FIRST AMENDED, RESTATED AND CONSOLIDATED LOAN AND SECURITY AGREEMENT

 

                                                                EX 99.1

 

                    FIRST AMENDED, RESTATED AND CONSOLIDATED

                           LOAN AND SECURITY AGREEMENT

 

 

                                  by and among

 

                              BIG DOG HOLDINGS, INC.,

 

                                   as Parent,

 

                                BIG DOG USA, INC.

 

                                       and

 

                              THE WALKING COMPANY,

 

                                   as Borrowers,

 

 

                    THE LENDERS THAT ARE SIGNATORIES HERETO,

 

                                 as the Lenders,

 

                                       and

 

                       WELLS FARGO RETAIL FINANCE II, LLC,

 

                     as the Arranger and Administrative Agent

 

 

                            Dated as of July 7, 2005

 

 

<PAGE>

 

 

                           LOAN AND SECURITY AGREEMENT

 

 

                  THIS FIRST AMENDED, RESTATED AND CONSOLIDATED LOAN AND

SECURITY AGREEMENT (this "Agreement"), is entered into as of July , 2005, by

and among, on the one hand, the lenders identified on the signature pages

hereof (such lenders, together with their respective successors and assigns, are

referred to hereinafter each individually as a "Lender" and collectively as the

"Lenders"), WELLS FARGO RETAIL FINANCE II, LLC, a Delaware limited liability

company, as the arranger and administrative agent for the Lenders ("Agent"),

and, on the other hand, BIG DOG HOLDINGS, INC., a Delaware corporation

("Parent"), BIG DOG USA, INC., a California corporation ("Big Dog"), and The

Walking Company, a Delaware corporation ("TWC" and Big Dog are referred to

hereinafter individually and collectively, jointly and severally, as the

"Borrower" or "Borrowers").

 

                  The parties agree as follows:

 

                                 R E C I T A L S

 

         Agent, the Lender, Big Dog, Parent and CSI Acquisition Corporation, a

California corporation are parties to a Loan and Security Agreement dated as of

October 23, 2001 (as amended, the "Big Dog Agreement"). Agent, Lender and the

TWC f/k/a TWC Acquisition Corp., are parties to another Loan Agreement dated as

of March 3, 2004 (as amended, the "TWC Agreement" and together with the Big Dog

Agreement, the "Existing Loan Agreement"). TWC and Big Dog are each wholly owned

subsidiaries of Parent. TWC and Big Dog have requested that Agent and Lender

agree to amend, restate and consolidate the Big Dog Loan Agreement and the TWC

Loan Agreement into one agreement and Lenders and Agent are willing to do so

upon the terms and conditions set forth herein. In so doing, none of the

Borrowers, Agent or Lenders intend that any of the outstanding loans from

Lenders to either of the Borrowers under either of the Existing Loan Agreements

("Existing Loans"), be considered to have been repaid or otherwise satisfied or

that any of the letters of credit issued for the account of either Borrower

which are outstanding as of the date hereof ("Existing L/Cs") be deemed

terminated. Rather, all of the Existing Loans and Existing L/Cs shall remain

outstanding and be deemed to constitute Advances or Letters of Credit (as both

are defined herein) made or issued hereunder and all Collateral which had

secured TWC's Obligations (as defined in the TWC Agreement) and Big Dog's

Obligations (as defined in the Big Dog Agreement) shall continue to secure the

Obligations of both Borrowers to the Agents and Lenders hereunder.

 

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 a General Intangible.

 

                  "Accounts" means all of Borrowers' now owned or hereafter

acquired right, title, and interest with respect to "accounts" (as that term is

defined in the Code), and any and all supporting obligations in respect thereof.

 

                   "Account Reserves" means such reserves as Agent determines

from time to time in its Permitted Discretion as being appropriate to reflect

impediments to the Agent's ability to realize upon the Collateral. Without

limiting the generality of the foregoing, Account Reserves may include (but are

not limited to) reserves based upon the following: (a) any Account or part

thereof which is past due, delinquent or otherwise at risk of non-payment, (b)

any Account or portion thereof which is subject to counterclaim, defense, or

dispute, (c) any Account or portion thereof which is subject to setoff or

chargeback, (d) any facts, events or circumstances which impair the validity,

enforceability or collectibility of such Account or reduce the amount payable

or delay payment thereunder, (e) any material adverse change in the financial

condition of the Credit Card Processor or Agent no longer deems the Credit Card

Processor as credit worthy, (f) any event of default under any Credit Card

Agreement which event of default gives the Credit Card Processor the right to

setoff against amounts otherwise payable to a Borrower or the right to establish

reserves or establish or demand collateral (g) the Landlord's Reserve, (h) a

Reserve for Customer Credit Liabilities, (i) a Reserve for taxes and other

governmental charges including, ad valorem, personal property and other taxes

which in each case have priority over the Agent's Lien in the Collateral, in

each case unless the subject of a Permitted Protest.

 

                  "ACH Transactions" means any cash management or related

services (including the Automated Clearing House processing of electronic funds

transfers through the direct Federal Reserve Fedline system) provided by Wells

Fargo or its Affiliates for the account of Borrower or its Subsidiaries.

 

                  "Acquisition" means any purchase or other acquisition by

either Borrower, Parent or a Subsidiary of Parent of the Stock or substantially

all of the assets of any other Person.

 

                  "Additional Documents" has the meaning set forth in Section

4.4.

 

                  "Advances" means advances under the Revolver made to the

Borrowers, pursuant to the provisions of Section 2.1(a)(ii) hereof.

 

                  "Affiliate" means, as applied to any Person, any other Person

who, directly or indirectly, controls, is controlled by, or is under common

control with, such Person. For purposes of this definition, "control" means the

possession, directly or indirectly, of the power to direct the management and

policies of a Person, whether through the ownership of Stock, by contract, or

otherwise; provided, however, that, for purposes of Section 7.14 hereof: (a) any

Person which owns directly or indirectly 10% or more of the securities having

ordinary voting power for the election of directors or other members of the

governing body of a Person or 10% or more of the partnership or other ownership

interests of a Person (other than as a limited partner of such Person) shall be

deemed to control such Person, (b) each director (or comparable manager) of a

Person shall be deemed to be an Affiliate of such Person, and (c) each

partnership or joint venture in which a Person is a partner or joint venturer

shall be deemed to be an Affiliate of such Person.

 

                   "Agent" means WFRF, solely in its capacity as agent for the

Lenders hereunder, and any successor thereto.

 

                  "Agent's Account" means an account at a bank designated by

Agent from time to time as the account into which Borrowers shall make all

payments to Agent for the benefit of the Lender Group and into which the Lender

Group shall make all payments to Agent under this Agreement and the other Loan

Documents; unless and until Agent notifies Borrowers and the Lender Group to the

contrary, Agent's Account shall be that certain deposit account listed on

Schedule A-1.

 

                  "Agent Advances" has the meaning set forth in Section

2.3(e)(i).

 

                  "Agent Contractor Agreement" means a tri-party agreement

between Agent, Borrower and a Material Contractor under which such Material

Contractor acknowledges Agent's Liens on Inventory which comes into the

possession of the Material Contractor for embellishment and the Agent's rights

hereunder, in form and substance reasonably satisfactory to Agent.

 

                  "Agent's Liens" means the Liens granted by Borrowers to Agent

for the benefit of the Lender Group under this Agreement or the other Loan

Documents.

 

                  "Agent-Related Persons" means Agent together with its

Affiliates, officers, directors, employees, and agents.

 

                  "Aggregate Availability" as defined in Section 2.1(a)(ii)

hereof.

 

                  "Aggregate Borrowing Base" as of any date of determination

shall mean the result of:

 

                   (a) the Big Dog Borrowing Base, plus,

 

                  (b) the TWC Borrowing Base, minus

 

                  (c) the sum of (i) the Bank Product Reserve, (ii) Contractor

Reserve, (iii) all Account Reserves then in effect, (iv) all Inventory Reserves

then in effect, (iv) the Distribution Center Inventory Reserve, (v) the Minimum

Excess Availability Reserve, and (vi) the aggregate amount of any other

Reserves established by Agent under Section 2.1(a)(iii) hereof and, in each

case, only to the extent such Reserve is not subtracted in the calculation of

either the Big Dog Borrowing Base or TWC Borrowing Base.

 

                  The amount of Eligible Receivables owed to both Borrowers

included in the Aggregate Borrowing Base shall not exceed the Eligible

Receivable Sublimit.

 

                  "Agreement" has the meaning set forth in the preamble hereto.

 

                  "Amended and Restated Guaranty Agreement" means the Amended

and Restated Guaranty of Parent being executed in conjunction with this

Agreement, which shall amend the Guaranty.

 

                  "Applicable Prepayment Premium" means, as of any date of

determination, an amount equal to (a) during the period of time from and after

the date of the execution and delivery of this Agreement up to October 23, 2007,

0.50% times the Maximum Loan Amount, (b) during the period of time from and

including the date that is the first anniversary of the Closing Date of this

Agreement up to October 23, 2008, 0.25% times the Maximum Loan Amount, and (c)

during the period of time from and including October 23, 2008 up to the Maturity

Date, zero (0).

 

                  "Assignee" has the meaning set forth in Section 14.1.

 

                  "Assignment and Acceptance" means an Assignment and

Acceptance in the form of Exhibit A-1.

 

                  "Authorized Person" means any officer or other employee of

Lead Borrower.

 

                   "Average Excess Availability" means the average daily Excess

Availability for the monthly period ending the last day of each month.

 

                  "Bank Product Agreements" means those certain cash management

service agreements entered into from time to time by Borrowers or its

Subsidiaries in connection with any of the Bank Products.

 

                  "Bank Product Obligations" means all obligations, liabilities,

contingent reimbursement obligations, fees, and expenses owing by Borrowers or

their Subsidiaries to Wells Fargo or its Affiliates pursuant to or evidenced by

the Bank Product Agreements and irrespective of whether for the payment of

money, whether direct or indirect, absolute or contingent, due or to become due,

now existing or hereafter arising, and including all such amounts that Borrowers

are obligated to reimburse to Agent or any member of the Lender Group as a

result of Agent or such member of the Lender Group purchasing participations or

executing indemnities or reimbursement obligations with respect to the Bank

Products provided to Borrowers or their Subsidiaries pursuant to the Bank

Product Agreements.

 

                  "Bank Products" means any one or more of the following types

of services or facilities extended to Borrowers or their Subsidiaries by Wells

Fargo or any Affiliate of Wells Fargo: (a) credit cards, (ii) debit cards, (iii)

purchase cards, (iv) ACH Transactions, (v) cash management, including controlled

disbursement, accounts or services, and (vi) Hedge Agreements.

 

                  "Bank Product Reserves" means, as of any date of

determination, the amount of reserves that Agent has established (based upon

Wells Fargo's or its Affiliate's reasonable determination of the credit exposure

in respect of then extant Bank Products) for Bank Products then provided or

outstanding.

 

                  "Bankruptcy Code" means the United States Bankruptcy Code, as

in effect from time to time.

 

                  "Base LIBOR Rate" means the rate per annum, determined by

Agent 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 1/16%), on the basis of the rates at which Dollar

deposits are offered to major banks in the London interbank market on or about

11:00 a.m. (California time) 2 Business Days prior to the commencement of the

applicable Interest Period, for a term and in amounts comparable to the Interest

Period and amount of the LIBOR Rate Loan requested by the applicable Borrower in

accordance with this Agreement, which determination shall be conclusive in the

absence of manifest error.

 

                  "Base Rate" means, the rate of interest announced within Wells

Fargo at its principal office in San Francisco as its "prime rate", with the

understanding that the "prime rate" is one of Wells Fargo's base rates (not

necessarily the lowest of such rates) and serves as the basis upon which

effective rates of interest are calculated for those loans making reference

thereto and is evidenced by the recording thereof after its announcement in such

internal publication or publications as Wells Fargo may designate.

 

                  "Base Rate Advance" means each portion of an Advance that

bears interest at a rate determined by reference to the Base Rate.

 

                  "Base Rate Margin" means 0 basis points.

 

                  "Benefit Plan" means a "defined benefit plan" (as defined in

Section 3(35) of ERISA) for which any Borrower or any Subsidiary or ERISA

Affiliate of any Borrower has been an "employer" (as defined in Section 3(5) of

ERISA) within the past six years.

 

                   "Bianca" means Bianca of Nevada, Inc., a Nevada corporation.

 

                  "Bianca Acquisition" means the Acquisition by TWC of

substantially all of the assets of the "Footworks business" of Bianca pursuant

to the terms and conditions of the Bianca Acquisition Agreement.

 

                  "Bianca Acquisition Agreement" means that certain Acquisition

Agreement by and between TWC and Bianca concerning the Bianca Acquisition dated

as of May, 2005.

                  "Bianca Assets" means all Inventory, Accounts and other assets

of every kind, nature and description acquired by TWC pursuant to the Bianca

Acquisition.

 

                  "Bianca L/C" means an L/C in the stated amount of Two Million

Dollars ($2,000,000), which Agent shall cause to be issued for TWC's account for

the benefit of Bianca pursuant to the Bianca Acquisition Documents, provided,

however, that only 50% of the stated amount of the Bianca L/C shall be included

in the calculation of TWC Letter of Credit Usage and Letter of Credit Usage so

long as no Default or Event of Default then exists and is continuing and the

Borrowers maintain Excess Availability of at least Seven Million Five Hundred

Thousand Dollars ($7,500,000) at all times that the Bianca L/C is outstanding

except that, upon at least five (5) Business Days prior written notice to the

Agent, the Borrowers shall be permitted to maintain Excess Availability of only

at least Six Million Dollars ($6,000,000) for no more than two (2) periods of

thirty (30) consecutive days in any period of twelve (12) consecutive months.

 

                  "Big Dog" has the meaning set forth in the preamble to this

Agreement.

 

                   "Big Dog Agreement" as defined in the Preamble.

 

                  "Big Dog Borrowing Base", as of any date of determination,

shall mean the result of:

 

                                           (a) the sum of:

 

                                   (i)       85% times Big Dog's then extant Net

                                            Liquidation Percentage times the

                                            value (at Cost) of Big Dog's

                                            Eligible Inventory, plus

 

                                   (ii)      85% times Big Dog's Eligible

                                             Wholesale Accounts Receivables up to

                                            an aggregate amount of $1,500,000,

 

                                            Plus

 

                                   (iii) 85% times Big Dog's Eligible Credit

                                         Card Receivables.

 

                                   (iv) Minus, any Inventory Reserves associated

                                        with Big Dog's Eligible Inventory.

 

                   "Big Dog Eligible Credit Card Receivables" means all Eligible

Credit Card Receivables due to Big Dog.

 

                  "Big Dog Eligible Inventory" means all Eligible Inventory owed

                   by Big Dog.

