particular
year, one hundred percent (100%) thereof, and in all cases in an amount not to
exceed $2,500,000, shall be available to be expended in the following fiscal
year, but only in such subsequent fiscal year, with the amount so carried over
being deemed to have been expended last in such subsequent year.

 

7.10                           Consignments.  Without
Foothill’s prior written consent, consign any Inventory of Borrower or its
Subsidiaries or sell any such Inventory on bill and hold, sale or return, sale
on approval, or other conditional terms of sale.  The foregoing to the contrary
notwithstanding, Borrower and any of its Subsidiaries shall be entitled to
consign their respective Inventory to Third Persons so long as no Event of
Default exists or would result therefrom and so long as prior thereto such
Person (a) notifies Foothill to exclude such Inventory from Eligible
Inventory, and (b) completes such documentation with the proposed
consignee (including the execution and delivery of a consignment agreement and
the filing of a UCC-1 with respect to the consigned Inventory), as Foothill
reasonably may require.

 

7.11                           Distributions.  Make
any distribution or declare or pay any dividends (in cash or property, other
than stock, warrants, or other equity interests) on, or purchase, acquire,
redeem, or retire any of Borrower’s capital stock, of any class, (or rights,
options, or warrants in respect thereof) whether now or hereafter
outstanding.  The foregoing to the
contrary notwithstanding, Borrower shall be entitled to repurchase, acquire,
redeem, or acquire any equity interests in Borrower, or rights, options, or
warrants in respect thereof, so long as no Event of Default exists or would
result therefrom and so long as after giving effect thereto Borrower has Excess
Availability equal to or greater than Two Million Dollars ($2,000,000).

 

7.12                           Accounting Methods. 
Except to the extent required by GAAP, modify or change its method of
accounting or enter into, modify, or terminate any agreement currently existing,
or at any time hereafter entered into with any third party accounting firm or
service bureau for the preparation or storage of Borrower’s accounting records
without said accounting firm or service bureau agreeing to provide Foothill
information regarding the Collateral or Borrower’s and its Subsidiaries’
financial condition.  Borrower waives the
right to assert a confidential relationship, if any, it may have with any
accounting firm or service bureau in connection with any information requested
by Foothill pursuant to or in accordance with this Agreement, and agrees that
Foothill may contact directly any such accounting firm or service bureau in
order to obtain such information.

 

7.13                           Investments.  Directly
or indirectly make, acquire, or incur any liabilities (including contingent
obligations) for or in connection with (a) the acquisition of the
securities (whether debt or equity) of, or other interests in, a Person, (b) loans,
advances, capital contributions, or transfers of property to a Person, (c) the
acquisition of all or substantially all of

 

47

 

the properties or assets of a Person, other than (i) advances
or loans made to employees for travel or other similar expenses incurred in the
ordinary course of business, (ii) additional advances or loans made to
employees in the ordinary course of business in an aggregate amount not to
exceed Six Hundred Thousand Dollars ($600,000) at any one time, (iii) Permitted
Investments, (d) investments in Third Persons engaged in the same or
related lines of business, the aggregate amount of all such investments not to
exceed, as of the date of the making of any such investment, ten percent (10%)
of Borrower’s then extant Tangible Net Worth, so long as no Event of Default
exists or would result therefore, (e) provided that Foothill shall
have approved the Asset Purchase Agreement and the schedules and exhibits
thereto, and provided, further, that Borrower shall have received
net issuance proceeds of the Offering of at least Ten Million Dollars
($10,000,000), Borrower may downstream to its wholly owned subsidiary, Image
Newco, Inc., a California corporation (“Newco”), cash in an amount not to
exceed Six Million Dollars ($6,000,000) to finance the acquisition of the
assets of Crane pursuant to the Asset Purchase Agreement and to pay certain
signing bonuses and consulting fees to affiliates of Crane related to such
acquisition, provided, that after giving effect to the downstreaming to
Newco, Borrower shall have retained a minimum of Two Million Dollars
($2,000,000) of the net issuance proceeds from the Offering; or (f) so
long as no Event of Default exists or would result therefrom, investments in
Crane, following the acquisition thereof by Borrower, in the amount not to
exceed (i) One Million Dollars ($1,000,000) during the first twelve months
following the acquisition, provided that the net issuance proceeds received by
Borrower from the Offering exceeds Two Million Dollars ($2,000,000), and (ii) One
Million Five Hundred Thousand Dollars ($1,500,000) in the aggregate during any
fiscal year (in addition to (i) above), such investments solely to be used
for operating needs; provided, however, that after giving effect
to any investment permitted by clauses (d) and (e), (x) Borrower
shall have Excess Availability equal to or greater than Two Million Dollars
($2,000,000), and (y) any Accounts acquired by Borrower from a Third
Person or any Inventory acquired by Borrower from a Third Person outside of the
ordinary course of business, regardless if any such acquisition is otherwise
permitted by the terms of this Agreement, shall not be deemed Eligible Accounts
or Eligible Inventory, as the case may be, until categorized as such by
Foothill as a result of a field audit or appraisal, as determined appropriate
by Foothill in its reasonable credit judgment.

