10-K

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                              to                             

Commission File Number: 1-7921

SECURITY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter.)

Delaware
(State or other jurisdiction of
incorporation or organization) 13-3003070
(I.R.S. Employer Identification No.)

Three Pickwick Plaza, Suite 310
Greenwich, Connecticut 06830
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (203) 625-0770

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class	Name of each exchange on which registered
Class A Common Stock, $.01 par value	American Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        As of March 20, 2002, 6,450,587 shares of the Registrant's voting stock were outstanding, of which 5,269,004 shares were held by affiliates of the Registrant. The aggregate market value of the remaining 1,181,583 shares of voting stock held by non-affiliates (based upon the closing price of the Registrant's Class A Common Stock on March 20, 2002 of $9.80) was approximately $11,579,513.

        Portions of Security Capital Corporation's definitive proxy statement to be filed with the Securities and Exchange Commission before April 30, 2002 are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

		PAGE
Item 1.	Business	3
Item 2.	Properties	13
Item 3.	Legal Proceedings	14
Item 4.	Submission of Matters to a Vote of Security Holders	14
Item 5.	Market for the Registrant's Common Equity and Related Stockholder Matters	14
Item 6.	Selected Financial Data	15
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 8.	Financial Statements and Supplementary Data	24
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	54
Item 10.	Directors and Executive Officers of the Registrant	54
Item 11.	Executive Compensation	54
Item 12.	Security Ownership of Certain Beneficial Owners and Management	54
Item 13.	Certain Relationships and Related Transactions	54
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	54

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PART I

ITEM 1. BUSINESS.

General

        Security Capital Corporation ("Security Capital" or "SCC" or the "Company") operates four subsidiaries in three distinct business segments. Each subsidiary has a high degree of operating autonomy, with its own chief executive officer and management. Management of each company has equity interests and other incentives based primarily on the performance of its own subsidiary. The parent company management of Security Capital is primarily focused on strategic, financial and other senior level managerial issues, as well as potential new related or other acquisitions.

        As a result of the December 2000 acquisition through a 100%-owned subsidiary, WC Holdings, Inc., SCC has an 80% equity interest in Health Power, Inc. ("Health Power"). Security Capital owns, through its 98%-owned subsidiary, Primrose Holdings, Inc., 100% of the outstanding shares of common stock of Primrose School Franchising Company and one related service company (together referred to as "Primrose"). Through its 80%-owned subsidiary, Pumpkin Masters Holdings, Inc., SCC owns 100% of the outstanding shares of Pumpkin, Ltd. (together referred to as "Pumpkin"). Security Capital owns, through its 100%-owned subsidiary, P.D. Holdings, Inc., 100% of the outstanding shares of Possible Dreams, Ltd. (together referred to as "Possible Dreams").

        The three business segments of SCC are employer cost containment-related services, educational services, and seasonal products. The employer cost containment-related services segment consists of Health Power which provides services to corporations and their employees primarily relating to industrial health and safety, industrial medical care, workers' compensation insurance and the direct and indirect costs associated therewith. The educational segment consists of Primrose which is engaged in the franchising of educational child care centers, with related activities in operations advisory, real estate and site selection services. Primrose also operates one educational child care center. The Primrose activities are national with the exception of the Northeast. The seasonal products segment consists of Pumpkin and Possible Dreams. Pumpkin is engaged primarily in the business of designing, out-sourcing and distributing pumpkin carving kits and related Halloween accessories. Possible Dreams operates as a designer, importer, and distributor of collectible and fine quality figurines and, to a lesser extent, other specialty giftware.

Health Power (Employer Cost Containment-Related Services Segment)

Background

        On December 21, 2000, the Company, through its subsidiary, WC Holdings, Inc. acquired Health Power, Inc., a Delaware corporation. The total consideration paid for 100% of Health Power common stock was $37,446,000. In addition, on April 1, 2001, the Company, through Health Power's subsidiary CompManagement, Inc., ("CompManagement"), acquired 100% of the outstanding stock of Trigon Administrators, Inc., a third party administrator in Virginia, Maryland and North Carolina. After contractual adjustments, the total consideration paid was $5,495,000.

Overview

        Health Power, Inc. operates through its wholly-owned subsidiary, CompManagement, Inc. CompManagement provides various services to corporations and their employees primarily relating to workplace health and safety, occupational medical care, workers' compensation and employee benefits. These services are targeted at improving the health and safety of workplaces and employees, as well as reducing and managing employer long-term costs of workplace health and safety.

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        CompManagement provides its services to an estimated 60,000 businesses and had 626 employees as of December 31, 2001. Approximately 85% of the businesses are located in Ohio, which makes CompManagement a leader in providing such services in Ohio. In recent years, CompManagement has expanded its operations to Indiana, Kentucky, Pennsylvania, West Virginia and Washington. In April 2001, CompManagement acquired the workers' compensation business of Trigon Healthcare, Inc. This allowed CompManagement to further expand into Maryland, North Carolina and Virginia.

        CompManagement provides services reducing or containing employers' lost time and other workers' compensation costs and managing workers' compensation claims. These include consulting, training and education services to improve workplace health and safety. CompManagement also provides medical and administrative services related to workers' compensation claims.

CompManagement Services

        CompManagement offers services in two general categories: (1) non-medical services related to workers' and unemployment compensation claims and (2) medical management of workers' compensation claims, or "MCO" services.

Non-medical Services

        CompManagement provides workers' compensation group rating services, risk management, medical cost containment and claims management services to employers with respect to workers' compensation claims and, to a lesser extent, unemployment compensation claims. Many of these services are typically referred to as "third party administration" or "TPA" services. CompManagement's TPA services for workers' compensation claims include the review and processing of an employer's workers' compensation claims, the design of individual programs to improve an employer's experience ratings, representation of employers before the Ohio Industrial Commission and The Ohio Bureau of Workers' Compensation (the "OBWC"), the performance of risk analysis for an employer's experience rating, the review of premium audits on behalf of employers and analysis of employers for inclusion in group rating plans. CompManagement also acts as a TPA of workers' compensation claims for self-insured employers. Each employer selects the types of services it desires and then enters into a contract with CompManagement to provide such services. These contracts are generally for a one-year period.

        CompManagement currently provides its TPA services to approximately 16,000 employers located throughout Ohio, Maryland, North Carolina, Washington and West Virginia. Ohio employers have entered into contracts with CompManagement because of their participation in group rating plans sponsored by trade associations of which such employers are members.

MCO Services

        CompManagement provides medical management services for workers' compensation claims, primarily to Ohio employers, as well as to a smaller number of employers located in Kentucky, Maryland, Virginia, North Carolina and Indiana. CompManagement owns and operates two state-wide certified MCOs under Ohio's Health Partnership Program. CompManagement currently serves approximately 51,000 employers located throughout Ohio. As a state-wide certified MCO, CompManagement provides medical management services for workers' compensation cases resulting from injuries suffered by employees arising out of the course and scope of their employment, as required by law. Because all workers' compensation claim liability is paid by the OBWC, CompManagement does not assume any risk for the payment of medical or disability benefits to employees with respect to their claims.

        MCO services provided by CompManagement are offered pursuant to a contract with the OBWC. Under this contract, CompManagement is responsible for providing, among other things, a state-wide

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health care provider network; treatment guidelines and utilization review procedures; peer review and quality assurance programs; provider sanction and termination procedures; medical and vocational case management programs; utilization management programs; medical bill adjudication and payment procedures; dispute resolution procedures; provider, employer and employee relations and education programs; and health care fraud detection and reporting programs.

        Under its OBWC contract, CompManagement receives an administrative fee equal to 4% of the annual workers' compensation premiums for employers assigned to its MCO. The administrative fee is paid monthly and is subject to setoffs if CompManagement does not meet certain criteria with respect to first report of injuries, bill submissions, or data accuracy, or if CompManagement makes a misfiling of death claims. CompManagement is also eligible to earn an additional quarterly incentive fee of up to 3% of the annual workers' compensation premiums for employers assigned to its MCO based upon its attainment of certain return-to-work measurements established in the contract.

        CompManagement has a state-wide health care provider network in Ohio, Kentucky, Indiana, Maryland, North Carolina and Virginia consisting of approximately 18,000 physicians, hospitals and ancillary providers. These networks include certain occupational health-based physician groups, which serve as its "anchor medical groups." The provider panel is credentialed using a multi-faceted peer review committee. CompManagement has a provider services department, which recruits new providers for its network and offers educational materials and training seminars.

Customers and Marketing

        CompManagement markets its TPA and MCO services jointly through both its own sales force of 24 persons who directly contact prospective and existing employer groups and its relationships with over 500 independent insurance agencies and brokers. CompManagement maintains service centers in Akron, Cincinnati, Cleveland and Toledo, Ohio, Seattle, Washington, Charleston, West Virginia, Lexington, Kentucky, Richmond and Fairfax, Virginia and Columbia, Maryland in addition to its Dublin, Ohio executive offices.

Competition

        The workers' compensation cost containment and medical management industry is fragmented and competitive. The market share in this industry is concentrated among a few companies, including CompManagement. The primary competitors of CompManagement are several TPAs and/or MCOs which offer one or more services similar to those offered by CompManagement and numerous independent companies, typically operating on a regional basis. Some of CompManagement's competitors are significantly larger and have greater financial and marketing resources than CompManagement. The principal competitive factors are the range of services offered and responsiveness to customer needs.

        CompManagement competes principally on the basis of its specialization in the workers' compensation area, breadth of services, attention to customer service and independence from insurance carriers.

Government Regulation

        CompManagement's TPA business is generally not subject to specific government regulation or oversight. However, its business is substantially dependent on the operation of workers' and unemployment compensation systems in Ohio and the other states in which it operates.

        CompManagement's MCOs are certified and regulated by the OBWC under Ohio's Health Partnership Program. Its MCOs are not, however, subject to Ohio's laws governing health insuring corporations, since its MCOs are not responsible for payment of health care claims or benefits, nor are

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they otherwise responsible for risk-bearing activities commonly associated with organizations licensed under Ohio's insurance laws.

        OBWC is required to pay to CompManagement an administrative fee for its medical management and administrative services, as well as an incentive payment, provided that CompManagement meets the performance criteria required by OBWC. These performance criteria are established in the MCO contract and primarily relate to the attainment of certain claim management and return to work measurements. The administrative and incentive payments to CompManagement are based on a percentage of the total premium payments of employers managed by the MCO.

        CompManagement believes that its MCOs are presently in compliance in all material respects with all laws, regulations and certification requirements applicable to them.

Employees

        As of December 31, 2001, CompManagement had approximately 627 employees, of which 321 were employed in connection with its TPA operations and 306 were employed in connection with its MCO operations. CompManagement's employees are not represented by a union, and CompManagement considers its relationships with its employees to be good.