 

                  "Big Dog Eligible Wholesale Accounts" means those Wholesale

Accounts due to Big Dog that are not excluded as ineligible by virtue of one or

more of the criteria set forth below, which criteria may be fixed and revised by

Agent in its Permitted Discretion from time to time after the Closing Date of

this Agreement. In determining the amount to be included, Eligible Wholesale

Accounts shall be calculated net of customer deposits and unapplied cash

remitted to Big Dog. Eligible Wholesale Accounts shall not include the

following:

 

                            (a)       Wholesale   Accounts   that the Account Debtor

has failed to pay within 90 days of original   invoice date or Accounts with

selling terms of more than 60 days,

 

                           (b)       Wholesale   Accounts   owed   by an   Account

Debtor   (or   its   Affiliates)   where   25% or more of all Wholesale Accounts owed

by that Account Debtor (or its Affiliates) are deemed ineligible under clause

(a) above,

 

                           (c) Wholesale Accounts with respect to which the

Account Debtor is an employee, Affiliate, or agent of

any Borrower,

 

                           (d) Wholesale Accounts arising in a transaction

wherein goods are placed on consignment or are sold pursuant to a guaranteed

sale, a sale or return, a sale on approval, a bill and hold, or any other terms

by reason of which the payment by the Account Debtor may be conditional,

 

                           (e) Wholesale Accounts that are not payable in

Dollars,

 

                           (f) Wholesale Accounts with respect to which the

Account Debtor either (i) does not maintain its chief

executive office in the United States, or (ii) is not organized under the laws

of the United States or any state thereof, or (iii) is the government of any

foreign country or sovereign state, or of any state, province, municipality, or

other political subdivision thereof, or of any department, agency, public

corporation, or other instrumentality thereof, unless (y) the Wholesale Account

is supported by an irrevocable letter of credit satisfactory to Agent (as to

form, substance, and issuer or domestic confirming bank) that has been delivered

to Agent and is directly drawable by Agent, or (z) the Wholesale Account is

covered by credit insurance in form, substance, and amount, and by an insurer,

satisfactory to Agent,

 

                           (g) Wholesale 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 Wholesale Accounts

with respect to which the applicable Borrower has complied, to the reasonable

satisfaction of Agent, with the Assignment of Claims Act, 31 USC ss. 3727), or

(ii) any state of the United States (exclusive, however, of (y) Wholesale

Accounts owed by any state that does not have a statutory counterpart to the

Assignment of Claims Act or (z) Accounts owed by any state that does have a

statutory counterpart to the Assignment of Claims Act as to which the applicable

Borrower has complied to Agent's satisfaction),

 

                           (h) Wholesale Accounts with respect to which the

Wholesale Account Debtor is a creditor of Big Dog, has asserted a right of

setoff, has disputed its liability, or has made any claim with respect to its

obligation to pay the Wholesale Account, to the extent of such claim, right of

setoff, or dispute,

 

                           (i) Wholesale Accounts with respect to an Account

Debtor whose total obligations owing to Big Dog exceed 15% (such percentage as

applied to a particular Account Debtor being subject to reduction by Agent in

its Permitted Discretion if the creditworthiness of such Account Debtor

deteriorates) of all Eligible Wholesale Accounts, to the extent of the

obligations owing by such Account Debtor in excess of such percentage,

 

                           (j) Wholesale Accounts with respect to which the

Account Debtor is subject to an Insolvency Proceeding, is not Solvent, has gone

out of business, or as to which a Borrower has received notice of an imminent

Insolvency Proceeding or a material impairment of the financial condition of

such Account Debtor,

                           (k) Wholesale Accounts with respect to which the

Account Debtor is located in the states of New Jersey, Minnesota, or West

Virginia (or any other state that requires a creditor to file a business

activity report or similar document in order to bring suit or otherwise enforce

its remedies against such Account Debtor in the courts or through any judicial

process of such state), unless Big Dog has qualified to do business in

New Jersey, Minnesota, West Virginia, or such other states, or has

filed a business activities report with the applicable division of taxation, the

department of revenue, or with such other state offices, as appropriate, for the

then-current year, or is exempt from such filing requirement,

 

                           (l) Wholesale Accounts, the collection of which,

Agent, in its Permitted Discretion, believes to be

doubtful by reason of the Account Debtor's financial condition,

 

                           (m) Wholesale Accounts that are not subject to a

valid and perfected first priority Agent's Lien,

 

                           (n) Wholesale Accounts with respect to which (i) the

goods giving rise to such Account have not been

shipped and billed to the Account Debtor, or (ii) the services giving rise to

such Wholesale Account have not been performed and billed to the Account Debtor,

 

                           (o) Wholesale Accounts that represent the right to

receive progress payments or other advance billings that are due prior to the

completion of performance by the applicable Borrower of the subject contract

for goods or services; or

 

                           (p) Wholesale Accounts that Agent in its Permitted

Discretion or otherwise determines to be ineligible,

 

                  provided, however, Eligible Wholesale Accounts shall be deemed

to be Zero (0) Dollars if the aggregate amount of Wholesale Accounts without

regard to eligibility is less than two hundred fifty thousand dollars

($250,000)..

 

                  "Big Dog Letter of Credit Usage" means, as of any date of

determination thereof, the aggregate undrawn amount of all outstanding Letters

of Credit issued for the account of Big Dog plus 100% of the amount of

outstanding time drafts accepted by an Underlying Issuer as a result of drawings

under Underlying Letters of Credit issued for the account of Big Dog.

 

                   "Big Dog Loan Account" means the Loan Account respecting Big

Dog maintained on the books of Agent pursuant to Section 2.10.

 

                  "Big Dog Loan Documents" means the Big Dog Agreement and all

documents and instruments executed in conjunction therewith and all amendments,

supplements, restatements and modifications thereof.

 

                    "Books" means each Borrower's and its Subsidiaries now owned

or hereafter acquired books and records (including all of its Records

indicating, summarizing, or evidencing its assets (including the Collateral) or

liabilities, all of each Borrower's or its Subsidiaries' Records relating to its

or their business operations or financial condition, and all of its or their

goods or General Intangibles related to such information).

 

                  "Borrower" and "Borrowers" have the respective meanings set

forth in the preamble to this Agreement.

 

                  "Borrowers' Collateral" means all of each Borrower's now owned

         or hereafter acquired right, title, and interest in and to each of the

         following:

 

                           (a) Accounts,

 

                           (b) Books,

 

                           (c) Deposit Accounts,

 

                           (d) Equipment,

 

                           (e) General Intangibles,

 

                           (f) Inventory,

 

                            (g) Investment Property,

 

                           (h) Negotiable Collateral,

 

                           (i) Goods,

 

                           (j) Commercial Tort Claims,

 

                           (k) money or other assets of each such Borrower that

                  now or hereafter come into the possession, custody, or control

                  of any member of the Lender Group,

 

                           (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, Books, Documents, Equipment, General

                  Intangibles, Instruments, Inventory, Investment Property,

                  Negotiable Collateral, real property, fixtures, leases and

                  leasehold interests, money, deposit accounts, 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, and

 

                           (m) liens, guaranties, rights, remedies, and

                   privileges pertaining to any of the foregoing, including the

                  right of stoppage in transit.

 

                  "Borrowers' Designated Account" means these certain accounts

designated as such on Schedule B-1.

 

                   "Borrowers' Designated Account Bank" means Wells Fargo Bank,

whose office located at 1036 Anacapa Street, Santa Barbara, CA 93101, and whose

ABA number is 121-000248.

 

                  "Borrowing" means a borrowing hereunder consisting of Advances

made on the same day by the Lenders (or Agent on behalf thereof), or by Swing

Lender in the case of a Swing Loan, or by Agent in the case of an Agent Advance,

in each case to the Borrowers.

 

                  "Business Day" means any day that is not a Saturday, Sunday,

or other day on which national banks are authorized or required to close, 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 Lease" means a lease that is required to be

capitalized for financial   reporting purposes in accordance with GAAP.

 

                  "Capitalized Lease Obligation" means any Indebtedness

represented by obligations under a Capital Lease.

 

                  "Cash Equivalents" means (a) marketable direct obligations

issued or unconditionally guaranteed by the United States or issued by any

agency thereof and backed by the full faith and credit of the United States, in

each case maturing within 1 year from the date of acquisition thereof, (b)

marketable direct obligations issued by any state of the United States or any

political subdivision of any such state or any public instrumentality thereof

maturing within 1 year from the date of acquisition thereof and, at the time of

acquisition, having the highest rating obtainable from either S&P or Moody's,

(c) commercial paper maturing no more than 270 days from the date of acquisition

thereof and, at the time of acquisition, having a rating of A-1 or P-1, or

better, from S&P or Moody's, and (d) certificates of deposit or bankers'

acceptances maturing within 1 year from the date of acquisition thereof either

(i) issued by any bank organized under the laws of the United States or any

state thereof which bank has a rating of A or A2, or better, from S&P or

Moody's, or (ii) certificates of deposit less than or equal to $100,000 in the

aggregate issued by any other bank insured by the Federal Deposit Insurance

Corporation.

 

                  "Cash Management Bank" has the meaning set forth in Section

2.7(a).

 

                  "Cash Management Account" has the meaning set forth in Section

2.7(a).

 

                  "Cash Management Agreements" means those certain cash

management service agreements, in form and substance satisfactory to Agent, each

of which is among each Borrower, Agent, and one of the Cash Management Banks.

 

                  "Change of Control" means (a) any Person, other than Permitted

Holders, becomes the beneficial owner (as defined in Rule 13d-3 under the

Exchange Act), directly or indirectly, of 50%, or more, of the Stock of Parent

having the right to vote for the election of members of the Board of Directors,

or (b) Parent ceases to directly own and control 100% of the outstanding capital

Stock of Big Dog and TWC and any other Subsidiary of Parent extant as of the

Closing Date other than TWC in respect to which Parent shall own and control at

least 75% of the outstanding capital stock.

 

                  "Closing Date" means the effective date of this Agreement.

 

                  "Closing Date Business Plan" means the set of Projections,

stated separately for each Borrower and on a consolidated basis for both

Borrowers for the following periods after the Closing Date (on a fiscal year and

month basis), in form and substance (including as to scope and underlying

assumptions) satisfactory to Agent.

 

                  "Code" means the Massachusetts Uniform Commercial Code, as in

effect from time to time.

 

                  "Collateral" means any and all assets and rights and interests

in or to property pledged from time to time as security for the Obligations

pursuant to this Loan Agreement or any other pledge or security agreement that

constitutes a Loan Document.

 

                  "Collateral Access Agreement" means a landlord waiver, bailee

letter, contractor letter, or acknowledgement agreement of any lessor,

warehouseman, processor, consignee, contractor, or other Person in possession

of, having a Lien upon, or having rights or interests in the Equipment or

Inventory, in each case, in form and substance satisfactory to Agent.

 

                  "Collections" means all cash, checks, notes, instruments, and

other items of payment (including insurance proceeds, proceeds of cash sales,

rental proceeds, and tax refunds) of Borrowers.

 

                  "Commercial Tort Claims" shall have the same definition as in

the Code.

 

                  "Commitment" means, with respect to each Lender, its

Commitment and, with respect to all Lenders, their Commitments, in each case as

such Dollar amounts are set forth beside such Lender's name on Schedule C-1 or

on the signature page of the Assignment and Acceptance pursuant to which such

Lender became a Lender hereunder in accordance with the provisions of Section

14.1.

 

                  "Compliance Certificate" means a certificate substantially in

the form of Exhibit C-1 delivered by the chief financial officer of Parent to

Agent.

 

                   "Contractor Reserve" shall mean a reserve equal to the greater

of (i) $0.75 times the number of units of Inventory in the possession of

contractors or (ii) in the amount of $50,000 or such higher amount as Agent in

its Permitted Discretion shall determine to be the amount of claims owed by

Borrowers to contractors in respect of Eligible Landed Inventory.

 

                  "Control Agreement" means a control agreement, in form and

substance satisfactory to Agent, executed and delivered by the applicable

Borrower, Agent, and the applicable securities intermediary with respect to a

Securities Account or bank with respect to a deposit account.

 

                  "Copyright" shall have the meaning ascribed to such term in

the United States Copyright Act of 1976, as amended, and includes unregistered

copyrights.

 

                  "Copyright Security Agreement" means a copyright security

agreement executed and delivered by Parent and the Borrowers, as applicable, and

Agent, the form and substance of which is satisfactory to Agent.

 

                  "Cost" means the lower of

 

                          (a)    the calculated cost of purchases, based upon a

                                Borrower's accounting practices, on a first-in,

                                 first-out (FIFO) basis, in accordance with GAAP,

                                which practices are in effect on the date on

                                which this Agreement was executed as such

                                calculated cost is determined from invoices

                                received by a Borrower; such Borrower's purchase

                                journal; or such Borrower's stock ledger; and

 

                          (b)    the cost equivalent of the lowest ticketed price

                                at which the subject Inventory is offered to the

                                public, after all ticketed mark-downs (whether

                                or not such price is then reflected on a

                                 Borrower's accounting system), determined in

                                accordance with the cost method of accounting

                                and reflecting a Borrower's practices in the

                                ordinary course of a Borrower's business;

 

                  provided that "Cost" shall not include Inventory

capitalization costs or other non-purchase price charges (such as freight

charges and UNICAP) used in a Borrower's calculation of cost of goods sold.

 

                  "CSI" means CSI Acquisition Corp., a California corporation.

 

                  "Custom Brokers Agreement" means a tri-party agreement in form

and substance satisfactory to the Agent in its Permitted Discretion among the

Borrower, Agent and customs broker or carrier, in which the customs broker or

carrier acknowledges that it has control over and holds the documents evidencing

ownership of the subject Inventory for the benefit of the Agent and agrees, upon

notice from the Agent, to hold and dispose of the subject Inventory solely as

directed by the Agent.

 

                  "Customer Credit Liabilities" means gift certificates,

customer deposits, merchandise credits, layaway obligations, frequent shopper

programs, and similar liabilities of Borrowers to its retail customers and

prospective customers.

 

                  "Daily Balance" means, with respect to each day during the

term of this Agreement, the amount of an Obligation owed at the end of such day.

 

                  "DDA" means any checking or other demand deposit account

maintained by Parent or any Borrower.

 

                  "Default" means an event, condition, or default that, with the

giving of notice, the passage of time, or both, would be an Event of Default.

 

                   "Defaulting Lender" means any Lender that fails to make any

Advance (or other extension of credit) that it is required to make hereunder on

the date that it is required to do so hereunder.

 

                  "Defaulting Lender Rate" means (a) the Base Rate for the first

3 days from and after the date the relevant payment is due, and (b) thereafter,

the Base Rate plus 200 basis points.

 

                  "Deposit Accounts" shall have the same definition as in the

Code.

 

                  "Designated Account" means the Big Dog Designated Account or

the TWC Designated Account, as the context requires.

 

                  "Designated Account Bank" means the Big Dog Designated Account

Bank or the TWC Designated Account Bank, as the context requires.

 

                   "Disbursement Letter" means an instructional letter executed

and delivered by each Borrower to Agent regarding the extensions of credit to be

made on the Closing Date, the form and substance of which is satisfactory to

Agent.

                  "Distribution" means, with respect to any Person, (a) the

declaration or payment of any dividend on or in respect of any shares of any

class of capital Stock of such Person, other than dividends payable solely in

shares of common Stock of such Person, (b) the purchase, redemption, or other

retirement of any shares of any class of capital Stock of such Person, directly

or indirectly, (c) the return of capital by such Person to its shareholders or

other interest holders, or (d) any other distribution on or in respect of any

shares of any class of capital Stock of such Person.

 

                  "Distribution Center Inventory Reserve" means an amount equal

to the extent to which the aggregate amount (based on Cost) of Big Dog Inventory

at Big Dog's warehouses or distribution centers measured on a consolidated and

month-end basis, exceeds the product of 40% times the aggregate amount of all

Inventory owned by Big Dog (whether located at such warehouses or distribution

centers or in retail stores) as of the last day of each month; provided,

however, that in calculating the Distribution Center Inventory Reserve, up to a

maximum aggregate amount of $2,000,000 of Big Dog Inventory that relates to Big

Dogs' mail order and internet business, corporate sales business, or wholesale

business and that is physically segregated from the other Inventory shall be

excluded.

 

                  "Dollars" or "$" means United States dollars.

 

                  "EBITDA" means, with respect to any fiscal period, Parent's

and its Subsidiaries consolidated net earnings (or loss), minus extraordinary

gains, plus interest expense, income taxes, and depreciation and amortization

for such period, as determined in accordance with GAAP.

 

                  "Eligible Credit Card Receivables" means Accounts due to

either Borrower on a non-recourse basis from major credit card processors, which

accounts have been outstanding for no more than four (4) Business Days. For the

purposes of this provision, major credit card processors shall include, without

limitation, Visa, MasterCard, Discover and American Express.

 

                  "Eligible Inventory" means collectively, and without

duplication, Eligible Landed Inventory and Eligible Letter of Credit Inventory.

Upon consummation of the Bianca Acquisition, Eligible Inventory shall include

Inventory included in the Bianca Assets.

