LOAN AND SECURITY AGREEMENT

[EXECUTION COPY]

EXHIBIT 10.13

LOAN AND SECURITY AGREEMENT

by and among

HANCOCK FABRICS, INC.
HF MERCHANDISING, INC.
HANCOCK FABRICS OF MI, INC.
HANCOCKFABRICS.COM, INC.
HANCOCK FABRICS, LLC
as Borrowers
and

HF ENTERPRISES, INC.
HF RESOURCES, INC.
as Guarantors

THE LENDERS AND ISSUING BANK FROM TIME TO TIME PARTY HERETO

GENERAL ELECTRIC CAPITAL CORPORATION ,
as Agent, Issuing Bank and Syndication Agent

GE CAPITAL MARKETS, INC.
as Sole Lead Arranger, Manager and Bookrunner

Dated: August 1, 2008

TABLE OF CONTENTS

 i 

TABLE OF CONTENTS
(continued)

 ii 

TABLE OF CONTENTS
(continued)

 iii 

TABLE OF CONTENTS
(continued)

 iv 

TABLE OF CONTENTS
(continued)

 v 

INDEX
TO
EXHIBITS, SCHEDULES AND ANNEXES

 vi 

 vii 

LOAN AND SECURITY AGREEMENT

     This Loan and Security Agreement dated August 1, 2008 is entered into by and among Hancock Fabrics, Inc, a Delaware corporation (“ Parent ”), HF Merchandising, Inc., a Delaware corporation (“ Merchandising ”), Hancock Fabrics of MI, Inc., a Delaware corporation (“ Fabrics MI ”), hancockfabrics.com, Inc., a Delaware corporation (“ Fabrics.com ”), Hancock Fabrics, LLC, a Delaware limited liability company (“ Fabrics LLC ”, and together with Parent, Merchandising, Fabrics MI and Fabrics.com, each individually a “ Borrower ” and collectively, “ Borrowers ” as hereinafter further defined), HF Enterprises, Inc., a Delaware corporation (“ Enterprises ”), HF Resources, Inc., a Delaware corporation (“ Resources ”, and together with Enterprises, each individually a “ Guarantor ” and collectively, “ Guarantors ” as hereinafter further defined), the parties hereto from time to time as lenders, whether by execution of this Agreement or an Assignment and Acceptance (each individually, a “ Lender ” and collectively, “ Lenders ” as hereinafter further defined) and General Electric Capital Corporation, a Delaware corporation, in its capacity as agent for Lenders (in such capacity, “ Agent ” as hereinafter further defined).

W I T N E S S E T H:

      WHEREAS , on March 21, 2007 (the “ Petition Date ”), Parent, Fabrics MI, Resources, Fabrics.com, Merchandising, Enterprises and Fabrics LLC each filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “ Bankruptcy Court ”), and on March 21, 2007 such cases were approved for joint-administration by the Bankruptcy Court, with Case No. 07-10353 (the “ Reorganization Cases ”);

      WHEREAS , on July 22, 2008, the Bankruptcy Court entered a Final Order (as hereinafter defined) approving the plan of reorganization of Parent, Fabrics MI, Resources, Fabrics.com, Merchandising, Enterprises and Fabrics LLC;

      WHEREAS , Borrowers and Guarantors have requested that Agent and Lenders enter into financing arrangements with Borrowers pursuant to which Lenders may make loans and provide other financial accommodations to Borrowers; and

      WHEREAS , each Lender is willing to agree (severally and not jointly) to make such loans and provide such financial accommodations to Borrowers on a pro rata basis according to its Commitment (as defined below) on the terms and conditions set forth herein and Agent is willing to act as agent for Lenders on the terms and conditions set forth herein and the other Financing Agreements;

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

SECTION 1   DEFINITIONS

     For purposes of this Agreement, the following terms shall have the respective meanings given to them below:

     “Accounts” shall mean, as to each Borrower and Guarantor, all present and future rights of such Borrower and Guarantor to payment of a monetary obligation, whether or not earned by performance, which is not evidenced by chattel paper or an instrument, (a) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (b) for services rendered or to be rendered, (c) for a secondary obligation incurred or to be incurred, or (d) arising out of the use of a credit or charge card or information contained on or for use with the card.

     “Adjusted Appraised Fair Market Value” shall mean, as of the date of determination, the value assigned to the Eligible Real Property by CRE Business Property (GE) or any Affiliate of GECC approved by the Agent from time to time, which shall be based upon an appraisal conducted in accordance with Section 7.4. As of the Closing Date the Adjusted Appraised Fair Market Value of the Baldwyn Real Property is $22,000,000.

     “Adjusted Eurodollar Rate” shall mean, with respect to each Interest Period for any Eurodollar Rate Loan comprising part of the same borrowing (including conversions, extensions and renewals), the rate per annum determined by dividing (a) the London Interbank Offered Rate for such Interest Period by (b) a number equal to 1.0 minus the aggregate (but without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on the day that is two (2) Business Days prior to the beginning of such Interest Period (including basic, supplemental, marginal and emergency reserves under any regulations of the Federal Reserve Board or other Governmental Authority having jurisdiction with respect thereto, as now and from time to time in effect) for Eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Federal Reserve Board) that are required to be maintained by a member bank of the Federal Reserve System.

     “Adjusted Excess Availability” shall mean, as of the date of determination, Excess Availability less $7,500,000.

     “Administrative Borrower” shall mean Hancock Fabrics, Inc., a Delaware corporation in its capacity as Administrative Borrower on behalf of itself and the other Borrowers pursuant to Section 6.8 hereof and it successors and assigns in such capacity.

     “Affiliate” shall mean, with respect to a specified Person, any other Person which directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with such Person, and without limiting the generality of the foregoing, includes (a) any Person which beneficially owns or holds five (5%) percent or more of any class of Voting Stock of such Person or other equity interests in such Person, (b) any Person of which such Person beneficially owns or holds five (5%) percent or more of any class of Voting Stock or in which such Person beneficially owns or holds five (5%) percent or more of the equity interests and (c) any director or executive officer of such Person. For the purposes of this definition, the term “control” (including with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Stock, by agreement or otherwise.

     “Agent” shall mean General Electric Capital Corporation, in its capacity as agent on behalf of Lenders pursuant to the terms hereof and any replacement or successor agent hereunder.

     “Agent Payment Account” shall mean that certain account of Agent, account number 502-795-13 in the name of Agent at Deutsche Bank Trust Company Americas in New York, New York (ABA No. 021 001 033) or such other account as Agent may from time to time designate to Administrative Borrower as Agent Payment Account for purposes of this Agreement and the other Financing Agreements.

     “Agreement” shall mean this Loan and Security Agreement by and among Borrowers, Guarantors, GE Capital, as Agent and Lender, and the other Lenders from time to time party hereto, as the same may be amended, supplemented, restated or otherwise modified from time to time.

     “Applicable Margin” shall mean, at any time, as to the interest rate for Prime Rate Loans and the interest rate for Eurodollar Rate Loans, the applicable percentage (on a per annum basis) set forth below if the Quarterly Average Excess Availability for the immediately preceding calendar quarter is at or within the amounts indicated for such percentage as of the last day of the immediately preceding calendar quarter:

provided , that (i) the Applicable Eurodollar Rate Margin from the Closing Date through December 31, 2008 shall be 2.25%, and (ii) the Applicable Prime Rate Margin from the Closing Date through December 31, 2008 shall be 0.50%. Adjustments in the Applicable Margins commencing January 1, 2009 shall be implemented effective as of each January 1, April 1, July 1, October 1, commencing at least five (5) days after the date of delivery to Agent of the Applicable Margin Certificate. Concurrently with the delivery of the Applicable Margin Certificate herein referenced, Administrative Borrower shall deliver to Agent a certificate, signed by its chief financial officer, setting forth in reasonable detail the basis for the continuance of, or any change in, the Applicable Margins. Failure to deliver the Applicable Margin Certificate

within five (5) days of the date such certificate is required to be delivered pursuant to Section 7.1(a)(iii) shall, in addition to any other remedy provided for in this Agreement, result in an increase in the Applicable Margins to the highest level set forth in the foregoing grid, until the delivery of the Applicable Margin Certificate demonstrating that such an increase is not required. If an Event of Default has occurred and is continuing at the time any reduction in the Applicable Margins is to be implemented, that reduction shall be deferred until the date on which such Event of Default is waived or cured.

     “Applicable Margin Certificate” shall mean the a certificate substantially in the form of Exhibit H hereto, as such form may from time to time be modified by Agent, which is duly completed (including all schedules thereto) and executed by the chief financial officer or other appropriate financial officer of Borrowers acceptable to Agent and delivered to Agent.

     “Assignment and Acceptance” shall mean an Assignment and Acceptance substantially in the form of Exhibit A attached hereto (with blanks appropriately completed) delivered to Agent in connection with an assignment of a Lender’s interest hereunder in accordance with the provisions of Section 13.8 hereof.

     “Baldwyn Real Property” shall mean the Real Property of Parent located at One Fashion Way, Baldwyn, Mississippi.

     “Baldwyn Real Property Sale-Leaseback” shall mean the sale and leaseback of the Baldwyn Real Property, the disposition of which shall be permitted by Section 9.7(b)(vi) , provided that:

     (a) the Borrowers shall provide the Agent with at least ten (10) days’ prior written notice (or such shorter period as may be agreed upon in writing by the Agent) of the closing date of the proposed sale-leaseback transaction;

     (b) the purchase price of the Baldwyn Real Property pursuant to such sale-leaseback transaction must be no less than eighty percent (80%) of the then current Adjusted Apprised Fair Market Value of the Baldwyn Real Property;

     (c) the consideration paid to the Borrowers for the Baldwyn Real Property pursuant to such sale-leaseback transaction shall be paid one hundred percent (100%) in cash in immediately available funds, the net proceeds of which shall be applied to the Obligations in accordance with the terms hereof;

     (d) the Borrowers shall have delivered to the Agent no less than five days prior to the disposition of the Baldywn Real Property pursuant to such sale-leaseback transaction, true and complete copies of the most current drafts of any documents, instruments or other similar agreements to be entered into or completed by the applicable Borrower(s) in connection with such disposition, such documentation to be in form and substance reasonably acceptable to the Agent; and

     (e) immediately prior to the consummation of such sale-leaseback transaction the Borrowers shall deliver to the Agent (i) a revised Borrowing Base Certificate, determined as of

last Business Day of the weekly or monthly period then most recently completed on a pro forma basis, as applicable pursuant to Section 7.1(a)(i) , eliminating therefrom the line item relating to Real Property Availability and revising the amount of the then outstanding Loans to reflect the prepayment of the Loans with net proceeds of such sale-leaseback transaction in accordance with the terms hereof; and (ii) a Collateral Access Agreement.

     “Bank Product Provider” shall mean any Lender, Affiliate of any Lender or other financial institution (in each case to the extent approved by Agent in writing) that provides any Bank Products to Borrowers or Guarantors.

     “Bank Products” shall mean any one or more of the following types or services or facilities provided to a Borrower by Agent, any Lender or any Affiliate of any Lender or any other financial institution acceptable to Agent: (a) credit cards or stored value cards or (b) cash management or related services, including (i) the automated clearinghouse transfer of funds for the account of a Borrower pursuant to agreement or overdraft for any accounts of Borrowers maintained at Agent, any Lender or any Affiliate of any Lender (in each case to the extent approved by Agent) that are subject to the control of Agent pursuant to any Deposit Account Control Agreement to which Agent, such Affiliate of Agent, Lender or Affiliate of Lender is a party, as applicable, and (ii) controlled disbursement services and (iii) Hedge Agreements if and to the extent permitted hereunder. Any of the foregoing shall only be included in the definition of the term “Bank Products” to the extent that the Lender, its Affiliate or the other financial institution has been approved by Agent in writing.

     “Bankruptcy Claims and Liens” shall mean those claims and Liens existing as of the Closing Date and identified on Schedule 1.6 hereof, which Schedule shall identify the claimant and the amount of the claim of each such claimant.

     “Bankruptcy Code” shall mean Title 11 of the United States Code, as amended from time to time and the Federal Rules of Bankruptcy Procedure, as amended from time to time.

     “Bankruptcy Court” shall have the meaning set forth in the preamble.

     “Blocked Account” shall mean a deposit account established and maintained by a Borrower or a Guarantor, at its expense, with such banks as are reasonably acceptable to Agent and subject at all times to a Deposit Account Control Agreement. The Concentration Account shall constitute a Blocked Account.

     “Borrowers” shall mean, collectively, the following (together with their respective successors and assigns): (a) Hancock Fabrics, Inc., a Delaware corporation; (b) HF Merchandising, Inc, a Delaware corporation; (c) Hancock Fabrics of MI, Inc., a Delaware corporation; (d) hancockfabrics.com, Inc., a Delaware corporation; (e) Hancock Fabrics, LLC, a Delaware limited liability company, and (f) any other Person that at any time after the date hereof becomes a Borrower; each sometimes being referred to herein individually as a “Borrower”.

     “Borrowing Base” shall mean, at any time, the amount equal to:

          (a) the sum of:

               (i) the amount equal to eighty-five (85%) percent of Eligible Credit Card Receivables, plus

               (ii) the amount equal to ninety (90%) percent of the Net Recovery Percentage multiplied by the Value of Eligible Inventory, plus

               (iii) the amount equal to ninety (90%) percent of the Net Recovery Percentage multiplied by the Value of Eligible In-Transit Inventory, plus

               (iv) the amount equal to ninety (90%) percent of the Net Recovery Percentage multiplied by the Value of Eligible LC Inventory, plus

               (v) the amount equal to sixty (60%) percent of Real Property Availability, minus

          (b) Reserves.

     “Borrowing Base Certificate” shall mean a certificate substantially in the form of Exhibit C hereto, as such form may from time to time be modified by Agent, which is duly completed (including all schedules thereto) and executed by the chief financial officer or other appropriate financial officer of Borrowers acceptable to Agent and delivered to Agent.

     “Business Day” shall mean any day other than a Saturday, Sunday, or other day on which commercial banks are authorized or required to close under the laws of the State of New York, and a day on which Agent is open for the transaction of business, except that if a determination of a Business Day shall relate to any Eurodollar Rate Loans, the term Business Day shall also exclude any day on which banks are closed for dealings in dollar deposits in the London interbank market or other applicable Eurodollar Rate market.

     “Capital Leases” shall mean, as applied to any Person, any lease of (or any agreement conveying the right to use) any property (whether real, personal or mixed) by such Person as lessee which in accordance with GAAP, is required to be reflected as a liability on the balance sheet of such Person.

     “Capital Stock” shall mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person’s capital stock or partnership, limited liability company or other equity interests at any time outstanding, and any and all rights, warrants or options exchangeable for or convertible into such capital stock or other interests (but excluding any debt security that is exchangeable for or convertible into such capital stock).

     “Cash Collateral Account” has the meaning set forth in Section 2.2(j) .

     “Cash Equivalents” shall mean, at any time, (a) any evidence of Indebtedness with a maturity date of ninety (90) days or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof; provided , that , the full faith and credit of the United States of America is pledged in support thereof; (b) certificates of deposit or bankers’ acceptances with a maturity of ninety (90) days or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus and undivided profits of not less than $1,000,000,000; (c) commercial paper (including variable rate demand notes) with a maturity of ninety (90) days or less issued by a corporation (except an Affiliate of any Borrower or Guarantor) organized under the laws of any State of the United States of America or the District of Columbia and rated at least A-1 by Standard & Poor’s Ratings Service, a division of The McGraw-Hill Companies, Inc. or at least P-1 by Moody’s Investors Service, Inc.; (d) repurchase obligations with a term of not more than thirty (30) days for underlying securities of the types described in clause (a) above entered into with any financial institution having combined capital and surplus and undivided profits of not less than $1,000,000,000; (e) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States of America or issued by any governmental agency thereof and backed by the full faith and credit of the United States of America, in each case maturing within ninety (90) days or less from the date of acquisition; provided , that , the terms of such agreements comply with the guidelines set forth in the Federal Financial Agreements of Depository Institutions with Securities Dealers and Others, as adopted by the Comptroller of the Currency on October 31, 1985; and (f) investments in money market funds and mutual funds which invest substantially all of their assets in securities of the types described in clauses (a) through (e) above.

     “Change of Control” shall mean (a) the transfer (in one transaction or a series of transactions) of all or substantially all of the assets of any Borrower or Guarantor to any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act), other than as permitted in Section 9.7 hereof; (b) the liquidation or dissolution of any Borrower or Guarantor or the adoption of a plan by the stockholders of any Borrower or Guarantor relating to the dissolution or liquidation of such Borrower or Guarantor, other than as permitted in Section 9.7 hereof; (c) the acquisition by any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act), other than Sopris Capital Partners, LP, Berg & Berg Enterprises, LLC and Trellus Management and their respective Affiliates, of more than thirty (30%) percent of beneficial ownership, directly or indirectly, of the voting power of the total outstanding Voting Stock of Parent or the Board of Directors of Parent; (d) during any period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board of Directors (or similar governing body) of any Borrower or Guarantor (together with any new directors whose nomination for election by the stockholders of such Borrower or Guarantor was approved by a vote of at least a majority of the directors (or similar persons) then still in office who were either directors (or similar persons) at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors (or similar governing body) of any Borrower or Guarantor then still in office; (e) the failure of Parent to own and control, directly or indirectly, one hundred (100%) percent of the voting power of the total outstanding Voting Stock of any other Borrower or Guarantor; provided , however , that any action taken in accordance with the terms of the Plan of Reorganization, the issuance of any Specified Warrant or the conversion of the Specified

Warrants into the Specified Common Stock pursuant to the terms of the Specified Warrant shall not be considered a “Change of Control” hereunder; or (f) any “Change of Control” (howsoever defined under the Indenture) occurs.