Primrose (Educational Services Segment)

Background

        On April 6, 1999, the Company acquired all the assets and assumed certain liabilities of Primrose School Franchising Company, Inc., a Georgia corporation established in September 1988 and engaged in the franchising of educational child care centers, and of two related companies engaged in real estate services for franchisees and in operating one educational child care center. The consideration paid in connection with the acquisition of the foregoing companies aggregated $27,388,000.

Overview

        Primrose is the exclusive franchiser of Primrose Schools, an industry leader in educational child care services. The one company-owned Primrose school is the original Primrose School and serves an important role in testing new curricula and initiatives.

        As of December 31, 2001, Primrose consisted of 95 franchised locations in the southern, central and western United States and one company-owned facility located in Marietta, Georgia. Additionally, as of that date, Primrose had awarded 35 franchises units that were in various stages of development and construction.

Educational Services

        Primrose Schools has established a position as a leader in educational child care in the upscale niche of the child care industry. Primrose is a franchised system of private, curriculum-based pre-schools which provide child care services for children six weeks to five years old and after-school programs for children five through twelve years old. The primary strategies of Primrose are aimed at delivering a consistent, high quality educational product throughout all its schools. The overall franchise system and product are tightly controlled and uniform.

        Primrose provides a proven early childhood curriculum and programming to its franchisees. These include detailed monthly educational lesson plans, management guidelines and other collateral materials. Primrose integrates nationally recognized packaged curriculums with its own copyrighted Balanced Learning^sm programs.

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        Primrose provides its franchisees with detailed manuals that cover all aspects of operating a Primrose School. The Primrose Schools curriculum and operating systems have been approved for national accreditation by the Commission on International and Trans-Regional Accreditation, the Southern Associations of Schools and Colleges and the North Central Association. Primrose has an Advisory Board made up of credentialed specialists in early childhood education.

Operational and Business Services

        Primrose provides new franchisees with pre-opening training at corporate headquarters and existing franchised schools. Primrose has an ongoing operations support infrastructure that includes comprehensive business, operational and marketing plans for franchisees. Operations support directors provide consulting services and visit schools on a continual basis to ensure that Primrose's quality standards are maintained.

        A complete internal and external equipment package is provided by Primrose for franchisees' use in their schools. This package includes furniture, educational programs and materials, playground equipment, school supplies and custom child care management software.

Real Estate Services

        Primrose provides real estate services to Primrose franchisees, including design based on proprietary prototype building and site plans, site selection assistance and development consulting.

Marketing Services

        Primrose believes that its marketing efforts are successful due to an effective sales and marketing strategy. Marketing efforts are directed in two areas: (i) creating consumer demand for Primrose educational child care services at the end-user level; and (ii) creating demand for Primrose School franchises among potential franchisees. Primrose markets its franchise schools to households in which parents are working professionals and which require more than just "day care" through targeted marketing with numerous mediums, including direct mail, radio, newspapers, internet and various magazines. Its franchise opportunities are targeted towards successful individuals with management experience and entrepreneurial desires. Primrose receives favorable publicity generated by its quality service and advertises in newspapers, trade publications, magazines, presentations and by word of mouth.

Financing Services

        Primrose has alliances with national lending sources to provide competitive financing for franchisees. These strategic partnerships provide a degree of familiarity and efficiency to the financing process for Primrose franchisees.

Sources of Revenues

        Primrose derives revenue from royalty income, franchise fees, real estate services and development fees. Its owned and operated center, Primrose Country Day School, derives its revenue from the collection of educational child care fees.

Trademarks and Other Proprietary Rights

        Primrose maintains trademarks and copyrights to its programs, characters, logos and building plans. Additionally, Primrose strives to protect itself, franchisees, parents and children through a strong, comprehensive franchise agreement that explicitly spells out the responsibilities of both Primrose and

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the franchisee. This agreement gives Primrose the ability to enforce its standards, helping to ensure system-wide quality and consistency.

Competition and Markets

        Primrose Schools competes in the center-based for-profit sector of the child care industry. The industry is highly fragmented with an estimated 100,000 licensed child care centers, of which only a small percentage consist of national for-profit child care "chains" such as Primrose. Management believes the fragmented nature of the industry, together with an increasing demand for educational child care, provides growth opportunities for well-managed child centers with professional, owner-operated child care providers.

        Management believes that the principal elements defining competitiveness are curriculum, product quality and consistency, well-trained staffing, strong customer service and good business center management. Although Primrose competes favorably with respect to these factors, some of Primrose School's competitors are larger and have greater financial resources, with a larger number of facilities and a broader national presence.

Government Regulation

        Primrose is subject to various federal, state and local laws affecting Primrose as well as a variety of regulatory provisions relating to zoning of school sites, sanitation, curriculum, health and safety. As a franchisor, Primrose is subject to state and federal laws regulating various aspects of franchise operations and sales. These laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises. In certain cases, they also apply substantive standards to the relationship between franchisor and franchisee, including primarily defaults, termination, non-renewal of franchises and the potential impact of new Primrose schools on enrollment levels at existing Primrose sites.

Employees

        Primrose had 55 employees at December 31, 2001, including 24 at Primrose Country Day School. Primrose's employees include 44 full-time and 11 part-time employees. None of the employees of Primrose are represented by a labor union, and Primrose considers its relationships with its employees to be good.

        Various federal and state labor laws govern Primrose's relationships with its employees. These include such matters as minimum wage requirements, overtime and other working conditions. Environmental requirements have not had a material effect on the operations of Primrose's company-operated school or the schools of Primrose's franchisees. Significant additional government-imposed increases in paid leaves of absence or mandated health benefits could, however, be detrimental to the economic viability of franchisee-operated and company-operated Primrose Schools.

Pumpkin (Portion of Seasonal Products Segment)

Background

        On June 27, 1997, the Company acquired substantially all of the assets and assumed certain liabilities of Pumpkin Ltd. d/b/a Pumpkin Masters, Inc., a Colorado corporation established in 1986 and engaged in the design, manufacture and distribution of pumpkin carving kits (comprised primarily of tools and patterns) and related accessories. The consideration paid in connection with the acquisition was approximately $7,700,000.

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Overview

        Pumpkin is a leading designer, manufacturer and distributor of specialty products and related accessories targeted primarily at the Halloween and, to a lesser degree, Easter seasonal markets. Pumpkin outsources all of its manufacturing, assembling and packaging activities. Pumpkin distributes its products primarily throughout the United States but also in Canada, Mexico, and Europe to over 7,000 retail locations, including mass merchandiser, craft, grocery, hardware, garden and drug stores, and through mail order catalogues. Its business is highly seasonal in nature with approximately 80% of its annual shipments occurring in the third quarter.

Products

        Pumpkin designs, markets and distributes specialty products for Halloween and Easter. Pumpkin's core product is a patented pumpkin carving kit. The Pumpkin Masters product line includes a variety of pumpkin carving kits containing different combinations of tools, saws and patterns for different ages and skill levels. The tools include patented saws and a patented Scraper Scoop for cleaning out the inside of a pumpkin. In addition, Pumpkin also currently sells and distributes a full line of Halloween products, including carving and decorating (both adults and kids), trick-or-treat, home décor, and accessory items. For the Easter market, Pumpkin recently introduced its Exceptional Easter™ decorating kits beginning with Easter 2001.

        For Halloween 2002, the pumpkin carving kit consists of two slender carving saws, a poker, a drill and ready-to-use patterns and instructions. Patterns are transferred onto pumpkins by poking along the design lines with the poker. Carving is as simple as sawing from dot-to-dot. Pumpkin has patents for the entire kit, as well as the additional tools that are sold separately. Pumpkin also offers a similar carving kit designed specifically for younger children. The patterns are protected by copyright or are used under license.

Design

        Creative design and product innovation are critical to the long-term success of Pumpkin. Pumpkin maintains a creative team of four people who are responsible for developing new products and designing patterns for each Halloween season.

Distribution and Suppliers

        Pumpkin has a retail customer base of over 1,500 retailers and mail order houses. Its products are sold in the United States, Canada, Mexico and Europe through its own personnel and a network of independent manufacturers' representatives and distributors. Retail outlets include mass-market, supermarket, drug and variety, hobby and craft, party and home improvement chain customers.

        Pumpkin also sells directly to smaller accounts through direct mail catalogs. Distributors are sold both directly and through the independent manufacturers' representatives. Pumpkin has appointed exclusive distributor representatives in Canada and Europe.

        All of Pumpkin's manufacturing and shipping activities are conducted by third party vendors. Since 1988, Pumpkin has used the same core group of domestic vendors to provide substantially all of its materials and to assemble, warehouse and ship its products. Pumpkin uses vendors that are experienced in their respective fields and that manufacture each product to Pumpkin's specifications. Pumpkin has identified back-up and secondary sources for all major materials and services; however, the sudden loss or interruption of supply or service from one of the major vendors could have an adverse effect on Pumpkin's results of operations and financial condition. Pumpkin currently splits some of its production between primary and back-up vendors. In addition, Pumpkin manufactures approximately 20 percent of its product in China. Pumpkin's import operations may be adversely affected by, among other things,

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political instability resulting in the disruption of trade from exporting countries, regulatory changes, increases in transportation costs or delay, any significant fluctuation in the value of the United States dollar against foreign currencies and restrictions on the transfer of funds.

        Based upon specific customer forecasted demand, Pumpkin begins manufacturing operations in January for the following Halloween season. The investment in inventory buildup is considerable, requiring Pumpkin to forecast customer demand accurately. To date, Pumpkin has been successful in forecasting demand with few write-downs of excess inventory or write-offs of obsolete inventory.

Patents and Other Proprietary Rights

        Pumpkin owns over a dozen registered U.S. patents. The patents will expire at various times between 2006 and 2018. It also owns numerous registered trademarks and copyrights.

        Pumpkin believes that its proprietary products, protected by patents and other intellectual property rights, are integral to its success, and, accordingly, vigorously pursues intellectual property protection of its products and any perceived infringements of its intellectual property rights. If Pumpkin were to lose its patent protection prior to the expiration of the patents, it could have a material adverse effect on Pumpkin's results of operations and financial condition.

Competition and Markets

        Within the market for pumpkin carving products, Pumpkin currently enjoys a substantial market share. Pumpkin believes that its ownership of patents on its pumpkin carving kits is a significant barrier to entry into its market niche.

        Pumpkin has several competitors in the pumpkin carving product market. The principal elements defining competitiveness are product design, patents, brand-identity and distribution. Although Pumpkin believes that it competes favorably with respect to these factors, some of Pumpkin's competitors are larger than Pumpkin and have greater financial resources, with a wider range of non-Halloween products and broader distribution channels.