 

                  "Eligible Landed Inventory" means Inventory of the applicable

Borrower that consists of first quality Landed Goods or other first quality

goods and complies with each of the representations and warranties respecting

Eligible Inventory made under the Loan Documents, and that is not excluded as

ineligible by Agent, in its Permitted Discretion, including, but not limited to,

by virtue of one or more of the criteria set forth below; provided, however,

that such criteria may be fixed and revised from time to time by Agent in

Agent's Permitted Discretion to address the results of any audit or appraisal

performed by Agent from time to time after the Closing Date. In determining the

amount to be so included, Inventory shall be valued at the lower of Cost or

market on a basis consistent with the applicable Borrower's historical

accounting practices. An item of Inventory shall not be included in Eligible

Landed Inventory if:

 

                           (a) the applicable Borrower does not have good,

valid, and marketable title thereto,

 

                           (b) it is not subject to a valid and perfected first

priority Agent's Lien,

 

                           (c) it consists of goods returned or rejected by the

applicable Borrower's customers,

 

                           (d) it consists of goods that are obsolete or slow

moving, restrictive or custom items,

work-in-process, raw materials, or goods that constitute spare parts, packaging

and shipping materials, supplies used or consumed in the applicable Borrower's

business, bill and hold goods, defective goods, "seconds," or Inventory acquired

on consignment,

 

                           (e) it consists of non-merchandise inventory (such as

labels, bags and packaging materials, or damaged or defective goods) (including,

returned to vendor merchandise, packaways, and other similar categories of

goods,

 

                           (f) it is located in any store of the Borrower which

had been closed for business for more than twenty

(20) days in any fiscal quarter, or

 

                           (g)       it has been presold to a customer   which has

paid a deposit equal to one hundred   percent (100%) of the purchase price of

such Inventory.

 

                  "Eligible Letter of Credit Inventory" means those items of

Inventory (without duplication of other Eligible Inventory) that do not qualify

as Eligible Landed Inventory solely because they are not Landed Goods, but as to

which (A)(a) such Inventory is the subject of a Qualified Import Letter of

Credit (other than such Inventory that, in the aggregate has a value on any date

of determination of $500,000 or less), (b) such Inventory currently is in

transit (whether by vessel, air, or land) from a location outside of the

continental United States and to be received by the Borrower within 50 days (or

65 days in the case of Inventory shipped to Big Dog from Turkey) of the issuance

date of the Qualified Import Letter of Credit at a location set forth on

Schedule E-1 that is the subject of a Collateral Access Agreement, (c) title to

such Inventory shall pass to the Borrower within 50 days of the issuance date of

the Qualified Import Letter of Credit and title did not pass to the applicable

Borrower more than fifty (50) days prior to such date, (d) such Inventory is

insured against types of loss, damage, hazards, and risks, and in amounts,

satisfactory to Agent in its Permitted Discretion, (e) such Inventory either (1)

is the subject of a negotiable bill of lading (x) that is consigned to Agent

(either directly or by means of endorsements), (y) that was issued by the

carrier respecting the subject Inventory, and (z) that either is (I) in the

possession of Agent or a customs broker that has executed a Custom Brokers

Agreement with Agent, or (II) the subject of a telefacsimile copy that Agent has

received from the Underlying Issuer which issued the Underlying Letter of Credit

and as to which Agent also has received a confirmation from such Underlying

Issuer that such document is in-transit by air-courier to Agent or a customs

broker, or (2) is the subject of a negotiable cargo receipt and is not the

subject of a bill of lading (other than a negotiable bill of lading consigned

to, and in the possession of, a consolidator or Agent, or their respective

agents) and such negotiable cargo receipt is (x) consigned to Agent (either

directly or by means of endorsements), (y) that was issued by a consolidator

respecting the subject Inventory, (z) that either is (I) in the possession of

Agent or a customs broker that has executed a Custom Brokers Agreement with

Agent, or (II) the subject of a telefacsimile copy that Agent has received from

the Underlying Issuer which issued the Underlying Letter of Credit and as to

which Agent also has received a confirmation from such Underlying Issuer that

such document is in-transit by air-courier to Agent or a customs broker that has

executed a Custom Brokers Agreement with Agent, (f) the applicable Borrower has

provided a certificate to Agent that certifies that, to the best knowledge of

such Borrower, such Inventory meets all of the Borrowers' representations and

warranties contained in the Loan Documents concerning Eligible Inventory, that

it knows of no reason why such Inventory would not be accepted by the Borrower

when it is delivered to Borrower, and that the shipment as evidenced by the

documents conforms to the related order documents or (B) (a) meets all of the

foregoing criteria except that the Underlying Letter of Credit has been drawn

upon in full and the Underlying Issuer has honored such drawing and Agent has

honored its obligations to the Underlying Issuer of the Qualified Import Letter

of Credit and (b) title has irrevocably passed to the Borrower. Notwithstanding

anything contained herein to the contrary, Eligible Letter of Credit Inventory

shall not at any time exceed Three Million Dollars ($3,000,000) at Cost.

 

                  "Eligible Receivables" means all Eligible Wholesale Accounts

and Eligible Credit Card Accounts due to either Borrower hereunder.

 

                  "Eligible Receivables Sublimit" means three million five

hundred thousand dollars ($3,500,000).

 

                  "Eligible Transferee" means (a) a commercial bank organized

under the laws of the United States, or any state thereof, and having total

assets in excess of $250,000,000, (b) a commercial bank organized under the laws

of any other country which is a member of the Organization for Economic

Cooperation and Development or a political subdivision of any such country and

which has total assets in excess of $250,000,000, provided that such bank is

acting through a branch or agency located in the United States, (c) a finance

company, insurance company, or other financial institution or fund that is

engaged in making, purchasing, or otherwise investing in commercial loans in the

ordinary course of its business and having (together with its Affiliates) total

assets in excess of $250,000,000, (d) any Affiliate (other than individuals) of

a Lender that was party hereto as of the Closing Date, (e) so long as no Event

of Default has occurred and is continuing, any other Person approved by Agent

and Borrowers, and (f) during the continuation of an Event of Default, any other

Person approved by Agent.

 

                  "Environmental Actions" means any complaint, summons,

citation, notice, directive, order, claim, litigation, investigation, judicial

or administrative proceeding, judgment, letter, or other communication from any

Governmental Authority, or any third party involving violations of Environmental

Laws or releases of Hazardous Materials from (a) any assets, properties, or

businesses of any Borrower or any predecessor in interest, (b) from adjoining

properties or businesses, or (c) from or onto any facilities which received

Hazardous Materials generated by any Borrower or any predecessor in interest.

 

                  "Environmental Law" means any applicable federal, state,

provincial, foreign or local statute, law, rule, regulation, ordinance, code,

binding and enforceable guideline, binding and enforceable written policy, or

rule of common law now or hereafter in effect and in each case as amended, or

any judicial or administrative interpretation thereof, including any judicial or

administrative order, consent decree or judgment, to the extent binding on

Borrowers, relating to the environment, employee health and safety, or Hazardous

Materials, including CERCLA; RCRA; the Federal Water Pollution Control Act, 33

USC ss. 1251 et seq; the Toxic Substances Control Act, 15 USC, ss. 2601 et seq;

the Clean Air Act, 42 USC ss. 7401 et seq.; the Safe Drinking Water Act, 42 USC.

ss. 3803 et seq.; the Oil Pollution Act of 1990, 33 USC. ss. 2701 et seq.; the

Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC. ss.

11001 et seq.; the Hazardous Material Transportation Act, 49 USC ss. 1801 et

seq.; and the Occupational Safety and Health Act, 29 USC. ss.651 et seq. (to the

extent it regulates occupational exposure to Hazardous Materials); any state and

local or foreign counterparts or equivalents, in each case as amended from time

to time.

 

                  "Environmental Liabilities and Costs" means all liabilities,

monetary obligations, Remedial Actions, losses, damages, punitive damages,

consequential damages, treble damages, costs and expenses (including all

reasonable fees, disbursements and expenses of counsel, experts, or consultants,

and costs of investigation and feasibility studies), fines, penalties,

sanctions, and interest incurred as a result of any claim or demand by any

Governmental Authority or any third party, and which relate to any Environmental

Action.

 

                  "Environmental Lien" means any Lien in favor of any

Governmental Authority for Environmental Liabilities and Costs.

 

                  "Equipment" includes, without limitation, "equipment" as it is

defined in the Code, and also all of Borrowers' now owned or hereafter acquired

right, title, and interest with respect to equipment, machinery, machine tools,

motors, furniture, furnishings, fixtures, vehicles (including motor vehicles),

tools, parts, goods (other than consumer goods, farm products, or Inventory),

wherever located, including 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 thereto.

 

                  "ERISA Affiliate" means (a) any Person subject to ERISA whose

employees are treated as employed by the same employer as the employees of a

Borrower 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

a Borrower 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 a Borrower 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 Person subject to ERISA that is a party to an arrangement

with a Borrower and whose employees are aggregated with the employees of a

Borrower 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 Aggregate Availability minus the

aggregate amount, if any, of all trade payables of Borrowers aged in excess of

their historical levels with respect thereto and all book overdrafts in excess

of their historical practices with respect thereto, in each case as determined

by Agent in its Permitted Discretion.

 

                   "Exchange Act" means the Securities Exchange Act of 1934, as

in effect from time to time.

 

                  "Exempt Copyright" means any Incipient Copyright or any

Obsolete Copyright.

 

                  "Existing L/C's" means all L/C's issued under either of the

Existing Loan Agreements which are outstanding as of the Closing Date.

 

                  "Existing Lender" means Wells Fargo Retail Finance II, LLC.

 

                  "Existing Loans" means all Advances made to either Borrower

under either of the Existing Loan Agreements outstanding as of the Closing Date.

 

                  "Existing Loan Agreements" as defined in the Preamble.

 

                  "Existing Obligations" means all Existing L/C's and Existing

Loans and any and all other "Obligations" of either Borrower to Agent or Lenders

as defined in the Existing Loan Agreements as of the Closing Date.

 

                  "Family Member" means, with respect to any individual, any

other individual having a relationship by blood (to the second degree of

consanguinity), marriage, or adoption to such individual.

 

                  "Family Trusts" means, with respect to any individual, trusts

or other estate planning vehicles established for the benefit of Family Members

of such individual and in respect of which such individual serves as trustee or

in a similar capacity.

 

                   "FEIN" means Federal Employer Identification Number.

 

                  "First Unsecured Creditors Promissory Note" shall mean that

promissory note issued to the Liquidating Agent for the benefit of the unsecured

creditors of the Walking Company pursuant to the Walking Company Plan of

Reorganization in the original face amount of $700,000.

 

                  "First Unsecured Creditor's Note Put Right" shall mean the

right of the liquidating agent (as defined in the Existing TWC Agreement) to

cause TWC to pay all or such portion of the then outstanding principal amount of

the First Unsecured Creditors' Promissory Note as designated by the liquidating

agent pursuant to that certain Note Put Right (First Unsecured Creditors

Promissory Note) dated as of March 3, 2004 by and between the liquidating agent

and TWC.

 

                  "Funding Date" means the date on which a Borrowing occurs.

 

                  "Funding Losses" has the meaning set forth in Section

2.13(b)(ii).

 

                  "GAAP" means generally accepted accounting principles as in

effect from time to time in the United States, consistently applied.

 

                  "General Intangibles" includes, without limitation, "general

intangibles" as defined in the Code; and also means all of Borrowers' now owned

or hereafter acquired right, title, and interest with respect to general

intangibles (including, but not limited to, payment intangibles, healthcare

insurance receivables, contract rights, rights to payment, rights arising under

common law, statutes, or regulations, choses or things in action, judgments,

payments under any settlement or other agreement, rights to performance,

royalties, all means and vehicles of investment or hedging, including without

limitation, options, warrants, and future contracts, goodwill, patents, patent

applications, trade names, trademarks, servicemarks, trademark applications,

copyrights, mask work rights and interests, and derivative works and interests,

internet addresses and domain names, developmental ideas and concepts,

proprietary processes, blueprints, drawings, designs, diagrams, plans, charts,

purchase orders, customer lists, telephone numbers, monies due or recoverable

from pension funds, route lists, rights to payment and other rights under any

royalty or licensing or franchise agreements, rights to admission, infringement

claims, computer programs, computer software, computer records, information

contained on computer disks or tapes, software, literature, literary rights,

reports, catalogs, manuals, technical data, money, trade secret rights,

insurance premium rebates, warranties, warranty claims, tax refunds, and tax

refund claims), and any and all supporting obligations in respect thereof, and

any other personal property other than goods, Accounts, Investment Property, and

Negotiable Collateral.

 

                  "Goods" shall have the same definition as in the Code.

 

                  "Governing Documents" means, with respect to any Person, the

certificate or articles of incorporation, by-laws, or other organizational

documents of such Person.

 

                  "Governmental Authority" means any federal, state, local, or

other governmental or administrative body, instrumentality, department, or

agency or any court, tribunal, administrative hearing body, arbitration panel,

commission, or other similar dispute-resolving panel or body.

 

                  "Guarantor Security Agreement" means that certain Guarantor

Security Agreement executed and delivered by Parent and Agent, the form and

substance of which is satisfactory to Agent.

 

                  "Guaranty" means that certain general continuing guaranty

executed and delivered by Parent in favor of Agent, for the benefit of the

Lender Group, in form and substance satisfactory to Agent.

 

                  "Hazardous Materials" means (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 that contains any oil or dielectric fluid containing levels of

polychlorinated biphenyls in excess of 50 parts per million.

 

                  "Hedge Agreement" means any and all transactions, agreements,

or documents now existing or hereafter entered into between any Borrower or its

Subsidiaries and Wells Fargo or its Affiliates, which provide for an interest

rate, credit, commodity or equity swap, cap, floor, collar, forward foreign

exchange transaction, currency swap, cross currency rate swap, currency option,

or any combination of, or option with respect to, these or similar transactions,

for the purpose of hedging any Borrower's or its Subsidiaries' exposure to

fluctuations in interest or exchange rates, loan, credit exchange, security or

currency valuations or commodity prices.

 

                  "IBD" means the Israel Discount Bank.

 

                   "IBD Note" shall mean that promissory note dated as of March

1, 2004 executed by Parent in favor of IDB establishing an unsecured line of

credit up to $3.0 million.

 

                  "Inactive Subsidiaries" means, collectively, Big Dog

International, Inc., a California corporation and CSI.

 

                  "Incipient Copyright" means any copyright of a Person that (a)

is under development (whether in the form of a new pictorial work, a new version

of a pre-existing pictorial work, an add-on or modification to a pre-existing

pictorial work, or otherwise) and that has not yet become a completed pictorial

work, version, add-on, or modification which is ready to be marketed by or on

behalf of such Person, or (b) is not the subject of licenses or other

dispositions giving rise to accounts, general intangibles, or other forms of

obligations.

 

                  "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 in respect of letters of

credit, bankers acceptances, interest rate swaps, or other financial products,

(c) all obligations under Capital Leases, (d) all obligations or liabilities of

others secured by a Lien on any asset of any Borrower or its Subsidiaries,

irrespective of whether such obligation or liability is assumed, (e) all

obligations for the deferred purchase price of assets (other than trade debt

incurred in the ordinary course of business and repayable in accordance with

customary trade practices), and (f) any obligation guaranteeing or intended to

guarantee (whether directly or indirectly guaranteed, endorsed, co-made,

discounted, or sold with recourse) any obligation of any other Person.

 

                   "Indemnified Liabilities" has the meaning set forth in Section

11.3.

 

                  "Indemnified Person" has the meaning set forth in Section

11.3.

 

                  "Insolvency Proceeding" means any proceeding commenced by or

against any Person under any provision of the Bankruptcy Code or under any other

state or federal bankruptcy or insolvency law, assignments for the benefit of

creditors, formal or informal moratoria, compositions, extensions generally with

creditors, or proceedings seeking reorganization, arrangement, or other similar

relief.

 

                  "Interest Period" means, with respect to each LIBOR Rate Loan,

a period commencing on the date of the making of such 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) no

Borrower may elect an Interest Period which will end after the Maturity Date.

 

                  "Intercompany Advances" means loans or advances (i) from

either Borrower to each other or Parent, any Subsidiary or any Affiliate, or

(ii) from Parent, any Subsidiary or any Affiliate to either Borrower.