 

7.14                           Transactions with Affiliates.  Directly or indirectly enter into or permit
to exist any material transaction with any Affiliate of Borrower or any of its
Subsidiaries except as permitted by Section 7.13, and except for
transactions that are in the ordinary course of Borrower’s or its Subsidiaries’
business, upon fair and reasonable terms, that are fully disclosed to Foothill,
and that are no less favorable to Borrower or such Subsidiary than would be
obtained in arm’s length transaction with a non-Affiliate.

 

7.15                           Suspension.  Suspend
or go out of a substantial portion of its business.

 

7.16                           Use of Proceeds.  Use
the proceeds of the advances made hereunder for any purpose other than:  (a) to pay transactional costs and
expenses incurred in connection with this Agreement, and (b) thereafter,
consistent with the terms and conditions hereof, for its lawful and permitted
corporate purposes.

 

7.17                           Change in Location of Chief Executive Office; Inventory and Equipment
with Bailees.  Without
thirty (30) days prior written notification to Foothill, relocate

 

48

 

its chief executive office to a new location and so
long as, at the time of such written notification, Borrower or any applicable
Subsidiary of Borrower provides any financing statements or fixture filings
necessary to perfect and continue perfected Foothill’s security interests and
also provides to Foothill a landlord’s waiver in form and substance
satisfactory to Foothill.  The Inventory
and Equipment of Borrower or any of its Subsidiaries’ shall not at any time now
or hereafter be stored with a bailee, warehouseman, or similar party without
Foothill’s prior written consent.

 

7.18                           Amendment or Termination of License Agreements.  Amend in any material respect or voluntarily
terminate any License Agreement if such amendment or termination reasonably
could be expected to have a Material Adverse Effect.

 

7.19                           Securities Accounts. 
Establish or maintain any Securities Account, or any Deposit Accounts
with Investments in excess of $250,000 in the aggregate outstanding at any one
time, unless Foothill shall have received a Control Agreement in respect of
such Securities Account or such Deposit Account. Neither Borrower nor any of
its Subsidiaries shall transfer assets out of any Securities Account; provided,
however, that, so long as no Event of Default has occurred and is
continuing or would result therefrom, such Person may use such assets (and the
proceeds thereof) to the extent not prohibited by this Agreement.

 

8.                                      EVENTS OF DEFAULT.

 

Any one or more of the following events shall
constitute an event of default (each, an “Event of Default”) under this
Agreement:

 

8.1                                 If
Borrower fails to pay when due and payable or when declared due and payable,
any portion of the Obligations (whether of principal, interest (including any
interest which, but for the provisions of the Bankruptcy Code, would have
accrued on such amounts), fees and charges due Foothill, reimbursement of
Foothill Expenses, or other amounts constituting Obligations);

 

8.2                                 (a) If
Borrower fails or neglects to perform, keep, or observe, in any material
respect, any term, provision, condition, covenant, or agreement contained in Section 6.2
of this Agreement and such failure continues for a period of five (5) days
from the date of such failure or neglect; (b) If Borrower fails or
neglects to perform, keep, or observe, in any material respect, any term,
provision, condition, covenant, or agreement contained in Sections 6.3,
6.4, 6.5, 6.8, 6.15, 6.16, or 6.17 of this Agreement and such failure
continues for a period of fifteen (15) days from the date of such failure
or neglect; (c) If Borrower fails or neglects to perform, keep, or
observe, in any material respect, any term, provision, condition, covenant, or
agreement contained in Sections 6.1 and 6.9 of this Agreement and
such failure continues for a period of fifteen (15) days from the date
Foothill sends Borrower written notice of such failure or neglect; and (d) If
Borrower or any other Obligor fails or neglects to perform, keep, or observe,
in any material respect, any other term, provision, condition, covenant, or
agreement contained in this Agreement, in any of the other Loan Documents, or
in any other present or future agreement between Borrower or such other
Obligor, on the one hand, and Foothill, on the other (other than any such term,
provision, condition, covenant, or agreement contained in Section 5 hereof
or that is the subject of another provision of this Section 8);