Employees

        Pumpkin employed 26 people as of December 31, 2001, 21 of whom were salaried employees and five of whom were hourly employees. None of its employees is represented by a labor union, and Pumpkin considers its relationship with its employees to be good.

Possible Dreams (Portion of Seasonal Products Segment)

Background

        On May 17, 1996, the Company acquired substantially all of the assets and assumed certain liabilities of Possible Dreams, Ltd., a Massachusetts corporation established in 1988 and engaged primarily in the design, importation and distribution of fine quality collectible and other specialty giftware. The consideration paid in connection with the acquisition was approximately $16,860,000.

Overview

        Possible Dreams is a leading designer, importer and distributor of fine quality collectibles and other specialty giftware. Possible Dreams is especially known for its handcrafted collectible Clothtique branded product line. Possible Dreams' products include the Clothtique Santa Collection, Clothtique Couture, The Clothtique Fine Arts Collection, Clothtique Champions and Clothtique Snowmen, as well as a variety of Angels and ornaments. Other branded lines include Flights of Fancy, Spring Surprises, Celtic Collection and Cagey Critters. Possible Dreams distributes its products throughout the United

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States to approximately 15,000 independent gift retailers, as well as to department stores, mail order houses and card and gift chains.

Products

        Possible Dreams designs, imports and distributes more than 3,000 products. Possible Dreams' leading product line is Clothtique, figurines crafted with a blend of stiffened cloth, ceramic and resin. The Clothtique process was first used by Possible Dreams for a series of angels and Santas. Clothtique is now marketed in a variety of holiday and year-round collections. The Clothtique process has the ability to mimic the look and feel of real wardrobes.

        One of Possible Dreams' earliest Clothtique collections is the Santa Claus Collection. This line is known for presenting a traditional Santa character yet contemporizing its appeal through style and theme. Many are now retired and have become more valuable as product availability decreases. Since the inception of the program, hundreds of original figurines, including over 350 Santas, have been created through the design talents of many artisans.

        There are new introductions each year to the Clothtique and other product lines of Possible Dreams. One area with many new introductions is Flights of Fancy, an engineered line of mobiles, which was first introduced in 1997. This collection of whimsical mobiles powered by battery-operated motors has increased in sales and customer recognition each year. In addition, Possible Dreams designs lines of seasonal and non-occasion figurines, musical water domes, stocking holders, ornaments and decorative accessories.

        Possible Dreams takes various steps to enhance the collectibility of its products. In particular, Possible Dreams limits the availability of certain styles and retires other styles even though they may still be selling well. While these actions sometimes cause it to forego sales, Possible Dreams believes they tend to provide recurring product demand, increase access to retailer shelf space and enhance the long-term value of Possible Dreams' products. Possible Dreams also attempts to improve collectibility by the regular introductions of product line extensions and new series additions.

        Possible Dreams further enhances collectibility and improves sales through its Collector club. Collector clubs are used by a number of branded giftware companies to stimulate interest in particular product lines, strengthen retail relationships and provide helpful consumer preference data. The success of Possible Dreams' Santa line led to the establishment in 1992 of the Santa Claus Network, a Clothtique Santa Collectors Club. This Club has approximately 15,000 members, each paying an annual membership fee and receiving quarterly newsletters.

Design and Production

        Possible Dreams' creative team consists of an in-house group and outside artists. The team regularly attends trade shows and seminars, and travels extensively throughout the world for ideas. All catalog design and preparation, excluding some photographing and printing, are done in-house. A major theme of Possible Dreams' trade marketing features Possible Dreams as the giftware industry's creative leader.

        The design and manufacture of Possible Dreams' many product lines is a complex process. Once a product is conceived, it can take up to a year before it is introduced into the market. First, detailed and scaled drawings are made for each piece. A prototype is then produced and reviewed by creative directors and management. Samples of the various designs are then made by the manufacturer for review by Possible Dreams and, often, prospective buyers. Typically, only about 60% of new designs created each year will be produced.

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        Possible Dreams endeavors to use first-rate craftsmanship at affordable prices. This strategy limits the possible sources of manufacturers and, accordingly, helps to achieve more controlled growth of product lines. Possible Dreams has long-standing relationships with overseas manufacturers.

Distribution and Suppliers

        As noted above, Possible Dreams has a retail customer base of approximately 15,000 independent gift shops, department stores and mail order houses. Its products are primarily sold by 14 sales groups with over 150 sales representatives operating out of 18 showrooms nationwide located in each of the major giftware markets in the United States. Possible Dreams opened its own showrooms in New York City in February 1998 and in Atlanta in January 2000.

        Possible Dreams also has a preferred dealer network consisting of some of its best retail customers. These customers agree to certain product display and other requirements. In return, they are entitled to sell certain limited pieces not available through non-network channels.

        Products sold by Possible Dreams in the United States are generally shipped by ocean freight from abroad and then by rail and/or common carrier to its warehouse and distribution center in Foxboro, Massachusetts. Shipments from Possible Dreams to its customers are handled by Roadway Package System, United Parcel Service or other commercial trucking lines.

        Possible Dreams utilizes computer systems an purchased and internally-developed software to help maintain efficient order processing from the time a product enters its system through shipping and ultimate payment collection from its customers. Software for the processing, shipping and tracking of orders from its warehouse plays a significant role in allowing Possible Dreams to maintain customer satisfaction.

Trademarks and Other Proprietary Rights

        Possible Dreams owns several federal trademark registrations and copyrights. In addition, Possible Dreams from time to time registers certain of its trademarks in foreign countries. Possible Dreams regularly files extensions and renews all registrations for the goods and services covered by such registrations and trademarks that are scheduled to expire and are still in use.

Competition and Markets

        Possible Dreams competes with other producers of fine quality collectibles, specialty giftware and home decorative accessory products. The giftware industry is highly fragmented and competitive, with a substantial number of both large and small participants. Possible Dreams believes that the principal elements defining competitiveness are product design and quality, product brand name loyalty, product display, reputation in the retail trade for reliable shipment and service and price. Although Possible Dreams believes it generally competes favorably with respect to these factors, some of Possible Dreams' competitors are larger than Possible Dreams and have greater financial resources and a wider range of products.

Imports; Major Suppliers; Regulation

        Possible Dreams does not own or operate any manufacturing facilities and, like most of its competitors, imports most of its products as finished goods from the Pacific Rim, primarily mainland China and, to a lesser extent, Taiwan, the Philippines and India. Possible Dreams' ability to import products and thereby satisfy customer orders is affected by the availability of, and demand for, quality production capacity abroad. Possible Dreams competes with other importers of specialty giftware products for a limited number of foreign manufacturing sources that can produce detailed, high quality products at affordable prices. Possible Dreams purchased approximately 82% and 76% of its supplies

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from two companies during 2001 and 2000, respectively. The loss of either supplier could have an adverse effect on Possible Dreams' results of operations and its financial condition. In addition, Possible Dreams' import operations may be adversely affected by political instability resulting in the disruption of trade from exporting countries, regulatory changes, increases in transportation costs or delays, any significant fluctuation in the value of the United States dollar against foreign currencies and restrictions on the transfer of funds.

        Substantially all of Possible Dreams' products are subject to United States Customs Service duties and regulations pertaining to the importation of goods, including requirements for the marking of certain information regarding the country of origin on its products. The United States and the countries in which Possible Dreams' products are manufactured may, from time to time, impose new quotas, duties, tariffs or other charges or restrictions, or adjust presently prevailing quotas, duty, or tariff levels, any of which could adversely affect Possible Dreams' financial condition or results of operations or its ability to continue to import products at current or increased levels.

Employees

        Possible Dreams employed 76 people as of December 31, 2001, 14 of whom were salaried employees, with the remainder being hourly employees. None of the employees is represented by a labor union, and Possible Dreams considers its relationship with its employees to be good.

ITEM 2. PROPERTIES.

        CompManagement leases a 70,000 square foot office building in Dublin, Ohio, which is used as its principal office facilities. The lease for the building is for a term of 15 years, which began in 1997, provides for annual rent payments, and requires CompManagement to pay all operating expenses for the building. The lease also provides for, among other things, three renewal options of five years each, an option to purchase the building, and a right of first offer with respect to the sale of such building. The lease restricts CompManagement's ability to distribute funds and/or assets to Health Power, Inc. or another affiliate unless CompManagement meets certain tangible net worth requirements. CompManagement also leases office space in Akron, Cincinnati, Cleveland, and Toledo, Ohio; Seattle, Washington; Charleston, West Virginia; Lexington, Kentucky; Richmond and Fairfax, Virginia; and Columbia, Maryland. These spaces are used as regional offices and service centers for its operations.

        Primrose leases a 4,500 square foot building in Cartersville, Georgia where it maintains all its operations, sales and administrative facilities. It also leases 2,000 square feet in an adjacent building where it maintains its real estate and development facilities.

        Primrose Country Day School leases land and buildings containing a total of 8,000 square feet located in Georgia where it maintains its educational child care operations.

        Pumpkin leases 10,671 square feet of office space in Denver, Colorado for its sales and administrative operations.

        Possible Dreams owns land and a 55,000 square foot building in Foxboro, Massachusetts where it maintains all its distribution, sales and administrative facilities. Possible Dreams currently utilizes approximately 48,000 square feet as distribution space and approximately 7,000 square feet as sales and administrative offices. Substantially all of the properties and other assets of Possible Dreams are pledged to Possible Dreams' principal lender as security for a line of credit and related loans.

        Possible Dreams leases 2,400 square feet in New York, New York for a showroom.

        Possible Dreams leases 2,400 square feet in Atlanta, Georgia for a showroom.

        The Company believes its owned and leased properties are adequate for its current needs.

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ITEM 3. LEGAL PROCEEDINGS

        The Company is party to several legal actions arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses to these actions, such that the resolution of such matters will not have a material effect on the financial position or future operating results of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        The Class A Common Stock of Security Capital is traded on the American Stock Exchange (the "AMEX") under the symbol SCC. The following table states the high and low sales prices for the Class A Common Stock on the AMEX for the quarterly periods indicated:

2001 PRICE RANGE					2000 PRICE RANGE
QUARTER	HIGH		LOW		QUARTER	HIGH		LOW
First—ended March 31	$	9.30	$	7.375	First—ended March 31	$	6.375	$	5.625
Second—ended June 30	$	10.75	$	9.30	Second—ended June 30	$	6.25	$	5.50
Third—ended September 30	$	12.99	$	10.65	Third—ended September 30	$	6.625	$	5.50
Fourth—ended December 31	$	11.38	$	9.90	Fourth—ended December 31	$	8.00	$	6.50

        As of March 20, 2002, there were approximately 1,057 stockholders of record of the Class A Common Stock and 6,450,587 shares outstanding, and 17 stockholders of record of the Common Stock and 380 shares outstanding. On such date, the closing price of the Class A Common Stock on the AMEX was $9.80.