 

                  "Intercompany Subordination Agreement" means a subordination

agreement, in form and substance satisfactory to Agent in its Permitted

Discretion executed and delivered by Borrowers, Parent, Subsidiary or another

Affiliate, as applicable; and Agent in which Parent, Subsidiary or another

Affiliate, as applicable, subordinate the obligations of the Borrowers to

Parent, Subsidiary or Affiliate, as applicable, to the Obligations of the

Borrowers to Agent and Lenders hereunder.

 

                  "Inventory" includes, without limitation, "inventory" as

defined in the Code and also means all Borrowers' now owned or hereafter

acquired right, title, and interest with respect to inventory, including goods

held for sale or lease or to be furnished under a contract of service, goods

that are leased by a Borrower as lessor, goods that are furnished by a Borrower

under a contract of service, and raw materials, work in process, or materials

used or consumed in a Borrower's business.

 

                  "Inventory Reserves" means reserves (determined from time to

time by Agent in its Permitted Discretion) for (a) the estimated costs relating

to unpaid freight charges, warehousing or storage charges, taxes, duties, and

other similar unpaid costs associated with the acquisition of Eligible Letter of

Credit Inventory by any Borrower, plus (b) the estimated reclamation claims of

unpaid sellers of Eligible In-Transit Inventory, which is not the subject of a

Qualified Import Letter of Credit, sold to any Borrower.

 

                  "Investment" means, with respect to any Person, any investment

by such Person in any other Person (including Affiliates) in the form of loans,

guarantees, advances, or capital contributions (excluding (a) commission,

travel, and similar advances to officers and employees of such Person made in

the ordinary course of business, and (b) bona fide Accounts arising in the

ordinary course of business consistent with past practices), purchases or other

acquisitions for consideration of Indebtedness or Stock, and any other items

that are or would be classified as investments on a balance sheet prepared in

accordance with GAAP.

 

                  "Investment Property" means all of Borrowers' now owned or

hereafter acquired right, title, and interest with respect to "investment

property" as that term is defined in the Code, and any and all supporting

obligations in respect thereof.

 

                  "IRC" means the Internal Revenue Code of 1986, as in effect

from time to time.

 

                  "Issuing Lender" means WFRF or any other Lender that, at the

request of any Borrower and with the consent of Agent agrees, in such Lender's

sole discretion, to become an Issuing Lender for the purpose of issuing L/Cs or

L/C Undertakings pursuant to Section 2.12.

 

                  "Junior Secured Creditors Note Put Right Agreement" means that

certain Note Put Right (Junior Secured Creditors Promissory Notes) Agreement

dated March 3, 2004, by and between the Parent and the Junior Secured Creditors.

 

                  "Junior Secured Creditors Promissory Note" means those

promissory notes issued by the Borrower to the Junior Secured Creditors in the

aggregate principal amount of $3.279 million pursuant to the Walking Company

Plan of Reorganization.

 

                  "Junior Secured Creditors Stock Put Right Agreement" means

that certain the Stock Put Right (Junior Secured Creditors) dated March 3, 2004,

by and between the Parent and the Junior Secured Creditors.

 

                  "Landed Goods" means (a) embellished articles of apparel held

for sale in the ordinary course of the applicable Borrower's business located at

one of the business locations set forth on Schedule E-1 (or in transit between

any such locations), (b) unembellished articles of apparel that are readily

saleable in their current condition and that are either at one of the business

locations set forth on Schedule E-1 (or in transit between such locations) or

with a contractor who has executed a Collateral Access Agreement (or in transit

between such contractor and one of the business locations set forth on Schedule

E-1), or (c) embellished articles of apparel that are readily saleable in their

current condition and that are with a contractor who has executed a Collateral

Access Agreement or a tri-party agreement (or in transit between such contractor

and one of the business locations set forth on Schedule E-1).

 

                  "Landlord's Lien State" means Pennsylvania, Texas, Virginia

and Washington.

 

                  "Landlord Reserve" means with respect to each leased location

(i) at which each Borrower stores Inventory in a state that has a landlord lien

or similar statute with respect to commercial property, including without

limitation, as of the Closing Date , the states of Pennsylvania, Texas, Virginia

and Washington, and (ii) for which either (I) a Collateral Access Agreement has

not been received by Agent, or (II) the underlying lease agreement does not

contain a provision that waives the Lien rights that the landlord may have in

and to the Inventory, including without limitation all rights of levy or

distraint for rent; a Reserve in an amount equal to the greater of (a) the

number of months rent for which a landlord will have, under the applicable

statutory lien, a Lien in the assets of the applicable Borrower to secure the

payment of rent or other amounts under a lease, or (b) two (2) months rent under

the lease provided, however, that if the Borrowers have Excess Availability of

at least Four Million ($4,000,000), a Landlord's Reserve of one (1) month's rent

shall be used in subparagraph (b) hereof.

 

                  "L/C" has the meaning set forth in Section 2.12(a).

 

                  "L/C Disbursement" means a payment made by the Issuing Lender

pursuant to a Letter of Credit.

 

                  "L/C Undertaking" has the meaning set forth in Section

2.12(a).

 

                  "Lead Borrower" shall mean Big Dog.

 

                  "Leasehold Threshold" shall mean, as of the date of

determination, a default by Parent or any of its Subsidiaries extant as of the

Closing Date under (a) any lease related to a distribution center or warehouse,

or (b) 3 or more leases related to retail stores.

 

                   "Lender" and "Lenders" have the respective meanings set forth

in the preamble to this Agreement, and shall include any other Person made a

party to this Agreement in accordance with the provisions of Section 14.1.

 

                  "Lender Group" means, individually and collectively, each of

the Lenders (including the Issuing Lender) and Agent.

 

                  "Lender Group Expenses" means all (a) costs or expenses

(including taxes, and insurance premiums) required to be paid by any Borrower

under any of the Loan Documents that are paid or incurred by the Lender Group,

(b) fees or charges paid or incurred by Agent in connection with the Lender

Group's transactions with Borrowers, including, fees or charges for

photocopying, notarization, couriers and messengers, telecommunication, public

record searches (including tax lien, litigation, and UCC searches and including

searches with the patent and trademark office, the copyright office, or the

department of motor vehicles), filing, recording, publication, appraisal

(including periodic Collateral appraisals or business valuations to the extent

of the fees and charges (and up to the amount of any limitation) contained in

this Agreement), real estate surveys, real estate title policies and

endorsements, and environmental audits, (c) costs and expenses incurred by Agent

in the disbursement of funds to or for the account of Borrowers (by wire

transfer or otherwise), (d) charges paid or incurred by Agent resulting from the

dishonor of checks, (e) reasonable costs and expenses paid or incurred by the

Lender Group 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, (f) audit fees and expenses of Agent related to audit examinations

of the Books to the extent of the fees and charges (and up to the amount of any

limitation) contained in this Agreement, (g) reasonable costs and expenses of

third party claims or any other suit paid or incurred by the Lender Group in

enforcing or defending the Loan Documents or in connection with the transactions

contemplated by the Loan Documents or the Lender Group's relationship with any

Borrower or any guarantor of the Obligations, (h) Agent's and each Lender's

reasonable fees and expenses (including attorneys fees) incurred in advising,

structuring, drafting, reviewing, administering, or amending the Loan Documents,

and (i) Agent's and each Lender's reasonable fees and expenses (including

attorneys fees) incurred in terminating, enforcing (including attorneys fees and

expenses incurred in connection with a "workout," a "restructuring," or an

Insolvency Proceeding concerning any Borrower or in exercising rights or

remedies under the Loan Documents), or defending the Loan Documents,

irrespective of whether suit is brought, or in taking any Remedial Action

concerning the Collateral.

 

                   "Lender-Related Person" means, with respect to any Lender,

such Lender, together with such Lender's Affiliates, and the officers,

directors, employees, and agents of such Lender.

 

                  "Letter of Credit" means an L/C or an L/C Undertaking, as the

context requires.

 

                  "Letter of Credit Usage" means, as of any date of

determination an amount equal to, the sum of (a) the Big Dog Letter of Credit

Usage, and (b) the TWC Letter of Credit Usage (calculated with the Bianco L/C

included at 50% of its stated amount if the conditions to the proviso in the

definition thereof are satisfied).

 

                  "LIBOR Deadline" has the meaning set forth in Section

2.13(b)(i).

 

                  "LIBOR Notice" means a written notice in the form of Exhibit

L-1.

 

                  "LIBOR Rate" means, for each Interest Period for each LIBOR

Rate Loan, the rate per annum determined by Agent (rounded upwards, if

necessary, to the next 1/16%) 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 a Standard Advance

that bears interest at a rate determined by reference to the LIBOR Rate.

 

                  "LIBOR Rate Margin" means 175 basis points, provided, however,

that for each fiscal month after May 31, 2005, that the Average Excess

Availability for the immediately preceding month is greater than $7,500,000, the

LIBOR Rate Margin for the immediately succeeding month shall mean 150 basis

points.

 

                  "License" has the meaning set forth in Section 4.1

 

                  "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, whether

such interest shall be based on the common law, statute, or contract, whether

such interest shall be recorded or perfected, and whether such interest shall be

contingent upon the occurrence of some future event or events or the existence

of some future circumstance or circumstances, including 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 including reservations, exceptions, encroachments, easements,

rights-of-way, covenants, conditions, restrictions, leases, and other title

exceptions and encumbrances affecting real property.

 

                  "Loan Account" and "Loan Accounts" have the respective

meanings set forth in Section 2.10 and shall include both the TWC Loan Account

and the Big Dog Loan Account.

 

                   "Loan Documents" means this Agreement, the Bank Product

Agreements, the Cash Management Agreements, the Control Agreements, the

Copyright Security Agreement, the Disbursement Letter, the Guarantor Security

Agreement, the Guaranty, the Intercompany Subordination Agreement, the Letters

of Credit, the Officers' Certificate, the Stock Pledge Agreement, the Trademark

Security Agreement, any note or notes executed by a Borrower in connection with

this Agreement and payable to a member of the Lender Group, and any other

agreement entered into, now or in the future, by any Borrower and the Lender

Group in connection with this Agreement.

 

                   "Marks" has the meaning set forth in Section 4.1.

 

                  "Material Contractor" shall mean any party to whom Big Dog

regularly sends unembellished articles of Inventory for finish work and to whom

during its most recent Fiscal Year, Big Dog paid more than $250,000 for such

finish work.

 

                  "Material Contractor Agreement" means an agreement or

arrangement between a Borrower and a Material Contractor under which the

Material Contractor receives unembellished articles of Borrower's Inventory for

finish work.

 

                  "Material Adverse Change" means (a) a material adverse change

in the business, prospects, operations, results of operations, assets,

liabilities or condition (financial or otherwise) of Parent and Borrowers, taken

as a whole, (b) a material impairment of Parent's or a Borrower's ability to

perform its respective obligations under the Loan Documents to which it is a

party or of the Lender Group's ability to enforce the Obligations or realize

upon the Collateral, or (c) a material impairment of the enforceability or

priority of the Agent's Liens with respect to the Collateral as a result of an

action or failure to act on the part of Parent or a Borrower.

 

                  "Maturity Date" has the meaning set forth in Section 3.4.

 

                  "Maximum Loan Amount" means Fifty Million Dollars

($50,000,000), the sum of the Maximum Revolver Account plus the Term Loan

Amount.

 

                  "Maximum Revolver Amount" means $47,000,000.

 

                  "Minimum Excess Availability Reserve" means Two Million Seven

Hundred Fifty Thousand Dollars ($2,750,000.00).

 

                  "Motorcycles" means Big Dog Motorcycles LLC

 

                  "Negotiable Collateral" means all of Borrowers' now owned and

hereafter acquired right, title, and interest with respect to letters of credit,

letter of credit rights, instruments, promissory notes, drafts, documents, and

chattel paper (including electronic chattel paper and tangible chattel paper),

and any and all supporting obligations in respect thereof.

 

                  "Net Issuance Proceeds" means, in respect of any issuance of

common equity or preferred equity (so long as the redemption and mandatory

dividend provisions are satisfactory to Agent), cash proceeds received in

connection therewith, net of reasonable out-of-pocket costs and expenses paid or

incurred in connection therewith in favor of any Person not an Affiliate of

Parent or any Borrower, such costs and expenses to be consistent with standard

investment practices for similar issuances.

 

                  "Net Liquidation Percentage" means the percentage of the book

value of the applicable Borrower's Inventory that is estimated to be recoverable

in an orderly liquidation of such Inventory, such percentage to be as determined

from time to time by a qualified appraisal company selected by Agent.

 

                   "Obligations" means (a) all loans, Advances (including, but

not limited to, all amounts advanced to, or L/Cs issued for the account of, the

Borrower under the Revolver), all amounts due in respect to the Term Loan and

all other debts, principal, interest (including any interest that, but for the

provisions of the Bankruptcy Code, would have accrued), contingent reimbursement

obligations with respect to outstanding Letters of Credit, premiums, liabilities

(including all amounts charged to Borrowers' Loan Accounts pursuant hereto),

obligations, fees, charges, costs, Lender Group Expenses (including any fees or

expenses that, but for the provisions of the Bankruptcy Code, would have

accrued), lease payments, guaranties, covenants, and duties of any kind and

description owing by Borrowers to the Lender Group pursuant to or evidenced by

the Loan Documents and irrespective of whether for the payment of money, whether

direct or indirect, absolute or contingent, due or to become due, now existing

or hereafter arising, and including all interest not paid when due and all

Lender Group Expenses that Borrowers are required to pay or reimburse by the

Loan Documents, by law, or otherwise, and (b) all Bank Product Obligations. Any

reference in this Agreement or in the Loan Documents to the Obligations shall

include all amendments, changes, extensions, modifications, renewals

replacements, substitutions, and supplements, thereto and thereof, as

applicable, both prior and subsequent to any Insolvency Proceeding. Without

limitation of the generality of the foregoing, "Obligations" shall include all

of the Existing Obligations outstanding as of the date hereof in respect to the

Existing Loans and Existing L/Cs, which Existing Obligations are being

consolidated under this Loan Agreement and shall continue to be secured by all

Collateral in respect to which Agent and Lenders have previously been granted a

security interest under the Big Dog Agreement or TWC Agreement or Big Dog Loan

Documents or TWC Loan Documents.

 

                   "Obsolete Copyright" means any copyright of a Person that, in

such Person's good faith determination (a) is no longer sold or marketed by such

Person, (b) is not generating any material amount of revenues of such Person, or

(c) does not have a material fair market value.

 

                  "Officers' Certificate" means the representations and

warranties of officer's form submitted by Agent to Borrowers, together with

Borrowers' completed responses to the inquiries set forth therein, the form and

substance of such responses to be satisfactory to Agent.

 

                  "Originating Lender" has the meaning set forth in Section

14.1(e).

 

                  "Overadvance" has the meaning set forth in Section 2.5.

 

                  "Parent" has the meaning set forth in the preamble to this

Agreement.

 

                  "Parent Capital Contribution" means the Parent Equity

Contribution and the Parent Loan I.

 

                  "Parent Equity Contribution" means an equity contribution by

Parent to TWC Acquisition in an amount of not less than Six Million Four Hundred

Fifty Thousand Dollars ($6,450,000.00).

 

                  "Parent Loan I" means that unsecured line of credit

established by Parent to TWC pursuant to the Subordinated Intercompany

Promissory Note dated as of March 3, 2004 in the face amount of up to One

Million Fifty Thousand Dollars ($1,050,000.00), funded from the proceeds of the

Big Dog Dividend.

 

                  "Parent Loan II" means that unsecured line of credit

established by Parent to TWC pursuant to the Subordinated Intercompany

Promissory Note dated as of March 3, 2004 in the face amount of up to Three

Million Dollars ($3,000,000.00), funded from the proceeds of the IBD Note.

 

                  "Parent Note Put Obligations" means the Junior Secured

Creditors Note Put Agreement and the Second Unsecured Creditors Note Put

Agreement.

 

                  "Parent Stock Put Obligations" means the Junior Secured

Creditors Stock Put Agreement.

 

                  "Participant" has the meaning set forth in Section 14.1(e).

 

                  "Pay-Off Letter" means a letter, in form and substance

satisfactory to Agent, from Existing Lender to Agent respecting the amount

necessary to repay in full all of the obligations of Big Dog owing to Existing

Lender and obtain a release of all of the Liens existing in favor of Existing

Lender in and to the assets of Big Dog.