     “Closing Date” shall mean August 1, 2008.

     “Closing Date Mortgaged Properties” means, collectively, the Real Property owned by the Loan Parties and located at: (i) the Baldwyn Real Property, (ii) 106 Airpark Road (Guin Building), Tupelo, MS, (iii) 1240 Ellis Avenue, Jackson, MS, (iv) 215 East Kings Highway Shreveport, LA and (v) 3314 South Linden Road, Flint, MI.

     “Code” shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto.

     “Collateral” shall mean, collectively, all assets of each Borrower and each Guarantor, in each case, as referred to in Section 5.1 hereof, any Pledge Agreement as “Pledged Collateral” or as “Collateral”, as the case may be, and all other property that is or is intended under the terms of the Security Documents to be subject to liens in favor of the Agent for the benefit of the Lenders and the other Secured Parties.

     “Collateral Access Agreement” shall mean an agreement in writing, in form and substance reasonably satisfactory to Agent, from any lessor of premises to any Borrower or Guarantor (other than lessors of retail store locations, except as otherwise agreed to by Administrative Borrower and Agent), or any other person to whom any Collateral is consigned or who has custody, control or possession of any such Collateral or is otherwise the owner or operator of any premises on which any of such Collateral is located, in favor of Agent with respect to the Collateral at such premises or otherwise in the custody, control or possession of such lessor, consignee or other person.

     “Commercial Letter of Credit” shall mean any Letter of Credit issued for the purpose of providing the primary manner of payment for the purchase price of goods or services by a Borrower in the ordinary course of the business of such Borrower.

     “Commitment” shall mean, at any time, as to each Lender, the principal amount set forth opposite such Lender’s name on Schedule 1.1 hereto or on Schedule 1 to the Assignment and Acceptance Agreement pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 13.8 hereof, as the same may be adjusted from time to time in accordance with the terms hereof; sometimes being collectively referred to herein as “Commitments”.

     “Commitment Termination Date” shall mean the earliest of (a) the Maturity Date, (b) the date of termination of Lenders’ obligations to make Loans and/or incur Letter of Credit Obligations or permit existing Loans to remain outstanding pursuant to Section 10.2(b) , and (c) the date of indefeasible prepayment in full in cash by Borrowers of the Loans and the cancellation and return (or stand-by guarantee) of all Letters of Credit or the cash

collateralization of all Letter of Credit Obligations pursuant to Section 2.2 , and the permanent reduction of all Obligations to zero dollars ($0).

     “Concentration Account” means that certain deposit account maintained with BancorpSouth Bank, with account number 01-210513, in the name of Parent, or any replacement account therefor expressly agreed to in advance in writing by the Agent, which replacement account shall be a Blocked Account.

     “Confirmation Order” shall have the meaning set forth in Section 4.1(w) .

     “Consolidated Net Income” shall mean, with respect to any Person for any period, the aggregate of the net income (loss) of such Person and its Subsidiaries, on a consolidated basis, for such period (and as to Borrowers and Guarantors, excluding to the extent included therein (i) any extraordinary, one-time or non-recurring gains, (ii) extraordinary, one-time or non-recurring non-cash losses or charges, and (iii) operations that have been discontinued on or before the date hereof) after deducting all charges which should be deducted before arriving at the net income (loss) for such period (but without regard to operations that have been discontinued on or before the date hereof) and after deducting the Provision for Taxes for such period, all as determined in accordance with GAAP; provided , that , (a) the net income of any Person that is not a wholly-owned Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid or payable to such Person or a wholly-owned Subsidiary of such Person; (b) except to the extent included pursuant to the foregoing clause, the net income of any Person accrued prior to the date it becomes a wholly-owned Subsidiary of such Person or is merged into or consolidated with such Person or any of its wholly-owned Subsidiaries or that Person’s assets are acquired by such Person or by any of its wholly-owned Subsidiaries shall be excluded; (c) the effect of any change in accounting principles adopted by such Person or its Subsidiaries after the date hereof shall be excluded; (d) net income shall exclude interest accruing, but not paid, on indebtedness owing to a Subsidiary or parent corporation of such Person; and (e) the net income (if positive) of any wholly-owned Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such wholly-owned Subsidiary to such Person or to any other wholly-owned Subsidiary of such Person is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such wholly-owned Subsidiary shall be excluded. For the purposes of this definition, net income excludes any gain and non-cash loss together with any related Provision for Taxes for such gain and non-cash loss realized upon the sale or other disposition of any assets that are not sold in the ordinary course of business (including, without limitation, dispositions pursuant to sale and leaseback transactions and for this purpose sales or other dispositions of retail store locations shall not be deemed to be in the ordinary course of the business of Borrowers and Guarantors) or of any Capital Stock of such Person or a Subsidiary of such Person and any net income or non-cash loss realized as a result of changes in accounting principles or the application thereof to such Person.

     “Credit Card Acknowledgments” shall mean, collectively, the agreements by Credit Card Issuers or Credit Card Processors who are parties to Credit Card Agreements in favor of Agent acknowledging Agent’s first priority security interest, for and on behalf of Lenders, in the

monies due and to become due to a Borrower or Guarantor (including, without limitation, credits and reserves) under the Credit Card Agreements, and agreeing to transfer all such amounts to the Blocked Accounts, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, sometimes being referred to herein individually as a “Credit Card Acknowledgment”.

     “Credit Card Agreements” shall mean all agreements now or hereafter entered into by any Borrower or any Guarantor for the benefit of any Borrower, in each case with any Credit Card Issuer or any Credit Card Processor, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, including, but not limited to, the agreements set forth on Schedule 8.16 hereto and the Elavon Processor Agreement.

     “Credit Card Issuer” shall mean any person (other than a Borrower or a Guarantor) who issues or whose members issue credit cards, including, without limitation, MasterCard or VISA bank credit or debit cards or other bank credit or debit cards issued through MasterCard International, Inc., Visa, U.S.A., Inc. or Visa International and American Express, Discover, Diners Club, Carte Blanche and other non-bank credit or debit cards, including, without limitation, credit or debit cards issued by or through American Express Travel Related Services Company, Inc., and Discover Financial Services, Inc.

     “Credit Card Processor” shall mean any servicing or processing agent or any factor or financial intermediary who facilitates, services, processes or manages the credit authorization, billing transfer and/or payment procedures with respect to any Borrower’s or Guarantor’s sales transactions involving credit card or debit card purchases by customers using credit cards or debit cards issued by any Credit Card Issuer.

     “Credit Card Receivables” shall mean, collectively, (a) all present and future rights of any Borrower or Guarantor to payment from any Credit Card Issuer, Credit Card Processor or other third party arising from sales of goods or rendition of services to customers who have purchased such goods or services using a credit or debit card and (b) all present and future rights of any Borrower or Guarantor to payment from any Credit Card Issuer, Credit Card Processor or other third party in connection with the sale or transfer of Accounts arising pursuant to the sale of goods or rendition of services to customers who have purchased such goods or services using a credit card or a debit card, including, but not limited to, all amounts at any time due or to become due from any Credit Card Issuer or Credit Card Processor under the Credit Card Agreements or otherwise.

     “Credit Facility” shall mean the Loans and Letters of Credit provided to or for the benefit of any Borrower pursuant to Sections 2.1 and 2.2 hereof.

     “Customs Broker” shall mean the persons listed on Schedule 1.2 hereto or such other person selected by any Borrower after written notice by such Borrower to Agent who are reasonably acceptable to Agent to perform port of entry services to process Inventory imported by such Borrower from outside the United States of America and to supply facilities, labor and materials to such Borrower in connection therewith.

     “Default” shall mean an act, condition or event which with notice or passage of time or both would constitute an Event of Default.

     “Defaulting Lender” shall have the meaning set forth in Section 6.11(d) hereof.

     “Deposit Account Control Agreement” shall mean an agreement in writing, in form and substance satisfactory to Agent, by and among Agent, the Borrower or Guarantor with a deposit account at any bank and the bank at which such deposit account is at any time maintained which provides that such bank will comply with instructions originated by Agent directing disposition of the funds in the deposit account without further consent by such Borrower or Guarantor and has such other terms and conditions as Agent may require.

     “Disclosure Letter” shall mean that Disclosure Letter delivered on the Closing Date pursuant to Section 4.1(f) , which letter shall be in form and substance reasonably satisfactory to the Agent.

     “Discover Deposit Account” means that certain deposit account maintained with BancorpSouth Bank, with account number 41972837 in the name of Parent.

     “EBITDA” shall mean, as to any Person, with respect to any period, an amount equal to: (a) the Consolidated Net Income of such Person and its Subsidiaries for such period, plus (b) depreciation, amortization, LIFO adjustments consisting of non-cash charges, and other non-cash charges, including imputed interest, deferred compensation and in the case of Borrowers and Guarantors, non-cash costs associated with the closing of retail store locations, in each case for such period (to the extent deducted in the computation of Consolidated Net Income of such Person), all in accordance with GAAP, plus (c) Interest Expense for such period (to the extent deducted in the computation of Consolidated Net Income of such Person), plus (d) the Provision for Taxes for such period (to the extent deducted in the computation of Consolidated Net Income of such Person).

     “Eligible Credit Card Receivables” shall mean, as of the date of determination, as to each Borrower, Credit Card Receivables of such Borrower which are and continue to be acceptable to Agent based on the criteria set forth below. Credit Card Receivables shall be Eligible Credit Card Receivables if:

          (a) such Credit Card Receivables arise from the actual and bona fide sale and delivery of goods or rendition of services by such Borrower in the ordinary course of the business of such Borrower which transactions are completed in accordance with the terms and provisions contained in any agreements binding on such Borrower or the other party or parties related thereto;

          (b) such Credit Card Receivables are not past due (beyond any stated applicable grace period, if any, therefor) pursuant to the terms set forth in the Credit Card Agreements with the Credit Card Issuer or Credit Card Processor of the credit card or debit card used in the purchase which give rise to such Credit Card Receivables;

          (c) such Credit Card Receivables are not unpaid more than five (5) Business Days after the date of the sale of Inventory giving rise to such Credit Card Receivables;

          (d) all material procedures required by the Credit Card Issuer or the Credit Card Processor of the credit card or debit card used in the purchase which gave rise to such Credit Card Receivables shall have been followed by such Borrower and all documents required for the authorization and approval by such Credit Card Issuer or Credit Card Processor shall have been obtained in connection with the sale giving rise to such Credit Card Receivables;

          (e) the required authorization and approval by such Credit Card Issuer or Credit Card Processor shall have been obtained for the sale giving rise to such Credit Card Receivables;

          (f) such Borrower shall have submitted all materials required by the Credit Card Issuer or Credit Card Processor obligated in respect of such Credit Card Receivables in order for such Borrower to be entitled to payment in respect thereof;

          (g) the Credit Card Issuer or Credit Card Processor obligated in respect of such Credit Card Receivable has not failed to timely remit any monthly payment in respect of such Credit Card Receivable;

          (h) such Credit Card Receivables comply with the applicable terms and conditions contained in Section 7.2 of this Agreement;

          (i) the Credit Card Issuer or Credit Card Processor with respect to such Credit Card Receivables has not asserted a counterclaim, defense or dispute and does not have, and does not engage in transactions which may give rise to, any right of setoff against such Credit Card Receivables (other than setoffs to fees and chargebacks consistent with the practices of such Credit Card Issuer or Credit Card Processor with such Borrower as of the date hereof or as such practices may change as a result of changes to the policies of such Credit Card Issuer or Credit Card Processor applicable to its customers generally and unrelated to the circumstance of such Borrower), but the portion of the Credit Card Receivables owing by such Credit Card Issuer or Credit Card Processor in excess of the amount owing by such Borrower to such Credit Card Issuer or Credit Card Processor pursuant to such fees and chargebacks may be deemed Eligible Credit Card Receivables;

          (j) the Credit Card Issuer or Credit Card Processor with respect to such Credit Card Receivables has not setoff against amounts otherwise payable by such Credit Card Issuer or Credit Card Processor to such Borrower for the purpose of establishing a reserve or collateral for obligations of such Borrower to such Credit Card Issuer or Credit Card Processor (notwithstanding that the Credit Card Issuer or Credit Card Processor may have setoffs for fees and chargebacks consistent with the practices of such Credit Card Issuer or Credit Card Processor with such Borrower as of the date hereof or as such practices may hereafter change as a result of changes to the policies of such Credit Card Issuer or Credit Card Processor applicable to its customers generally and unrelated to the circumstances of such Borrower);

          (k) there are no facts, events or occurrences which would impair the validity, enforceability or collectability of such Credit Card Receivables or reduce the amount payable or delay payment thereunder (other than for setoffs for fees and chargebacks consistent with the practices of such Credit Card Issuer or Credit Card Processor with such Borrower as of the date hereof or as such practices may hereafter change as a result of changes to the policies of such Credit Card Issuer or Credit Card Processor applicable to its customers generally and unrelated to the circumstances of such Borrower or any Guarantor);

          (l) such Credit Card Receivables are subject to the first priority, valid and perfected security interest and lien of Agent, for and on behalf of itself and Lenders, and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any security interest or lien in favor of any person other than Agent except as otherwise permitted in this Agreement, in each case subject to and in accordance with the terms and conditions applicable hereunder to any such permitted security interest or lien;

          (m) there are no proceedings or actions which are pending or, to the best of any Borrower’s knowledge, threatened against the Credit Card Issuers or Credit Card Processors with respect to such Credit Card Receivables which would reasonably be expected to result in any material adverse change in the financial condition of any such Credit Card Issuer or Credit Card Processor;

          (n) such Credit Card Receivables are owed by Credit Card Issuers or Credit Card Processors deemed creditworthy at all times by Agent in good faith;

          (o) no event of default has occurred under the Credit Card Agreement of such Borrower with the Credit Card Issuer or Credit Card Processor who has issued the credit card or debit card or handles payments under the credit card or debit card used in the sale which gave rise to such Credit Card Receivables which event of default gives such Credit Card Issuer or Credit Card Processor the right to cease or suspend payments to such Borrower or any Guarantor and no event shall have occurred which gives such Credit Card Issuer or Credit Card Processor the right to setoff against amounts otherwise payable to such Borrower, including on behalf of a Guarantor (other than for then current fees and chargebacks consistent with the current practices of such Credit Card Issuer or Credit Card Processor as of the date hereof or as such practices may hereafter change as a result of changes to the policies of such Credit Card Issuer or Credit Card Processor applicable to its customers generally and unrelated to the circumstances of such Borrower or any Guarantor), except as may have been waived in writing on terms and conditions reasonably satisfactory to Agent pursuant to the Credit Card Acknowledgment by such Credit Card Issuer or Credit Card Processor, or the right to establish reserves or establish or demand collateral, and the Credit Card Issuer or Credit Card Processor has not sent any written notice of default and/or notice of its intention to cease or suspend payments to such Borrower in respect of such Credit Card Receivables or to establish reserves or cash collateral for obligations of such Borrower to such Credit Card Issuer or Credit Card Processor, and such Credit Card Agreements are otherwise in full force and effect and constitute the legal, valid, binding and enforceable obligations of the parties thereto;

          (p) the terms of the sale giving rise to such Credit Card Receivables and all practices of such Borrower and Guarantors with respect to such Credit Card Receivables comply in all material respects with applicable Federal, State, and local laws and regulations; and

          (q) the customer using the credit card or debit card giving rise to such Credit Card Receivable shall not have returned the merchandise purchased giving rise to such Credit Card Receivable.

     Credit Card Receivables which would otherwise constitute Eligible Credit Card Receivables pursuant to this Section will not be deemed ineligible solely by virtue of the Credit Card Agreements with respect thereto having been entered into by any Guarantor, for the benefit of Borrowers. Agent shall have the right to establish, modify or eliminate Reserves against Eligible Credit Card Receivables from time to time in its reasonable credit judgment. In addition, Agent reserves the right, at any time and from time to time after the Closing Date, to adjust any of the criteria set forth above, to establish new criteria, and to adjust advance rates with respect to Eligible Credit Card Receivables, in its reasonable credit judgment, subject to the approval of Required Lenders in the case of adjustments or new criteria or changes in advance rates which have the effect of making more credit available. Any Credit Card Receivables which are not Eligible Credit Card Receivables shall nevertheless be part of the Collateral.

     “Elavon” means Elavon, Inc. ( formerly Nova Information Systems, Inc.), as processor under the Elavon Processor Agreement.

     “Elavon Deposit Account” means that certain deposit account maintained with BancorpSouth Bank, with account number 41972803 in the name of Parent, or any replacement account therefor expressly agreed to in advance in writing by the Agent, which replacement account shall be a Blocked Account.

     “Elavon Member” means, as of the date hereof, U.S. Bank, National Association, in its capacity as “Member” under the Elavon Processor Agreement and any replacement “Member” thereunder.

     “Elavon Processor Agreement” means that certain Terms of Service agreement, dated on or about the Closing Date, among Parent, Elavon, as processor, and Elavon Member, together with all other agreements, documents and instruments now or at any time hereafter executed and/or delivered in connection therewith.

     “Elavon Reserve Account” means that “Reserve Account” identified in the Elavon Processor Agreement as in effect on the date hereof.