 

49

 

8.3                                 If
there is a material impairment of the prospect of repayment of any portion of
the Obligations owing to Foothill or a material impairment of the value or
priority of Foothill’s security interests in the Collateral and such material
impairment is not cured within five (5) days of the date on which
Foothill sends Borrower written notice thereof; provided, however,
that Foothill need not give any such notice in cases involving fraud,
intentional misrepresentation, or conversion of the Collateral;

 

8.4                                 If
any material portion of any Obligor’s properties or assets is attached, seized,
subjected to a writ or distress warrant, or is levied upon, or comes into the
possession of any third Person in connection with a claim of $250,000, or more,
and such attachment, seizure, writ, warrant, or levy is not released,
discharged, or bonded against within fifteen (15) days of the date it
first arises;

 

8.5                                 If
an Insolvency Proceeding is commenced by any Obligor;

 

8.6                                 If
an Insolvency Proceeding is commenced against any Obligor and any of the
following events occur:  (a) any
Obligor consents to the institution of the Insolvency Proceeding against it; (b) the
petition commencing the Insolvency Proceeding is not timely controverted; (c) the
petition commencing the Insolvency Proceeding is not dismissed within
sixty (60) calendar days of the date of the filing thereof; provided,
however, that, during the pendency of such period, Foothill shall be relieved
of its obligation to make additional advances, Capital Expenditure Loans, or
issue additional L/Cs or L/C Guarantees hereunder; (d) an interim trustee
is appointed to take possession of all or a substantial portion of the
properties or assets of, or to operate all or any substantial portion of the
business of, any Obligor and such interim trustee is not removed within
sixty (60) calendar days of the date of the appointment thereof; provided,
however, that, during the pendency of such period, Foothill shall be relieved
of its obligation to make additional advances, Capital Expenditure Loans, or
issue additional L/Cs or L/C Guarantees hereunder; or (e) an order for
relief shall have been issued or entered therein;

 

8.7                                 If
any Obligor is enjoined, restrained, or in any way prevented by court order
from continuing to conduct all or any material part of its business affairs and
such injunction, restraint, or other prevention has continued for twenty (20)
consecutive days;

 

8.8                                 (a) If
a notice of lien, levy, or assessment is filed of record with respect to any
properties of any Obligor or assets by the United States Government, or any
department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, or if any taxes or debts owing at any time
hereafter to any one or more of such entities becomes a lien, whether choate or
otherwise, upon any properties of any Obligor or assets and, in any such case,
the aggregate amount of such taxes or debts is in excess of Twenty Five
Thousand Dollars ($25,000) and less than Two Hundred Fifty Thousand Dollars
($250,000) and within five (5) days of the filing or attachment of
same, Borrower does not instruct Foothill to reserve the entire amount thereof
(together with interest and penalties projected to be added thereto) from the
Borrowing Base; or (b) If a notice of lien, levy, or assessment is filed
of record with respect to any properties of any Obligor or assets by the United
States Government, or any department, agency, or instrumentality thereof, or by
any state, county, municipal, or governmental agency, or if any taxes or debts
owing at any time hereafter to any one or more of such entities becomes a lien,
whether choate or otherwise, upon any of Borrower’s properties or

 

50

 

assets and, in any such case, the aggregate amount of
such taxes or debts is in equal to or in excess of Two Hundred Fifty Thousand
Dollars ($250,000);

 

8.9                                 If
a judgment or other claim becomes a lien or encumbrance upon any material
portion of any Obligor’s properties or assets and such liens or encumbrances
are not released, discharged, or bonded against within twenty (20) days of the
date they first arise;

 

8.10                           (a) If
there is a default in any material agreement respecting Indebtedness of any
Obligor resulting in a right by the third Person to such agreement,
irrespective of whether exercised, to accelerate the maturity of such Obligor’s
Indebtedness thereunder, or (b) If there is a termination of a material
License Agreement by the licensor thereunder as a result of an alleged breach
thereof by Borrower or any of its Subsidiaries, if the termination of such
License Agreement reasonably could be expected to have a Material Adverse
Effect.