 

                  "Permitted Acquisitions" means, during the term of this

Agreement, one or more Acquisitions so long as:

 

                   (a) no Default or Event of Default shall have occurred and be

continuing or would result from the consummation of such proposed Acquisition,

 

                  (b) the assets being acquired or the Person whose Stock is

being acquired is engaged in the business of the Borrowers or a business

reasonably related thereto,

 

                  (c) except as provided in subparagraphs (g) or (h) below, the

consideration payable in respect of such Acquisition shall be composed solely of

(i) common Stock of Parent, warrants for common Stock of Parent, preferred Stock

of Parent (so long as such preferred Stock does not require any current cash

payment until, at the earliest, the date that is 360 days from the Closing

Date), any other Stock of Parent that does not require any current cash payment

until, at the earliest, the date that is 360 days from the Closing Date, or

Subordinated Indebtedness, (ii) payments made with Net Issuance Proceeds or with

the proceeds of Subordinated Indebtedness, (iii) the assumption of Purchase

Money Indebtedness, (iv) the assumption of liabilities of the Person whose Stock

or assets are being acquired in respect of operating leases, or (v) any

combination of the foregoing.

 

                  (d) Parent has provided to Agent written notice thereof not

less than 15 days prior to the anticipated closing date of such subject

Acquisition together with such documentation that Agent may require

demonstrating that after giving effect to such subject Acquisition, Parent and

its Subsidiaries (taken as a whole) would not suffer a Material Adverse Change

as a result of such proposed Acquisition,

 

                  (e) the subject Stock is being acquired in such Acquisition

directly by Parent, or the subject assets are being acquired in such Acquisition

directly by a Borrower or a new Subsidiary formed for the purposes of such

Acquisition, and

 

                  (f) Parent shall have caused such acquired Person to execute

and deliver a guaranty of the Obligations hereunder, together with any and all

security agreements, UCC-1 financing statements, fixture filings, and other

documentation reasonably requested by Agent to cause such acquired Person to be

obligated with respect to the Obligations and to include the assets of the

acquired Person within the Collateral, and provided that none of such assets

shall be included in the calculation of the Borrowing Base, except to the extent

such assets are deemed acceptable for Borrowing Base purposes by the Agent, in

its Permitted Discretion, which Agent may elect to exercise only after it has

completed an audit or appraisal on the acquired assets and determined what

Reserves and Inventory Advance Rates would be appropriate for such assets.

 

                  (g) If all or any portion of the consideration payable in

respect of such Acquisition is cash or the assumption of debt or a combination

thereof, the aggregate amount of such cash payments in any fiscal year

(including any Indebtedness issued by Borrower to Seller or any liabilities

assessed by Borrower) shall not exceed One Million Dollars ($1,000,000);

provided however that and notwithstanding the foregoing to the contrary, if

after giving effect to such Acquisition, the Borrowers shall have Excess

Availability of at least Seven Million Five Hundred Thousand Dollars

($7,500,000) and (ii) based on a pro forma Business Plan furnished by the

Borrowers to the Agent, which Agent has determined to be satisfactory in its

Permitted Discretion, the Borrowers shall continue to have Excess Availability

of at least Seven Million Five Hundred Thousand Dollars ($7,500,000) for a

period of forty-five (45) days following the proposed Acquisition), the

Borrowers may pay cash or issue or assume liabilities of up to Five Million

Dollars ($5,000,000) in conjunction with such Acquisition.

 

                  (h) Notwithstanding the foregoing, solely in connection with

the Bianca Acquisition, the Agent shall permit TWC to pay cash or issue or

assume liabilities of up to Eleven Million Dollars ($11,000,000) (which amount

shall be subject to an increase for normal and customary closing adjustments

pursuant to the Acquisition Agreement such as Bianca's having a higher inventory

level than represented in the Acquisition Agreement), provided that (i) after

giving effect to the Bianca Acquisition, the Borrowers shall have Excess

Availability of at least Five Million Dollars ($5,000,000) and (ii) based on a

pro forma Business Plan provided by Borrowers to Agent, which Agent deems

satisfactory, in its Permitted Discretion, Borrowers will continue to have

Excess Availability of at least Five Million Dollars ($5,000,000) for a period

of forty-five (45) days following the closing of the Bianca Acquisition.

 

                  "Permitted Bond Financing" means Indebtedness incurred by

Parent or any Borrower in connection with the purchase of Cash Equivalents where

such Borrower has simultaneously entered into an agreement to sell such Cash

Equivalents and where the economic risk of loss of such transaction does not

exceed $250,000.

 

                  "Permitted Discretion" means a determination made in good

faith and in the exercise of reasonable (from the perspective of a secured

asset-based lender) business judgment.

 

                  "Permitted Dispositions" means (a) sales or other dispositions

by Borrowers or their Subsidiaries of Equipment that is substantially worn,

damaged, or obsolete in the ordinary course of the applicable Borrower's

business, (b) sales by Borrowers or their Subsidiaries of Inventory to buyers in

the ordinary course of business, (c) the use or transfer of money or Cash

Equivalents by Borrowers or their Subsidiaries in a manner that is not

prohibited by the terms of this Agreement or the other Loan Documents, (d) the

licensing by Parent or its Subsidiaries, on an exclusive or non-exclusive basis,

and for fair market value, of patents, trademarks, copyrights, and other

intellectual property rights in the ordinary course of their business, provided,

however, that Parent or its Subsidiaries, as applicable, must retain or obtain

sufficient rights to use the subject intellectual property as to enable Parent

or its Subsidiaries, as applicable, to continue to conduct its business in the

ordinary course and such rights shall be assignable to Agent, for the benefit of

the Lender Group, (e) charitable donations by Borrowers of Inventory that is old

or obsolete and has a retail value of not more than one million dollars

($1,000,000), in the aggregate, during any fiscal year, and (f) sales of Cash

Equivalents in a Permitted Bond Financing; and (g) sales or other dispositions

of any of the Borrower's leases, provided, that, such sales or other

dispositions are in connection with a store closing permitted by the terms of

this Agreement or consented to by the Agent and the proceeds are, upon closing,

directed and delivered to the Agent's Account.

 

                  "Permitted Distributions" means (a) so long as no Default or

Event of Default has occurred and is continuing or would result therefrom, cash

Distributions by Borrowers to Parent for the sole purpose of permitting Parent

to pay, and Parent shall pay, federal and state income taxes solely attributable

to its ownership of Borrowers, (b) so long as no Event of Default has occurred

and is continuing or would result therefrom, cash Distributions by Subsidiaries

(other than Borrowers) to Parent, and (c) so long as no Default or Event of

Default has occurred and is continuing or would result therefrom and so long as

Borrowers have Excess Availability of not less than Two Million dollars

($2,000,000) after giving effect thereto, redemptions of Parent's outstanding

Stock in an aggregate amount not to exceed $1,000,000 in any fiscal year.

 

                  "Permitted Holder" means Fred Kayne, Andrew Feshbach, and

their Family Members and Family Trusts.

 

                  "Permitted Intercompany Advance" means Intercompany Advances

(including, but not limited to, proper allocations of shared corporate overhead

or shared goods and services) made (i) from Parent to either Big Dog or TWC or

(ii) Big Dog or TWC to each other (but not from Big Dog or TWC to Parent),

provided that, in each case, all such Permitted Intercompany Advances are

expressly subordinate to the Obligations of Borrowers and Parent to Lender

pursuant to the Intercompany Subordination Agreement.

 

                   "Permitted Investments" means (a) investments in Cash

Equivalents, (b) investments in negotiable instruments for collection, (c)

advances made in connection with purchases of goods or services in the ordinary

course of business, (d) investments resulting from Permitted Intercompany

Advances, and (e) Permitted Acquisitions.

 

                  "Permitted Liens" means (a) Liens held by Agent for the

benefit of Agent and the Lenders, (b) Liens for unpaid taxes that either (i) are

not yet delinquent, or (ii) do not constitute an Event of Default hereunder and

are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d)

the interests of lessors under operating leases, (e) purchase money Liens or the

interests of lessors under Capital Leases to the extent that such Liens or

interests secure Permitted Purchase Money Indebtedness and so long as such Lien

attaches only to the asset purchased or acquired and the proceeds thereof, (f)

Liens arising by operation of law in favor of warehousemen, landlords, carriers,

mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course

of Borrowers' business and not in connection with the borrowing of money, and

which Liens either (i) are for sums not yet delinquent, or (ii) are the subject

of Permitted Protests, (g) Liens arising from deposits made in connection with

obtaining worker's compensation or other unemployment insurance, (h) Liens or

deposits to secure performance of bids, tenders, or leases incurred in the

ordinary course of Borrowers' business and not in connection with the borrowing

of money, (i) Liens granted as security for surety or appeal bonds in connection

with obtaining such bonds in the ordinary course of Borrowers' business, (j)

Liens resulting from any judgment or award that is not an Event of Default

hereunder, (k) with respect to any real property, easements, rights of way, and

zoning restrictions that do not materially interfere with or impair the use or

operation thereof by Borrowers, and (l) Liens on Cash Equivalents in a Permitted

Bond Financing. Notwithstanding anything contained herein to the contrary, the

inclusion of any of the foregoing "Permitted Liens" shall not effect their

respective relative priorities vis-a-vis the Agent's Liens created hereunder or

under the Existing Loan Agreement.

 

                  "Permitted Protest" means the right of Parent or the

applicable Borrower or their Subsidiaries to protest any Lien (other than any

such Lien that secures the Obligations), taxes (other than payroll taxes or

taxes that are the subject of a United States federal tax lien), or rental

payment, provided that (a) a reserve with respect to such obligation is

established on the Books in such amount as is required under GAAP, (b) any such

protest is instituted promptly and prosecuted diligently by Parent or the

applicable Borrower or their Subsidiary, as applicable, in good faith, and (c)

Agent is satisfied that, while any such protest is pending, there will be no

impairment of the enforceability, validity, or priority of any of the Agent's

Liens.

 

                  "Permitted Purchase Money Indebtedness" means, as of any date

of determination, Purchase Money Indebtedness incurred after the Closing Date in

an aggregate principal amount outstanding at any one time not in excess of

$1,500,000.

 

                  "Person" means 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.

 

                  "Proceeding" means the Chapter 11 case of the Walking Company

pending before the Bankruptcy Court as case number SV 03-44040 GM, jointly

administered with Case No. SV 03-15932 GM.

 

                  "Projections" means Parent's and Borrower's forecasted (a)

balance sheets, (b) profit and loss statements, and (c) cash flow statements,

all prepared on a basis consistent with Parent's and Borrower's historical

financial statements, stated separately for TWC and Big Dog and on a

consolidated basis, together with appropriate supporting details and a statement

of underlying assumptions.

 

                   "Pro Rata Share" means:

 

                           (a) with respect to a Lender's obligation to make

Advances and receive payments of principal,

interest, fees, costs, and expenses with respect thereto, the percentage

obtained by dividing (i) such Lender's Commitment, by (ii) the aggregate

Revolver of all Lenders,

 

                           (b) with respect to a Lender's obligation to

participate in Letters of Credit, to reimburse the

Issuing Lender, and to receive payments of fees with respect thereto, the

percentage obtained by dividing (i) such Lender's Commitment, by (ii) the

aggregate Commitments of all Lenders,

 

                           (c) with respect to all other matters (including the

indemnification obligations arising under Section

16.7), the percentage obtained by dividing (i) such Lender's Commitment, by (ii)

the aggregate amount of Commitments of all Lenders; provided, however, that, in

each case, in the event all Commitments have been terminated, Pro Rata Share

shall be determined according to the Commitments in effect immediately prior to

such termination.

 

                  "Purchase Money Indebtedness" means Indebtedness (other than

the Obligations, but including Capitalized Lease Obligations), incurred at the

time of, or within 20 days after, the acquisition of any fixed assets for the

purpose of financing all or any part of the acquisition cost thereof.

 

                   "Qualified Import Letter of Credit" means a Letter of Credit

that (a) is issued to facilitate the purchase by Borrowers of Eligible

Inventory, (b) is in form and substance acceptable to Agent in its Permitted

Discretion, and (c) is issued to support an Underlying Letter of Credit that

only is drawable by the beneficiary thereof by the presentation of, among other

documents, either (i) a negotiable bill of lading that is consigned to Agent

(either directly or by means of endorsements) and that was issued by the carrier

respecting the subject Eligible Inventory, or (ii) a negotiable cargo receipt

that is consigned to Agent (either directly or by means of endorsements) and

that was issued by a consolidator respecting the subject Eligible Inventory;

provided, however, that, in the latter case, no bill of lading shall have been

issued by the carrier (other than a bill of lading consigned to the consolidator

or to Agent).

 

                  "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.

 

                  "Remedial Action" means all actions taken to (a) clean up,

remove, remediate, contain, treat, monitor, assess, evaluate, or in any way

address Hazardous Materials in the indoor or outdoor environment, (b) prevent or

minimize a release or threatened release of Hazardous Materials so they do not

migrate or endanger or threaten to endanger public health or welfare or the

indoor or outdoor environment, (c) perform any pre-remedial studies,

investigations, or post-remedial operation and maintenance activities, or (d)

conduct any other actions authorized by 42 USC ss. 9601.

 

                  "Report" has the meaning set forth in Section 16.17.

 

                  "Required Availability" means Excess Availability in an amount

not less than Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000).

 

                  "Required Lenders" means, at any time, (a) Agent, and (b)

Lenders whose Pro Rata Shares aggregate 50.1% of the Commitments, or if the

Commitments have been terminated irrevocably, 50.1% of the Obligations (other

than Bank Product Obligations) then outstanding.

 

                  "Required Library" means, as of any date of determination,

those copyrights of Parent and Borrowers relating to pictorial works of Parent

and Borrowers that were among the ten highest sellers in adult T-shirt sales (by

unit) for the three month period immediately preceding the date of

determination.

 

                  "Reserves" means collectively, all Account Reserves, the

Landlord's Reserve, the Distribution Center Reserve, Inventory Reserves, the

Minimum Excess Availability Reserve, Bank Product Reserves, Contractor Reserve

and any other Reserves established by Agent pursuant to Section 2.1(a)(iii)

hereof.

 

                "Reserve Percentage" means, on any day, for any Lender, 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 funding

(currently referred to as "eurocurrency liabilities") of that Lender, but so

long as such Lender is not required or directed under applicable regulations to

maintain such reserves, the Reserve Percentage shall be zero.

 

                  "Revolver" as defined in Section 2.1(a)(ii) below.

 

                  "Revolver Obligations". The aggregate of the Borrowers'

liabilities, obligations and indebtedness of any character on account or in

respect to the Revolver.

 

                  "Revolver Usage" means, as of any date of determination, the

sum of (a) the then extant amount of outstanding Advances, plus (b) the then

extant amount of the Letter of Credit Usage (calculated with the Bianca L/C

included at only 50% of its stated value if the conditions to the proviso in the

definition thereof are satisfied).

 

                  "Risk Participation Liability" means, as to each Letter of

Credit, all reimbursement obligations of the applicable Borrower to the Issuing

Lender with respect to an L/C Undertaking, consisting of (a) the amount

available to be drawn or which may become available to be drawn, (b) all amounts

that have been paid by the Issuing Lender to the Underlying Issuer to the extent

not reimbursed by the applicable Borrower, whether by the making of an Advance

or otherwise, and (c) all accrued and unpaid interest, fees, and expenses

payable with respect thereto.

 

                  "SEC" means the United States Securities and Exchange

Commission and any successor thereto.

 

                  "Second Unsecured Creditors Promissory Note" means that

promissory note issued by the Borrower to the Liquidating Agent in the original

face amount of $21,000 pursuant to the Walking Company Plan of Reorganization.

 

                   "Second Unsecured Creditors Note Put Agreement" means that

certain Note Put Right (Second Unsecured Creditors Promissory Note) Agreement

dated March 3, 2004, by and between the Parent and the Liquidating Agent for the

benefit of the unsecured creditors of the Walking Company.

 

                  "Securities Account" means a "securities account" as that term

is defined in the Code.

 

                  "Settlement" has the meaning set forth in Section 2.3(f)(i).