     “Eligible In-Transit Inventory” shall mean, as of the date of determination, without duplication of other Eligible Inventory, Inventory that as to which: (i) the Inventory is not purchased with and subject to a Letter of Credit, (ii) the Inventory is then in transit (whether by vessel, air or land) from a location outside of the continental United States of America to a location permitted hereunder and for which Agent shall have received such evidence thereof as Agent may require, (iii) has been paid for and the title of the Inventory has passed to, and such Inventory is owned by, a Borrower and for which Agent shall have received such evidence

thereof as Agent may require, (iv) Agent has received each of the following: (A) a Collateral Access Agreement, duly authorized, executed and delivered by the customs broker, freight forwarder or other third party handling the shipping and delivery of such Inventory, (B) a copy of the certificate of marine cargo insurance in connection therewith in which Agent has been named as an additional insured and loss payee in a manner acceptable to Agent and (C) a copy of the invoice, packing slip and manifest with respect thereto, (v) the Inventory is either (A) subject to a negotiable bill of lading: (1) that is consigned to Agent, (2) that was issued by the carrier in respect of such Inventory and (3) is either in the possession of the customs broker, freight forwarder or other third party handling the shipping and delivery of such Inventory acting on behalf of Agent or the subject of a telefacsimile or other electronic copy which also confirms that such document is in transit to Agent or the customs broker, freight forwarder or other third party handling the shipping and delivery of such Inventory acting on behalf of Agent or (B) subject to 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 carrier or Agent, or their respective agents) and such negotiable cargo receipt is (1) consigned to Agent, (2) issued by a carrier in respect of such Inventory and (3) either in the possession of Agent or the customs broker, freight forwarder or other third party handling the shipping and delivery of such Inventory acting on behalf of Agent or the subject of a telefacsimile or other electronic copy which also confirms that such document is in transit to Agent or the customs broker, freight forwarder or other third party handling the shipping and delivery of such Inventory, (vi) such Inventory is insured against types of loss, damage, hazards, and risks, and in amounts, satisfactory to Agent, (vii) such Inventory shall not have been in transit for more than forty-five (45) days, and (viii) such Inventory is otherwise deemed Eligible Inventory (other than in respect of its location) hereunder.

     “Eligible Inventory” shall mean, as of the date of determination, as to each Borrower, Inventory of such Borrower consisting of finished goods held for resale in the ordinary course of the business of such Borrower that satisfy the criteria set forth below as determined by Agent. In general, Eligible Inventory shall not include: (a) raw materials and work-in-process; (b) spare parts for equipment; (c) packaging and shipping materials; (d) supplies used or consumed in such Borrower’s business; (e) Inventory at premises other than those owned or leased and controlled by any Borrower except any Inventory (other than Eligible In-Transit Inventory and Eligible LC Inventory) which would otherwise be deemed Eligible Inventory that is not located at premises owned and operated by such Borrower may nevertheless be considered Eligible Inventory: (i) as to retail store locations which are leased by such Borrower, Agent may, at its option, establish such Reserves in respect of amounts at any time payable by such Borrower to the lessor thereof as Agent shall determine in accordance with the definition of Reserves, (ii) as to locations which are leased by such Borrower (other than retail store locations which are leased), if Agent shall have received a Collateral Access Agreement from the lessor of such location, duly authorized, executed and delivered by such lessor, or if Agent shall not have received such Collateral Access Agreement (or Agent shall determine to accept a Collateral Access Agreement that does not include all required provisions or provisions in the form otherwise required by Agent), Agent may, at its option, nevertheless consider Inventory at such location to be Eligible Inventory to the extent Agent shall have established such Reserves in respect of amounts at any time payable by such Borrower to the lessor thereof as Agent shall determine in good faith, and (iii) as to locations operated by a third person, (A) if Agent shall have received a Collateral Access Agreement from such owner with respect to such location, duly authorized, executed and

delivered by such operator or if Agent shall not have received such Collateral Access Agreement (or Agent shall determine to accept a Collateral Access Agreement that does not include all required provisions or provisions in the form otherwise required by Agent), Agent may, at its option, nevertheless consider Inventory at such location to be Eligible Inventory to the extent Agent shall have established such Reserves in respect of amounts at any time payable by such Borrower to the owner and operator thereof as Agent shall determine, and (B) in addition, if required by Agent, if Agent shall have received: (1) UCC financing statements between the owner and operator, as consignee or bailee and such Borrower, as consignor or bailor, in form and substance satisfactory to Agent, which are duly assigned to Agent and (2) a written notice to any lender to the owner and operator of the first priority security interest in such Inventory of Agent; (f) Inventory subject to a security interest or lien in favor of any Person other than Agent except those permitted in this Agreement that are subject to an intercreditor agreement in form and substance satisfactory to Agent between the holder of such security interest or lien and Agent; (g) bill and hold goods; (h) unserviceable, obsolete or slow moving Inventory; (i) Inventory that is not subject to the first priority, valid and perfected security interest of and lien in favor of Agent; (j) returned Inventory that is not saleable and held for sale in the ordinary course of business; (k) damaged and/or defective Inventory; (l) Inventory purchased or sold on consignment; (m) Inventory located outside the United States of America; and (n) Inventory of a Borrower sold under a licensed trademark or trade name or which contains or uses a medium subject to a licensed copyright, unless, on or prior to the forty-fifth (45 ^th ) day after the date of this Agreement, either (i) Agent shall be satisfied that it has the right to sell or otherwise dispose of such Inventory without further action or (ii) Agent shall have received a letter agreement, in form and substance satisfactory to Agent, duly authorized, executed and delivered by such Borrower and the applicable licensor. Agent shall have the right to establish, modify or eliminate Reserves against Eligible Inventory from time to time in its reasonable credit judgment. In addition, Agent reserves the right, at any time and from time to time after the Closing Date, to adjust any of the criteria set forth above, to establish new criteria, and to adjust advance rates with respect to Eligible Inventory, in its reasonable credit judgment, subject to the approval of Required Lenders in the case of adjustments or new criteria or changes in advance rates which have the effect of making more credit available. Any Inventory that is not Eligible Inventory shall nevertheless be part of the Collateral.

     “Eligible LC Inventory” shall mean, as of the date of determination, without duplication of other Eligible Inventory, Inventory that as to which: (i) the Inventory is purchased with and subject to a Letter of Credit, (ii) the Inventory is then in transit (whether by vessel, air or land) from a location outside of the continental United States of America to a location permitted hereunder and for which Agent shall have received such evidence thereof as Agent may require, (iii) the title of the Inventory has passed to, and such Inventory is owned by, a Borrower and for which Agent shall have received such evidence thereof as Agent may require, (iv) Agent has received each of the following: (A) a Collateral Access Agreement, duly authorized, executed and delivered by the customs broker, freight forwarder or other third party handling the shipping and delivery of such Inventory, (B) a copy of the certificate of marine cargo insurance in connection therewith in which Agent has been named as an additional insured and loss payee in a manner acceptable to Agent and (C) a copy of the invoice, packing slip and manifest with respect thereto, (v) the Inventory is either (A) subject to a negotiable bill of lading: (1) that is consigned to Agent, (2) that was issued by the carrier in respect of such Inventory and (3) is either in the

possession of the customs broker, freight forwarder or other third party handling the shipping and delivery of such Inventory acting on behalf of Agent or the subject of a telefacsimile or other electronic copy which also confirms that such document is in transit to Agent or the customs broker, freight forwarder or other third party handling the shipping and delivery of such Inventory acting on behalf of Agent or (B) subject to 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 carrier or Agent, or their respective agents) and such negotiable cargo receipt is (1) consigned to Agent, (2) issued by a carrier in respect of such Inventory and (3) either in the possession of Agent or the customs broker, freight forwarder or other third party handling the shipping and delivery of such Inventory acting on behalf of Agent or the subject of a telefacsimile or other electronic copy which also confirms that such document is in transit to Agent or the customs broker, freight forwarder or other third party handling the shipping and delivery of such Inventory, (vi) such Inventory is insured against types of loss, damage, hazards, and risks, and in amounts, satisfactory to Agent, (vii) such Inventory shall not have been in transit for more than forty-five (45) days, and (viii) such Inventory is otherwise deemed Eligible Inventory (other than in respect of its location) hereunder.

     “Eligible Real Property” shall mean, as to any Borrower, Real Property owned by such Borrower in fee simple in each case which are acceptable to Agent in good faith based on the criteria set forth below. In general, Eligible Real Property shall not include: (i) Real Property which is not operated by a Borrower except as Agent may otherwise agree; (ii) Real Property subject to a security interest, lien, mortgage or other encumbrance in favor of any person other than Agent (and other than those permitted under Section 9.8(b) , 9.8(c) or 9.8(d) hereof or are subject to an intercreditor agreement in form and substance satisfactory to Agent between the holder of such lien and Agent); (iii) Real Property that is not located in the continental United States of America; (iv) Real Property that is not subject to the valid and enforceable, first priority, perfected security interest, lien and mortgage of Agent; (v) Real Property where Agent determines that issues relating to compliance with Environmental Laws adversely affect such Real Property in such manner that such Real Property would not be acceptable for purposes of including it in the calculation of the Borrowing Base based on the customary practices, procedures and policies of Agent and its Affiliates; provided , that , if the Real Property is acceptable for such purposes in accordance with such practices, procedures and policies, subject to the satisfaction of the other conditions set forth herein and any requirements arising pursuant to such practices, procedures and policies, such Real Property will be considered Eligible Real Property but subject to the right of Agent to establish Reserves to reflect the adverse affect of any environmental conditions or events with respect thereto on its value or the ability of Agent to sell or otherwise realize on such Collateral; (vi) Real Property improved with residential housing; (vii) Real Property that is not subject to a then current final written appraisal by an appraiser reasonably acceptable to Agent (which shall be one of the appraisers selected by Agent from its list of approved appraisers), on which Agent and Lenders are expressly permitted to rely, and that is in form, scope and methodology reasonably satisfactory to Agent; (viii) if requested by Agent, Real Property for which Agent shall not have received a then current environmental audit conducted by an independent environmental engineering firm reasonably acceptable to Agent (based on Agent’s list of approved firms and in form, scope, substance and methodology reasonably satisfactory to Agent, the results of which are satisfactory to Agent; (ix) if requested by Agent, Real Property for which Agent shall not have received, in form and

substance reasonably satisfactory to Agent, a valid and effective title insurance policy (whether in the form of a pro form policy or a marked up title policy commitment) issued by a company and agent reasonably acceptable to Agent: (A) insuring the priority, amount and sufficiency of the Mortgage with respect to such Real Property, (B) insuring against matters that would be disclosed by surveys and (C) containing any legally available endorsements, assurances or affirmative coverage requested by Agent for protection of its interests; and (x) any Real Property other than the Baldwyn Real Property, except as Agent may otherwise agree. Any Real Property that is not Eligible Real Property shall nevertheless be part of the Collateral.

     “Eligible Transferee” shall mean (a) any Lender; (b) the parent company of any Lender and/or any Affiliate of such Lender which is at least fifty (50%) percent owned by such Lender or its parent company; (c) any person (whether a corporation, partnership, trust or otherwise) that is engaged in the business of making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Lender or with respect to any Lender that is a fund which invests in bank loans and similar extensions of credit, any other fund that invests in bank loans and similar extensions of credit and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor, and in each case is approved by Agent; and (d) any other commercial bank, financial institution or “accredited investor” (as defined in Regulation D under the Securities Act of 1933) approved by Agent, provided , that , (i) neither any Borrower nor any Guarantor or any Affiliate of any Borrower or Guarantor shall qualify as an Eligible Transferee and (ii) no Person to whom any Indebtedness which is in any way subordinated in right of payment to any other Indebtedness of any Borrower or Guarantor shall qualify as an Eligible Transferee, except as Agent may otherwise specifically agree in writing.

     “Environmental Laws” shall mean all foreign, Federal, State and local laws (including common law), legislation, rules, codes, licenses, permits (including any conditions imposed therein), authorizations, judicial or administrative decisions, injunctions or agreements between any Borrower or Guarantor and any Governmental Authority, (a) relating to pollution and the protection, preservation or restoration of the environment (including air, water vapor, surface water, ground water, drinking water, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, (b) relating to the exposure to, or the use, storage, recycling, treatment, generation, manufacture, processing, distribution, transportation, handling, labeling, production, release or disposal, or threatened release, of Hazardous Materials, or (c) relating to all laws with regard to recordkeeping, notification, disclosure and reporting requirements respecting Hazardous Materials. The term “Environmental Laws” includes: (i) the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Water Act, the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water Act of 1974, (ii) applicable state counterparts to such laws and (iii) any common law or equitable doctrine that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Materials.

     “Equipment” shall mean, as to each Borrower and Guarantor, all of such Borrower’s and Guarantor’s now owned and hereafter acquired equipment, wherever located, including machinery, data processing and computer equipment (whether owned or licensed and including embedded software), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, together with all rules, regulations and interpretations thereunder or related thereto.

     “ERISA Affiliate” shall mean any person required to be aggregated with any Borrower, any Guarantor or any of its or their respective Subsidiaries under Sections 414(b), 414(c), 414(m) or 414(o) of the Code.

     “ERISA Event” shall mean (a) any “reportable event”, as defined in Section 4043(c) of ERISA or the regulations issued thereunder, with respect to a Pension Plan, other than events as to which the requirement of notice has been waived in regulations by the Pension Benefit Guaranty Corporation; (b) the adoption of any amendment to a Pension Plan or the taking of any action with respect to a Pension Plan that would require the provision of security pursuant to the Pension Funding Rules; (c) a complete or partial withdrawal by any Borrower, Guarantor or any ERISA Affiliate from a Multiemployer Plan or a cessation of operations which is treated as such a withdrawal or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Pension Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the Pension Benefit Guaranty Corporation to terminate a Pension Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; (f) the imposition of any liability under Title IV of ERISA, other than the Pension Benefit Guaranty Corporation premiums due but not delinquent under Section 4007 of ERISA, upon any Borrower, Guarantor or any ERISA Affiliate in excess of $750,000 and (g) any other event or condition with respect to a Plan including any Pension Plan subject to Title IV of ERISA maintained, or contributed to, by any ERISA Affiliate that could reasonably be expected to result in liability of any Borrower in excess of $750,000.

     “Eurodollar Rate Loans” shall mean any Revolving Loans or portion thereof on which interest is payable based on the Adjusted Eurodollar Rate in accordance with the terms hereof.

     “Event of Default” shall mean the occurrence or existence of any event or condition described in Section 10.1 hereof.

     “Excess Availability” shall mean the amount, as determined by Agent, calculated at any time, equal to:

          (a) the lesser of (i) the Borrowing Base or (ii) the Maximum Credit (in each case under (i) or (ii) after giving effect to any Reserves (other than any Reserves in respect of Letters of Credit to the extent such amounts are deducted pursuant to clause (b)(ii) below)), minus

          (b) the sum of (i) the amount of the then outstanding Loans, plus (ii) the aggregate undrawn amount of all outstanding Letters of Credit plus any fees and expenses then due and owing in respect to all Letters of Credit.

     “Exchange Act” shall mean the Securities Exchange Act of 1934, together with all rules, regulations and interpretations thereunder or related thereto.

     “Existing Lenders” shall mean the lenders to Borrowers listed on Schedule 1.3 hereto and their respective predecessors, successors and assigns.

     “Existing Letters of Credit” means those Letters of Credit identified on Schedule 1.5 hereto.

     “Federal Funds Rate” shall mean, for any day, a floating rate per annum equal to the weighted average of the rates on overnight Federal funds transactions among members of the Federal Reserve System, as determined by Agent in its sole discretion, which determination shall be final, binding and conclusive (absent manifest error).

     “Federal Reserve Board” shall mean the Board of Governors of the Federal Reserve System.

     “Fee Letter” shall mean the letter agreement, dated of even date herewith, by and among Borrowers and Agent, setting forth certain fees payable by Borrowers in connection with the Credit Facility, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.

     “Fees” shall mean any and all fees payable to Agent or any Lender pursuant to this Agreement or any of the other Financing Agreements.

     “Final Order” means (a) an order or judgment of the Bankruptcy Court, or other court of competent jurisdiction, as entered on the docket in any Reorganization Case, the docket of an adversary proceedings related to any Reorganization Case or the docket of any other court of competent jurisdiction, (b) that has not been reversed, stayed, modified or amended, (c) as to which the time to appeal or seek certiorari or move for a new trial, reargument or rehearing has expired, and (d) for which no appeal or petition for certiorari or other proceedings for a new trial, reargument or rehearing has been timely taken, or as to which any appeal that has been taken or any petition for certiorari that has been timely filed has been withdrawn with prejudice or resolved by the highest court to which the order or judgment was appealed or from which certiorari was sought or the new trial, reargument or rehearing shall have been denied or resulted in no modification of such order.

     “Financing Agreements” shall mean, collectively, this Agreement and all notes, the Letter of Credit Documents, all Security Documents, the Intercompany Subordination Agreement, the Subordination Provisions, the Disclosure Letter, the Transfer of Letter of Credit Liability Letter, all guarantees, all other intercreditor agreements, all subordination agreements and all other agreements, documents and instruments now or at any time hereafter executed and/or delivered

by any Borrower or Guarantor in connection with this Agreement; provided , that , the Financing Agreements shall not include Hedge Agreements other than Secured Rate Contracts.