        The Company has not paid any dividends to common stockholders for several years and does not intend to pay any dividends in the foreseeable future. The Company has entered into various financing arrangements at the subsidiary level that may limit the ability to pay dividends to the parent company, thus limiting the parent company's ability to pay dividends to its shareholders.

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ITEM 6. SELECTED FINANCIAL DATA.

        The following table sets forth certain selected consolidated financial data for the Company. This selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in Item 8 of this Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of this Form 10-K.

	FOR THE YEARS ENDED DECEMBER 31,
	2001			2000			1999			1998		1997
	(In thousands, except per share data)
Net revenues	$	93,186		$	41,904		$	37,345		$	30,018	$	25,723
Income from continuing operations		2,835			1,425			1,935			2,149		2,145
Income from discontinued operations		—			—			—			—		66
Gain on disposal of discontinued operations		—			—			—			—		1,149
Net income		2,835			1,425			1,935			2,149		3,360
Less preferred stock accretion		(352	)		(309	)		(206	)		—		—
Less preferred stock dividends		—			—			—			—		(450	)
Net income available to common stockholders	$	2,483		$	1,116		$	1,729		$	2,149	$	2,910
Basic and diluted earnings per common share:
Income from continuing operations	$	0.39		$	0.17		$	0.28		$	0.41	$	0.39
Income from discontinued operations		—			—			—			—		0.01
Gain on disposal of discontinued operations		—			—			—			—		0.26
Basic earnings per common share	$	0.39		$	0.17		$	0.28		$	0.41	$	0.66
Diluted earnings per common share	$	0.35		$	0.17		$	0.28		$	0.41	$	0.66
Dividends per share of common stock		—			—			—			—		—
Total assets	$	107,285		$	100,557		$	55,320		$	33,638	$	32,550
Long-term obligations		36,760			38,890			19,870			11,266		12,383
Redeemable preferred stock		2,867			2,515			2,206			—		—
Total stockholders' equity	$	27,285		$	24,789		$	23,672		$	16,943	$	14,794

Discontinued Operations

        On July 17, 1997, the Company sold, effective June 30, 1997, its beneficial interest in Foster Insurance Service, Inc. a Texas corporation, to Bowen, Miclette, Descant and Britt for consideration of $1,526,000 and recognized a gain of approximately $1,149,000 (net of tax). In an unrelated transaction, the Company in December 1997 sold Foster Insurance Managers, Inc. for $265,000 in cash to Tri-Star Insurance Services, Ltd., a Kentucky corporation. The Company recognized no gain as part of this transaction. The Company no longer has any interest in the insurance brokerage business as a result of these two transactions.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

        The following discussion should be read in conjunction with the financial statements of the Company and the related notes thereto appearing in Item 8 "Financial Statements and Supplementary Data" in this Report on Form 10-K.

Critical Accounting Policies

        There are certain accounting policies that the Company believes are critical to its business and the understanding of its financial statements. These policies are discussed below. In addition, the

15

preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company's management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. The Company's accounting policies are disclosed in the Notes to Financial Statements in this Annual Report on Form 10K. The more critical of these policies include revenue recognition, business combinations and use of management estimates.

Revenue Recognition

        Generally, all revenues are recognized when the activities prerequisite to obtaining the benefits have been completed and the amounts are realized or realizable.

        Seasonal product sales are recognized in the period the merchandise is sold, which occurs when the merchandise is shipped.

        The educational services segment recognizes royalties based on the monthly revenues of the franchisees. Franchise fees are collected at various intervals prior to the opening of a school and are deferred until the franchised school has commenced operations. Real estate service fees are recognized as earned. Assignment fees relate to revenue earned for site identification and preparation for the construction of the building, including zoning permits. Assignment fees are recognized upon the closing of the purchase of the property. School tuition revenue is recognized as earned over the school year. All fees received in advance of time of recognition are recorded as unearned revenue.

        Employer cost containment-related service contract revenues are derived from claims management, administrative, consulting services and managed care administration services that are recorded as earned based on the requirements and duration of the related contracts. Revenues from the managed care administration services are recognized on a monthly basis based on the contracted administrative fee with the Ohio Bureau of Workers' Compensation. In addition, contract revenues are recorded for certain incentive awards when the claims are processed to which the incentive is related, and a bonus award is recorded in the year earned. Revenues on certain contracts have been deferred and are recognized in income on a pro rata basis over the related contract periods, which typically range between 3 and 12 months. Commission expense associated with these contracts is also deferred and recognized as an expense on a pro rata basis over the related contract periods. For services related to group rating contracts, fees are paid to the group's sponsor and netted against contract revenues. Contract revenues received in advance are recorded as deferred revenues.

Business Combinations

        Acquisitions are accounted for under the "purchase method" requiring the Company to record acquired tangible and intangible assets and assumed liabilities at fair value. The valuation of acquired assets and the resulting goodwill required certain estimates and assumptions that affect amounts reported in the Company's financial statements. Amounts recorded for tangible and intangible assets affect future results of operations through depreciation and amortization expense. In addition, all acquired assets, including goodwill, are subject to tests for impairment. Starting January 1, 2002, the Company, under SFAS No. 142 "Goodwill and Other Intangible Assets", must test goodwill for impairment at least annually, or more frequently if indications of possible impairment exist, by comparing the net assets of each "reporting unit" (an organizational grouping) with the current fair value of the reporting unit. If the current fair value of the reporting unit is less than its carrying amount, then a second test must be performed. Under the second test, the current fair value of the reporting unit is allocated to the assets and liabilities of the reporting unit, including an amount for any "implied" goodwill. If implied goodwill exceeds the net carrying amount of goodwill, no impairment loss is recorded. Otherwise, an impairment loss is recognized for the difference.

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Use of Management Estimates

        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

        Significant estimates included within the financial statements include sales return and discount reserves, allowance for doubtful accounts, inventory obsolescence reserves, the fair value of carryforward tax benefits, and the fair value and economic lives of intangible assets.

Results of Operations—2001 Compared to 2000

        Security Capital reported net income of $2,835,000 for the year ended December 31, 2001. This compares to net income of $1,425,000 for the year ended December 31, 2000. The Company reported basic net income per common share of $0.39 for the year ended December 31, 2001, as compared to basic net income per common share of $0.17 for the year ended December 31, 2000. This increase was primarily attributable to the inclusion in the 2001 results of the employer cost containment-related segment, acquired in late December 2000, coupled with the beneficial effects of lower interest rates on the Company's variable rate debt in 2001 and reduced debt levels in 2001 as compared with December 31, 2000 as partially offset by lower sales volumes at the seasonal products segment during 2001.

        Revenues increased by $51,282,000 or 122% to $93,186,000 for the year ended December 31, 2001. The Company's employer cost containment-related services segment revenues increased by $52,333,000 or 4,023% to $53,634,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, due to the inclusion of a full year of results for this segment which was acquired on December 21, 2000 and therefore only reflected ten days of activity for the year ended December 31, 2000. The Company's seasonal products segment revenues decreased by $1,859,000 or 6% to $31,900,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, due to impact that the economic slowdown has had on the retail market. Educational segment revenues increased by $808,000 or 12% to $7,652,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, due to same school revenue increases and the revenue contribution made by the 14 new schools opened during 2001. As an additional performance measure of the increasing success of the educational services segment's concept, the Company monitors the revenues generated by its franchisees. Total education system revenue, or gross revenue of all educational-based child care center franchises, increased by $13,076,000 or 18% to $85,318,000, for the year ended December 31, 2001, as compared to the same period of the prior year. This increase was generated as a result of a 17% increase in the number of educational-based child care centers, which numbered 96 and 82 as of December 31, 2001 and 2000, respectively.

        Selling, general and administrative expense increased by $37,412,000 or 246% to $52,642,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, primarily due to the acquisition of the employer cost containment-related services segment. Without taking into consideration the acquisition of this segment, selling, general and administrative expense increased by $52,000 or less than 1% for the year ended December 31, 2001 as compared to the year ended December 31, 2000. The seasonal products segment's selling, general and administrative expense decreased by $702,000 or 6% for the year ended December 31, 2001 as compared to the year ended December 31, 2000, primarily attributable to lower commission expense associated with lower sales volumes. On the other hand, the educational services segment's selling, general and administrative expense increased by $744,000 or 32% for the year ended December 31, 2001 as compared to the year ended December 31, 2000, due to an increase in staff to accommodate this segment's growth in the number of operating locations.

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        Amortization and depreciation expense increased by $3,630,000 or 149% to $6,066,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, primarily due to the amortization of goodwill associated with the acquisition of the employer cost containment-related services segment. Without taking into consideration the acquisition of this segment, amortization and depreciation expense increased by $135,000 or 6% for the year ended December 31, 2001 as compared to the year ended December 31, 2000, entirely due to the seasonal products segment's amortization expense related to goodwill recorded in connection with the payment of an earnout obligation related to Pumpkin Masters. The educational services segment amortization and depreciation expense was basically unchanged from the prior year. As discussed in Note 2 of the Notes to Consolidated Financial Statements in this Report on Form 10-K, the Financial Accounting Standards Board's newly-issued SFAS No. 141 and SFAS No. 142 have had no impact on the 2001 amortization expense of the Company but will result in reduced amortization expense of $3,200,000 for 2002.

        Interest expense increased by $2,384,000 or 69% to $5,826,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, primarily due to the acquisition of the employer cost containment-related services segment. Without taking into consideration the acquisition of this segment, interest expense decreased by $651,000 or 19% for the year ended December 31, 2001 as compared to the year ended December 31, 2000 with the major factors being lower interest rates on all of the Company's variable rate debt and reduced average debt levels.

        Income tax expense increased by $1,960,000 or 172% to $3,100,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, due to the pre-tax income effects of adding the employer cost containment-related services segment in December 2000, and an increase in the effective tax rate from 41% to 47% for the years ended December 31, 2000 and 2001, respectively. This increase in the effective tax rate in 2001 reflects the Company's amortization of goodwill acquired in the December 2000 acquisition, most of which is non-deductible for income tax purposes. After the implementation of FAS 142 the Company estimates its effective tax rate will decrease by 15% to 32% for 2002.

Results of Operations—2000 Compared to 1999

        Security Capital reported net income of $1,425,000 for the year ended December 31, 2000. This compares to net income of $1,935,000 for the year ended December 31, 1999. The Company reported basic net income per common share of $0.17 for the year ended December 31, 2000, as compared to basic net income per common share of $0.28 for the year ended December 31, 1999. For 2000 the Company's basic net income per common share was reduced by $0.18 due to a net $1,146,000 reduction in deferred tax benefit from the utilization of its net operating loss carryforward during 1999.