 

                  "Settlement Date" has the meaning set forth in Section

2.3(f)(i).

 

                  "Shoes.com Administrative Claim" means any claim of Shoes.com,

Inc. allowed by Final Order of the Bankruptcy Court as an administrative claim

against the Borrower pursuant to Section 503 of the Bankruptcy Code in the

Proceeding.

 

                  "Shoes.com Loan" means an unsecured loan to be made by either

(i) Parent to TWC Acquisition Cup or (ii) by Fred Kayne and/or Andrew Feshbach

to TWC Acquisition Cup in an amount sufficient to satisfy the Shoes.com

Administrative Claim after application of then available proceeds of Parent Loan

II.

 

                  "Solvent" means, with respect to any Person on a particular

date, that such Person is not insolvent (as such term is defined in the Uniform

Fraudulent Transfer Act).

 

                  "Standard Advance" means an Advance under the Revolver made by

Lenders to Borrowers based upon Availability pursuant to Section 2.1(a)(ii)

hereof.

 

                  "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, in

form and substance satisfactory to Agent, executed and delivered by Parent and

Borrowers to Agent with respect to the pledge of the Stock owned by Parent and

Borrowers.

 

                  "Subordinated Indebtedness" means any Indebtedness of Parent

or a Borrower that contains terms and conditions (including subordination terms)

acceptable to Agent in the exercise of its Permitted Discretion.

 

                  "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 comparable

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

entity.

 

                  "Swing Lender" means WFRF or any other Lender that, at the

request of a Borrower and with the consent of Agent agrees, in such Lender's

sole discretion, to become the Swing Lender hereunder.

 

                  "Swing Loan" has the meaning set forth in Section 2.3(d)(i).

 

                  "Taxes" has the meaning set forth in Section 16.11.

 

                  "Term Loan" defined in Section 2.2 hereof.

 

                  "Term Loan Amount" means Three Million Dollars ($3,000,000).

 

                  "Term Loan Commitment" the commitment of the Lenders to make

the Term Loan hereunder.

 

                  "Term Loan Fee" a fee of $15,000 due and payable upon the

advance of the Term Loan.

 

                  "Term Loan Funding Conditions" means that Agent shall have

received all of the following or shall have waived the requirement that it

receive such item by written notice to Lead Borrower:

 

                  (a) duly executed originals of all documents evidencing the

Bianca Acquisition or required to be executed and delivered under the Bianca

Acquisition Agreement, certified as being true, correct, and complete by an

appropriate officer of Borrowers, the form and substance of which documents

shall be satisfactory to Agent in its Permitted Discretion, including, without

limitation the Bianca Acquisition Agreement, together with fully executed copies

of any and all amendments thereto and waivers of any conditions thereof, and all

bills of sale and other transfer documents;

 

                  (b) a certificate by an appropriate officer of TWC that all

conditions precedent, other than the payment of the purchase price, to its and

Bianca's respective Obligations to consummate the Bianca Acquisition shall have

been satisfied or the fulfillment of such conditions shall have been duly waived

by TWC or Bianca; as the case may be, with the prior written consent of the

Agent, in its Permitted Discretion, in respect to any waiver by TWC of a

material condition precedent of Bianca;

 

                  (c) Intentionally Omitted.

 

                  (d) evidence satisfactory to Agent in its Permitted Discretion

that the security interests granted in favor of Agent in the Bianca Assets

pursuant hereto (including, but not limited to, in all tradenames and other

intellectual property concerning the name "Footworks") will be duly perfected

and senior in priority to all other liens, claims, security interests, or

encumbrances, except for Permitted Liens, immediately upon the consummation of

the Bianca Acquisition;

 

                  (e) evidence satisfactory to Agent, in its Permitted

Discretion that, the Bianca Acquisition has or will be consummated substantially

in accordance with the terms and provisions of the documents evidencing the

Bianca Acquisition, subject only to the Lenders' funding of the Term Loan and

causing the Bianca L/C to be issued;

 

                  (f) no Default or Event of Default shall have occurred and be

continuing or would result from the consummation of the Bianca Acquisition.

 

                  (g) the Borrowers shall have demonstrated to the satisfaction

of Agent that (i) after giving effect to the Bianca Acquisition, the Borrowers

shall have Excess Availability of at least Five Million Dollars ($5,000,000) and

(ii) based on the pro forma Business Plan provided by Borrowers to Agent, which

Agent deemed satisfactory in its permitted discretion, the Borrower shall have

Excess Availability of at least $5,000,0000 for a period of at least 45 days

following the Bianca Acquisition.

 

                  (h) a current UCC search in respect to Bianca or the assets

being transferred to the Borrower by Bianca as well as any additional litigation

or other searches which Agent may reasonably request;

 

                  (i) copies of Secretary's Certificate as to charter, by-laws,

resolution and incumbency of Bianca and authorizing the Borrowers to enter into

and consummate the Bianca Acquisition;

 

                  (j) any necessary payoff or release letters in respect to the

Bianca Assets necessary to cause the release or termination of any UCC-1

financing statements on file against Bianca in respect to the assets being

transferred or of any security interests in the Borrower's Assets created by

Bianca as well as authorization from Bianca to the Agent to file any necessary

UCC-3 termination statements with respect to such assets;

 

                   (k) copies of any and all other legal opinions or transfer

documents executed and delivered by Bianca in favor of the Borrowers;

 

                  (l) Any and all other documents or information required under

Section 3.2 hereof; and

 

                   (m) Borrowers must be in compliance with the minimum EBITDA

covenant in Section 7.21(a)(ii) hereof.

 

                  "Term Loan Maturity Date" October 23, 2009.

 

                  "Term Loan Obligations" means all Obligations of the Borrowers

to the Lender Group in respect to the Term Loan.

 

                  "Term Note" defined in Section 2.2 hereof.

 

                  "Trademark Security Agreement" means a trademark security

agreement executed and delivered by Parent, each Borrower, and Agent, the form

and substance of which is satisfactory to Agent.

 

                  "TWC" has the meaning set forth in the preamble to this

Agreement.

 

                  "TWC Agreement" as defined in the preamble of this Agreement.

 

                  "TWC Acquisition" shall refer to the former name of the

corporation now known as The Walking Company ("TWC").

 

                  "TWC Borrowing Base", as of any date of determination, shall

mean the result of:

 

                  (a) the lesser of:

 

                            (i) 70% times the value (at Cost) of TWC Eligible

Inventory; and

 

                           (ii) the TWC Maximum Advance Rate times TWC's then

extant Net Liquidation Percentage times the value

(at Cost) of TWC's Eligible Inventory,

 

                  plus

 

                  (b)       85% of TWC Eligible Credit Card Receivables, up to a

maximum amount of $2,000,000.

 

                  minus

 

                  (c) any Inventory Reserves associated with TWC Eligible

Inventory (without duplication in the calculation of Availability or the

Aggregate Borrowing Base).

 

                  "TWC Eligible Credit Card Receivables" means all Eligible

Credit Card Receivables due to TWC.

 

                  "TWC Eligible Inventory" means all Eligible Inventory owned by

TWC.

 

                  "TWC Letter of Credit Usage" means, as of any date of

determination thereof, the aggregate undrawn amount of all outstanding Letters

of Credit issued for the account of TWC plus 100% of the amount of outstanding

time drafts accepted by an Underlying Issuer as a result of drawings under

Underlying Letters of Credit issued for the account of TWC.

 

                  "TWC Loan Account" means the Loan Account respecting TWC

maintained on the books of Agent pursuant to Section 2.10.

 

                   "TWC Loan Documents" means the TWC Agreement and all documents

or instruments executed or delivered in conjunction therewith.

 

                  "TWC Maximum Advance Rate" means eighty five percent (85%),

except that during the months of August and September of each fiscal year of

Parent, such percentage shall be increased to ninety percent (90%) provided,

that there does not exist an Event of Default and an Event of Default would not

exist after giving effect to the increased percentage.

 

                   "TWC Obligations" all Obligations of TWC to the Agent and

Lenders.

 

                  "Underlying Issuer" means a third Person which is the

beneficiary of an L/C Undertaking and which has issued a letter of credit at the

request of the Issuing Lender for the benefit of Borrowers and, in the case of a

proposed Qualified Import Letter of Credit, has agreed, in writing, to hold

documents of title as agent for Agent.

 

                  "Underlying Letter of Credit" means a letter of credit that

has been issued by an Underlying Issuer.

 

                  "Voidable Transfer" has the meaning set forth in Section 17.7.

 

                  "Walking Company" means The Walking Company, a California

corporation, and Alan's Shoes, Inc., an Arizona corporation, both of which are

debtors in possession in the Proceeding.

 

                  "Walking Company Acquisition" means the acquisition of the

Walking Company Assets by TWC.

 

                  "Walking Company Assets" means all of the property and assets

(tangible and intangible) of the Walking Company purchased by Borrower acquired

by TWC in the Walking Company Acquisition.

 

                  "Warrants" shall have the respective meaning as set forth in

the Recitals of this Third Amendment.

 

                  "Wells Fargo" means Wells Fargo Bank, National Association, a

national banking association.

 

                  "WFRF" means Wells Fargo Retail Finance II, LLC, a Delaware

limited liability company.

 

                  "Wholesale Accounts" means those Accounts created by Borrowers

in the ordinary course of Borrowers' business, that arise out of Borrowers' sale

of goods or rendition of services to Borrowers' wholesale customers.

 

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

"Borrowers" or the term "Parent" is used in respect of a financial covenant or a

related definition, it shall be understood to mean Parent 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.

 

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 herein are to this Agreement unless otherwise

specified. Any reference in this Agreement or in the other Loan Documents to any

agreement, instrument, or document shall include all alterations, amendments,

changes, extensions, modifications, renewals, replacements, substitutions,

joinders, and supplements, thereto and thereof, as applicable (subject to any

restrictions on such alterations, amendments, changes, extensions,

modifications, renewals, replacements, substitutions, joinders, and supplements

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.

 

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       Revolver Advances(a)(i)    On the date hereof, all Existing Loans made

                        to either Borrower shall automatically be deemed to

                        constitute Advances made to both of the Borrowers

                        hereunder for which the Borrowers shall each be jointly

                        and severally liable and all Existing L/Cs made for

                        the account of either Borrower under either of the

                         Existing Loan Agreements shall automatically be

                        deemed to constitute L/Cs issued hereunder in respect

                        to which the Borrowers shall each be jointly and

                        severally liable. Such Existing Loans and Existing L/Cs

                        shall be counted toward the   measurement of Revolver

                        Usage hereunder as provided herein.   Notwithstanding

                        the foregoing,   such Existing Loans shall not be deemed

                        to have been repaid and   re-advanced   and such Existing

                        L/Cs shall not be deemed to have been   terminated   and

                        reissued   and all   Collateral   which   secures such

                         Existing   Loans and Existing L/Cs and which is being

                        pledged by the Borrowers to the Agent   hereunder   shall

                        secure all of such Existing   Loans and Existing L/Cs

                        and all other   Obligations   of each   Borrower to Agent

                        and   Lender,   whether now existing or   hereafter

                        arising,   with the same   priority as when such

                        security interests were originally granted to Agent by

                        each Borrower.

 

                (ii)     Subject to the terms and conditions of this Agreement,

                        and during the term of this   Agreement,   each Lender

                        agrees   (severally,   not jointly or jointly and

                        severally)   to make   Advances   to the   Borrowers   in an

                        amount   at any one time outstanding not to exceed such

                        Lender's Pro Rata Share of an amount equal to the

                        Aggregate   Borrowing   Base   less the then   extant

                        Revolver   Usage   and less the aggregate amount of all

                        Reserves   established   hereunder (without duplication

                         of Reserves   deducted when   calculating the Aggregate

                        Borrowing   Base),   provided, however, that at no time

                        shall the then extant Revolver Usage exceed the Maximum

                        Revolver   Amount.   The   revolving   line of credit

                        established   pursuant to this paragraph shall be

                        referred to herein as the "Revolver".   The difference

                        between the Aggregate   Borrowing Base and the sum of

                        then extant   Revolver Usage and all

                        Reserves established hereunder shall be referred to as

                        "Aggregate Availability".

 

                (iii)    Anything to the contrary in this Section   2.1(a)

                        notwithstanding,   Agent shall have the right to

                        establish, without duplication, Account Reserves,

                        Inventory   Reserves,   Bank Product Reserves,   the

                         Contractor Reserve, Landlord Reserve,   Distribution

                        Center Inventory Reserve and the Minimum Excess

                        Availability   Reserve and such other Reserves in such

                        amounts,   and with respect to such matters,   as Agent

                        in its Permitted   Discretion   shall deem necessary or

                        appropriate,   against the   Aggregate   Borrowing   Base,

                        including   reserves with respect   to (i)   sums   that

                        Borrowers   are   required   to pay   (such   as   taxes,

                        assessments,   insurance   premiums,   or, in the case of

                        leased   assets,   rents or other amounts payable under

                         such leases) and has failed to pay under any Section

                        of this Agreement or any other Loan Document, (ii)

                        amounts owing by Borrowers to any   Person   to the

                        extent   secured   by a Lien on,   or trust   over,   any

                        of its Collateral   (other than any   existing   Permitted

                        Lien set forth on Schedule P-1 which is specifically

                        identified   thereon as entitled to have priority over

                        the Agent's Liens), which Lien or trust, in the

                        Permitted Discretion of Agent likely would have a

                        priority   superior to the Agent's Liens (such as Liens

                         or trusts in favor of landlords, warehousemen, carriers,

                        mechanics, materialmen, laborers,   or suppliers,   or

                        Liens or trusts for ad valorem,   excise,   sales, or

                        other taxes where given   priority under   applicable

                        law) in and to such item of the Collateral,   (iii) the

                        Minimum Excess Availability   Reserve, (iv) shrinkage,

                        markdowns (to the extent not taken into account in the

                        calculation   of "Cost"), seasonality   and other such

                        categories of reasons which the Agent may establish,

                        in its Permitted Discretion, which reflect other factors

                         which affect the market value   of   Eligible   Inventory,

                        (v)   Customer   Credit   Liabilities,    (vi)   the

                        Distribution Center Inventory Reserve,   and (vii)

                        Account Reserves.   In addition to the foregoing and

                        subject to Section   2.11(c),   Agent shall have the

                        right to have Borrower's Inventory   reappraised by a

                        qualified appraisal company   selected   by Agent   from

                        time to time   after the   Closing   Date for the

                        purpose of   re-determining   the Net Liquidation

                        Percentages   applicable to each Borrower's   Eligible

                        Inventory   portion   of its   Collateral   and,   as a

                        result, re-determining the Borrowing Base.

 

                        (a) The Lenders shall have no obligation to make

                        additional Advances hereunder to the extent such

                        additional Advances would cause the Revolver Usage to

                        exceed the Maximum Revolver Amount.

 

                        (b) Amounts borrowed pursuant to this Section 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       Term Loan.

 

(a) Funding of Term Loan. Provided that the Term Loan Funding Conditions have

been satisfied or waived by Agent in writing in its Permitted Discretion, each

Lender agrees (severally, not jointly or jointly and severally) to advance such

Lender's Pro Rata Share of the Term Loan and the Agent agrees to cause the

issuance of the Bianca L/C within three (3) Business Days of the date on which

Agent receives written notice from the Lead Borrower requesting that the Lenders

advance the Term Loan and that the Agent arrange for the issuance of the Bianca

L/C ("Term Loan Draw Notice"). The Term Loan Draw Notice shall be accompanied by

evidence substantiating that the Term Loan Funding conditions have been

satisfied or will be satisfied upon the funding of the Term Loan and issuance of

the Bianca L/C. The proceeds of the Term Loan shall be used solely to finance

the Bianca Acquisition. The obligation of the Lenders to make the Term Loan and

the Agent to arrange for the issuance of the Bianca L/C shall expire if the

Bianca Acquisition has not been consummated on or before September 30, 2005. The

Lenders' obligation to advance the Term Loan and to cause the issuance of the

Bianca L/C shall not be subject to Availability as it then may be in effect or

the Borrowing Base.