     “Fiscal Month” shall mean one of the three fiscal periods in a Fiscal Quarter, the first of such periods comprised of four weeks, the second of such periods comprised of five weeks, and the third of such periods comprised of four weeks, with each of the weeks in a Fiscal Quarter ending on the close of business on a Saturday (except that the last fiscal period in the last Fiscal Quarter of a 53 week year shall be five weeks). There are twelve Fiscal Months in a Fiscal Year.

     “Fiscal Quarter” means one of four thirteen or fourteen week quarters in a Fiscal Year, with the first of such quarters beginning on the first day of a Fiscal Year and ending on the Saturday of the last week in such quarter.

     “Fiscal Year” shall mean the 52 or 53 week period ending on the Saturday nearest to January 31 of each calendar year.

     “Foreign Lender” shall mean any Lender that is organized under the laws of a jurisdiction other than that in which a Borrower is resident for tax purposes. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

     “Funding Bank” shall have the meaning given to such term in Section 3.3(a) hereof.

     “GAAP” shall mean generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board which are applicable to the circumstances as of the date of determination consistently applied.

     “GE Capital” shall mean General Electric Capital Corporation, a Delaware corporation.

     “Governmental Authority” shall mean any nation or government, any state, province, or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

     “Guarantors” shall mean, collectively, the following (together with their respective successors and assigns): (a) each Borrower, (b) HF Enterprises, Inc., a Delaware corporation; (c) HF Resources, Inc., a Delaware corporation; and (d) any other Person that at any time after the date hereof becomes party to a guarantee in favor of Agent for the benefit of any Secured Party or otherwise liable on or with respect to the Obligations or who is the owner of any property which is security for the Obligations (other than Borrowers); each sometimes being referred to herein individually as a “Guarantor”.

     “Hazardous Materials” shall mean any hazardous, toxic or dangerous substances, materials and wastes, including hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation,

radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law (including any that are or become classified as hazardous or toxic under any Environmental Law).

     “Hedge Agreement” shall mean an agreement between any Borrower or Guarantor and a Bank Product Provider that is a rate swap agreement, basis swap, forward rate agreement, commodity swap, interest rate option, forward foreign exchange agreement, spot foreign exchange agreement, rate cap agreement, rate floor agreement, rate collar agreement, currency swap agreement, cross-currency rate swap agreement, currency option, any other similar agreement (including any option to enter into any of the foregoing or a master agreement for any the foregoing together with all supplements thereto) for the purpose of protecting against or managing exposure to fluctuations in interest or exchange rates, currency valuations or commodity prices; sometimes being collectively referred to herein as “Hedge Agreements”.

     “Indebtedness” shall mean, with respect to any Person, any liability, whether or not contingent, (a) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof) or evidenced by bonds, notes, debentures or similar instruments; (b) representing the balance deferred and unpaid of the purchase price of any property or services (other than an account payable to a trade creditor (whether or not an Affiliate) incurred in the ordinary course of business of such Person and payable in accordance with customary trade practices); (c) all obligations as lessee under leases which have been, or should be, in accordance with GAAP recorded as Capital Leases; (d) any contractual obligation, contingent or otherwise, of such Person to pay or be liable for the payment of any indebtedness described in this definition of another Person, including, without limitation, any such indebtedness, directly or indirectly guaranteed, or any agreement to purchase, repurchase, or otherwise acquire such indebtedness, obligation or liability or any security therefor, or to provide funds for the payment or discharge thereof, or to maintain solvency, assets, level of income, or other financial condition; (e) all obligations with respect to redeemable stock and redemption or repurchase obligations under any Capital Stock or other equity securities issued by such Person; (f) all reimbursement obligations and other liabilities of such Person with respect to surety bonds (whether bid, performance or otherwise), letters of credit, banker’s acceptances, drafts or similar documents or instruments issued for such Person’s account; (g) all indebtedness of such Person in respect of indebtedness of another Person for borrowed money or indebtedness of another Person otherwise described in this definition which is secured by any consensual lien, security interest, collateral assignment, conditional sale, mortgage, deed of trust, or other encumbrance on any asset of such Person, whether or not such obligations, liabilities or indebtedness are assumed by or are a personal liability of such Person, all as of such time; (h) all obligations, liabilities and indebtedness of such Person (marked to market) arising under swap agreements, cap agreements and collar agreements and other agreements or arrangements designed to protect such person against fluctuations in interest rates or currency or commodity values; (i) all obligations owed by such Person under License Agreements with respect to non-refundable, advance or minimum guarantee royalty payments; (j) indebtedness of any partnership or joint venture in which such Person is a general partner or a

joint venturer to the extent such Person is liable therefor as a result of such Person’s ownership interest in such entity, except to the extent that the terms of such indebtedness expressly provide that such Person is not liable therefor or such Person has no liability therefor as a matter of law; and (k) the principal and interest portions of all rental obligations of such Person under any synthetic lease or similar off-balance sheet financing where such transaction is considered to be borrowed money for tax purposes but is classified as an operating lease in accordance with GAAP.

     “Indenture” shall mean that certain Indenture dated as of June 17, 2008 between Deutsche Bank National Trust Company, as trustee, and the Parent, as Issuer, in respect of the Floating Rate Series A Secured Notes Due 2013.

     “Information Certificate” shall mean, collectively, the Information Certificates of Borrowers and Guarantors each substantially in the form of Exhibit B hereto containing material information with respect to Borrowers and Guarantors, their respective businesses and assets provided by or on behalf of Borrowers and Guarantors to Agent in connection with the preparation of this Agreement and the other Financing Agreements and the financing arrangements provided for herein.

     “Intellectual Property” shall mean, as to each Borrower and Guarantor, such Borrower’s and Guarantor’s now owned and hereafter arising or acquired: patents, patent rights, patent applications, copyrights, works which are the subject matter of copyrights, copyright applications, copyright registrations, trademarks, servicemarks, trade names, trade styles, trademark and service mark applications, and licenses and rights to use any of the foregoing and all applications, registrations and recordings relating to any of the foregoing as may be filed in the United States Copyright Office, the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof, any political subdivision thereof or in any other country or jurisdiction, together with all rights and privileges arising under applicable law with respect to any Borrower’s or Guarantor’s use of any of the foregoing; all extensions, renewals, reissues, divisions, continuations, and continuations-in-part of any of the foregoing; all rights to sue for past, present and future infringement of any of the foregoing; inventions, trade secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys, reports, manuals, and operating standards; goodwill (including any goodwill associated with any trademark or servicemark, or the license of any trademark or servicemark); customer and other lists in whatever form maintained; trade secret rights, copyright rights, rights in works of authorship, domain names and domain name registration; software and contract rights relating to computer software programs, in whatever form created or maintained.

     “Intercompany Indebtedness” shall have the meaning set forth in Section 8.20 hereof.

     “Intercompany Royalty Accounts” shall mean, collectively, the following bank accounts maintained at PNC Bank: (a) the bank account of Resources bearing account number 5602229374 and (b) the bank account of Enterprises bearing account number 5602229788.

     “Intercompany Subordination Agreement” shall mean the Intercompany Subordination Agreement substantially in the form of Exhibit I attached hereto executed by the Borrowers and each of their subsidiaries from time to time.

     “Interest Expense” shall mean, for any period, as to any Person, as determined in accordance with GAAP, the total interest expense of such Person, whether paid or accrued during such period (including the interest component of Capital Leases for such period), including, without limitation, discounts in connection with the sale of any Accounts and bank fees, commissions, discounts and other fees and charges owed with respect to letters of credit, banker’s acceptances or similar instruments.

     “Interest Period” shall mean for any Eurodollar Rate Loan, each period commencing on a Business Day selected by Administrative Borrower and ending one (1), two (2), or three (3) months thereafter as selected by Administrative Borrower in an irrevocable notice to Agent as set forth in Section 2.1 , the exact duration to be determined in accordance with the customary practice in the applicable Eurodollar Rate market; provided , that :

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

          (b) any Interest Period that would otherwise extend beyond the Commitment Termination Date shall end two (2) Business Days prior to such date;

          (c) any 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) shall end on the last Business Day of a calendar month;

          (d) Administrative Borrower shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar Rate Loan during a Interest Period for such Loan; and

          (e) Administrative Borrower shall select Interest Periods so that there shall be no more than 5 separate Eurodollar Rate Loans in existence at any one time.

     “Interest Rate” shall mean,

          (a) Subject to clause (b) of this definition below:

               (i) as to Prime Rate Loans, a rate equal to the then Applicable Margin for Prime Rate Loans on a per annum basis plus the Prime Rate, and

               (ii) as to Eurodollar Rate Loans, a rate equal to the then Applicable Margin for Eurodollar Rate Loans on a per annum basis plus the Adjusted Eurodollar Rate.

          (b) Notwithstanding anything to the contrary contained herein, during the continuance of an Event of Default under Sections 10.1(a) , 10.1(f) , 10.1(g) or 10.1(h) or, during the continuance of any other Event of Default and at election of Agent (or at the direction of the Required Lenders), the Interest Rates applicable to the Loans and Letters of Credit Fees shall be increased by two (2%) percent per annum above the rates of interest or rates for such fees otherwise applicable hereunder.

     “Inventory” shall mean, as to each Borrower and Guarantor, all of such Borrower’s and Guarantor’s now owned and hereafter existing or acquired goods, wherever located, which (a) are leased by such Borrower or Guarantor as lessor; (b) are held by such Borrower or Guarantor for sale or lease or to be furnished under a contract of service; (c) are furnished by such Borrower or Guarantor under a contract of service; or (d) consist of raw materials, work in process, finished goods or materials used or consumed in its business.

     “Investment” shall have the meaning set forth in Section 9.10 hereof.

     “Investment Property Control Agreement” shall mean an agreement in writing, in form and substance satisfactory to Agent, by and among Agent, any Borrower or Guarantor (as the case may be) and any securities intermediary, commodity intermediary or other person who has custody, control or possession of any investment property of such Borrower or Guarantor acknowledging that such securities intermediary, commodity intermediary or other person has custody, control or possession of such investment property on behalf of Agent, that it will comply with entitlement orders originated by Agent with respect to such investment property, or other instructions of Agent, and has such other terms and conditions as Agent may require.

     “Issuing Bank” shall have the meaning set forth in Section 2.2(a) .

     “Lenders” shall mean (a) GE Capital, the other Lenders named on the signature pages of this Agreement, and, if any such Lender shall decide to assign all or any portion of the Obligations in accordance with Section 13.8 , such term shall include any assignee of such Lender, and (b) solely for the purpose of (x) obtaining the benefit of the liens granted to Agent for the benefit of Lenders under any Financing Agreement and (y) obtaining the benefit of any guarantees by the Guarantors, a Person to whom any Obligations in respect of a Secured Rate Contract are owed. For the avoidance of doubt, any Person to whom any Obligations in respect of a Secured Rate Contract are owed and which does not hold any Loans or Commitments shall not be entitled to any other rights as a “Lender” under this Agreement or any other Financing Agreements.

     “Letter of Credit Documents” shall mean, with respect to any Letter of Credit, such Letter of Credit, any amendments thereto, any documents delivered in connection therewith, including, without limitation, any Master Commercial Agreement and/or Master Standby Agreement, any application therefor, and any agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for i) the rights and obligations of the parties concerned or at risk or ii) any collateral security for such obligations.

     “Letter of Credit Fee” shall have the meaning set forth in Section 2.2(b) .

     “Letter of Credit Limit” shall mean $20,000,000.

     “Letter of Credit Obligations” shall mean all outstanding obligations incurred by Agent and Lenders, whether direct or indirect, contingent or otherwise, due or not due, in connection with the issuance of Letters of Credit by the Issuing Bank or the purchase of a participation as set forth in Section 2.2 with respect to any Letter of Credit. The amount of such Letter of Credit

Obligations shall equal the maximum amount that may be payable at such time or at any time thereafter Agent or Lenders thereupon or pursuant thereto.

     “Letters of Credit” shall mean all letters of credit (whether documentary or stand-by and whether for the purchase of inventory, equipment or otherwise) issued by an Issuing Bank for the account of any Borrower pursuant to this Agreement, and all amendments, renewals, extensions or replacements thereof. The Existing Letters of Credit shall constitute Letters of Credit hereunder for all purposes.

     “License Agreements” shall have the meaning set forth in Section 8.11 hereof.

     “Loans” shall mean the Revolving Loans.

     “London Interbank Offered Rate” shall mean, for each Interest Period, a rate of interest determined by Agent equal to the offered rate for deposits in United States dollars for the applicable Interest Period that appears on Reuters Screen LIBOR01 Page as of 11:00 a.m. (London time), on the second full Business Day next preceding the first day of such Interest Period (unless such date is not a Business Day, in which event the next succeeding Business Day will be used). If such interest rates shall cease to be available from Telerate News Service (or its successor satisfactory to Agent), the London Interbank Offered Rate shall be determined from such financial reporting service or other information as shall be mutually acceptable to Agent and Administrative Borrower.

     “Master Commercial Agreement” shall mean the Master Agreement for Commercial Letters of Credit dated as of the Closing Date among Borrowers, as Applicant(s), and GE Capital.

     “Master Standby Agreement” shall mean the Master Agreement for Standby Letters of Credit dated as of the Closing Date among Borrowers, as Applicant(s), and GE Capital, as issuer.

     “Master Warrant Agreement shall mean the Master Warrant Agreement dated as of June 17, 2008 between Continental Stock Transfer & Trust Company, as Warrant Agent, and Parent, in respect of the Specified Warrants of Parent to be issued thereunder.

     “Material Adverse Effect” shall mean a material adverse effect on (a) the financial condition, business, performance or operations of Borrowers; (b) the legality, validity or enforceability of this Agreement or any of the other Financing Agreements; (c) the legality, validity, enforceability, perfection or priority of the security interests and liens of Agent upon the Collateral; (d) the Collateral or its value; (e) the ability of any Borrower to repay the Obligations or of any Borrower to perform its obligations under this Agreement or any of the other Financing Agreements as and when to be performed; or (f) the ability of Agent or any Lender to enforce the Obligations or realize upon the Collateral or otherwise with respect to the rights and remedies of Agent and Lenders under this Agreement or any of the other Financing Agreements.

     “Material Contract” shall mean (a) any contract or other agreement (other than the Financing Agreements), written or oral, of any Borrower or Guarantor involving monetary liability of or to any Person in an amount in excess of $5,000,000 in any Fiscal Year and (b) any

other contract or other agreement (other than the Financing Agreements), whether written or oral, to which any Borrower or Guarantor is a party as to which the breach, nonperformance, cancellation or failure to renew by any party thereto would have a Material Adverse Effect.

     “Maturity Date” shall mean the earlier of the date which is (i) August 1, 2013 or (ii) 120 calendar days prior to the “Maturity Date” (as defined in the Indenture).

     “Maximum Credit” shall mean the amount of $100,000,000.

     “Mortgage” shall means each of the mortgages, deeds of trust, leasehold mortgages, leasehold deeds of trust, collateral assignments of leases or other real estate security documents delivered by any Borrower or any Guarantor to Agent on behalf of itself and Secured Parties with respect to the Real Property of the Borrowers and the Guarantors, all in form and substance reasonably satisfactory to Agent, including, without limitation, the Deed of Trust, Security Agreement, Assignment of Rents and Leases and Fixture Filing, dated even date herewith by Parent in favor of Agent with respect to the Real Property and related assets of such Borrower located in Baldwyn, Mississippi, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.

     “Multiemployer Plan” shall mean a “multi-employer plan” as defined in Section 4001(a)(3) of ERISA which is or was at any time during the current year or the immediately preceding six (6) years contributed to by any Borrower, Guarantor or any ERISA Affiliate or with respect to which any Borrower, Guarantor or any ERISA Affiliate may incur any liability.

     “Net Recovery Percentage” shall mean the net appraised liquidation value of Borrowers’ Eligible Inventory, Eligible LC Inventory and Eligible In-Transit Inventory as set forth in Borrowers’ inventory ledger as determined from time to time in accordance with an independent appraisal satisfactory to Agent.

     “Notice of Borrowing” shall have the meaning set forth in Section 2.1(a) .

     “Notice of Conversion/Continuation” shall have the meaning set forth in Section 3.1(b) .

     “Obligations” shall mean (a) any and all Loans, Letter of Credit Obligations and all other obligations, liabilities and indebtedness of every kind, nature and description owing by any or all of Borrowers to Agent or any Lender or any Secured Swap Provider, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, arising under this Agreement or any of the other Financing Agreements or any Secured Rate Contract, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to such Borrower under the United States Bankruptcy Code or any similar statute (including the payment of interest and other amounts which would accrue and become due but for the commencement of such case, whether or not such amounts are allowed or allowable in whole or in part in such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, or secured or unsecured and (b) for purposes only of Section 5.1 hereof and the Security Documents and subject to the priority in right of payment set forth in Section 6.4 hereof, all obligations,

liabilities and indebtedness of every kind, nature and description owing by any or all of Borrowers or Guarantors to Agent, any Secured Swap Provider arising under or pursuant to any Secured Rate Contract or any Bank Product Provider arising under or pursuant to any Bank Products, whether now existing or hereafter arising, provided , that , (i) as to any such obligations, liabilities and indebtedness arising under or pursuant to a Hedge Agreement (other than a Secured Rate Contract), the same shall only be included within the Obligations if upon Agent’s request, Agent shall have entered into an agreement, in form and substance satisfactory to Agent, with the Bank Product Provider that is a counterparty to such Hedge Agreement, as acknowledged and agreed to by Borrowers and Guarantors, providing for the delivery to Agent by such counterparty of information with respect to the amount of such obligations and providing for the other rights of Agent and such Bank Product Provider in connection with such arrangements, (ii) any Bank Product Provider, other than GE Capital and its Affiliates or a Secured Swap Provider, shall have delivered written notice to Agent that (A) such Bank Product Provider has entered into a transaction to provide Bank Products to a Borrower and Guarantor and (B) the obligations arising pursuant to such Bank Products provided to Borrowers and Guarantors constitute Obligations entitled to the benefits of the security interest of Agent granted hereunder, and Agent shall have accepted such notice in writing, and (iii) in no event shall any Bank Product Provider (other than a Secured Swap Provider) to whom such obligations, liabilities or indebtedness are owing be deemed a Lender for purposes hereof to the extent of and as to such obligations, liabilities or indebtedness other than for purposes of Section 5.1 hereof and other than for purposes of Sections 12.1 , 12.2 , 12.3(b) , 12.6 , 12.7 , 12.9 , 12.12 and 13.7 hereof and in no event shall such obligations be included in the Obligations to the extent that the effect is that the value of the Collateral (as determined by Agent) is less than the Obligations and in no event shall the approval of any such person be required in connection with the release or termination of any security interest or lien of Agent.