 

8.11                           If
any Obligor makes any payment on account of Indebtedness that has been
contractually subordinated in right of payment to the payment of the
Obligations, except to the extent such payment is permitted by the terms of the
subordination provisions applicable to such Indebtedness;

 

8.12                           If
any material misstatement or misrepresentation exists now or hereafter in any
warranty, representation, statement, or report made to Foothill by Borrower or
any other Obligor or any officer, employee, agent, or director of Borrower or
such Obligor, or if any such material warranty or representation is withdrawn;
or

 

8.13                           If
the obligation of any third Person under any Loan Document is limited or
terminated by operation of law or by the third Person thereunder, or any such
third Person becomes the subject of an Insolvency Proceeding.

 

9.                                      FOOTHILL’S RIGHTS AND REMEDIES.

 

9.1                                 Rights and Remedies. 
Upon the occurrence, and during the continuation, of an Event of Default
Foothill may, at its election, without notice of its election and without
demand, do any one or more of the following, all of which are authorized by
Borrower:

 

(a)                                  Declare
all Obligations, whether evidenced by this Agreement, by any of the other Loan
Documents, or otherwise, immediately due and payable;

 

(b)                                 Cease
advancing money or extending credit to or for the benefit of Borrower under
this Agreement, under any of the Loan Documents, or under any other agreement
between Borrower and Foothill;

 

(c)                                  Terminate
this Agreement and any of the other Loan Documents as to any future liability
or obligation of Foothill, but without affecting Foothill’s rights and security
interests in the Collateral and without affecting the Obligations;

 

(d)                                 Settle
or adjust disputes and claims directly with Account Debtors for amounts and upon
terms which Foothill considers advisable, and in such cases, Foothill will
credit Borrower’s Loan Account with only the net amounts received by Foothill
in payment of

 

51

 

such disputed Accounts after deducting all Foothill
Expenses incurred or expended in connection therewith;

 

(e)                                  Cause
Borrower or any its Subsidiaries to hold all returned Inventory in trust for
Foothill, segregate all returned Inventory from all other property of Borrower
or such Subsidiary or in Borrower’s or such Subsidiary’s possession and
conspicuously label said returned Inventory as the property of Foothill;

 

(f)                                    Without
notice to or demand upon Borrower, make such payments and do such acts as
Foothill considers necessary or reasonable to protect its security interests in
the Collateral.  Borrower agrees to
assemble the Collateral if Foothill so requires, and to make the Collateral
available to Foothill as Foothill may designate.  Borrower, for itself and each of its
Subsidiaries, authorizes Foothill to enter the premises where the Collateral is
located, to take and maintain possession of the Collateral, or any part of it,
and to pay, purchase, contest, or compromise any encumbrance, charge, or lien
that in Foothill’s determination appears to conflict with its security
interests and to pay all expenses incurred in connection therewith.  With respect to any of Borrower’s or its
Subsidiaries’ owned premises, Borrower, for itself and each of its
Subsidiaries, hereby grants Foothill a license to enter into possession of such
premises and to occupy the same, without charge, for up to one hundred
twenty (120) days in order to exercise any of Foothill’s rights or
remedies provided herein, at law, in equity, or otherwise;

 

(g)                                 Without
notice to Borrower (such notice being expressly waived), and without
constituting a retention of any collateral in satisfaction of an obligation
(within the meaning of Section 9620 of the Code), set off and apply to the
Obligations any and all (i) balances and deposits of Borrower or its
Subsidiaries held by Foothill (including any amounts received in the Blocked
Account), or (ii) indebtedness at any time owing to or for the credit or
the account of Borrower or any of its Subsidiaries held by Foothill;

 

(h)                                 Hold,
as cash collateral, any and all balances and deposits of Borrower or any of its
Subsidiaries held by Foothill, and any amounts received in the Lockbox
Accounts, to secure the full and final repayment of all of the Obligations;

 

(i)                                     Ship,
reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise
for sale, and sell (in the manner provided for herein) the Collateral, but only
to the extent that Borrower or any of its Subsidiaries has rights therein.  To the maximum extent permitted by law, Foothill
is hereby granted a license or other right to use, without charge, Borrower’s
and its Subsidiaries’ labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale, and selling any Collateral and
Borrower’s and its Subsidiaries’ rights under all licenses and all franchise
agreements shall inure to Foothill’s benefit;

 