        Revenues increased by $4,559,000 or 12% to $41,904,000 for the year ended December 31, 2000. The Company's seasonal products segment revenues increased by $642,000 or 2% to $33,759,000, due to increased demand for its products during the third and fourth quarters of 2000, which are that segment's traditionally strongest quarters. Educational segment revenues increased by $2,616,000 or 62% to $6,844,000, for the year ended December 31, 2000, due to both the demand for its services and its inclusion for the full year of 2000 compared to nine months for 1999 due to its April 1999 acquisition. As a measure of the increasing success of the educational segment's concept, the Company monitors the revenues generated by its franchisees. Total education system revenue, or gross revenue of all educational-based child care center franchises increased $13,741,000 or 23% to $72,242,000, for the year ended December 31, 2000, as compared to the same period of the prior year. Total royalty revenue of the educational segment earned from system revenues increased $962,000 or 23%, for the year ended December 31, 2000, as compared to the same period of the prior year. These increases were generated from a 12% increase in the number of educational-based child care centers, which numbered 82 and 73 as of December 31, 2000 and 1999, respectively. Additionally, as of December 31, 2000, this segment had awarded 42 franchise agreements in various stages of development and construction with associated unearned revenue of $2,319,000 recorded on the Company's balance sheet

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as of December 31, 2000. In December 2000, the Company acquired Health Power, a provider of cost containment-related services, and now has three segments. This new segment accounted for $1,301,000 of the increase in revenues.

        Selling, general and administrative expense increased by $1,757,000 to $15,230,000 for the year ended December 31, 2000. Without taking into consideration the Health Power acquisition, selling, general and administrative expense increased by $1,010,000 for the year ended December 31, 2000, as compared to the year ended December 31, 1999. The educational segment selling, general and administrative expense increased by $793,000, primarily attributable to increasing its staff to accommodate growth and to a lesser extent its inclusion for the full year of 2000 compared to nine months for 1999 due to its April 1999 acquisition. The remainder of the increase was attributable to holding company expense incurred.

        Amortization and depreciation increased by $550,000 for the year ended December 31, 2000. Without taking into consideration the Health Power acquisition, amortization and depreciation increased by $446,000 for the year ended December 31, 2000, as compared to the year ended December 31, 1999. The educational segment's amortization and depreciation expense increased by $410,000, which was primarily attributable to its inclusion for the full year of 2000 compared to nine months for 1999 due to its April 1999 acquisition. The remainder of the increase, $36,000, was attributable to the seasonal products segment.

        Interest expense increased by $320,000 for the year ended December 31, 2000. Without taking into consideration the Health Power acquisition, interest expense increased by $223,000 for the year ended December 31, 2000, as compared to the year ended December 31, 1999. The seasonal products segment's expense decreased by $165,000 due to reduced average debt levels. The educational segment's interest expense increased by $401,000, which was primarily attributable to its inclusion for the full year of 2000 compared to nine months for 1999 due to its April 1999 acquisition.

        The Company's income tax expense increased by $1,908,000, primarily as a result of the 1999 period reflecting a $1,347,000, benefit from the utilization of net operating losses compared to $204,000 in 2000.

Seasonality

        The seasonal products segment consists of Possible Dreams and Pumpkin. This segment experiences a significant seasonal pattern in its working capital requirements and operating results. In 2001 and 2000, the seasonal products segment received orders representing approximately 41% and 35% of its annual bookings during the first and second quarters, respectively. Possible Dreams and Pumpkin ship products throughout the year, with approximately 61% of their combined shipments in the third quarter. Temporary employees are hired to accommodate peak shipping periods. This segment provides extended payment terms to some of its customers for seasonal merchandise and, accordingly, collects a substantial portion of its accounts receivable in the fourth calendar quarter. Due to the seasonal pattern, the seasonal products segment has had greater working capital needs in its peak season and has experienced greater cash availability in its fourth calendar quarter. As a result of this sales pattern, a substantial portion of its revenues is typically recorded in the third and fourth calendar quarters. The Company expects this seasonal pattern to continue for the foreseeable future. The seasonal products segment has historically financed its operations through internally-generated cash flow and short term seasonal borrowings.

Liquidity and Capital Resources

        Cash and cash equivalents increased by $5,785,000 from $5,777,000 at December 31, 2000 to $11,562,000 at December 31, 2001. This increase was primarily attributable to cash flow generated from the employer cost containment-related segment and timing differences in the paydown of working capital revolving credit lines in the seasonal products segment.

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        The Company's consolidated working capital increased by $788,000 from a deficit of $7,354,000 at December 31, 2000 to a deficit of $6,566,000 at December 31, 2001. The Company typically has a deficit working capital due to the receipt of prepaid fees at both its cost containment-related services and educational segments. This increase was attributable to an increase in accounts receivable in the employer cost containment-related services and seasonal products segments coupled with the increase in cash levels as discussed above.

        The Company maintains four revolving lines of credit, with a total of $6,600,000 outstanding and $6,495,000 additional availability (net of borrowing base restrictions) at December 31, 2001. Borrowings under the revolving lines of credit may be limited to a borrowing base which could restrict availability.

        Total term debt, exclusive of original issue discount but inclusive of capital lease obligations, was $44,239,000 at December 31, 2001. The Company added $7,847,000 in term debt for: an additional $5,347,000 of new term debt in conjunction with its Trigon acquisition; a warrant repurchase for Pumpkin; and a new information system for Possible Dreams. The Company made payments on its term debt and capital lease obligations of $9,458,000 during the year ended December 31, 2001, decreasing its balance to $44,239,000 at December 31, 2001. Term debt in the aggregate carried an approximate 8.38% weighted average interest rate at December 31, 2001 and an approximate 9.77% weighted average interest rate for the year ended December 31, 2001. Current maturities of term debt, exclusive of original issue discount but inclusive of current capital lease obligations, were $15,680,000 at December 31, 2001.

        Term debt has certain covenants at the subsidiary operating company level, the more significant of which require the subsidiary operating companies to maintain minimum earnings before interest, taxes, depreciation and amortization ("EBITDA"), leverage ratios, interest coverage ratios, fixed charge ratios and maximum lease expenses.

        The Company's subsidiary, Possible Dreams, entered into a capital lease for an information system to replace its information system during the first quarter of 2001. The total net present value reflected in the December 31, 2001 balance sheet as both a fixed asset and a liability was $606,734. The system is currently being installed, and it is anticipated that it will be fully operational during the first quarter of 2002 when the lease payments and depreciation of the fixed asset will begin.

        On June 13, 2001, Pumpkin entered into a three-year loan agreement with LaSalle Business Credit, Inc. The total credit facility is $10,000,000, consisting of a term loan amount of $2,500,000 and a revolving loan commitment of $7,500,000. The amount Pumpkin is allowed to draw on the revolver is limited by a borrowing base determined by specific accounts receivable and inventory levels. The agreement also provides for seasonal overadvances from April 1^st through July 31^st of each year during the peak of the inventory build-up period. On June 14, 2001, Pumpkin used the new financing facility to retire all amounts owing to Banc of America Commercial Finance Corporation ($3,247,001, including $900,000 to repurchase the full amount of outstanding warrants) and to pay the closing costs of the refinancing of $100,000.

        In a loan and security agreement with an effective date of December 31, 2001 and a funded date of January 3, 2002, Possible Dreams entered into a new financing facility with LaSalle Business Credit, Inc. that provides for a $12,700,000 revolving line of credit and two separate term loans, Term Loan A for $1,500,000 and Term Loan B for $1,800,000. Amounts drawn on the new line of credit bear interest at the prime rate or LIBOR plus 2.50%. Term Loan A and Term Loan B are payable in monthly installments through December 2004 and January 2004, respectively, with Term Loan A also requiring a balloon principal payment in December 2004 of $1,075,000. Both term loans bear interest at the prime rate plus ¹/2% or LIBOR plus 3%. Borrowings under the new facility are secured by substantially all of the assets of Possible Dreams. There were $213,000 in financing costs which were deferred and will be amortized over the life of the loan.

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        On February 28, 2002, WC Holdings fully prepaid its $6,000,000 subordinated debt with Bank One Mezzanine which carried a 20% per annum interest rate and was due to be repaid in a balloon payment in December 2005. In addition to the principal amount, WC Holdings also was required to pay $431,000 in prepayment penalties. Cash flow from operations was sufficient to prepay this note and penalties without utilizing the Bank One revolving line of credit. WC Holdings' senior term debt with Bank One was amended to allow prepayment of the subordinated debt prior to repayment of the senior term debt and to concurrently increase the revolving facility from $4,500,000 to $5,000,000 effective February 28, 2002.

        The Company refinanced its debt at Primrose on April 5, 2002. The terms of the new debt are as follows: $3,200,000 term loan repayable at $624,000 per quarter beginning July 15, 2002 bearing interest at an interest rate of prime plus 2.0%, an additional $4,000,000 of non-amortizing term debt with a balloon payment due in September 2003 bearing interest at LIBOR plus 1.0% and a revolving facility of $1,000,000 (of which $681,000 was drawn at closing) bearing interest at LIBOR plus 3.0% or Prime plus 0.5% expiring in September 2003. To secure this debt, Primrose has pledged all of its assets, Primrose Holdings and the Company has guaranteed the debt and the Chairman of the Company has issued a personal guarantee for $4,000,000 for which he will receive a guarantee fee of 8% per annum of the declining average quarterly balance of his guarantee. This fee has been approved by both the Audit Committee and the Board of Directors. This guarantee entitles the Chairman to a subordinated interest in Primrose's assets, and Primrose agrees to reimburse the Chairman for any amount paid by him on this guarantee. In addition, the Company agrees to reimburse the Chairman for any amount paid by him on his guarantee in the event Primrose fails to reimburse him. The Company will use its best efforts to relieve the Chairman of his personal guarantee through the Company's setting aside of funds in a designated reserve bank account. The Company estimates that it can reserve approximately $4,000,000 (the full amount of the Chairman's guarantee) by December 2002 or January 2003.

        This transaction was necessary and beneficial to the Company because of the following:

1.

It allowed Primrose to meet an agreed-upon deadline for its refinancing, which enables Primrose to repurchase its warrants which had been issued to the previous lender for 8.03% of Primrose's stock. These warrants are included on the Consolidated Balance Sheet at December 31, 2001 in the amount of $1,334,000 but will be repurchased by Primrose for $24.

2.

It allowed Primrose—concurrently with the repurchase of these warrants—to cease recording the accretion of the warrants' value based on a multiple of their EBITDA through its income statement, thereby reducing the variability of the Company's earnings.

3.

It allowed the Company to avoid a potential forbearance fee with its previous lender.