     “Obligor” shall mean any guarantor, endorser, acceptor, surety or other person liable on or with respect to the Obligations or who is the owner of any property which is security for the Obligations (including, without limitation, Guarantors).

     “Other Taxes” shall have the meaning set forth in Section 6.5(c) .

     “Owned Real Properties” shall mean, collectively, the Real Properties of Parent listed on Schedule 1.4 .

     “Parent” shall mean Hancock Fabrics, Inc., a Delaware corporation, and its successors and assigns.

     “Participant” shall mean any financial institution that acquires and holds a participation in the interest of any Lender in any of the Loans and Letters of Credit in conformity with the provisions of Section 13.8 of this Agreement governing participations.

     “Pension Funding Rules” shall mean the rules of the Code and ERISA regarding minimum required contributions (including any installment payment thereof) to certain Plans and set forth in, with respect to plan years ending prior to the effective date as to any such Plan of the Pension Protection Act of 2006, Section 412 of the Code and Part 3, Subtitle I, of Title I of

ERISA each as in effect prior to the Pension Protection Act of 2006 and, thereafter, Sections 412 and 430 of the Code and Sections 302 and 303 of ERISA.

     “Pension Plan” shall mean an employee benefit plan (as defined in Section 3(3) of ERISA) subject to the Pension Funding Rules which is or was at any time during the current year or the immediately preceding six (6) years contributed to by any Borrower, Guarantor or any ERISA Affiliate or with respect to which any Borrower, Guarantor or any ERISA Affiliate may incur any liability, other than a Multiemployer Plan.

     “Permits” shall have the meaning set forth in Section 8.7(b) .

     “Permitted Acquisitions” shall mean the purchase by a Borrower or Guarantor after the date hereof of all or substantially all of the assets of any Person or a business or division of such Person (including pursuant to a merger with such Person or the formation of a wholly owned Subsidiary solely for such purpose that is merged with such Person) or of all or a majority of the Capital Stock (such assets or Person being referred to herein as the “Acquired Business”) and in one or a series of transaction that satisfies each of the following conditions as determined by Agent:

          (a) Agent shall have received not less than ten (10) Business Days’ prior written notice of the proposed acquisition and such information with respect thereto as Agent may request, including (i) the proposed date and amount of the acquisition, (ii) a list and description of the assets or shares to be acquired, (iii) the total purchase price for the assets to be purchased (and the terms of payment of such purchase price), and (iv) a summary of the due diligence undertaken by Borrowers in connection with such acquisition,

          (b) the Acquired Business shall be an operating company that engages in a line of business substantially similar to the business that Borrowers are engaged in on the date hereof,

          (c) (i) the aggregate consideration paid for or in connection with the assets or shares of the Acquired Business shall not exceed $15,000,000 (calculated after giving effect to all payments or other consideration paid in respect of such acquisition and after giving effect to the assumption of all Indebtedness in connection with such acquisition), and (ii) the aggregate consideration paid for or in connection with all Permitted Acquisitions shall not exceed $30,000,000 (calculated after giving effect to all payments or other consideration paid in respect of all Permitted Acquisitions and after giving effect to the assumption of all Indebtedness in connection with all Permitted Acquisition),

          (d) if requested by Agent, Agent shall have received: (i) the most recent annual and interim financial statements with respect to the Acquired Business and related statements of income and cash flows, (ii) detailed forecasts of cash flows for the Acquired Business, (iii) detailed projections for Parent and its Subsidiaries through the Maturity Date, on a monthly basis for the first year after the acquisition and on a quarterly basis thereafter, giving pro forma effect to such acquisition, based on assumptions satisfactory to Agent and demonstrating pro forma compliance with all financial covenants set forth in this Agreement, prepared in good faith an in a manner and using such methodology as is consistent with the most recent financial

statements delivered to Agent pursuant to Section 9.6 hereof and in form and substance satisfactory to Agent and (iv) current, updated projections of the amount of the Borrowing Base and Excess Availability for the six month period after the date of such acquisition, in a form reasonably satisfactory to Agent, representing Borrowers’ reasonable best estimate of the future Borrowing Base and Excess Availability for the period set forth therein as of the date not more than ten (10) days prior to the date of such acquisition, which projections shall have been prepared on the basis of the assumptions set forth therein which Borrowers believe are fair and reasonable as of the date of preparation in light of current and reasonably foreseeable business conditions,

          (e) if Agent so elects, Agent shall have received an appraisal of the inventory of the Acquired Business and such other assets of the Acquired Business as Agent may specify, in each case in form and containing assumptions and appraisal methods satisfactory to Agent by an appraiser acceptable to Agent, on which Agent and Lenders are expressly permitted to rely,

          (f) if Agent so elects, Agent shall have completed a field examination with respect to the business and assets of the Acquired Business in accordance with Agent’s customary procedures and practices and as otherwise required by the nature and circumstances of the business of the Acquired Business, the scope and results of which shall be satisfactory to Agent and any inventory of the Acquired Business shall only be Eligible Inventory to the extent the criteria for Eligible Inventory set forth herein are satisfied with respect thereto in accordance with this Agreement (or such other or additional criteria as Agent may, at its option, establish with respect thereto in accordance with this Agreement and subject to such Reserves as Agent may establish in connection with the Acquired Business),

          (g) Agent shall have received (i) all items required by Sections 5.2 and 9.23 in connection with the Acquired Business, (ii) evidence satisfactory to Agent that all liens and encumbrances with respect to the assets of the Acquired Business (other than liens and encumbrances permitted under Section 9.8 ) have been discharged in full or arrangements therefor satisfactory to the Agent have been made and (iii) evidence satisfactory to Agent that any Indebtedness assumed in connection with such acquisition shall constitute Indebtedness permitted under Section 9.9 ,

          (h) in the case of the acquisition of the Capital Stock of another Person, the board of directors (or other comparable governing body) of such other Person shall have duly approved such acquisition and such Person shall not have announced that it will oppose such acquisition or shall not have commenced any action which alleges that such acquisition will violate applicable law,

          (i) Adjusted Excess Availability shall have been not less than $25,000,000 for each of the two consecutive months immediately prior to the date of any such acquisition based on the Borrowing Base as of the end of each of such months and after giving effect to the acquisition and all payments and other consideration in respect thereof, on a pro forma basis using the Adjusted Excess Availability as of the end of the month immediately prior to the date of such acquisition and payments or other consideration, Adjusted Excess Availability shall be not less than $25,000,000,

          (j) no Default or Event of Default shall exist or have occurred as of the date of the acquisition or any payment in respect thereof and after giving effect to the acquisition or such payment,

          (k) Agent shall have received true, correct and complete copies of all agreements, documents and instruments relating to such acquisition, which documents shall be satisfactory to Agent, and

          (l) if required by Agent, Agent shall have received a certificate of the chief financial officer or chief executive officer of Administrative Borrower certifying to Agent and Lenders as to the matters set forth above in this definition.

     “Permitted Dispositions” shall mean each of the following:

          (a) sales of Inventory in the ordinary course of business,

          (b) the sale or other disposition of Equipment (including worn-out or obsolete Equipment or Equipment no longer used or useful in the business of any Borrower or Guarantor) so long as such sales or other dispositions do not involve Equipment having an aggregate fair market value in excess of $500,000 for all such Equipment disposed of in any Fiscal Year of Borrowers or as Agent may otherwise agree,

          (c) sales or other dispositions by any Borrower of assets in connection with the closing or sale of a retail store location of such Borrower in the ordinary course of such Borrower’s business which consist of leasehold interests in the premises of such store, the Equipment and fixtures located at such premises and the books and records relating exclusively and directly to the operations of such store; provided , that , as to each and all such sales and closings, (i) after giving effect thereto, no Default or Event of Default shall exist or have occurred and be continuing, and (ii) such sale shall be on commercially reasonable prices and terms in a bona fide arm’s length transaction,

          (d) the grant by any Borrower or Guarantor after the date hereof of a non-exclusive license to any person for the use of any Intellectual Property consisting of trademarks owned by such Borrower or Guarantor; provided , that , as to any such license, each of the following conditions is satisfied, (i) such licenses shall be on commercially reasonable prices and terms in a bona fide arms’ length transactions, (ii) the rights of the licensee shall be subject to the rights of Agent, and shall not adversely affect, limit or restrict the rights of Agent to use any Intellectual Property of a Borrower or Guarantor to sell or otherwise dispose of any Inventory or other Collateral, (iii) Agent shall have received, true, correct and complete copies of the executed license agreement, promptly upon the execution thereof and (iv) as of the date of the grant of any such license, and after giving effect thereto, no Default or Event of Default shall exist or have occurred,

          (e) sales, transfers and dispositions of assets of a Borrower to another Borrower or by a Guarantor or other Subsidiary of Parent to a Borrower or Guarantor, in each case to the extent permitted under Section 9.12 hereof; and

          (f) the sale of the Tupelo Real Property, any of the Owned Real Properties (other than the Baldwyn Real Property), the Equipment and fixtures located at the Tupelo Real Property and the Owned Real Properties (other than the Baldwyn Real Property) and the books and records relating exclusively and directly to the operations of the Tupelo Real Property or any of the Owned Real Properties (other than the Baldwyn Real Property); provided, that, as to such sale and closing, (i) Agent shall have received not less than ten (10) Business Days prior written notice of such sale or closing, which notice shall set forth in reasonable detail satisfactory to Agent, the parties to such sale, the purchase price and the manner of payment thereof and such other information with respect thereto as Agent may request, (ii) after giving effect thereto, no Default or Event of Default shall exist or have occurred and be continuing, (iii) such sale shall be on commercially reasonable prices and terms in a bona fide arm’s length transaction.

     “Permitted Investments” shall mean each of the following:

          (a) the endorsement of instruments for collection or deposit in the ordinary course of business;

          (b) Investments in cash or Cash Equivalents, provided , that , (i) no Loans are then outstanding and (ii) the terms and conditions of Section 5.2 hereof shall have been satisfied with respect to the deposit account, investment account or other account in which such cash or Cash Equivalents are held;

          (c) the existing Investments of each Borrower and Guarantor as of the date hereof in its Subsidiaries, provided , that , no Borrower or Guarantor shall have any further obligations or liabilities to make any capital contributions or other additional investments or other payments to or in or for the benefit of any of such Subsidiaries;

          (d) loans and advances by any Borrower or Guarantor to employees of such Borrower or Guarantor not to exceed the principal amount of $250,000 in the aggregate at any time outstanding for: (i) reasonably and necessary work-related travel or other ordinary business expenses to be incurred by such employee in connection with their work for such Borrower or Guarantor and (ii) reasonable and necessary relocation expenses of such employees (including home mortgage financing for relocated employees);

          (e) stock or obligations issued to any Borrower or Guarantor by any Person (or the representative of such Person) in respect of Indebtedness of such Person owing to such Borrower or Guarantor in connection with the insolvency, bankruptcy, receivership or reorganization of such Person or a composition or readjustment of the debts of such Person; provided , that , the original of any such stock or instrument evidencing such obligations shall be promptly delivered to Agent, upon Agent’s request, together with such stock power, assignment or endorsement by such Borrower or Guarantor as Agent may request; and

          (f) obligations of account debtors to any Borrower or Guarantor arising from Accounts which are past due evidenced by a promissory note made by such account debtor payable to such Borrower or Guarantor; provided , that , promptly upon the receipt of the original of any such promissory note by such Borrower or Guarantor, such promissory note shall be

endorsed to the order of Agent by such Borrower or Guarantor and promptly delivered to Agent as so endorsed.

     “Person” or “person” shall mean any individual, sole proprietorship, partnership, corporation (including any corporation which elects subchapter S status under the Code), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof.

     “Petition Date” shall have the meaning set forth in the preamble.

     “Plan” shall mean an employee benefit plan (as defined in Section 3(3) of ERISA) which any Borrower or Guarantor sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or, in the case of a Multiemployer Plan, has made contributions at any time during the immediately preceding six (6) plan years or with respect to which any Borrower or Guarantor may incur liability.

     “Plan of Reorganization” shall mean a plan (within the meaning of the Bankruptcy Code) proposed in the Reorganization Cases which is confirmed by a Final Order of the Bankruptcy Court and is in form and substance satisfactory to Agent.

     “Pledge Agreements” shall mean that certain Pledge Agreement dated as of the Closing Date executed and delivered by Borrowers, Guarantors and Agent and any pledge agreements entered into after the Closing Date by any Borrower or Guarantor (as required by this Agreement or any other Financing Agreement).

     “Prime Rate” shall mean, on any date, the greater of (a) the rate publicly quoted from time to time by The Wall Street Journal as the “prime rate” (or, if The Wall Street Journal ceases quoting a prime rate, the highest per annum rate of interest published by the Federal Reserve Board in Federal Reserve statistical release H.15 (519) entitled “Selected Interest Rates” as the Bank prime loan rate or its equivalent) or (b) the Federal Funds Rate in effect on such day plus one-half (1/2%) percent. Each change in any interest rate provided for in this Agreement based upon the Prime Rate shall take effect at the time of such change in the Prime Rate.

     “Prime Rate Loans” shall mean any Revolving Loans or portion thereof on which interest is payable based on the Prime Rate in accordance with the terms thereof.

     “Pro Rata Share” shall mean as to any Lender, the fraction (expressed as a percentage) the numerator of which is such Lender’s Commitment and the denominator of which is the aggregate amount of all of the Commitments of Lenders, as adjusted from time to time in accordance with the provisions of Section 13.8 hereof; provided , that , if the Commitments have been terminated, the numerator shall be the unpaid amount of such Lender’s Loans and its interest in the Letters of Credit and the denominator shall be the aggregate amount of all unpaid Loans and Letters of Credit.

     “Provision for Taxes” shall mean an amount equal to all taxes imposed on or measured by net income, whether Federal, State, county or local, and whether foreign or domestic, that are paid or payable by any Person in respect of any period in accordance with GAAP.

     “Quarterly Average Excess Availability” shall mean, as of the date of determination, the daily average of the aggregate amount of the Adjusted Excess Availability, calculated for the immediately preceding calendar quarter then most recently ended.

     “Rate Contracts” shall mean swap agreements (as such term is defined in Section 101 of the Bankruptcy Code) and any other agreements or arrangements designed to provide protection against fluctuations in interest or currency exchange rates.

     “Real Property” shall mean all now owned and hereafter acquired real property of each Borrower and Guarantor, including leasehold interests, together with all buildings, structures, and other improvements located thereon and all licenses, easements and appurtenances relating thereto, wherever located.

     “Real Property Availability” shall mean the Adjusted Appraised Fair Market Value of Eligible Real Property as set forth in the most recent acceptable appraisal (or acceptable updates of existing appraisals) of such Real Property received by Agent in accordance with Section 4.1 or 7.4 hereof.

     “Receivables” shall mean all of the following now owned or hereafter arising or acquired property of each Borrower and Guarantor: (a) all Accounts; (b) all interest, fees, late charges, penalties, collection fees and other amounts due or to become due or otherwise payable in connection with any Account; (c) all payment intangibles of such Borrower or Guarantor; (d) letters of credit, indemnities, guarantees, security or other deposits and proceeds thereof issued payable to any Borrower or Guarantor or otherwise in favor of or delivered to any Borrower or Guarantor in connection with any Account; or (e) all other accounts, contract rights, chattel paper, instruments, notes, general intangibles and other forms of obligations owing to any Borrower or Guarantor, whether from the sale and lease of goods or other property, licensing of any property (including Intellectual Property or other general intangibles), rendition of services or from loans or advances by any Borrower or Guarantor or to or for the benefit of any third person (including loans or advances to any Affiliates or Subsidiaries of any Borrower or Guarantor) or otherwise associated with any Accounts, Inventory or general intangibles of any Borrower or Guarantor (including, without limitation, choses in action, causes of action, tax refunds, tax refund claims, any funds which may become payable to any Borrower or Guarantor in connection with the termination of any Plan or other employee benefit plan and any other amounts payable to any Borrower or Guarantor from any Plan or other employee benefit plan, rights and claims against carriers and shippers, rights to indemnification, business interruption insurance and proceeds thereof, casualty or any similar types of insurance and any proceeds thereof and proceeds of insurance covering the lives of employees on which any Borrower or Guarantor is a beneficiary).

     “Records” shall mean, as to each Borrower and Guarantor, all of such Borrower’s and Guarantor’s present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements,

correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of any Borrower or Guarantor with respect to the foregoing maintained with or by any other person).