(j)                                     Sell
the Collateral at either a public or private sale, or both, by way of one or
more contracts or transactions, for cash or on terms, in such manner and at
such places (including Borrower’s premises) as Foothill determines is
commercially reasonable.  It is not
necessary that the Collateral be present at any such sale;

 

52

 

(k)                                  Foothill
shall give notice of the disposition of the Collateral as follows:

 

(A)                              Foothill
shall give Borrower or any of its applicable Subsidiaries and each holder of a
security interest in the Collateral who has filed with Foothill a written
request for notice, a notice in writing of the time and place of public sale,
or, if the sale is a private sale or some other disposition other than a public
sale is to be made of the Collateral, then the time on or after which the
private sale or other disposition is to be made;

 

(B)                                The
notice shall be personally delivered or mailed, postage prepaid, to Borrower or
such Subsidiary as provided in Section 12, at least ten (10) days
before the date fixed for the sale, or at least ten (10) days before
the date on or after which the private sale or other disposition is to be made;
no notice needs to be given prior to the disposition of any portion of the
Collateral that is perishable or threatens to decline speedily in value or that
is of a type customarily sold on a recognized market.  Notice to Persons other than Borrower or such
Subsidiary claiming an interest in the Collateral shall be sent to such
addresses as they have furnished to Foothill; and

 

(C)                                If
the sale is to be a public sale, Foothill also shall give notice of the time
and place by publishing a notice one time at least ten (10) days
before the date of the sale in a newspaper of general circulation in the county
in which the sale is to be held;

 

(l)                                     Foothill
may credit bid and purchase at any public sale; and

 

(m)                               Any
deficiency that exists after disposition of the Collateral as provided above
will be paid immediately by Borrower. 
Any excess will be returned, without interest and subject to the rights
of third Persons, by Foothill to Borrower.

 

9.2                                 Remedies Cumulative. 
Foothill’s rights and remedies under this Agreement, the other Loan
Documents, and all other agreements shall be cumulative.  Foothill shall have all other rights and
remedies not inconsistent herewith as provided under the Code, by law, or in
equity.  No exercise by Foothill of one
right or remedy shall be deemed an election, and no waiver by Foothill of any
Event of Default shall be deemed a continuing waiver.  No delay by Foothill shall constitute a
waiver, election, or acquiescence by it.

 

10.                               TAXES AND EXPENSES.

 

If Borrower or any of its Subsidiaries fails to pay
any monies (whether taxes, rents, assessments, insurance premiums, or, in the
case of leased properties or assets, rents or other amounts payable under such
leases) due to third Persons, or fails to make any deposits or furnish any
required proof of payment or deposit, all as required under the terms of this
Agreement, then, to the extent that Foothill determines that such failure by
Borrower or such Subsidiary reasonably could be expected to have a material
adverse effect on Foothill’s interests in the Collateral, in its discretion,
Foothill may do any or all of the following: 
(a) make payment of the same or any part thereof; (b) set up
such reserves in Borrower’s Loan Account as Foothill deems necessary to protect
Foothill from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type described in Section 6.11,
and take any action with respect to such policies as Foothill deems
prudent.  Any such amounts paid by
Foothill shall

 

53

 

constitute Foothill Expenses.  Foothill agrees to provide Borrower with
concurrent notice of any action taken by it under clauses (a), (b), or (c) above.  Any such payments made by Foothill shall not
constitute an agreement by Foothill to make similar payments in the future or a
waiver by Foothill of any Event of Default under this Agreement.  Foothill need not inquire as to, or contest
the validity of, any such expense, tax, security interest, encumbrance, or lien
and the receipt of the usual official notice for the payment thereof shall be
conclusive evidence that the same was validly due and owing.

 

11.                               WAIVERS; INDEMNIFICATION.

 

11.1                           Demand; Protest; etc. 
Borrower waives demand, protest, notice of protest, notice of default or
dishonor, notice of payment and nonpayment, notice of any default, nonpayment
at maturity, release, compromise, settlement, extension, or renewal of
accounts, documents, instruments, chattel paper, and guarantees at any time
held by Foothill on which Borrower may in any way be liable.

 

11.2                           Foothill’s Liability for Collateral.  So long as Foothill complies with its
obligations, if any, under Section 9207 of the Code, Foothill shall not in
any way or manner be liable or responsible for: 
(a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other Person.  All risk of loss, damage, or destruction of
the Collateral shall be borne by Borrower.