        In the second quarter of 2002, the Company will record a gain on the early extinguishment of debt associated with this Primrose refinancing of approximately $400,000 relating to the repurchase of warrants net of the write-off of original issue discount and deferred financing costs associated with the original debt.

        On April 1, 2001, the Company's subsidiary, Health Power, acquired 100% of the common stock of Trigon Administrators, Inc., a TPA administrator in Virginia and Maryland. The entire purchase price paid for the acquisition—$6,000,000—was financed through Health Power's revolving line of credit. Subsequent adjustments to the purchase price reduced it to $5,495,000. In conjunction with this purchase, Health Power's loan agreement was amended during the first quarter of 2001, and Health Power converted the revolver balance to term during the third quarter of 2001.

        Aside from the capital lease entered into at Possible Dreams, discussed earlier in this section, the Company had no other major capital expenditures during 2001 and expects no major capital expenditures during the 2002 calendar year.

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        Excess of cost over the fair value of net assets acquired (goodwill) is amortized on a straight-line basis over 20 to 25 years. Management continues to believe that the amortization periods utilized are appropriate.

        The Company's quarterly and annual revenues and other operating results have been and will continue to be affected by a wide variety of factors that could have a material adverse effect on the Company's financial performance during any particular quarter or year. Such factors include, but are not limited to those referred to in Item 7. The seasonal products segment businesses introduced a number of new products in their target markets in 2001 which are expected to enhance future revenues and liquidity of the Company. However, there can be no assurance that these businesses will be able to implement their plans to introduce such products in a timely fashion, or that such products will meet the expectations of the Company for either revenues or profitability. The Company believes that cash flows from operating activities and the successful introduction of its new products and continued growth of its franchises, as well as its available borrowings under the revolving credit facilities, will be adequate to meet the Company's debt service obligations, working capital needs and planned capital expenditures for at least the next 12 months.

New Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, all goodwill and those intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.

        The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Beginning January 1, 2002, the Company will no longer amortize goodwill or any indefinite-lived intangible assets. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets.

        In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, " Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations" for a disposal of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier appliation encouraged. The Company expects to adopt SFAS 144 as of January 1, 2002 and it does not expect the adoption of this statement to have a significant impact on the Company's financial position and results of operations.

Forward Looking Statements

        This filing contains "forward-looking" statements within the meaning of the "safe harbor" provision of the Private Litigation Reform Act of 1995. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. Such factors and uncertainties include, but are not limited to: future legislative changes which could impact the laws governing workers' compensation insurance in Ohio and the other states in which our employer cost containment-related services segment operates, the level of orders that are received and shipped by the Company in any given quarter, the rescheduling and cancellation of orders by customers, the availability and cost of materials, the Company's ability to enhance its existing products and to develop, manufacture and successfully introduce and market new products, new product developments by the

22

Company's competitors, market acceptance of products of both the Company and its competitors, competitive pressures on prices, the ability to attract and maintain qualified personnel, significant damage to or prolonged delay in operations at the manufacturing facilities of the Company's suppliers, interest rate and foreign exchange fluctuations, political stability in the Pacific Rim, and the Company's ability to attract qualified franchisees.

Quarterly Information (Unaudited)

        The following is a summary of operations by quarter (dollar amounts in thousands, except per share amounts):

	1ST QUARTER			2ND QUARTER		3RD QUARTER		4TH QUARTER
2001:
Net revenues	$	16,096		$	22,032	$	35,312	$	19,746
Gross profit		13,410			17,354		25,357		15,534
Net (loss) income		(569	)		634		3,632		(862	)
Basic (loss) earnings per common share		(0.10	)		0.09		0.55		(0.15	)
Diluted (loss) earnings per common share		(0.10	)		0.08		0.48		(0.15	)
2000:
Net revenues	$	4,748		$	8,717	$	20,309	$	8,130
Gross profit		2,768			5,033		11,930		4,685
Net (loss) income		(604	)		141		2,987		(1,099	)
Basic (loss) earnings per common share		(0.11	)		0.01		0.45		(0.18	)
Diluted (loss) earnings per common share		(0.11	)		0.01		0.41		(0.18	)

        The amounts reflected in the 2001 quarterly table above include a restatement to record the fair value of a derivative instrument which was entered into to modify the risk of interest rate fluctuations. The net effect of this adjustment was to (reduce) increase the first, second, and third quarters' net (loss) income as reported by $(150), $28 and $(174), respectively. The net effect of this adjustment was to (reduce) increase the first, second and third quarters' basic (loss) earnings per common share as reported by $(0.02), 0.01 and $(0.03), respectively. The net effect of this adjustment was to (reduce) increase the first, second and third quarters' diluted (loss) earnings per common share as reported by $(0.02), 0.01 and $(0.02), respectively.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of the Company. The Company is exposed to market risk associated with changes in interest rates. The Company's notes payable and long-term debt bear interest primarily at variable rates. The Company is subject to increases and decreases in interest expense on its variable rate debt resulting from fluctuations in the interest rates on such debt. The effect of a one percentage point change in interest rates would have increased or decreased interest expense by approximately $345,000 for the year ended December 31, 2001. To modify the risk from these interest rate fluctuations, the Company entered into an interest rate swap transaction. The Company does not use financial investments for trading purposes and is not a party to any leveraged derivatives.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index To Consolidated Financial Statements

Reports of Independent Auditors		25
Consolidated Financial Statements
	Consolidated Balance Sheets— At December 31, 2001 and 2000	27
Consolidated Statements of Income— For the years ended December 31, 2001, 2000 and 1999		28
Consolidated Statements of Stockholders' Equity— For the years ended December 31, 2001, 2000 and 1999		29
Consolidated Statements of Cash Flows— For the years ended December 31, 2001, 2000 and 1999		30
Notes to Consolidated Financial Statements		31

        All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

24

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Security Capital Corporation

        We have audited the accompanying consolidated balance sheets of Security Capital Corporation and subsidiaries (the "Company") as of December 31, 2001 and 2000 and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security Capital Corporation and subsidiaries at December 31, 2001 and 2000 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Stamford, Connecticut
March 4, 2002, except for Note 22,
as to which the date is April 5, 2002

25

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
Security Capital Corporation

        We have audited the accompanying consolidated statements of income, stockholders' equity, and cash flows of Security Capital Corporation and subsidiaries (the "Company") for the year ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the results of the operations and cash flows of Security Capital Corporation and subsidiaries for the year ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Stamford, Connecticut
March 27, 2000

26

SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

		DECEMBER 31,
		2001			2000
ASSETS
Current assets:
	Cash and cash equivalents	$	11,562		$	5,777
	Accounts receivable (less allowances for doubtful accounts of $850 and $612, respectively)		11,111			9,265
	Inventories		4,557			5,594
	Deferred tax assets		1,364			1,943
	Other current assets		1,660			1,470
	Total current assets		30,254			24,049
Property and equipment, net			5,385			5,966
Goodwill (less accumulated amortization of $7,149 and $3,992, respectively)			60,290			57,836
Franchise agreements (less accumulated amortization of $1,135 and $719, respectively)			7,615			8,031
Intangible assets, net			2,453			1,551
Deferred income taxes			626			1,074
Other assets			662			2,050
	Total assets	$	107,285		$	100,557
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt and other obligations	$	9,591		$	7,840
	Accounts payable		2,549			3,371
	Accrued expenses and other liabilities		5,977			3,102
	Unearned revenue		12,103			12,890
	Notes payable		6,600			4,200
	Total current liabilities		36,820			31,403
Long-term debt			33,873			36,372
Other long-term obligations			2,887			2,518
Minority interests			3,553			2,960
Redeemable convertible preferred stock (liquidation value—$5,000)			2,867			2,515
Commitments and contingencies (Note 19):
Stockholders' equity:
Common stock, $.01 par value, 7,500 shares authorized; 380 shares issued and outstanding			—			—
Class A common stock, $.01 par value, 10,000,000 shares authorized; 6,458,309 shares issued (6,442,309 in 2000), 6,450,587 shares outstanding (6,442,309 in 2000)			65			65
Additional paid-in capital			66,528			66,782
Accumulated deficit			(39,223	)		(42,058	)
Less: treasury stock, at cost, 7,722 and 0 shares in 2001 and 2000, respectively			(85	)		—
	Total stockholders' equity		27,285			24,789
	Total liabilities and stockholders' equity	$	107,285		$	100,557

The accompanying notes are an integral part of these consolidated financial statements.

27

SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)

		Years ended December 31,
		2001			2000			1999
Revenues:
	Employer cost containment-related services	$	53,634		$	1,301		$	—
	Seasonal products		31,900			33,759			33,117
	Educational services		7,652			6,844			4,228
Total revenues			93,186			41,904			37,345
Cost of Revenues:
	Employer cost containment-related services		5,139			197			—
	Seasonal products		15,082			15,807			16,110
	Educational services		1,310			1,484			1,078
Total cost of revenues			21,531			17,488			17,188
Gross profit			71,655			24,416			20,157
Selling, general and administrative expenses			52,642			15,230			13,473
Amortization and depreciation			6,066			2,436			1,886
Operating income			12,947			6,750			4,798
Interest expense			(5,826	)		(3,442	)		(3,122	)
Other expense			(544	)		(507	)		(236	)
Income before income taxes and minority interest			6,577			2,801			1,440
Income tax (expense) benefit			(3,100	)		(1,140	)		768
Minority interests			(642	)		(236	)		(273	)
Net income			2,835			1,425			1,935
Less preferred stock accretion			(352	)		(309	)		(206	)
Income available to common stockholders		$	2,483		$	1,116		$	1,729
Basic earnings per share		$	0.39		$	0.17		$	0.28
Diluted earnings per share		$	0.35		$	0.17		$	0.28
Basic weighted average shares used in computation			6,444			6,442			6,150
Diluted weighted average shares used in computation			6,648			6,484			6,150

The accompanying notes are an integral part of these consolidated financial statements.

28

SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)

		Number of Shares Issued*		Common Stock*			Additional Paid-in Capital			Accumulated Deficit			Treasury Stock			Total
Balance, January 1, 1999		5,624,900		$	56		$	67,520		$	(45,418	)	$	(5,215	)	$	16,943
	Net income	—			—			—			1,935			—			1,935
	Accretion of redeemable/convertible preferred stock	—			—			(206	)		—			—			(206	)
	Sale of 1,136,364 shares of Class A common stock	1,136,364			12			4,988			—			—			5,000
Balance, December 31, 1999		6,761,264			68			72,302			(43,483	)		(5,215	)		23,672
	Net income	—			—			—			1,425			—			1,425
	Accretion of redeemable/convertible preferred stock	—			—			(308	)		—			—			(308	)
Retirement of 159 shares of common stock and 318,416 shares of Class A common stock		(318,575	)		(3	)		(5,212	)		—			5,215			—
Balance, December 31, 2000		6,442,689			65			66,782			(42,058	)		—			24,789
	Net income	—			—			—			2,835			—			2,835
	Accretion of redeemable/convertible preferred stock	—			—			(352	)		—			—			(352	)
	Purchase of treasury stock (Class A)	(7,722	)		—			—			—			(85	)		(85	)
	Issuance of 16,000 shares of Class A common stock upon exercise of stock options	16,000			—			98			—			—			98
Balance, December 31, 2001		6,450,967		$	65		$	66,528		$	(39,223	)	$	(85	)	$	27,285

*Includes both Common Stock and Class A Common Stock

The accompanying notes are an integral part of these consolidated financial statements.