     “Register” shall have the meaning set forth in Section 13.8(b) hereof.

     “Reorganization Cases” shall have the meaning set forth in the preamble.

     “Required Lenders” shall mean, at any time, those Lenders whose Pro Rata Shares aggregate more than fifty (50%) percent of the aggregate of the Commitments of all Lenders, or if the Commitments shall have been terminated, Lenders to whom more than fifty (50%) percent of the then outstanding Obligations are owing; provided , that , if the Pro Rata Share of any Lender exceeds fifty (50%) percent at a time when more than one Lender exists, then Required Lenders shall mean such Lender and at least one other Lender.

     “Reserves” shall mean as of any date of determination, such amounts as Agent may from time to time establish and revise in good faith reducing the amount of Revolving Loans and Letters of Credit which would otherwise be available to Borrowers that Agent may, in its reasonable credit judgment, establish from time to time. Without limiting the generality of the foregoing, Reserves may be established to reflect any of the following: dilution; gift certificates; customs duties and other costs to release Inventory which is being imported into the United States; inventory shrinkage; mark downs and cost variances; taxes; rental payments, services charges and other amounts to become due to lessors of real property to the extent Inventory or Records are located in or on such property or such Records are needed to monitor or otherwise deal with the Collateral, provided , that, the Reserves established in respect of such payments and charges as to retail store locations that are leased shall not exceed at any time the aggregate of amounts payable for the next three (3) months to the lessors of such retail store locations located in those States where any right of the lessor to Collateral may have priority over the security interest and lien of Agent therein, provided , further , that such limitation on the amount of the Reserves shall only apply so long as: (A) no Event of Default shall exist or have occurred, (B) neither a Borrower, Guarantor nor Agent shall have received notice of any event of default under the lease with respect to such location and (C) no Borrower has granted to the lessor a security interest or lien upon any assets of such Borrower; customer deposits; other obligations, liabilities or indebtedness (contingent or otherwise) of any Borrower or any Guarantor to any Bank Product Provider arising under or in connection with any Bank Products or to any other Person arising in connection with any deposit accounts or other cash management arrangements; and Letter of Credit Outstandings. Without limiting the generality of the foregoing, Reserves established to ensure the payment of accrued Interest Expenses or Indebtedness shall be deemed to be a reasonable exercise of Agent’s credit judgment.

     “Restricted Payment” shall mean (a) any cash dividend or other cash distribution, direct or indirect, on account of any shares of any class of Capital Stock of Parent or any of its Subsidiaries, as the case may be, now or hereafter outstanding, (b) any redemption, retirement, sinking fund or similar payment on account of, or purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of Parent or any of its Subsidiaries, except

for any redemption, retirement, sinking funds or similar payment payable solely in such shares of that class of stock or in any class of stock junior to that class, (c) any cash payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire any shares of any class of Capital Stock of Parent or any of its Subsidiaries now or hereafter outstanding, (d) any payment or other transfer of funds or other property made in satisfaction of any Indebtedness arising under any Subordinated Debt Documents, (e) any payment or other transfer of funds or other property made in satisfaction of any liability or obligation owing to any Person arising under any Subordinated Debt Documents, including any fees, expenses, premiums, indemnification obligations or otherwise arising under any Specified Subordinated Indebtedness Documents, or (f) any payment (including, without limitation, any payment of management, consulting, monitoring or advisory fees) to any Affiliate of any Borrower except to the extent expressly permitted in this Agreement.

     “Revolving Loans” shall mean the loans now or hereafter made by or on behalf of any Lender or by Agent for the account of any Lender on a revolving basis pursuant to the Credit Facility (involving advances, repayments and readvances) as set forth in Section 2.1 hereof.

     “Secured Parties” shall mean, collectively, (i) Agent, (ii) Lenders, (iii) the Issuing Bank and (iv) any Bank Product Provider (including, in the avoidance of doubt, any Secured Swap Provider); provided , that , (i) as to any Bank Product Provider, only to the extent of the Obligations owing to such Bank Product Provider and (ii) such parties are sometimes referred to herein individually as a “Secured Party”.

     “Secured Rate Contract” shall mean any Rate Contract between a Borrower and a Secured Swap Provider.

     “Secured Swap Provider” shall mean a Person with whom a Borrower has entered into a Secured Rate Contract provided or arranged by GE Capital or an Affiliate of GE Capital, and any assignee thereof.

     “Security Documents” shall mean, collectively, the following agreements (as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced): this Agreement, each Pledge Agreement, each Mortgage, each Collateral Access Agreement, each Credit Card Acknowledgment, each Deposit Account Control Agreement, each Investment Property Control Agreement, each trademark security agreement, each copyright security agreement, each patent security agreement, each landlord waiver and consent, each customs broker agreement and any other Financing Agreements as Agent may from time to time designate as a “Security Document” in a writing delivered by Agent to Administrative Borrower.

     “Settlement Period” shall have the meaning set forth in Section 6.11(b) .

     “Solvent” shall mean, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person; (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such

debts and liabilities mature; and (d) such Person is not engaged in a business or transaction, and is not about to engage in a business or transaction, for which such Person’s property would constitute an unreasonably small capital. The amount of contingent liabilities (such as litigation, guaranties and pension plan liabilities) at any time shall be computed as the amount that, in light of all the facts and circumstances existing at the time, represents the amount that can reasonably be expected to become an actual or matured liability.

     “Special Agent Advances” shall have the meaning set forth in Section 12.11(a) hereof.

     “Specified Amount” shall mean, as of the date of determination, twenty five percent (25%) of the Borrowing Base then most recently delivered to Agent pursuant to the terms hereof.

     “Specified Common Stock” shall mean the shares of common stock of Parent issuable upon exercise of the Specified Warrants.

     “Specified Subordinated Indebtedness” shall mean the floating rate secured promissory notes to be issued by Parent in the aggregate principal amount of $20,000,000 on terms reasonably acceptable to Agent and subject to documentation reasonably acceptable to Agent.

     “Specified Subordinated Indebtedness Documents” shall mean, collectively, (i) the Indenture, (ii) each of the “Notes” issued pursuant to and as defined under the Indenture, (iii) each of the “Collateral Documents” entered into pursuant to and under the Indenture, and (iv) each of the Indenture Documents as defined in the Indenture as in effect on the date hereof.

     “Specified Warrants” shall mean the warrants to be issued by Parent to purchase an aggregate of 9,500,000 shares of common stock of Parent in connection with the issuance of the Specified Subordinated Indebtedness.

     “Standby Letters of Credit” shall mean all Letters of Credit other than Commercial Letters of Credit.

     “Store Accounts” shall mean each of the deposit accounts of a Borrower that are used solely for receiving store receipts from a retail store location of a Borrower.

     “Subordinated Debt Documents” shall mean, collectively, any and all agreements, documents and instruments evidencing or otherwise related to Indebtedness permitted under Section 9.9(g) hereof, including, without limitation the Specified Subordinated Indebtedness Documents.

     “Subordination Provisions” shall mean Article XI of the Indenture.

     “Subsidiary” or “subsidiary” shall mean, with respect to any Person, any corporation, limited liability company, limited liability partnership or other limited or general partnership, trust, association or other business entity of which an aggregate of at least a majority of the outstanding Capital Stock or other interests entitled to vote in the election of the board of directors of such corporation (irrespective of whether, at the time, Capital Stock of any other class or classes of such corporation shall have or might have voting power by reason of the

happening of any contingency), managers, trustees or other controlling persons, or an equivalent controlling interest therein, of such Person is, at the time, directly or indirectly, owned by such Person and/or one or more subsidiaries of such Person.

     “Supermajority Lenders” shall mean, at any time, those Lenders whose Pro Rata Shares aggregate more than eighty (80%) percent of the aggregate of the Commitments of all Lenders, or if the Commitments shall have been terminated, Lenders to whom more than eighty (80%) percent of the then outstanding Obligations are owing.

     “Taxes” shall have the meaning set forth in Section 6.5(a) .

     “Transfer of Letter of Credit Liability Letter” shall mean that certain Letter Agreement regarding the Existing Letters of Credit pursuant to which, among other things, Wachovia Bank, N.A. transfers to GE Capital all liability with respect to the Existing Letters of Credit.

     “Tupelo Real Property” shall mean the Real Property of Parent located at 3400 Convention Drive, Tupelo, Mississippi.

     “UCC” shall mean the Uniform Commercial Code as in effect in the State of New York and any successor statute, as in effect from time to time (except that terms used herein which are defined in the Uniform Commercial Code as in effect in the State of New York on the date hereof shall continue to have the same meaning notwithstanding any replacement or amendment of such statute except as Agent may otherwise determine).

     “Value” shall mean, as determined by Agent in good faith, with respect to Inventory, the lower of (a) cost computed on a first-in first-out basis in accordance with GAAP or (b) market value, provided , that , for purposes of the calculation of the Borrowing Base, (i) the Value of the Inventory shall not include: (A) the portion of the value of Inventory equal to the profit earned by any Borrower or Guarantor on the sale thereof to any other Borrower, or (B) that portion of the value of Inventory constituting capitalized costs incurred in the acquisition, storage or distribution of any Inventory or (C) write-ups or write-downs in value with respect to currency exchange rates and (ii) notwithstanding anything to the contrary contained herein, the cost of the Inventory shall be computed in the same manner and consistent with the most recent appraisal of the Inventory received and accepted by Agent prior to the date hereof, if any.

     “Voting Stock” shall mean with respect to any Person, (a) one (1) or more classes of Capital Stock of such Person having general voting powers to elect at least a majority of the board of directors, managers or trustees of such Person, irrespective of whether at the time Capital Stock of any other class or classes have or might have voting power by reason of the happening of any contingency, and (b) any Capital Stock of such Person convertible or exchangeable without restriction at the option of the holder thereof into Capital Stock of such Person described in clause (a) of this definition.

SECTION 2   CREDIT FACILITIES

     2.1 Revolving Loans .

          (a) (i) Subject to and upon the terms and conditions contained herein, each Lender severally (and not jointly) agrees to make its Pro Rata Share of Revolving Loans to Borrowers from time to time until the Commitment Termination Date in amounts requested by Administrative Borrower on behalf of the applicable Borrower up to the aggregate amount outstanding for all Lenders at any time equal to the Borrowing Base at such time. The Pro Rata Share of the Revolving Loan of any Lender shall not at any time exceed its separate Commitment. Until the Commitment Termination Date, Borrowers may borrow, repay and reborrow under this Section 2.1(a)(i) .

                (ii) Each Revolving Loan shall be made on notice by Administrative Borrower on behalf of the applicable Borrower to one of the representatives of Agent identified on Schedule 2.1 at the address specified therein. Any such notice must be given no later than (1) 1 p.m. (Eastern time) on the Business Day of the proposed Revolving Loan, in the case of an Prime Rate Loan, or (2) 1 p.m. (Eastern time) on the date which is three (3) Business Days prior to the proposed Revolving Loan, in the case of a Eurodollar Rate Loan. Each such notice (each a “Notice of Borrowing”) must be given in writing (by telecopy or overnight courier) substantially in the form of Exhibit F , and shall include the information required in such Exhibit and such other information as may be required by Agent.

          (b) Except in Agent’s discretion, with the consent of all Lenders, or as otherwise provided herein, the aggregate principal amount of the Revolving Loans and the Letter of Credit Obligations outstanding at any time shall not exceed Excess Availability.

          (c) In the event that the aggregate principal amount of the Revolving Loans and the Letter of Credit Obligations outstanding at any time exceed Adjusted Excess Availability, such event shall not limit, waive or otherwise affect any rights of Agent or Lenders in such circumstances or on any future occasions and Borrowers shall, upon demand by Agent, which may be made at any time or from time to time, immediately repay to Agent the entire amount of any such excess(es) for which payment is demanded.

     2.2 Letters of Credit .

          (a) (i) Subject to and upon the terms and conditions contained herein and in the Letter of Credit Documents, at the request of Administrative Borrower on behalf of the applicable Borrower for such Borrower’s account, Agent and Lenders agree to incur, from time to time prior to the Commitment Termination Date, Letter of Credit Obligations by causing Letters of Credit to be issued by GE Capital or a Subsidiary thereof or a bank or other legally authorized Person selected by or acceptable to Agent in its sole discretion (each “an Issuing Bank”). Issuing Bank agrees to issue, for the account of such Borrower, one or more Letters of Credit, for the ratable risk of each Lender according to its Pro Rata Share, containing terms and conditions acceptable to Agent and Issuing Bank. No such Letter of Credit shall have an expiry date that is more than one year following the date of issuance thereof, unless otherwise determined by Agent, in its sole discretion (including with respect to customary evergreen

provisions), and neither Agent nor Lenders shall be under any obligation to incur Letter of Credit Obligations in respect of, or purchase risk participations in, any Letter of Credit having an expiry date that is later than the Commitment Termination Date.

          (b) In addition to any charges, fees or expenses charged by any bank or issuer in connection with the Letters of Credit, Borrowers shall pay to Agent, for the benefit of Lenders, monthly a letter of credit fee (the “ Letter of Credit Fee ”) at a rate equal to the percentage (on a per annum basis) set forth below on the daily outstanding balance of the Commercial Letters of Credit and Standby Letters of Credit during the immediately preceding month (or part thereof), payable in arrears as of the first Business Day of each succeeding month and on the Commitment Termination Date and calculated based on a three hundred and sixty (360) day year and actual days elapsed, provided , that , such percentage shall be increased or decreased, as the case may be, to the percentage (on a per annum basis) set forth below based on the Quarterly Average Excess Availability for the immediately preceding calendar quarter being at or within the amounts indicated for such percentage:

provided , that , (i) the Commercial Letter of Credit Rate from the Closing Date through December 31, 2008 shall be 1.75%, and (ii) the Standby Letter of Credit Rate from the Closing Date through December 31, 2008 shall be 2.25%. Adjustments in the rates applicable for Letter of Credit Fees commencing January 1, 2009 shall be implemented effective as of each January 1, April 1, July 1, October 1, commencing at least five (5) days after the date of delivery to Agent of the Applicable Margin Certificate. Concurrently with the delivery of the Applicable Margin Certificate herein referenced, Administrative Borrower shall deliver to Agent a certificate, signed by its chief financial officer, setting forth in reasonable detail the basis for the continuance of, or any change in, the rates for the Letter of Credit Fees. Failure to deliver such Applicable Margin Certificate within five (5) days of the date such certificate is required to be delivered pursuant to Section 7.1(a)(iii) shall, in addition to any other remedy provided for in this Agreement, result in an increase in the rates in the Letter of Credit Fees to the highest level set forth in the foregoing grid, until the delivery of the Applicable Margin Certificate demonstrating that such an increase is not required. If an Event of Default has occurred and is continuing at the time any reduction in

the rates applicable for the Letter of Credit Fees is to be implemented, that reduction shall be deferred until the date on which such Event of Default is waived or cured.

          (c) Borrowers shall give Agent at least three (3) Business Days’ prior written notice requesting the incurrence of any Letter of Credit Obligation. The notice shall be accompanied by the form of the Letter of Credit (which shall be acceptable to the Issuing Bank) and a completed Application for Standby Letter of Credit or Application and Agreement for Commercial Letter of Credit or Application for Commercial Letter of Credit (as applicable) in the form of Exhibit E-1 or E-2 attached hereto. Notwithstanding anything contained herein to the contrary, Letter of Credit applications by Borrowers and approvals by Agent and the Issuing Bank may be made and transmitted pursuant to electronic codes and security measures mutually agreed upon and established by and among Borrowers, Agent and the Issuing Bank. In addition to being subject to the satisfaction of the applicable conditions precedent contained in Section 4 hereof and the other terms and conditions contained herein, no Letter of Credit shall be available unless each of the following conditions precedent have been satisfied in a manner reasonably satisfactory to Agent: (i) Administrative Borrower on behalf of the applicable Borrower shall have delivered to Issuing Bank at such times and in such manner as Issuing Bank may require, an application, in form and substance satisfactory to Issuing Bank and Agent, for the issuance of the Letter of Credit and such other Letter of Credit Documents as may be required pursuant to the terms thereof, and the form and terms of the proposed Letter of Credit shall be reasonably satisfactory to Agent and Issuing Bank, (ii) as of the date of issuance, no order of any court, arbitrator or other Governmental Authority shall purport by its terms to enjoin or restrain money center banks generally from issuing letters of credit of the type and in the amount of the proposed Letter of Credit, and no law, rule or regulation applicable to money center banks generally and no request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over money center banks generally shall prohibit, or request that Issuing Bank refrain from, the issuance of letters of credit generally or the issuance of such Letter of Credit, (iii) after giving effect to the issuance of such Letter of Credit, the Letter of Credit Obligations shall not exceed the Letter of Credit Limit, and (iv) Adjusted Excess Availability, prior to giving effect to any Reserves in the calculation of Excess Availability with respect to such Letter of Credit, on the date of the proposed issuance of any Letter of Credit shall be equal to or greater than an amount equal to one hundred (100%) percent of the face amount of such Commercial Letter of Credit or Standby Letter of Credit being requested and all other commitments and obligations made or incurred by Agent with respect thereto. Effective on the issuance of each Letter of Credit, a Reserve shall be established in the amount equal to one hundred (100%) percent of the face amount of such Commercial Letter of Credit or Standby Letter of Credit being requested and all other commitments and obligations made or incurred by Agent with respect thereto.