 

(b) Term Loan Note. The obligation to repay the Term Loan, with interest as

provided therein shall be evidenced by the Term Note in the form of Exhibit T-1

annexed hereto executed by each of the Borrowers. Each of the Borrowers shall be

jointly and severally liable for the repayment of the Term Loan. Neither the

original nor a copy of the Term Note shall be required or, to establish or

approve any obligation of the Borrowers to the Lender in respect to the Term

Loan. In the event that the Term Note is ever lost, mutilated or destroyed, the

Borrower shall execute a replacement thereof and deliver such replacement to the

Agent or Lenders, subject to Lender's agreeing to indemnify Borrower against

claims by any third Persons that they are assignees of the lost or destroyed

Term Note.

 

(c) Term Loan Principal. The outstanding principal balance of the Term Loan will

be amortized through fifty-two (52) consecutive monthly principal payments of

Fifty Five Thousand Five Hundred Fifty-Five Dollars ($55,555) with the first

such payment being due and payable on the first day of January, 2006 and any

unpaid principal balance due on the Maturity Date. If any portion of the Term

Loan is paid in advance of the amortization schedule (whether following

Acceleration, or otherwise), the Borrower shall pay the Administrative Agent,

contemporaneously with such prepayment, for the account of the Lender, the

Applicable Prepayment Fee then due, if any, in respect to such prepayment of the

Term Loan.

 

(d) Term Loan Interest. The unpaid principal balance of the Term Loan shall bear

interest, until repaid at rate per annum equal to either the Base Rate plus

one-half of one percent (0.50%) or the LIBOR Rate plus two and seventy five

hundredths of one percent (2.75%). Such interest shall be due and payable, in

arrears, on the first day of each month commencing with the month immediately

following the date the Term Loan is advanced or in the case of any portion of

the Term Loan bearing interest at the LIBOR Rate, on the last day of the

applicable Interest Period as provided in section 2.13(a) hereof. Such interest

shall be computed pursuant to Section 2.6(e) and the provisions of 2.6(c), (d)

and (f) shall apply thereto. On the date when the Term Loan is advanced and from

time to time thereafter, pursuant to Section 2.13 hereof, the Lead Borrower may

designate whether a portion of all of the unpaid principal balance of the Term

Loan shall bear interest based on the Base Rate or the LIBOR Rate as set forth

above. The LIBOR Rate may only be selected for at least a one million dollar

($1,000,000) portion of the Term Loan and in increments of $500,000 as provided

in Section 2.13(a)(iii) hereof and the entire portion of the Term Loan which

bears interest at the LIBOR Rate shall be incorporated into one (1) LIBOR Rate

Loan which shall be included among the five (5) LIBOR Rate Loans which may be in

effect at any one time pursuant to Section 2.13(b)(iii) hereof.

 

2.3 (e) Term Loan Fee. On the date on which the Term Loan is advanced, Borrower

shall pay Agent, on Lenders' behalf, the Term Loan Fee.

 

2.4 Borrowing Procedures and Settlements/Procedure for Borrowing. Each Borrowing

shall be made by an irrevocable written request by an Authorized Person

delivered to Agent (which notice must be received by Agent no later than 10:00

a.m. (California time) on the Business Day prior to the date that is the

requested Funding Date in the case of a request for an Advance specifying (i)

the amount of such Borrowing, and (ii) the requested Funding Date, which shall

be a Business Day; provided, however, that in the case of a request for Swing

Loan in an amount of $2,000,000, or less, such notice will be timely received if

it is received by Agent no later than 10:00 a.m. (California time) on the

Business Day that is the requested Funding Date) specifying (i) the amount of

such Borrowing, and (ii) the requested Funding Date, which shall be a Business

Day. At Agent's election, in lieu of delivering the above-described written

request, any Authorized Person may give Agent telephonic notice of such request

by the required time, with such telephonic notice to be confirmed in writing

within 24 hours of the giving of such notice.

 

(a)                Agent's Election. Promptly after receipt of a request for a

                  Borrowing pursuant to Section 2.3(a), Agent shall elect, in

                  its discretion, (i) to have the terms of Section 2.3(c) apply

                  to such requested Borrowing, or (ii) if the Borrowing is for a

                  Base Rate Standard Advance, to request Swing Lender to make a

                  Swing Loan pursuant to the terms of Section 2.3(d) in the

                  amount of the requested Borrowing; provided, however, that if

                  Swing Lender declines in its sole discretion to make a Swing

                  Loan pursuant to Section 2.3(d), Agent shall elect to have the

                  terms of Section 2.3(c) apply to such requested Borrowing.

 

(b)                Making of Advances.

 

(i)       In the event that Agent shall elect to have the terms of this Section

2.3(c)   apply to a requested   Borrowing as described in Section   2.3(b),   then

promptly after receipt of a request for a Borrowing   pursuant to Section

2.3(a),   Agent shall notify the Lenders, not later than 1:00 p.m. (California

time) on the Business Day immediately   preceding the Funding Date   applicable

thereto,   by   telecopy,   telephone,   or other   similar form of transmission,

of the requested Borrowing.   Each Lender shall make the amount of such   Lender's

Pro Rata Share of the requested   Borrowing   available to Agent in immediately

available   funds,   to   Agent's   Account,   not later than 10:00 a.m.

(California time) on the Funding Date applicable thereto.   After Agent's receipt

of the proceeds of such Advances, upon satisfaction of the applicable conditions

precedent set forth in Section 3 hereof,   Agent shall make the proceeds   thereof

available to the ----------   applicable   Borrower on the applicable Funding Date

by transferring   immediately   available funds equal to such proceeds received by

Agent to such Borrower's Designated Account; provided, however, that, subject to

the provisions   -------- ------- of Section 2.3(i),   Agent shall not request any

Lender   to   make,   and   no   Lender   shall   have   the   obligation   to   make,   any

---------------   Advance if Agent   shall have actual   knowledge   that (1) one or

more of the applicable   conditions   precedent set forth in Section 3 will not be

satisfied on the requested Funding Date for the applicable Borrowing unless such

condition --------- has been waived, or (2) the requested Borrowing would exceed

the Availability on such Funding Date.

 

(ii) Unless Agent receives   notice from a Lender on or prior to the Closing Date

or,   with   respect to any   Borrowing   after the Closing   Date,   at least one (1)

Business Day prior to the date of such Borrowing, that such Lender will not make

available   as and when   required   hereunder   to   Agent   for the   account   of the

applicable Borrower the amount of that Lender's Pro Rata Share of the Borrowing,

Agent may assume that each Lender has made or will make such amount available to

Agent in   immediately   available   funds on the   Funding   Date and Agent may (but

shall not be so required),   in reliance upon such assumption,   make available to

such   Borrower   on such date a   corresponding   amount.   If and to the extent any

Lender   shall not have made its full amount   available   to Agent in   immediately

available   funds   and   Agent in such   circumstances   has made   available   to the

applicable Borrower such amount, that Lender shall on the Business Day following

such Funding Date make such amount available to Agent, together with interest at

the Defaulting   Lender Rate for each day during such period.   A notice submitted

by Agent to any Lender with respect to amounts owing under this subsection shall

be conclusive,   absent manifest error. If such amount is so made available, such

payment to Agent shall constitute such Lender's Advance on the date of Borrowing

for all   purposes of this   Agreement.   If such amount is not made   available   to

Agent on the   Business Day   following   the Funding   Date,   Agent will notify the

applicable   Borrower of such   failure to fund and,   upon   demand by Agent,   such

Borrower   shall pay such   amount to Agent for   Agent's   account,   together   with

interest   thereon for each day elapsed   since the date of such   Borrowing,   at a

rate per annum equal to the interest rate applicable at the time to the Advances

composing such   Borrowing.   The failure of any Lender to make any Advance on any

Funding Date shall not relieve any other Lender of any   obligation   hereunder to

make an Advance on such Funding Date, but no Lender shall be responsible for the

failure of any other   Lender to make the Advance to be made by such other Lender

on any Funding Date.

 

(iii)   Agent shall not be   obligated   to   transfer   to a   Defaulting   Lender any

payments made by a Borrower to Agent for the Defaulting   Lender's benefit,   and,

in the absence of such transfer to the Defaulting   Lender,   Agent shall transfer

any such payments to each other non-Defaulting Lender member of the Lender Group

ratably in accordance with their   Commitments   (but only to the extent that such

Defaulting Lender's Advance was funded by the other members of the Lender Group)

or, if so   directed   by a Borrower   and if no   Default   or Event of Default   had

occurred and is continuing (and to the extent such Defaulting   Lender's   Advance

was not funded by the   Lender   Group),   retain   same to be   re-advanced   to such

Borrower   as if such   Defaulting   Lender   had made   Advances   to such   Borrower.

Subject   to the   foregoing,   Agent may hold and,   in its   Permitted   Discretion,

re-lend to a Borrower   for the account of such   Defaulting   Lender the amount of

all such payments received and retained by it for the account of such Defaulting

Lender.   Solely for the purposes of voting or consenting to matters with respect

to the Loan   Documents,   such   Defaulting   Lender   shall be   deemed   not to be a

"Lender" and such Lender's   Commitment   shall be deemed to be zero. This Section

shall remain   effective   with   respect to such Lender until (x) the   Obligations

under this Agreement   shall have been declared or shall have become   immediately

due and payable,   (y) the   non-Defaulting   Lenders,   Agent,   and the   applicable

Borrower shall have waived such Defaulting   Lender's default in writing,   or (z)

the   Defaulting   Lender makes its Pro Rata Share of the   applicable   Advance and

pays to Agent all amounts owing by   Defaulting   Lender in respect   thereof.   The

operation of this Section shall not be construed to increase or otherwise affect

the   Commitment   of any   Lender,   to relieve or excuse the   performance   by such

Defaulting   Lender or any other Lender of its duties and obligations   hereunder,

or to   relieve   or excuse   the   performance   by   Borrowers   of their   duties and

obligations   hereunder   to Agent or to the   Lenders   other than such   Defaulting

Lender.   Any such failure to fund by any   Defaulting   Lender shall   constitute a

material   breach by such   Defaulting   Lender of this Agreement and shall entitle

Borrower   at its   option,   upon   written   notice   to   Agent,   to   arrange   for a

substitute   Lender to assume the   Commitment   of such   Defaulting   Lender,   such

substitute   Lender to be acceptable to Agent. In connection with the arrangement

of such a substitute Lender, the Defaulting Lender shall have no right to refuse

to be replaced hereunder,   and agrees to execute and deliver a completed form of

Assignment   and   Acceptance   Agreement   in favor of the   substitute   Lender (and

agrees that it shall be deemed to have executed and   delivered   such document if

it fails to do so)   subject   only to being   repaid its share of the   outstanding

Obligations   (other than Bank Product   Obligations)   (including an assumption of

its Pro Rata Share of the Risk   Participation   Liability) without any premium or

penalty   of any   kind   whatsoever;   provided   further,   however,   that   any such

assumption of the   Commitment of such   Defaulting   Lender shall not be deemed to

constitute   a waiver   of any of the   Lender   Groups'   or   Borrowers'   rights   or

remedies   against any such   Defaulting   Lender   arising out of or in relation to

such failure to fund.

 

(c)                Making of Swing Loans.

 

(i) In the event   Agent shall   elect,   with the   consent of Swing   Lender,   as a

Lender, to have the terms of this Section 2.3(d) apply to a requested   Borrowing

as described in Section 2.3(b), Swing Lender as a Lender shall make such Advance

in the amount of such Borrowing (any such Advance made solely by Swing Lender as

a Lender pursuant to this Section 2.3(d) being referred to as a "Swing Loan" and

such Advances being referred to collectively as "Swing Loans")   available to the

applicable   Borrower   on the Funding   Date   applicable   thereto by   transferring

immediately available funds to Borrower's Designated Account. Each Swing Loan is

an   Advance   hereunder   and shall be   subject   to all the   terms and   conditions

applicable to other   Advances,   except that no such Swing Loan shall be eligible

for the LIBOR   Option   and all   payments   on any Swing   Loan shall be payable to

Swing Lender as a Lender   solely for its own account (and for the account of the

holder of any participation   interest with respect to such Swing Loan).   Subject

to the provisions of Section   2.3(i),   Agent shall not request Swing Lender as a

Lender to make,   and Swing Lender as a Lender shall not make,   any Swing Loan if

Agent has actual   knowledge   that (i) one or more of the   applicable   conditions

precedent set forth in Section 3 will not be satisfied on the requested   Funding

Date for the applicable Borrowing unless such condition has been waived, or (ii)

the   requested   Borrowing   would exceed the   Availability   on such Funding Date.

Swing   Lender as a Lender shall not   otherwise be required to determine   whether

the applicable   conditions   precedent set forth in Section 3 have been satisfied

on the Funding Date applicable   thereto prior to making, in its sole discretion,

any Swing Loan.

 

(ii) The Swing   Loans shall be secured by the Agent's   Liens,   shall   constitute

Advances and   Obligations   hereunder,   and shall bear   interest at the Base Rate

plus 200 basis points.

 

(d)                Agent Advances.

 

(i) Agent hereby is authorized   by each   Borrower and the Lenders,   from time to

time in   Agent's   sole   discretion,   (1) after the   occurrence   and   during   the

continuance of a Default or an Event of Default,   or (2) at any time that any of

the other applicable   conditions   precedent set forth in Section 3 have not been

satisfied,   to make   Advances to each   Borrower   on behalf of the   Lenders   that

Agent, in its Permitted   Discretion deems necessary or desirable (A) to preserve

or protect the Collateral, or any portion thereof, (B) to enhance the likelihood

of repayment of the Obligations   (other than the Bank Product   Obligations),   or

(C) to pay any other amount chargeable to each Borrower pursuant to the terms of

this   Agreement,   including   Lender   Group   Expenses   and the costs,   fees,   and

expenses   described in Section 10 (any of the Advances described in this Section

2.3(e)   shall be   referred   to as "Agent   Advances").   Each Agent   Advance is an

Advance   hereunder   and   shall   be   subject   to all   the   terms   and   conditions

applicable   to   other   Advances,   except   that no such   Agent   Advance   shall be

eligible for the LIBOR Option and all payments thereon shall be payable to Agent

solely   for   its   own   account   (and   for   the   account   of   the   holder   of any

participation interest with respect to such Agent Advance).

 

(ii) The Agent   Advances shall be repayable on demand and secured by the Agent's

Liens granted to Agent under the Loan Documents,   shall constitute   Advances and

Obligations   hereunder,   and shall bear interest at the Base Rate plus 200 basis

points.

 

(e)   Settlement.   It is agreed that each Lender's funded portion of the Advances

is intended by the Lenders to equal, at all times,   such Lender's Pro Rata Share

of the   outstanding   Advances.   Such   agreement   notwithstanding,   Agent,   Swing

Lender,   and the   other   Lenders   agree   (which   agreement   shall not be for the

benefit of or   enforceable   by any   Borrower)   that in order to   facilitate   the

administration of this Agreement and the other Loan Documents,   settlement among

them as to the   Advances,   the Swing Loans,   and the Agent   Advances   shall take

place on a periodic basis in accordance with the following provisions:

 

(i) Agent shall request settlement   ("Settlement")   with the Lenders on a weekly

basis,   or on a more frequent basis if so determined by Agent,   (1) on behalf of

Swing Lender,   with respect to each outstanding Swing Loan, (2) for itself, with

respect to each Agent Advance, and (3) with respect to Collections   received, as

to each by notifying the Lenders by telecopy,   telephone,   or other similar form

of   transmission,   of   such   requested   Settlement,   no   later   than   2:00   p.m.