 

11.3                           Indemnification. 
Borrower agrees to defend, indemnify, save, and hold Foothill and its
officers, employees, and agents harmless against:  (a) all obligations, demands, claims,
and liabilities claimed or asserted by any other Person arising out of or
relating to the transactions contemplated by this Agreement or any other Loan
Document, and (b) all losses (including attorneys fees and disbursements)
in any way suffered, incurred, or paid by Foothill as a result of or in any way
arising out of, following, or consequential to the transactions contemplated by
this Agreement or any other Loan Document, except, in any such case, to the
extent that the same arises from the gross negligence or willful misconduct of
the indemnified Person.  This provision
shall survive the termination of this Agreement.

 

12.                               NOTICES.

 

Unless otherwise provided in this Agreement, all
notices or demands by any party relating to this Agreement or any other Loan
Document shall be in writing and (except for financial statements and other
informational documents which may be sent by first-class mail, postage prepaid)
shall be personally delivered or sent by registered or certified mail (postage
prepaid, return receipt requested), overnight courier, or telefacsimile to
Borrower or to Foothill, as the case may be, at its address set forth below:

 

54

 

If to Borrower:                                                                   IMAGE ENTERTAINMENT, INC.

20525 Nordhoff Street, Suite 200

Chatsworth, California  91311 

Attn.:  Jeffrey M. Framer 

Telefacsimile No. (818) 407-9331

 

with a copy to:                                                                 IMAGE ENTERTAINMENT, INC.

20525 Nordhoff Street, Suite 200 

Chatsworth, California  91311 

Attn.:  Dennis Hohn Cho, Esq.  

Telefacsimile No. (818) 407-9331

 

If to Foothill                                                                              WELLS FARGO FOOTHILL, INC.

2450 Colorado Avenue

Suite 3000 West

Santa Monica, California 90404

Attn: Business Finance Division Manager

Fax No: (310) 453-7442

 

with a copy to:                                                                 PAUL HASTINGS JANOFSKY & WALKER LLP  

515 South Flower Street , 25th Floor

Los Angeles, California  90071 

Attn:  John Francis Hilson, Esq.  

Telefacsimile No. (213) 683-6300

 

The parties hereto may change the address at which
they are to receive notices hereunder, by notice in writing in the foregoing
manner given to the other.  All notices
or demands sent in accordance with this Section 12, other than notices by
Foothill in connection with enforcement rights against the Borrower or its
Subsidiaries under the provisions of the Code, shall be deemed received on the
earlier of the date of actual receipt or three (3) days after the
deposit thereof in the mail.  Borrower
acknowledges and agrees that notices sent by Foothill in connection with the
exercise of enforcement rights against Borrower Collateral under the provisions
of the Code shall be deemed sent when deposited in the mail or transmitted by
telefacsimile or other similar method set forth above.

 

13.                               CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

 

THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND
THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL
MATTERS ARISING HEREUNDER AND THEREUNDER OR RELATED HERETO OR THERETO SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS
PRINCIPLES.  THE PARTIES AGREE THAT ALL
ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER
LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE

 

55

 

STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF
LOS ANGELES, STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING
ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT
FOOTHILL’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR
OTHER PROPERTY MAY BE FOUND.  EACH
OF BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW,
ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR
TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH
THIS SECTION 13.  BORROWER AND
FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY
OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY
CLAIMS.  BORROWER AND FOOTHILL REPRESENT
THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS
JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.  IN THE EVENT OF LITIGATION, A COPY OF THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

 

14.                               DESTRUCTION OF BORROWER’S DOCUMENTS.

 

All documents, schedules, invoices, agings, or other
papers delivered to Foothill may be destroyed or otherwise disposed of by
Foothill four (4) months after they are delivered to or received by
Foothill, unless Borrower requests, in writing, the return of said documents,
schedules, or other papers and makes arrangements, at Borrower’s expense, for
their return.

 

15.                               GENERAL PROVISIONS.

 

15.1                           Effectiveness.  This
Agreement shall be binding and deemed effective when executed by Borrower and
Foothill.