          (d) Each Borrower shall reimburse immediately Issuing Bank for any draw under any Letter of Credit issued for the account of such Borrower and pay Issuing Bank the amount of all other charges and fees payable to Issuing Bank in connection with any Letter of Credit issued for the account of such Borrower immediately when due, irrespective of any claim, setoff, defense or other right which such Borrower may have at any time against Issuing Bank or any other Person. Each drawing under any Letter of Credit or other amount payable in connection therewith when due shall constitute a request by the Borrower for whose account

such Letter of Credit was issued to Agent for a Prime Rate Loan in the amount of such drawing or other amount then due, and shall be made by Agent on behalf of Lenders as a Revolving Loan (or Special Agent Advance, as the case may be). The date of such Loan shall be the date of the drawing or as to other amounts, the due date therefor. Any payments made by or on behalf of Agent or any Lender to Issuing Bank and/or related parties in connection with any Letter of Credit shall constitute additional Revolving Loans to such Borrower pursuant to this Section 2 (or Special Agent Advances as the case may be).

          (e) Borrowers and Guarantors shall indemnify and hold the Issuing Bank, Agent and Lenders harmless from and against any and all losses, claims, damages, liabilities, costs and expenses which the Issuing Bank, Agent or any Lender may suffer or incur in connection with any Letter of Credit and any documents, drafts or acceptances relating thereto, including any losses, claims, damages, liabilities, costs, charges and expenses (including reasonable attorneys’ fees) due to any action taken by any issuer or correspondent with respect to any Letter of Credit, except for such losses, claims, damages, liabilities, costs or expenses that are a direct result of the gross negligence or willful misconduct of the Issuing Bank, Agent or such Lender as determined pursuant to a final non-appealable order of a court of competent jurisdiction. Each Borrower and Guarantor assumes all risks with respect to the acts or omissions of the drawer under or beneficiary of any Letter of Credit and for such purposes the drawer or beneficiary shall be deemed such Borrower’s agent. Each Borrower and Guarantor assumes all risks for, and agrees to pay, all foreign, Federal, State and local taxes, duties and levies relating to any goods subject to any Letter of Credit or any documents, drafts or acceptances thereunder. Each Borrower and Guarantor hereby releases and holds the Issuing Bank, Agent and Lenders harmless from and against any acts, waivers, errors, delays or omissions, whether caused by any Borrower, Guarantor, by any issuer or correspondent or otherwise with respect to or relating to any Letter of Credit, except for the gross negligence or willful misconduct of the Issuing Bank, Agent or such Lender as determined pursuant to a final, non-appealable order of a court of competent jurisdiction. The provisions of this Section 2.2(e) shall survive the payment of Obligations and the termination of this Agreement. Nothing contained herein shall be deemed to limit or to expand any waivers, covenants or indemnities made by Borrowers in favor of any Issuing Bank in any letter of credit application, reimbursement agreement or similar document, instrument or agreement between or among Borrowers and such Issuing Bank, including an Application and Agreement For Commercial Letter of Credit, a Master Commercial Agreement and a Master Standby Agreement entered into with Agent.

          (f) In connection with Inventory purchased pursuant to any Letter of Credit, Borrowers and Guarantors shall, at Agent’s request, instruct all suppliers, carriers, forwarders, customs brokers, warehouses or others receiving or holding cash, checks, Inventory, documents or instruments in which Agent holds a security interest that, upon Agent’s request, such items shall be delivered to Agent and/or subject to Agent’s order, and if they shall come into such Borrower’s or Guarantor’s possession, to deliver them, upon Agent’s request, to Agent in their original form; provided , that , so long as no Default or Event of Default shall then be continuing, Agent shall not exercise the rights under this clause (f) to have such Persons deliver any cash, checks, Inventory, documents or instruments so long as the same are held by a Customs Broker that has entered into a customs broker agreement in form and substance reasonably satisfactory

to the Agent). Borrowers and Guarantors shall also, at Agent’s request, designate Agent as the consignee on all bills of lading and other negotiable and non-negotiable documents.

          (g) Each Borrower and Guarantor hereby irrevocably authorizes and directs Issuing Bank to name such Borrower or Guarantor as the account party therein and to deliver to Agent all instruments, documents and other writings and property received by Issuing Bank pursuant to any Letter of Credit and to accept and rely upon Agent’s instructions and agreements with respect to all matters arising in connection with any Letter of Credit or the Letter of Credit Documents with respect thereto. Nothing contained herein shall be deemed or construed to grant any Borrower or Guarantor any right or authority to pledge the credit of Agent or any Lender in any manner. Borrowers and Guarantors shall be bound by any reasonable interpretation made in good faith by Agent, or Issuing Bank under or in connection with any Letter of Credit or any documents, drafts or acceptances thereunder, notwithstanding that such interpretation may be inconsistent with any instructions of any Borrower or Guarantor.

          (h) Immediately upon the issuance or amendment of any Letter of Credit, each Lender shall be deemed to have irrevocably and unconditionally purchased and received, without recourse or warranty, an undivided interest and participation to the extent of such Lender’s Pro Rata Share of the liability with respect to such Letter of Credit and the obligations of Borrowers with respect thereto (including all Letter of Credit Obligations with respect thereto). Each Lender shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and be obligated to pay to Issuing Bank therefor and discharge when due, its Pro Rata Share of all of such obligations arising under such Letter of Credit. Without limiting the scope and nature of each Lender’s participation in any Letter of Credit, to the extent that Issuing Bank has not been reimbursed or otherwise paid as required hereunder or under any such Letter of Credit, each such Lender shall pay to Issuing Bank its Pro Rata Share of such unreimbursed drawing or other amounts then due to Issuing Bank in connection therewith. If it shall be illegal or unlawful for Borrowers to incur Revolving Loans because of an Event of Default described in Sections 10.1(f) , 10.1(g) or 10.1(h) or otherwise or if it shall be illegal or unlawful for any Lender to be deemed to have assumed a ratable share of the reimbursement obligations owed to an Issuing Bank, or if the Issuing Bank is a Lender, then (A) immediately and without further action whatsoever, each Lender shall be deemed to have irrevocably and unconditionally purchased from Agent (or such Issuing Bank, as the case may be) an undivided interest and participation equal to such Lender’s Pro Rata Share (based on the Maximum Credit) of the Letter of Credit Obligations in respect of all Letters of Credit then outstanding and (B) thereafter, immediately upon issuance of any Letter of Credit, each Lender shall be deemed to have irrevocably and unconditionally purchased from Agent (or such Issuing Bank, as the case may be) an undivided interest and participation in such Lender’s Pro Rata Share (based on the Maximum Credit) of the Letter of Credit Obligations with respect to such Letter of Credit on the date of such issuance. Each Lender shall fund its participation in all payments or disbursements made under the Letters of Credit in the same manner as provided in this Agreement with respect to Revolving Loans.

          (i) The obligations of Borrowers to pay each Letter of Credit Obligations and the obligations of Lenders to make payments to Agent for the account of Issuing Bank with respect to Letters of Credit shall be absolute, unconditional and irrevocable without necessity of

presentment, demand, protest or other formalities, and the obligations of each Lender to make payments to the Issuing Bank with respect to Letters of Credit shall be unconditional and irrevocable. Such obligations of the Borrowers and Lenders shall be paid strictly in accordance with the terms hereof under all circumstances, including, without limitation: (i) any lack of validity or enforceability of any Letter of Credit or this Agreement or any other Financing Agreement, (ii) the existence of any claim, setoff, defense or other right that any Borrower or any of their respective Affiliates or any Lender may at any time have against a beneficiary or any transferee of any Letter of Credit (or any Persons or entities for whom any such transferee may be acting), Issuing Bank, Agent, any Lender, or any other Person, whether in connection with this Agreement, the Letter of Credit, the transactions contemplated herein or therein or any unrelated transaction (including any underlying transaction between any Borrower or any of their respective Affiliates and the beneficiary for which the Letter of Credit was procured), (iii) any draft, demand, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or statement therein being untrue or inaccurate in any respect, (iv) payment by any Issuing Bank under any Letter of Credit or guaranty thereof against presentation of a demand, draft or certificate or other document that does not comply with the terms of such Letter of Credit or guaranty, (v) the failure to satisfy any other condition set forth in Section 4 (including whether a Default or Event of Default has occurred and is continuing) or (vi) any other event or circumstance that is similar to the foregoing. Furthermore, as between Agent, Issuing Bank, any Lender and the Borrowers, Borrowers assume all risk of the acts and omissions of, or misuse of any Letter of Credit by beneficiaries, of any Letter of Credit. If such amount is not made available by a Lender when due, Agent shall be entitled to recover such amount on demand from such Lender with interest thereon, for each day from the date such amount was due until the date such amount is paid to Agent at the interest rate then payable by any Borrower in respect of Loans that are Prime Rate Loans. Any such reimbursement shall not relieve or otherwise impair the obligation of Borrowers to reimburse Issuing Bank under any Letter of Credit or make any other payment in connection therewith.

          (j) (i) If a Borrower is required to provide cash collateral for any Letter of Credit Obligations pursuant to this Agreement, including Section 10.2 of this Agreement, prior to the Commitment Termination Date, such Borrower will pay to Agent for the ratable benefit of itself and Lenders cash or Cash Equivalents in an amount equal to one hundred five (105%) percent of the amount of the Letter of Credit Obligations plus the amount of any fees and expenses payable in connection therewith through the end of the latest expiration date of such Letter of Credit Obligations. Such funds or Cash Equivalents shall be held by Agent in a cash collateral account (the “ Cash Collateral Account ”) maintained at a bank or financial institution acceptable to Agent. The Cash Collateral Account shall be in the name of the applicable Borrower and shall be pledged to, and subject to the control of, Agent, for the benefit of Agent and Lenders, in a manner reasonably satisfactory to Agent. Each Borrower hereby pledges and grants to Agent, on behalf of itself and Lenders, a security interest in all such funds and Cash Equivalents held in the Cash Collateral Account from time to time and all proceeds thereof, as security for the payment of all amounts due in respect of the Letter of Credit Obligations and other Obligations, whether or not then due. This Agreement shall constitute a security agreement under applicable law.

               (ii) If any Letter of Credit Obligations, whether or not then due and payable, shall for any reason be outstanding on the Commitment Termination Date, Borrowers shall either (A) provide cash collateral therefor in the manner described above, or (B) cause all such Letters of Credit and guaranties thereof, if any, to be canceled and returned, or (C) deliver a stand-by letter (or letters) of credit in guaranty of such Letter of Credit Obligations, which stand-by letter (or letters) of credit shall be of like tenor and duration (plus thirty (30) additional days) as, and in an amount equal to one hundred five (105%) percent of the amount of the Letter of Credit Obligations plus the amount of any fees and expenses payable in connection therewith through the end of the latest expiration date of such Letter of Credit Obligations, and shall be issued by a Person, and shall be subject to such terms and conditions, as are be satisfactory to Agent in its sole discretion.

               (iii) From time to time after funds are deposited in the Cash Collateral Account by any Borrower, whether before or after the Commitment Termination Date, Agent may apply such funds or Cash Equivalents then held in the Cash Collateral Account to the payment of any amounts, and in such order as Agent may elect, as shall be or shall become due and payable by such Borrower to Agent and Lenders with respect to such Letter of Credit Obligations of such Borrower and, upon the satisfaction in full of all Letter of Credit Obligations of such Borrower, to any other Obligations of any Borrower then due and payable.

               (iv) No Borrower nor any Person claiming on behalf of or through any Borrower shall have any right to withdraw any of the funds or Cash Equivalents held in the Cash Collateral Account. Upon the termination of any Letter of Credit and the payment of all amounts payable by Borrowers to Agent and Lenders in respect thereof, the Agent shall promptly pay to the Borrowers unless otherwise required by law such amounts in excess of 105% of the then extant Letter of Credit Obligations. Interest earned on deposits in the Cash Collateral Account shall be for the account of the Borrowers and held as additional collateral. Upon payment in full in cash of all Obligations and the termination of all Commitments to lend hereunder, the Agent shall return to the Borrowers any accrued interest not otherwise applied to the payment of the Obligations, unless otherwise required by law.

          (k) Unless otherwise specified herein, the amount of a Letter of Credit at any time shall be deemed to be the stated amount of such Letter of Credit in effect at such time; provided , however , that with respect to any Letter of Credit that, by its terms or the terms of any Letter of Credit Document, provides for one or more automatic increases in the stated amount thereof, the amount of such Letter of Credit shall be deemed to be the maximum stated amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum stated amount is in effect at such time.

          (l) All Existing Letters of Credit shall be deemed to have been issued pursuant hereto, and from and after the Closing Date shall be subject to and governed by the terms and conditions hereof.

SECTION 3   INTEREST AND FEES

     3.1 Interest .

          (a) Borrowers shall pay to Agent, for the benefit of Lenders, interest on the outstanding principal amount of the Loans at the Interest Rate as provided in clause (d) of this Section 3.1 ; provided , however , all interest accruing hereunder on and after the date of any Event of Default or the Commitment Termination Date shall be payable on demand.

          (b) Administrative Borrower on behalf of the applicable Borrower may from time to time (i) request that Prime Rate Loans be converted to Eurodollar Rate Loans, (ii) request to convert any Eurodollar Rate Loan to a Prime Rate Loan upon payment of an administrative fee of $250 and subject to payment of Eurodollar breakage costs in accordance with Section 3.3(c) if such conversion is made prior to the expiration of the Interest Period applicable thereto, or (iii) request that all or any portion of any Eurodollar Rate Loan be continued as a Eurodollar Rate Loan upon the expiration of the applicable Interest Period and the succeeding Interest Period of that continued Loan shall commence on the first day after the last day of the Interest Period of the Loan to be continued. Any Loan or group of Loans having the same proposed Interest Period to be made or continued as, or converted into, a Eurodollar Rate Loan must be in a minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of such amount. Such request must be made by 1 p.m. (Eastern time) on the third Business Day prior to (1) the date of any proposed Loan which is to bear interest at the Eurodollar Rate, (2) the end of each Interest Period with respect to any Eurodollar Rate Loans to be continued as such, or (3) the date on which Administrative Borrower wishes to convert any Prime Rate Loan to a Eurodollar Rate Loan for an Interest Period designated by Administrative Borrower in such election. Any request by Administrative Borrower on behalf of a Borrower for Eurodollar Rate Loans or to convert Prime Rate Loans to Eurodollar Rate Loans or to continue any existing Eurodollar Rate Loans shall be irrevocable. Notwithstanding anything to the contrary contained herein, Agent and Lenders shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable Eurodollar Rate market to fund any Eurodollar Rate Loans, but the provisions hereof shall be deemed to apply as if Agent and Lenders had purchased such deposits to fund the Eurodollar Rate Loans. Administrative Borrower on behalf of the applicable Borrower must make such election by notice to Agent in writing, by telecopy or overnight courier. In the case of any conversion or continuation, such election must be made pursuant to a written notice (a “ Notice of Conversion/Continuation ”) substantially in the form of Exhibit G .

          (c) Any Eurodollar Rate Loans shall automatically convert to Prime Rate Loans upon the last day of the applicable Interest Period, unless Agent has received and approved a request to continue such Eurodollar Rate Loan at least three (3) Business Days prior to such last day in accordance with the terms hereof. Any Eurodollar Rate Loans shall, at Agent’s option, upon notice by Agent to Parent, be subsequently converted to Prime Rate Loans in the event that this Agreement shall terminate or not be renewed. Borrowers shall pay to Agent, for the benefit of Lenders, upon demand by Agent (or Agent may, at its option, charge any loan account of any Borrower) any amounts required to compensate any Lender or Participant for any loss (including loss of anticipated profits), cost or expense incurred by such

person, as a result of the conversion of Eurodollar Rate Loans to Prime Rate Loans pursuant to any of the foregoing.

          (d) Interest shall be payable by Borrowers to Agent, for the account of Lenders, monthly in arrears not later than the first Business Day of each calendar month and shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. The interest rate on non-contingent Obligations (other than Eurodollar Rate Loans) shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the first day of the month after any change in such Prime Rate is announced based on the Prime Rate in effect on the last day of the month in which any such change occurs. In no event shall charges constituting interest payable by Borrowers to Agent and Lenders exceed the maximum amount or the rate permitted under any applicable law or regulation, and if any such part or provision of this Agreement is in contravention of any such law or regulation, such part or provision shall be deemed amended to conform thereto.

     3.2 Fees .

          (a) Borrowers shall pay to Agent, for the account of Lenders a monthly unused line fee at a rate equal to the percentage (on a per annum basis) of 0.25% calculated upon the amount by which the Maximum Credit exceeds the average daily principal balance of the outstanding Revolving Loans and Letters of Credit during the immediately preceding month (or part thereof). Such fee shall be payable on the first Business Day of each month in arrears and on the Commitment Termination Date and shall be calculated based on a three hundred sixty (360) day year and actual days elapsed.

          (b) Borrowers agree to pay to Agent the other fees and amounts set forth in the Fee Letter in the amounts and at all times specified therein.