(California   time) on the   Business   Day   immediately   prior to the date of such

requested    Settlement   (the   date   of   such   requested    Settlement   being   the

"Settlement   Date").   Such notice of a Settlement   Date shall   include a summary

statement of the amount of outstanding Advances, Swing Loans, and Agent Advances

for the   period   since   the   prior   Settlement   Date.   Subject   to the terms and

conditions contained herein (including Section   2.3(c)(iii)):   (y) if a Lender's

balance of the Advances,   Swing Loans,   and Agent Advances exceeds such Lender's

Pro Rata   Share   of the   Advances,   Swing   Loans,   and   Agent   Advances   as of a

Settlement Date, then Agent shall, by no later than 12:00 p.m. (California time)

on the Settlement Date,   transfer in immediately   available funds to the account

of such   Lender as such   Lender   may   designate,   an amount   such that each such

Lender shall,   upon receipt of such amount,   have as of the Settlement Date, its

Pro Rata Share of the Advances,   Swing Loans,   and Agent Advances,   and (z) if a

Lender's   balance of the Advances,   Swing Loans, and Agent Advances is less than

such Lender's Pro Rata Share of the Advances, Swing Loans, and Agent Advances as

of a Settlement   Date,   such Lender   shall no later than 12:00 p.m.   (California

time) on the   Settlement   Date transfer in   immediately   available   funds to the

Agent's   Account,   an amount such that each such Lender shall,   upon transfer of

such amount, have as of the Settlement Date, its Pro Rata Share of the Advances,

Swing Loans,   and Agent   Advances.   Such   amounts made   available to Agent under

clause (z) of the   immediately   preceding   sentence shall be applied against the

amounts of the   applicable   Swing Loan or Agent   Advance and,   together with the

portion of such Swing Loan or Agent Advance representing Swing Lender's Pro Rata

Share thereof,   shall constitute Advances of such Lenders. If any such amount is

not made   available   to Agent by any Lender on the   Settlement   Date   applicable

thereto to the extent   required by the terms hereof,   Agent shall be entitled to

recover for its account   such   amount on demand from such Lender   together   with

interest thereon at the Defaulting Lender Rate.

 

(ii) In determining whether a Lender's balance of the Advances, Swing Loans, and

Agent   Advances is less than,   equal to, or greater than such   Lender's Pro Rata

Share of the Advances,   Swing Loans, and Agent Advances as of a Settlement Date,

Agent   shall,   as part of the   relevant   Settlement,   apply to such   balance the

portion of payments   actually   received   in good funds by Agent with   respect to

principal,   interest, fees payable by each Borrower and allocable to the Lenders

hereunder,   and proceeds of Collateral.   To the extent that a net amount is owed

to any such Lender after such application,   such net amount shall be distributed

by Agent to that Lender as part of such next Settlement.

 

(iii) Between Settlement Dates,   Agent, to the extent no Agent Advances or Swing

Loans are   outstanding,   may pay over to Swing Lender any   payments   received by

Agent,   that in accordance   with the terms of this Agreement would be applied to

the reduction of the Advances,   for application to Swing Lender's Pro Rata Share

of the Advances.   If, as of any Settlement Date,   Collections received since the

then immediately   preceding   Settlement Date have been applied to Swing Lender's

Pro Rata Share of the Advances other than to Swing Loans, as provided for in the

previous   sentence,   Swing   Lender   shall pay to Agent for the   accounts   of the

Lenders,   and Agent shall pay to the Lenders,   to be applied to the   outstanding

Advances of such Lenders, an amount such that each Lender shall, upon receipt of

such   amount,   have,   as of such   Settlement   Date,   its Pro   Rata   Share of the

Advances.   During the period between Settlement Dates, Swing Lender with respect

to Swing Loans,   Agent with respect to Agent Advances,   and each Lender (subject

to the effect of letter   agreements   between Agent and individual   Lenders) with

respect to the   Advances   other than Swing   Loans and Agent   Advances,   shall be

entitled   to   interest   at the   applicable   rate or   rates   payable   under   this

Agreement on the daily amount of funds employed by Swing Lender,   Agent,   or the

Lenders, as applicable.

 

(f)                Notation. Agent shall record on its books the principal amount

                  of the Advances owing to each Lender, including the Swing

                  Loans owing to Swing Lender, and Agent Advances owing to

                  Agent, and the interests therein of each Lender, from time to

                  time. In addition, each Lender is authorized, at such Lender's

                  option, to note the date and amount of each payment or

                  prepayment of principal of such Lender's Advances in its books

                  and records, including computer records.

 

(g)                Lenders' Failure to Perform. All Advances (other than Swing

                  Loans and Agent Advances) shall be made by the Lenders

                  contemporaneously and in accordance with their Pro Rata

                  Shares. It is understood that (i) no Lender shall be

                  responsible for any failure by any other Lender to perform its

                  obligation to make any Advance (or other extension of credit)

                  hereunder, nor shall any Commitment of any Lender be increased

                  or decreased as a result of any failure by any other Lender to

                  perform its obligations hereunder, and (ii) no failure by any

                  Lender to perform its obligations hereunder shall excuse any

                  other Lender from its obligations hereunder.

 

(h)                Optional Overadvances. Any contrary provision of this

                  Agreement notwithstanding, the Lenders hereby authorize Agent

                  or Swing Lender, as applicable, and Agent or Swing Lender, as

                  applicable, may, but is not obligated to, knowingly and

                  intentionally, continue to make Advances (including Swing

                  Loans) to Borrowers notwithstanding that an Overadvance exists

                  or thereby would be created, so long as (i) after giving

                  effect to such Advances (including a Swing Loan), the

                  outstanding Adjusted Revolver Usage does not exceed the

                  Aggregate Borrowing Base by more than $500,000, (ii) after

                  giving effect to such Advances (including a Swing Loan), the

                  outstanding Revolver Usage (except for and excluding amounts

                  charged to the Loan Accounts for interest, fees, or Lender

                  Group Expenses) does not exceed the Maximum Revolver Amount,

                  and (iii) at the time of the making of any such Advance

                  (including any Swing Loan), Agent does not believe, in good

                  faith, that the Overadvance created by such Advance will be

                   outstanding for more than 90 days. The foregoing provisions

                  are for the exclusive benefit of Agent, Swing Lender, and the

                  Lenders and are not intended to benefit Borrowers in any way.

                  The Advances and Swing Loans, as applicable, that are made

                  pursuant to this Section 2.3(i) shall be subject to the same

                  terms and conditions as any other Advance or Swing Loan, as

                  applicable, except that they shall not be eligible for the

                  LIBOR Option and the rate of interest applicable thereto shall

                  be the Base Rate plus 200 basis points without regard to the

                  presence or absence of a Default or Event of Default.

 

(i) In the event Agent obtains actual   knowledge that the Revolver Usage exceeds

the amounts permitted by the preceding   paragraph,   regardless of the amount of,

or reason for, such excess,   Agent shall notify   Lenders as soon as   practicable

(and prior to making any (or any additional)   intentional   Overadvances   (except

for and excluding   amounts   charged to the Loan Accounts for interest,   fees, or

Lender Group Expenses) unless Agent determines that prior notice would result in

imminent harm to the Collateral or its value),   and the Lenders thereupon shall,

together with Agent,   jointly   determine the terms of arrangements that shall be

implemented   with Borrower   intended to reduce,   within a reasonable   time,   the

outstanding   principal amount of the Advances to Borrower to an amount permitted

by the preceding paragraph.   In the event Agent or any Lender disagrees over the

terms of reduction or   repayment of any   Overadvance,   the terms of reduction or

repayment   thereof shall be implemented   according to the   determination   of the

Required Lenders.

 

(ii) Each Lender   shall be obligated to settle with Agent as provided in Section

2.3(f)   for the   amount of such   Lender's   Pro Rata   Share of any   unintentional

Overadvances by Agent reported to such Lender, any intentional Overadvances made

as permitted under this Section 2.3(i), and any Overadvances   resulting from the

charging to the Loan Accounts of interest, fees, or Lender Group Expenses.

 

 

2.5       Payments.

 

 

(a)                Payments by Borrowers.

 

(i) Except as otherwise   expressly   provided   herein,   all payments by Borrowers

shall be made to Agent's   Account for the account of the Lender   Group and shall

be made in immediately   available   funds,   no later than 11:00 a.m.   (California

time) on the date   specified   herein.   Any payment   received by Agent later than

11:00   a.m.   (California   time)   shall be deemed to have   been   received   on the

following   Business   Day and any   applicable   interest or fee shall   continue to

accrue until such following Business Day.

 

(ii) Unless Agent receives notice from the applicable Borrower prior to the date

on which any payment is due to the Lenders that such Borrower will not make such

payment in full as and when   required,   Agent may assume that such   Borrower has

made (or will   make) such   payment in full to Agent on such date in   immediately

available   funds and Agent may (but shall not be so required),   in reliance upon

such   assumption,   distribute to each Lender on such due date an amount equal to

the amount then due such Lender.   If and to the extent a Borrower   does not make

such payment in full to Agent on the date when due, each Lender   severally shall

repay to Agent on demand such amount   distributed to such Lender,   together with

interest   thereon at the Defaulting   Lender Rate for each day from the date such

amount is distributed to such Lender until the date repaid.

 

 

(b)                Apportionment and Application of Payments.

 

(i) Except as otherwise   provided with respect to Defaulting   Lenders and except

as otherwise provided in the Loan Documents (including letter agreements between

Agent and individual   Lenders),   aggregate principal and interest payments shall

be   apportioned   ratably among the Lenders   (according   to the unpaid   principal

balance of the   Obligations   to which such payments   relate held by each Lender)

and   payments of fees and   expenses   (other   than fees or expenses   that are for

Agent's separate account,   after giving effect to any letter agreements   between

Agent and individual   Lenders)   shall be   apportioned   ratably among the Lenders

having a Pro   Rata   Share of the type of   Commitment   or   Obligation   to which a

particular   fee relates.   All   payments   shall be remitted to Agent and all such

payments   (other than payments   received   while no Event of Default has occurred

and is   continuing   and which   relate to the payment of principal or interest of

specific   Obligations or which relate to the payment of specific fees),   and all

proceeds of Accounts or other Collateral   received by Agent, shall be applied as

follows:

 

                           (A)       first, to pay any Lender Group Expenses

then due to Agent under the Loan Documents, until paid in full,

 

                           (B) second, to pay any Lender Group Expenses then due

         to the Lenders under the Loan Documents, on a ratable basis, until paid

         in full,

 

                           (C) third, to pay any fees then due to Agent (for its

         separate accounts, after giving effect to any letter agreements between

         Agent and individual Lenders) under the Loan Documents until paid in

         full,

 

                           (D) fourth, to pay any fees then due to any or all of

         the Lenders (after giving effect to any letter agreements between Agent

         and individual Lenders) under the Loan Documents, on a ratable basis,

         until paid in full,

 

                           (E) fifth, to pay interest due in respect of all

         Agent Advances, until paid in full,

 

                           (F) sixth, ratably to pay interest due in respect of

         all other Advances (other than Agent Advances) and the Swing Loans

         until paid in full,

 

                           (G) seventh, to pay the principal of all Agent

         Advances until paid in full,

 

                           (H) eighth, to pay the principal of all Swing Loans

         until paid in full,

 

                           (I) ninth, so long as no Event of Default has

         occurred and is continuing, and at Agent's election (which election

         Agent agrees will not be made if an Overadvance would be created

         thereby), to pay amounts then due and owing by Borrowers or their

         Subsidiaries in respect of Bank Products, until paid in full,

 

                           (J) tenth, so long as no Event of Default has

         occurred and is continuing, to pay the principal of all Advances until

         paid in full,

 

                           (K) eleventh, if an Event of Default has occurred and

         is continuing, to Agent, to be held by Agent, for the benefit of Wells

         Fargo or its Affiliates, as applicable, as cash collateral in an amount

         up to the amount of the Bank Products Reserve established prior to the

         occurrence of, and not in contemplation of, the subject Event of

         Default until Borrowers' and their Subsidiaries' obligations in respect

         of the then extant Bank Products have been paid in full or the cash

         collateral amount has been exhausted,

 

                           (L) twelfth, to pay the principal of all other

         Advances and the Term Loan until paid in full,

 

                           (M) thirteenth, if an Event of Default has occurred

         and is continuing, to Agent, to be held by Agent, for the ratable

         benefit of Issuing Lender and the Lenders, as cash collateral in an

         amount up to 105% of the then extant Letter of Credit Usage until paid

         in full,

 

                            (N)       fourteenth, to pay any other Obligations

(including Bank Product Obligations) until paid in full, and

 

                           (O) fifteenth, to Borrowers (to be wired to the

         applicable Borrower's Designated Account) or such other Person entitled

         thereto under applicable law.

 

                           Notwithstanding the foregoing to the contrary

         provided that no Default or Event of Default then exists, any payment

         which the Borrowers designate as being for principal and/or interest on

         the Term Loan shall be applied against the Term Loan Obligations.

 

(ii)               Agent promptly shall distribute to each Lender, pursuant to

                  the applicable wire instructions received from each Lender in

                  writing, such funds as it may be entitled to receive, subject

                  to a Settlement delay as provided in Section 2.3(h).

 

(iii)              In each instance, so long as no Event of Default has occurred

                   and is continuing, Section 2.4(b) shall not be deemed to apply

                  to any payment by Borrowers specified by Borrowers to be for

                  the payment of specific Obligations then due and payable (or

                  prepayable) under any provision of this Agreement.

 

(iv)               For purposes of the foregoing, "paid in full" means payment of

                  all amounts owing under the Loan Documents according to the

                  terms thereof, including loan fees, service fees, professional

                  fees, interest (and specifically including interest accrued

                  after the commencement of any Insolvency Proceeding), default

                  interest, interest on interest, and expense reimbursements,

                  whether or not the same would be or is allowed or disallowed

                  in whole or in part in any Insolvency Proceeding.

 

(v)                In the event of a direct conflict between the priority

                  provisions of this Section 2.4 and other provisions contained

                  in any other Loan Document, it is the intention of the parties

                  hereto that such priority provisions in such documents shall

                  be read together and construed, to the fullest extent

                  possible, to be in concert with each other. In the event of

                  any actual, irreconcilable conflict that cannot be resolved as

                  aforesaid, the terms and provisions of this Section 2.4 shall

                  control and govern.

 

2.6 Overadvances. If, at any time or for any reason, (a) the amount of Revolver

Obligations (other than Bank Product Obligations) owed by Borrowers to the

Lender Group pursuant to Sections 2.1 and 2.12 is greater than either the Dollar

or percentage limitations set forth in Sections 2.1 or 2.12, or (b) the

Obligations (other than Bank Product Obligations and the Term Loan Obligations)

exceed the Aggregate Borrowing Base (in each case, an "Overadvance"), Borrowers

immediately shall pay to Agent, in cash, the amount of such excess, which amount

shall be used by Agent to reduce the Obligations in accordance with the

priorities set forth in Section 2.4(b). In addition, Borrowers, jointly and

severally, hereby promises to pay the Obligations (including principal,

interest, fees, costs, and expenses) in Dollars in full to Agent, on behalf of

the Lender Group, as and when due and payable under the terms of this Agreement

and the other Loan Documents.

 

2.7 Interest Rates and Letter of Credit Fee: Rates, Payments, and Calculations.

 

 

(a)                         Interest Rates. Except as provided in clause (c)

                           below, all Obligations (except for undrawn Letters of

                           Credit, the Term Loan Obligations and Bank Product

                           Obligations) that have been charged to the Loan

                           Accounts pursuant to the terms hereof shall bear

                           interest on the Daily Balance thereof as follows (i)

                           if the relevant Obligation is a Standard Advance that

                           is a LIBOR Rate Loan, at a per annum rate equal to

                           the LIBOR Rate plus the LIBOR Rate Margin, and (ii)

                           otherwise, at a per annum rate equal to the Base Rate

                           plus the Base Rate Margin.

 

(b)                         Letter of Credit Fees. Borrowers shall pay Agent (for

                           the ratable benefit of the Lenders, subject to any

                           letter agreement between Agent and individual

                           Lenders), (i) a Letter of Credit fee (in addition to

                           the charges, commissions, fees, and costs set forth

                           in Section 2.12(e)), which shall accrue at a rate

                           equal to 1.00% per annum times the Daily Balance of

                           the undrawn amount of all outstanding standby

                            Qualified Import Letters of Credit, (ii) a Letter of

                           Credit fee (in addition to the charges, commissions,

                           fees, and costs set forth in Section 2.12(e)), which

                           shall accrue at a rate equal to 0.50% per annum times

                           the Daily Balance of the undrawn amount of all

                           outstanding documentary Qualified Import Letters of

                           Credit, (iii) a Letter of Credit fee (in addition to

                           the charges, commissions, fees, and costs set for