 

15.2                           Successors and Assigns. 
This Agreement shall bind and inure to the benefit of the respective
successors and assigns of each of the parties; provided, however, that Borrower
may not assign this Agreement or any rights or duties hereunder without
Foothill’s prior written consent and any prohibited assignment shall be
absolutely void.  No consent to an
assignment by Foothill shall release Borrower from its Obligations.  Foothill may assign this Agreement and its
rights and duties hereunder and no consent or approval by Borrower is required
in connection with any such assignment. 
Foothill reserves the right to sell, assign, transfer, negotiate, or
grant participations in all or any part of, or any interest in Foothill’s
rights and benefits hereunder.  In
connection with any such assignment or participation, Foothill may disclose all
documents and information which Foothill now or hereafter may have relating to
Borrower or Borrower’s business.  To the
extent that Foothill assigns its rights and obligations hereunder to a third
Person, Foothill thereafter shall be released from such assigned obligations

 

56

 

to Borrower and such assignment shall effect a
novation between Borrower and such third Person.  Anything to the contrary contained herein
notwithstanding, Foothill agrees that so long as no Event of Default has
occurred and is continuing, Foothill will not assign any of its rights and
obligations hereunder without the prior written consent of Borrower which
consent shall not be unreasonably withheld; provided, however, that Borrower’s
consent shall not be required in connection with the assignment of Foothill’s
rights hereunder made in connection with the sale of all or a substantial
portion of Foothill’s commercial loan portfolio.  No such consent of Borrower shall be required
in connection with the grant by Foothill of any participation interest in its
rights and benefits hereunder.

 

15.3                           Confidentiality. 
Foothill agrees to hold all material information obtained by it pursuant
to the requirements of this Agreement in accordance with its customary
procedures for handling confidential information; it being understood and
agreed by Borrower that in any event Foothill may make disclosures (a) reasonably
required by any bona fide potential or actual assignee, transferee, or
participant in connection with any contemplated or actual assignment or
transfer by Foothill of an interest herein or any participation interest in
Foothill’s rights hereunder, (b) of information that has become public by
disclosures made by Persons other than Foothill, its Affiliates, assignees,
transferees, or participants, or (c) as required or requested by any
court, governmental or administrative agency, pursuant to any subpoena or other
legal process, or by any law, statute, regulation, or court order; provided,
however, that, unless prohibited by applicable law, statute, regulation, or
court order, Foothill shall notify Borrower of any request by any court,
governmental or administrative agency, or pursuant to any subpoena or other
legal process for disclosure of any such non-public material information
concurrent with, or where practicable, prior to the disclosure thereof.

 

15.4                           Section Headings. 
Headings and numbers have been set forth herein for convenience
only.  Unless the contrary is compelled
by the context, everything contained in each section applies equally to
this entire Agreement.

 

15.5                           Interpretation. 
Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against Foothill or Borrower, whether under any rule of
construction or otherwise.  On the
contrary, this Agreement has been reviewed by all parties and shall be
construed and interpreted according to the ordinary meaning of the words used
so as to fairly accomplish the purposes and intentions of all parties hereto.

 

15.6                           Severability of Provisions. 
Each provision of this Agreement shall be severable from every other
provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.

 

15.7                           Amendments in Writing. 
This Agreement can only be amended by a writing signed by both Foothill
and Borrower.

 

15.8                           Counterparts; Telefacsimile Execution.  This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same
Agreement.  Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally as effective as
delivery of a

 

57

 

manually executed counterpart of this Agreement.  Any party delivering an executed counterpart
of this Agreement by telefacsimile also shall deliver a manually executed
counterpart of this Agreement but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect
of this Agreement.

 

15.9                           Revival and Reinstatement of Obligations.  If the incurrence or payment of the
Obligations by Borrower or the transfer by Borrower to Foothill of any property
of Borrower should for any reason subsequently be declared to be void or
voidable under any state or federal law relating to creditors’ rights,
including provisions of the Bankruptcy Code relating to fraudulent conveyances,
preferences, and other voidable or recoverable payments of money or transfers
of property (collectively, a “Voidable Transfer”), and if Foothill is
required to repay or restore, in whole or in part, any such Voidable Transfer,
or elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that Foothill is required or
elects to repay or restore, and as to all reasonable costs, expenses, and
attorneys fees of Foothill related thereto, the liability of Borrower
automatically shall be revived, reinstated, and restored and shall exist as
though such Voidable Transfer had never been made.

 

15.10                     Integration.  This
Agreement, together with the other Loan Documents, reflects the entire
understanding of the parties with respect to the transactions contemplated
hereby and shall not be contradicted or qualified by any other agreement, oral
or written, before the date hereof.