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SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

		Years ended December 31,
		2001			2000			1999
Cash flows from operating activities:
Net income		$	2,835		$	1,425		$	1,935
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
	Deferred income taxes		1,682			755			(887	)
	Warrant (income) expense		(74	)		559			290
	Amortization		4,363			2,520			2,066
	Depreciation		2,249			378			255
	Minority interest in income of consolidated subsidiaries		642			236			273
	Unrealized loss on derivatives		529			—			—
Changes in operating assets and liabilities, net of effects of acquisitions:
	Accounts receivable		(376	)		(260	)		(856	)
	Inventories		1,036			(1,401	)		1,146
	Other current assets		1,158			306			240
	Accounts payable, accrued expenses and other liabilities		553			(4,549	)		(1,553	)
Net cash provided by (used in) operating activities			14,597			(31	)		2,909
Cash flows from investing activities:
	Capital expenditures		(844	)		(346	)		(324	)
	Payments for acquired businesses (net of acquired cash of $0, $15,963, and $838, respectively)		(7,870	)		(19,867	)		(25,033	)
Net cash used in investing activities			(8,714	)		(20,213	)		(25,357	)
Cash flows from financing activities:
	Issuance of common stock		98			—			5,000
	Purchase of treasury stock		(85	)		—			—
	Proceeds from long-term borrowings		7,847			33,128			13,150
	Repayments of long-term borrowings		(9,367	)		(3,870	)		(3,272	)
	Repurchase of warrants		(900	)		—			—
	Payments of capital leases		(91	)		—			—
	Proceeds from lines of credit		25,488			14,785			6,065
	Repayment of lines of credit		(23,088	)		(19,835	)		(5,815	)
	Net cash (used in) provided by financing activities		(98	)		24,208			15,128
Increase (decrease) in cash and cash equivalents			5,785			3,964			(7,320	)
Cash and cash equivalents, beginning of period			5,777			1,813			9,133
Cash and cash equivalents, end of period		$	11,562		$	5,777		$	1,813
Interest paid		$	4,900		$	2,672		$	2,727
Income taxes paid		$	351		$	352		$	131

The accompanying notes are an integral part of these consolidated financial statements.

30

SECURITY CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001
(Amounts in thousands, except share and per share amounts)

1. Organization and Description of Business

        Security Capital Corporation ("Security Capital") operates as a financial buyer of established companies as portfolio investments. Primarily, Security Capital participates in the management of its portfolio companies at the board level, and encourages operating autonomy and preservation of entrepreneurial environments. Currently, Security Capital has four portfolio subsidiary activities (together with Security Capital, referred to as the "Company"), known as Health Power, Primrose, Pumpkin, and Possible Dreams. WC Holdings Inc. is a wholly-owned subsidiary with an 80% equity interest in Health Power, Inc. Health Power—through its wholly-owned subsidiary CompManagement, Inc.—provides services to corporations and their employees primarily relating to workplace health and safety occupational medical care, workers' compensation insurance and employee benefits costs. CompManagement's activities are centered primarily in Ohio and to a lesser extent in Indiana, Kentucky, Pennsylvania, West Virginia, and Washington. Primrose is a 98.5%-owned subsidiary involved in the franchising of educational child care centers, with related activities in real estate consulting and site selection services. Primrose also operates one child care center. The Primrose activities are primarily based in the southern, central and western United States. Pumpkin is an 80%-owned subsidiary in the business of manufacturing and distributing pumpkin carving kits and related accessories. Pumpkin's activities are centered in the United States. Possible Dreams is a wholly-owned subsidiary that operates as an importer, designer, and distributor of collectible Christmas, everyday and other figurines and ornaments, primarily in the United States.

2. Summary of Significant Accounting Policies

Consolidation

        The accompanying consolidated financial statements include the accounts of Security Capital and its subsidiaries. All significant intercompany balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.

Use of Management Estimates

        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

        Significant estimates included within the financial statements include sales return and discount reserves, allowance for doubtful accounts, inventory obsolescence reserves, the fair value of carryforward tax benefits, and the fair value and economic lives of intangible assets.

Revenue Recognition

        Revenues from product sales are recognized in the period in which the merchandise is shipped.

        Primrose recognizes royalties based on the monthly revenues of the franchisees. Franchise fees are collected at various intervals prior to the opening of a school and are deferred until the franchised school has commenced operations. Real estate service fees are recognized as earned. Assignment fees

31

relate to revenue earned for site identification and preparation for the construction of the building, including zoning permits. Assignment fees are recognized upon the closing of the purchase of the property. School tuition revenue is recognized as earned over the school year. All fees received in advance of time of recognition are recorded as unearned revenue.

        Employer cost containment-related service contract revenues are derived from claims management, administrative, consulting services and managed care administration services that are recorded as earned based on the requirements and duration of the related contracts. Revenues from the managed care administration services are recognized on a monthly basis based on the contracted administrative fee with the Ohio Bureau of Workers' Compensation. In addition, contract revenues are recorded for certain incentive awards when the claims are processed to which the incentive is related and a bonus award is recorded in the year earned. Revenues on certain contracts have been deferred and are recognized in income on a pro rata basis over the related contract periods, which typically range between 3 and 12 months. Commission expense associated with these contracts is also deferred and recognized as an expense on a pro rata basis over the related contract periods. For services related to group rating contracts, fees are paid to the group's sponsor and netted against contract revenues. Contract revenues received in advance are included in deferred revenues.

Shipping and Handling Fees and Costs

        Shipping and handling fees and costs are included in the cost of revenues of the seasonal products segment.

Cash and Cash Equivalents

        The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Receivables

        A summary of the changes in the allowance for doubtful accounts for the years ended December 31 is as follows:

	2001			2000			1999
Balance at beginning of year	$	612		$	213		$	214
Amount purchased—acquisition of WC Holdings, Inc.		—			65			—
Provisions		1,849			1,953			182
Deductions		(1,611	)		(1,619	)		(183	)
Balance at end of year	$	850		$	612		$	213

Inventories

        Inventories are principally comprised of finished goods and are stated at the lower of cost or market using the first-in, first-out method.

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Prepaid Catalog Costs

        Prepaid catalog costs consist of the cost to produce, print and distribute catalogs. These costs are considered direct-response advertising and, as such, are capitalized as incurred and amortized over a period which is generally less than one year. Other advertising costs which are expensed when incurred were $314, $338 and $280 for 2001, 2000 and 1999, respectively.

Property and Equipment, Net

        Property and equipment are carried at cost, less accumulated depreciation. Significant renewals and betterments to property and equipment are capitalized, and maintenance and repairs that do not improve or extend the lives of the assets are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 27 years. Leasehold improvements are amortized over the shorter of the useful life or the lease term.

Goodwill, Franchise Agreements and Intangible Assets, Net

        Goodwill relates to the cost in excess of the fair value of the net assets acquired in the purchase business combinations of Possible Dreams, Pumpkin, Primrose, WC Holdings and Trigon. Goodwill is being amortized over periods of 20 to 25 years. Patent rights, acquired in such acquisitions, are amortized over 9 to 17 years.

        Deferred financing costs are amortized over the term of the related debt to interest expense using the effective income method.

        Franchise agreements, curriculum and non-compete agreements related to Primrose are being amortized over periods of 21, 10 and 2 years, respectively. Remaining lives of the franchise agreements and curriculum are 18 and 7 years, respectively. The non-compete agreements were fully amortized by the end of 2001. Health provider costing lists relate to WC Holdings and are being amortized over the 4.75 years remaining life of WC Holdings access to the costing data. All such assets are being amortized on a straight-line basis.

Fair Value of Financial Instruments

        Financial instruments consist of current assets (except inventories), current liabilities, notes payable, long-term debt and other long-term obligations. Current assets and current liabilities are carried at cost, which approximates fair value due to the short-term nature of these items. Notes payable, the additional payment obligations and long-term debt bear interest at current market rates or at fixed rates which approximate current market rates and, accordingly, their carrying values.

Derivative Financial Instruments

        The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 on January 1, 2001. The Company uses financial instruments to manage its exposures to movements in interest rates. The use of the financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to the Company. The Company does not use derivatives for trading purposes and is not a party to leveraged derivatives. The fair value of derivatives is recorded in the consolidated balance sheets in other long-term obligations. The Company assesses changes in the fair value of their

33

derivative instruments and records any changes in fair market value in the consolidated statements of income as such instruments are not being accounted for as hedges.

Impairment of Long-lived Assets

        The Company reviews long-lived assets, including goodwill and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is determined based on future undiscounted net cash flows from the use and ultimate disposition of the asset. Impairment loss is calculated as the difference between the carrying amount of the asset and its fair value. Fair value is determined primarily by using the anticipated cash flows discounted at a rate commensurate with the risk involved. As of December 31, 2001, the Company has determined that there is no need to recognize any impairment losses.

Warrant Obligations

        Warrants to acquire subsidiary shares issued in connection with the acquisitions of the subsidiaries can be settled in cash at the option of the holders. Accordingly, the estimated fair value of the warrants have been recorded as liabilities and changes in the estimated fair value of the warrants are recorded as other income or expense in the respective statements of income.

Preferred Stock Accretion

        Differences between the carrying value of redeemable preferred shares and their redemption value are accreted using the interest method over the remaining estimated period to redemption (4¹/2 years), by charges to additional paid-in capital.

Debt Discount Amortization

        Differences between the carrying value and the face amount of the debt are amortized to interest expense over the life of the debt using the effective interest method.

Stock Options

        The Company measures compensation cost for stock options issued to employees using the intrinsic value method of accounting for stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB 25, when the exercise price of the Company's stock options equals the market value of the underlying stock on the date of the grant, no compensation expense is recognized. The Company has adopted the disclosure only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." See notes 12 and 14 for a summary of the pro forma effects to reported net income as if the Company had decided to recognize compensation cost based on the fair value of the options granted as prescribed by SFAS No. 123.