     3.3 Changes in Laws and Increased Costs of Loans .

          (a) If after the date hereof, either (i) any change in, or in the interpretation of, any law or regulation is introduced, including, without limitation, with respect to reserve requirements, applicable to any Lender or any banking or financial institution from whom any Lender borrows funds or obtains credit (a “Funding Bank”), or (ii) a Funding Bank or any Lender complies with any future guideline or request from any central bank or other Governmental Authority or (iii) a Funding Bank, any Lender or Issuing Bank determines that the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof has or would have the effect described below, or a Funding Bank, any Lender or Issuing Bank complies with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, and in the case of any event set forth in this clause (iii), such adoption, change or compliance has or would have the direct or indirect effect of reducing the rate of return on any Lender’s or Issuing Bank’s capital as a consequence of its obligations hereunder to a level below that which such Lender or Issuing Bank could have achieved but for such adoption, change or compliance (taking into consideration the Funding Bank’s or Lender’s or Issuing Bank’s policies with respect to capital

adequacy) by an amount deemed by such Lender or Issuing Bank to be material, and the result of any of the foregoing events described in clauses (i) , (ii) or (iii) is or results in an increase in the cost to any Lender or Issuing Bank of funding or maintaining the Loans, the Letters of Credit or its Commitment, then Borrowers and Guarantors shall from time to time upon demand by Agent pay to Agent additional amounts sufficient to indemnify such Lender, as the case may be, against such increased cost on an after-tax basis (after taking into account applicable deductions and credits in respect of the amount indemnified). A certificate as to the amount of such increased cost shall be submitted to Administrative Borrower by Agent or the applicable Lender and shall be conclusive, absent manifest error.

          (b) If prior to the first day of any Interest Period, (i) Agent shall have determined in good faith (which determination shall be conclusive and binding upon Borrowers and Guarantors) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Adjusted Eurodollar Rate for such Interest Period, (ii) Agent has received notice from the Required Lenders that the Adjusted Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to Lenders of making or maintaining Eurodollar Rate Loans during such Interest Period, or (iii) Dollar deposits in the principal amounts of the Eurodollar Rate Loans to which such Interest Period is to be applicable are not generally available in the London interbank market, Agent shall give telecopy or telephonic notice thereof to Administrative Borrower as soon as practicable thereafter, and will also give prompt written notice to Administrative Borrower when such conditions no longer exist. If such notice is given (A) any Eurodollar Rate Loans requested to be made on the first day of such Interest Period shall be made as Prime Rate Loans, (B) any Loans that were to have been converted on the first day of such Interest Period to or continued as Eurodollar Rate Loans shall be converted to or continued as Prime Rate Loans and (C) each outstanding Eurodollar Rate Loan shall be converted, on the last day of the then-current Interest Period thereof, to Prime Rate Loans. Until such notice has been withdrawn by Agent, no further Eurodollar Rate Loans shall be made or continued as such, nor shall Administrative Borrower on behalf of any Borrower have the right to convert Prime Rate Loans to Eurodollar Rate Loans.

          (c) Notwithstanding any other provision herein, if the adoption of or any change in any law, treaty, rule or regulation or final, non-appealable determination of an arbitrator or a court or other Governmental Authority or in the interpretation or application thereof occurring after the date hereof shall make it unlawful for Agent or any Lender to make or maintain Eurodollar Rate Loans as contemplated by this Agreement, (i) Agent or such Lender shall promptly give written notice of such circumstances to Administrative Borrower (which notice shall be withdrawn whenever such circumstances no longer exist), (ii) the commitment of such Lender hereunder to make Eurodollar Rate Loans, continue Eurodollar Rate Loans as such and convert Prime Rate Loans to Eurodollar Rate Loans shall forthwith be canceled and, until such time as it shall no longer be unlawful for such Lender to make or maintain Eurodollar Rate Loans, such Lender shall then have a commitment only to make a Prime Rate Loan when a Eurodollar Rate Loan is requested and (iii) such Lender’s Loans then outstanding as Eurodollar Rate Loans, if any, shall be converted automatically to Prime Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a Eurodollar Rate Loan occurs on a day which is

not the last day of the then current Interest Period with respect thereto, Borrowers and Guarantors shall pay to such Lender such amounts, if any, as may be required pursuant to Section 3.3(d) below.

          (d) Borrowers and Guarantors shall jointly and severally indemnify Agent and each Lender and to hold Agent and each Lender harmless from any loss or expense which Agent or such Lender may sustain or incur as a consequence of (i) default by any Borrower in making a borrowing of, conversion into or extension of Eurodollar Rate Loans after Administrative Borrower on behalf of such Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (ii) default by any Borrower in making any prepayment of a Eurodollar Rate Loan after Administrative Borrower on behalf of such Borrower has given a notice thereof in accordance with the provisions of this Agreement, and (iii) the making of a prepayment of Eurodollar Rate Loans on a day which is not the last day of an Interest Period with respect thereto. With respect to Eurodollar Rate Loans, such indemnification may include an amount equal to the excess, if any, of (A) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or extended, for the period from the date of such prepayment or of such failure to borrow, convert or extend to the last day of the applicable Interest Period (or, in the case of a failure to borrow, convert or extend, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Eurodollar Rate Loans provided for herein over (B) the amount of interest (as determined by such Agent or such Lender) which would have accrued to Agent or such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank Eurodollar market. This covenant shall survive the termination or non-renewal of this Agreement and the payment of the Obligations.

SECTION 4   CONDITIONS PRECEDENT

     4.1 Conditions Precedent to Initial Loans and Letters of Credit . The obligation of Agent and Lenders to make the initial Loans or of Issuing Bank to issue the initial Letters of Credit hereunder is subject to the satisfaction of, or waiver of, immediately prior to or concurrently with the making of such Loan or the issuance of such Letter of Credit of each of the following conditions precedent:

          (a) this Agreement or counterparts hereof shall have been duly executed by, and delivered to, Borrowers, Guarantors, Agent and Lenders; and Agent shall have received such documents, instruments, agreements and legal opinions as Agent shall reasonably request in connection with the transactions contemplated by this Agreement and the other Financing Agreement, including all those listed in the Closing Checklist attached hereto as Annex 1 , each in form and substance reasonably satisfactory to Agent;

          (b) Agent shall have received, in form and substance satisfactory to Agent, all releases, terminations and such other documents as Agent may request to evidence and effectuate the termination by the Existing Lenders of their respective financing arrangements with Borrowers and Guarantors;

          (c) all requisite corporate action and proceedings in connection with this Agreement and the other Financing Agreements shall be satisfactory in form and substance to

Agent, and Agent shall have received all information and copies of all documents, including records of requisite corporate action and proceedings which Agent may have requested in connection therewith, such documents to be certified by appropriate corporate officers or Governmental Authority (and including a copy of the certificate of incorporation or formation of each Borrower and Guarantor certified by the Secretary of State (or equivalent Governmental Authority) which shall set forth the same complete name of such Borrower or Guarantor as is set forth herein and such document as shall set forth the organizational identification number of each Borrower or Guarantor, if one is issued in its jurisdiction of incorporation or formation);

          (d) a certificate signed by the chief executive officer, chief financial officer, president or vice president of each Borrower, certifying that since February 2, 2008 no event has occurred, that alone or together with other events, could reasonably be expected to have a Material Adverse Effect;

          (e) Agent shall have completed a field review of the Records and such other information with respect to the Collateral as Agent may require to determine the amount of Loans available to Borrowers (including, without limitation, current perpetual inventory records with respect to the distribution center of Borrowers and/or roll-forwards of Accounts and Inventory through the date of closing and test counts of the Inventory in a manner reasonably satisfactory to Agent, together with such supporting documentation as may be necessary or appropriate, and other documents and information that will enable Agent to accurately identify and verify the Collateral), the results of which in each case shall be reasonably satisfactory to Agent, not more than seven (7) Business Days prior to the date hereof or such earlier date as Agent may agree;

          (f) Agent shall have received, in form and substance reasonably satisfactory to Agent, (i) an opening pro-forma balance sheet of Parent and its Subsidiaries (on a consolidated basis), reflecting the transactions contemplated hereby and (ii) the Disclosure Letter attaching the projected income statements, balance sheets and statements of cash flow for Parent and its Subsidiaries (on a consolidated basis) prepared on a monthly basis for the period through the end of the 2009 Fiscal Year and thereafter, on an annual basis for each Fiscal Year through the end of the 2012 Fiscal Year, in each case with the results and assumptions set forth in all of such projections in form and substance reasonably satisfactory to Agent;

          (g) Agent shall have received a certificate signed by the chief executive officer or chief financial officer of Administrative Borrower, in form and substance satisfactory to Agent, attaching all consents, waivers, acknowledgments and other agreements from third persons which Agent may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral or to effectuate the provisions or purposes of this Agreement and the other Financing Agreements, including, without limitation, Collateral Access Agreements (other than from the lessors of retail store locations) and Credit Card Acknowledgments;

          (h) Adjusted Excess Availability as determined by Agent, as of the Closing Date, shall be not less than $12,000,000 after giving effect to the Plan of Reorganization, the initial Loans made or to be made, the Letters of Credit issued or to be issued in connection with the initial transactions hereunder, the incurrence of the Specified Subordinated Indebtedness, and

the payment of all trade payables and expenses and liabilities of Borrowers in the ordinary course of business;

          (i) Agent shall have received evidence, in form and substance satisfactory to Agent, that Agent has a valid perfected first priority security interest in all of the Collateral;

          (j) Agent shall have received and reviewed lien search results for each Borrower and Guarantor in such jurisdictions as Agent shall request, which search results shall be in form and substance satisfactory to Agent;

          (k) Agent shall have received environmental audits of the Baldwyn Real Property conducted by an independent environmental engineering firm acceptable to Agent, and in form, scope and methodology reasonably satisfactory to Agent, the results of which shall be satisfactory to Agent;

          (l) Agent shall have received, in form and substance reasonably satisfactory to Agent, a valid and effective title insurance policy issued by a company and agent acceptable to Agent: (i) insuring the priority, amount and sufficiency of the Closing Date Mortgaged Property, (ii) insuring against matters that would be disclosed by surveys and (iii) containing any legally available endorsements, assurances or affirmative coverage requested by Agent for protection of its interests;

          (m) Agent shall have received originals of the shares of the stock certificates (if any) representing all of the issued and outstanding shares of the Capital Stock of each Borrower and Guarantor (other than Parent) and owned by any Borrower or Guarantor, in each case together with stock powers duly executed in blank with respect thereto;

          (n) Agent shall have received a Borrowing Base Certificate setting forth the Loans and Letters of Credit available to Borrowers as of the date hereof as completed in a manner reasonably satisfactory to Agent and duly authorized, executed and delivered on behalf of Borrowers;

          (o) Agent shall have received evidence of insurance and loss payee endorsements required hereunder and under the other Financing Agreements, in form and substance satisfactory to Agent, and certificates of insurance policies and/or endorsements naming Agent as loss payee;

          (p) Agent shall have received a written appraisal as to the Inventory of Borrowers and Guarantors and the Baldwyn Real Property, in each case by an appraiser acceptable to Agent, in form, scope and methodology reasonably acceptable to Agent, addressed to Agent and upon which Agent and Lenders are expressly permitted to rely;

          (q) no material pending or threatened, litigation, proceeding, bankruptcy (other than the Reorganization Cases) or insolvency, injunction, order or claims with respect to Borrowers and Guarantors shall exist;

          (r) as of the date hereof and after giving effect to the transactions contemplated hereby, no defaults or events of default on any material Indebtedness or any other Material Contracts of Borrowers or Guarantors shall exist or have occurred and be continuing;

          (s) Agent shall have received, in form and substance reasonably satisfactory to Agent, such opinion letters of counsel to Borrowers and Guarantors with respect to the Financing Agreements and such other matters as Agent may request;

          (t) Agent shall have received the audited financial statements of Borrowers and their Subsidiaries for the Fiscal Year ended February 2, 2008, and such financial statements shall be in form and substance reasonably satisfactory to Agent;

          (u) Agent shall have received satisfactory background and reference checks on (i) each Borrower and each Guarantor and (ii) the chief executive officer, chief financial officer, chief operating officer and each other officer and director of each Borrower and each Guarantor, in each case, as determined by the Agent, and the Borrowers and the Guarantors shall have delivered all such documents and instruments necessary to effectuate such background and reference checks;

          (v) Agent shall have received evidence satisfactory to Agent that Borrowers shall have received the Specified Subordinated Indebtedness, together with copies, certified by the chief executive officer or chief financial officer of the Administrative Borrower of all Specified Subordinated Indebtedness Documents. The terms of the Specified Subordinated Indebtedness and the Specified Subordinated Indebtedness Documents shall be reasonably acceptable to Agent, including, without limitation, with respect to payment subordination and blockage, remedy standstill periods, cross-default provisions and agreement not to contest the Obligations and the liens granted to Agent under the Financing Agreements, and the Obligations arising under the Financing Agreements and the liens granted to Agent under the Financing Agreements shall be senior and first in priority, as applicable, in all respects;

          (w) all motions and other documents to be filed with and submitted to the Bankruptcy Court in connection with this Agreement and the Plan of Reorganization and the approval hereof and thereof shall be satisfactory in form and substance to Agent. All service and notice requirements in connection this Agreement and the Plan of Reorganization shall have been timely complied with and such requirements have been fulfilled in accordance with all applicable laws and rules. A Final Order confirming the Plan of Reorganization in form and substance acceptable to Agent (the “ Confirmation Order ”) shall have been entered in the Reorganization Cases, which order shall not have been subject to injunction, stayed, modified, appealed, reversed or otherwise affected;

          (x) Borrowers’ Plan of Reorganization, as confirmed, shall be in form and substance satisfactory to Agent, including, without limitation, providing for the discharge of all Indebtedness and other claims against the Borrowers existing as of the Petition Date, the termination of all commitments relating thereto, and the termination, release and discharge of all liens or security interests granted thereunder (other than Permitted Liens), in each case on terms satisfactory to the Agent. The Bankruptcy Court shall have approved any amendments or modifications to the Plan of Reorganization and entered any and all related orders requested or

approved by Agent in connection therewith, and no other amendments or modifications thereto shall have occurred except as shall have been consented to by Agent or the Required Lenders, as appropriate. All conditions precedent to the Effective Date (as defined in the Plan of Reorganization) of the Plan of Reorganization shall have been met (or the Agent shall have granted its prior written consent to a waiver thereof) and the Effective Date of the Plan of Reorganization shall have occurred or shall be scheduled to occur but for the initial Loans under this Agreement to be made on the Closing Date. The Confirmation Order shall be a Final Order and shall not have been reversed, modified, amended, subject to injunction, or stayed, shall be in full force and effect, and, unless otherwise agreed by Agent, all appeal periods relating to the Confirmation Order shall have expired, and, unless otherwise agreed by Agent, no appeals from the Confirmation Order shall be outstanding. Except with the prior written consent of the Agent, the Bankruptcy Court’s retention of jurisdiction under the Final Order confirming the Plan of Reorganization shall not extend to nor govern the enforcement of the Financing Agreements from and after the Closing Date, or any rights or remedies relating thereto;

          (y) Agent shall have completed its legal due diligence with results reasonably satisfactory to Agent (including without limitation Agent’s reasonable satisfactory with any previously undisclosed issues of a business nature that arise in connection with the legal due diligence) for which Agent previously did not have actual knowledge of such issues prior to the date the Commitment Letter dated as of April 8, 2008 having been executed and which such issues affect any Borrower or any of its Subsidiaries or the Transaction that in the Agent’s reasonable judgment is inconsistent in a material and adverse manner with any such information disclosed to the Agent prior to the date of such Commitment Letter. Without limiting the generality of the foregoing, the corporate structure of the Borrowers and their subsidiaries, documentation evidencing Indebtedness of the Borrowers and their subsidiaries, material contracts and Governing Documents of the Borrowers and their subsidiaries shall be reasonably acceptable to the Agent; and

          (z) Agent shall have received an officer’s certificate duly executed by chief executive officer, president, vice president or treasurer of each of the Borrowers and Guarantors certifying and attesting that, as of the Closing Date, (i) no appeal of the Confirmation Order has been filed; (ii) no request for a stay of the Confirmation Order pending appeal has been made; and (iii) the Confirmation Order has not been stayed in any manner.

          (aa) Agent shall have received such other documents and instruments reasonably as Agent or its counsel may require or request.

     4.2 Conditions Precedent to All Loans and Letters of Credit . The obligation of Lenders to make the Loans, including the initial Loans, or of the Issuing Bank to issue any Letter of Credit, including the initial Letters of Credit and any further Loans and Letters of Credit, is subject to the further satisfaction of, or waiver of, immediately prior to or concurrently with the making of each such Loan or the issuance of such Letter of Credit of each of the following conditions precedent:

          (a) all representations and warranties contained herein and in the other Financing Agreements shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of the making of

each such Loan or providing each such Letter of Credit and after giving effect thereto, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and accurate in all material respects on and as of such earlier date);

          (b) no law, regulation, order, judgment or decree of any Governmental Authority shall exist, and no action, suit, investigation, litigation or proceeding shall be pending or threatened in any court or before any arbitrator or Governmental Authority, which (i) purports to enjoin, prohibit, restrain or otherwise affect (A) the making of the Loans or providing the Letters of Credit, or (B) the consummation of the transactions contemplated pursuant to the terms hereof or the other Financing Agreements or (ii) has or has a reasonable likelihood of having a Material Adverse Effect; and

          (c) no Default or Event of Default shall exist or have occurred and be continuing on and as of the date of the making of such Loan or providing each such Letter of Credit and after giving effect thereto;

          (d) Borrowers shall be in compliance with the covenant set forth in Section 9.19 ; and

          (e) the Final Order confirming the Plan of Reorganization shall be in full force and effect and shall not have been vacated, reversed, modified, amended or stayed.

SECTION 5   GRANT AND PERFECTION OF SECURITY INTEREST

     5.1 Grant of Sec