 

15.11                     Borrower Acknowledgment of Prior Obligations and Continuation Thereof.  Borrower (a) consents to the
amendment and restatement of the Existing Loan Agreement by this Agreement; (b) acknowledges
and agrees that (i) its obligations owing to Foothill, and (ii) the
prior grant or grants (if any) of security interests in favor of Foothill in
its properties and assets, under each “Loan Document” (as defined in the
Existing Loan Agreement; hereinafter referred to as the “Original Loan
Documents”) and each Loan Document to which it is a party shall be in
respect of the obligations of Borrower under this Agreement and the other Loan
Documents; (c) reaffirms (i) all of its obligations owing to
Foothill, and (ii) all prior grants (if any) of security interests in
favor of Foothill under each Original Loan Document and each Loan Document; and
(d) agrees that, except as expressly amended hereby, each of the Original
Loan Documents to which it is a party is and shall remain in full force and
effect.  Borrower acknowledges that, as
of the Restatement Effective Date, under the Existing Loan Agreement: (i) the
aggregate outstanding principal amount of the Advances is $11,643,335.41, (ii) the
accrued but unpaid interest on such Advances and accrued fees is $22,615.36, (iii) the
aggregate outstanding principal amount of the Capital Expenditure Loan is
$0.00, (iv) the accrued but unpaid interest on such Capital Expenditure
Loan is $0.00, (v) the accrued but unpaid fee pursuant to Section 2.2(d) is
$0.00 and (vi) the accrued but unpaid fee pursuant to Section 2.10(c) of
the Existing Loan Agreement is $0.00. 
Borrower hereby confirms and agrees that all outstanding principal,
interest and fees (including such accrued and unpaid principal, interest and
fees set forth in the immediately preceding sentence) and other obligations
under the Existing Loan Agreement immediately prior to the Restatement
Effective Date shall, to the extent not paid on the Restatement Effective Date,
from and after the Restatement Effective Date, be, without duplication, Obligations
owing and payable pursuant to this Agreement (with respect to all such amounts,
payable on the first day of calendar month occurring following the Restatement
Effective Date as part of all other amounts payable on such date) and the other
Loan

 

58

 

Documents as in effect from time to time, shall accrue
interest thereon as specified in this Agreement, and shall be secured by this
Agreement and the other Loan Documents. 
Although Borrower has been informed of the matters set forth herein and
has acknowledged and agreed to same, it understands that Foothill shall have no
obligation to inform it of such matters in the future or to seek its
acknowledgement or agreement to future amendments or modifications, and nothing
herein shall create such a duty.

 

15.12                     No Novation.  This Agreement does not extinguish the
obligations for the payment of money outstanding under the Existing Loan
Agreement or discharge or release the obligations or the liens or priority of
any mortgage, pledge, security agreement or any other security therefor.  Nothing herein contained shall be construed
as a substitution or novation of the obligations outstanding under the Existing
Loan Agreement, the other Original Loan Documents or instruments securing the
same, which shall remain in full force and effect, except as modified hereby or
by instruments executed concurrently herewith. 
Nothing expressed or implied in this Agreement shall be construed as a
release or other discharge of the Borrower from any of its obligations or
liabilities under the Existing Financing Agreement or any of the security
agreements, pledge agreements, mortgages, guaranties or other loan documents
executed in connection therewith. 
Borrower hereby (a) confirms and agrees that each Original Loan
Document to which it is a party that is not being amended and restated
concurrently herewith is, and shall continue to be, in full force and effect
and is hereby ratified and confirmed in all respects except that on and after the
Restatement Effective Date, all references in any such Original Loan Document
to “the Loan and Security Agreement,” “the Loan Agreement,” “thereto,” “thereof,”
“thereunder” or words of like import referring to the Existing Loan Agreement
shall mean the Existing Loan Agreement as amended and restated by this
Agreement; and (b) confirms and agrees that to the extent that any such
Original Loan Document purports to assign or pledge to Foothill or to grant to
Foothill a security interest in or lien on, any collateral as security for the
obligations of the Borrower from time to time existing in respect of the
Existing Loan Agreement, such pledge or assignment or grant of the security
interest or lien is hereby ratified and confirmed in all respects.

 

59

 

IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed in Los Angeles, California.

 

	
   

  	
  WELLS FARGO FOOTHILL, INC.,

  
	
   

  	
  a California corporation

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  IMAGE ENTERTAINMENT, INC.,

  
	
   

  	
  a California corporation

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

60

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