Earnings Per Share

        Basic earnings per common share amounts are based on the weighted average number of Common and Class A Common shares outstanding. The sum of Common Stock and Class A Common Stock is used because the two classes are identical except for certain transfer restrictions. Diluted earnings per

34

common share are based on the weighted average shares outstanding and the dilutive effect, if any, of outstanding stock options of both the subsidiaries and the parent and convertible securities.

Income Taxes

        The Company computes income taxes using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the assets and liabilities, using presently enacted rates.

New Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", (the "statements") effective for fiscal years beginning after December 15, 2001 for pre-July 1, 2001 goodwill and other intangibles. Under the new rules, all goodwill and those intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. These pronouncements had no impact on the 2001 amortization expense of the Company but will result in reduced amortization expense of $3,200 for the year ended December 31, 2002.

        The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Beginning January 1, 2002, the Company will no longer amortize goodwill or any indefinite-lived intangible assets. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets. The impact of the adoption of this statement will be determined in 2002.

        In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations" for a disposal of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company expects to adopt SFAS 144 as of January 1, 2002 and it does not expect that the adoption of this statement to have a significant impact on the Company's financial position and results of operations.

3. Acquisitions

Trigon Administrators, Inc.

        On April 1, 2001, the Company's subsidiary, Health Power, Inc., acquired 100% of the outstanding common stock of Trigon Administrators, Inc., a third party administrator in Virginia, Maryland, and North Carolina. The results of operations of Trigon Administrators for the nine months ended December 31, 2001 have been included in the financial statements. The acquisition has been accounted

35

for as a purchase, with the purchase price of $5,495 preliminarily allocated as follows based on estimated fair values at the date of acquisition.

Goodwill (20 years)	$	4,590
Other intangibles (5 years)		153
Other assets		4,735
Unearned revenue		(742	)
Accrued liabilities		(3,241	)
Total	$	5,495

        The Company financed the entire purchase price through its revolving line of credit which was subsequently converted to a term note (See Note 7). Under the terms of the bank credit agreement, the borrowings are secured by a pledge of all assets of the Trigon Administrators business.

WC Holdings, Inc.

        On December 20, 2000, the Company purchased a 100% interest in WC Holdings, Inc. which, in turn, purchased an 80% interest in Health Power, Inc. The results of operations of WC Holdings have been included in the financial statements from the date of acquisition. The Company paid $37,446 in cash. The acquisition was accounted for as a purchase, with the purchase price, net of cash acquired of $14,567, allocated as follows based on estimated fair values at the date of acquisition:

Goodwill (20 years)	$	29,981
Other assets		12,807
Unearned revenue		(10,853	)
Accrued liabilities		(9,056	)
Total	$	22,879

        The amounts above are reflective of final purchase price allocations made during 2001. Goodwill increased by $1,163 during 2001 due to these final purchase price allocations.

        In connection with the financing of the acquisition, the Company borrowed funds under bank credit agreements (see Notes 7 and 8). Under terms of the bank credit agreements, the borrowings are secured by a pledge of all assets of the WC Holdings businesses, and by the capital stock of WC Holdings held by the Company. The costs associated with such financing were recorded as to deferred financing costs and are being amortized over the life of the related debt agreements (see Note 1).

Primrose

        In April 1999, the Company purchased a 98% interest in Primrose. The results of operations of Primrose have been included in the financial statements from the date of acquisition. The Company paid $26,225 in cash, issued 500,000 shares of zero coupon redeemable convertible preferred stock

36

valued at $2,000, and issued a warrant to a bank to purchase shares of Primrose. The acquisition was accounted for as a purchase, with the purchase price, net of cash acquired of $838, allocated as follows:

Goodwill (25 years)	$	18,937
Intangibles, principally franchise agreements (21 years)		9,522
Other assets		1,773
Unearned revenue		(1,600	)
Accrued liabilities		(1,244	)
Total	$	27,388

        In connection with the financing of the acquisition, the Company sold 1,136,364 shares of Class A Common Stock for $5,000 in a private placement transaction with an affiliate of the Company's controlling shareholder, and borrowed funds under bank credit agreements (see Note 8). Under terms of the bank credit agreements, the borrowings are secured by a pledge of all assets of the Primrose businesses, and by the capital stock of Primrose held by the Company.

Pro Forma Financial Information

        The following unaudited pro forma financial information presents the combined results of the Company, Health Power, Inc and Trigon as if the acquisitions had taken place on January 1, 2000. It also includes Primrose as if the acquisition had taken place on January 1, 1999. The pro forma amounts give effect to certain adjustments, including the amortization of goodwill and intangibles, increased interest expense and income tax effects. This pro forma information does not necessarily reflect the results of operations as they would have been if the business had been managed by the Company during these periods and is not indicative of results that may be obtained in the future:

	YEAR ENDED DEC. 31, 2001		YEAR ENDED DEC. 31, 2000			YEAR ENDED DEC. 31, 1999
	(unaudited)		(unaudited)			(unaudited)
Pro forma:
Revenue	$	95,804	$	97,273		$	78,917
Net income	$	2,904	$	23		$	2,080
Net income available to common stockholders	$	2,552	$	(286	)	$	1,874
Basic earnings per share	$	0.40	$	(0.04	)	$	0.27
Diluted earnings per share	$	0.36	$	(0.04	)	$	0.27

4. Inventories

	DECEMBER 31,
	2001		2000
Finished goods	$	4,139	$	5,199
Raw materials		418		395
Total	$	4,557	$	5,594

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5. Property and Equipment, Net

	DECEMBER 31,
	2001			2000
Land and improvements	$	370		$	370
Buildings and improvements		1,256			1,182
Computer equipment and software		4,765			3,777
Machinery and equipment		735			384
Furniture and fixtures		1,202			1,103
		8,328			6,816
Less accumulated depreciation		(2,943	)		(850	)
Total	$	5,385		$	5,966

6. Intangible Assets, Net

	DECEMBER 31,
	2001			2000
Patents	$	1,279		$	1,223
Deferred financing costs		2,221			1,403
Curriculum		250			250
Health provider costing lists		153			—
Non-compete agreements		89			89
		3,992			2,965
Less accumulated amortization		(1,539	)		(1,414	)
Total	$	2,453		$	1,551

7. Notes Payable

        WC Holdings, Possible Dreams, Pumpkin and Primrose each have short-term borrowing facilities under bank credit agreements. Each such agreement contains restrictive covenants which prohibit or limit certain actions, including levels of capital expenditures, investments and incurrence of additional debt, and which require the maintenance of defined levels of profitability and tangible net worth. As a result, substantially all of the subsidiaries net assets are limited from being transferred to the parent company.

        Pumpkin recorded a contingent earnout obligation to its former owners that was earned on December 31, 2000. The amount recorded was determined based upon the average EBITDA during the four-year period ended December 31, 2000. The former owners are entitled to an earnout amount of $1,812, which is included in long term debt. The earnout obligation is subordinated to Pumpkins term note and revolving loan and is due in 2004.

        On March 31, 2001, the Company's subsidiary, Health Power, amended its existing loan agreement relating to the lender's consent to the Trigon acquisition discussed in Note 3. The lender consented to the use of $6,000 of Health Power's revolving line of credit to pay for such acquisition, which was later reduced for purchase price reductions to $5,347, and the amendment of the ratio of funded

38

indebtedness to EBITDA covenant. During the third quarter of 2001, Health Power, Inc., converted the $5,347 revolver balance still outstanding from the total $6,000 it had drawn in April to term debt. This conversion was accomplished by increasing the existing term loan with Bank One, which is senior term debt payable in monthly installments through January 2007. It carries an interest rate of prime minus ¹/2% or LIBOR plus 1.75% (3.89% at December 31, 2001). Concurrent with this conversion, the revolving facility was reduced from $8,000 to $4,500. Subsequent to year-end on February 28, 2002, the revolving facility was increased to $5,000 (see Note 22).

        WC Holdings' subsidiary Health Power, Inc.'s agreement is a $4,500 line of credit at December 31, 2001 ($8,000 at December 31, 2000) under which $0 and $1,000 were borrowed at December 31, 2001 and 2000, respectively, at an interest rate of LIBOR plus 175 basis points (4.25% and 9% at December 31, 2001 and 2000, respectively).

        Possible Dreams' agreement at December 31, 2001 is a $10,000 line of credit, under which borrowing capacity is limited to a defined borrowing base, of which $6,000 and $2,700 was borrowed at December 31, 2001 and 2000, respectively, at the commercial paper rate of interest plus 4% (5.99% and 10.5% at December 31, 2001 and 2000, respectively). Additional unutilized borrowing capacity of $0 and $1,644 was available at December 31, 2001 and 2000, respectively. The agreement was scheduled to expire in 2003 but was refinanced in January 2002 as discussed in Note 22.

        On June 13, 2001, Pumpkin entered into a three-year loan agreement with LaSalle Business Credit, Inc. The total credit facility is $10,000, consisting of a maximum term loan amount of $2,500 and a revolving loan commitment of $7,500. The amount Pumpkin is allowed to draw on the revolver is limited by a borrowing base defined by specific accounts receivable and inventory levels. The agreement also provides for seasonal overadvances from April 1^st through July 31^st of each year during the peak of the inventory build-up period. On June 14, 2001, Pumpkin used the new financing facilities to retire all amounts owing to Banc of America Commercial Finance Corporation ($3,247, including $900 to repurchase the full amount of outstanding warrants) and to pay the closing costs of the refinancing ($100).

        Pumpkin's agreement at December 31, 2001, therefore, is a $7,500 line of credit, under which borrowing capacity is limited to a defined borrowing base. Interest is calculated at the prime rate or LIBOR plus 2.5% (4.75% at December 31, 2001) as compared to the interest rate on the revolving facility in effect at the prior year-end which was at the commercial paper rate plus 4.25% (10.61% at December 31, 2000). There were no borrowings outstanding at either balance sheet date. Borrowing capacity under the revolving facilities was $1,095 (under the new facility) and $1,560 (under the old facility) at December 31, 2001 and 2000, respectively. The new agreement expires in 2004.

        Primrose's agreement is a $1,500 line of credit, under which $600 and $500 were borrowed at December 31, 2001 and 2000, respectively, at the greater of the prime rate plus 2% or the federal funds rates plus 3.5% (6.75% and 11.5% at December 31, 2001 and 2000, respectively). Additional borrowing capacity under the line was $141 at December 31, 2001. The agreement expires in 2005.

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8. Long-term Debt and Other Obligations

	DECEMBER 31,
	2001			2000
Possible Dreams Tranche A Term Loan, repaid during 2001; was payable in twenty quarterly installments through July 1, 2001; interest was payable monthly at the commercial paper rate plus 4% (10.5% at December 31, 2000)	$	0		$	800
Possible Dreams Tranche B Term Loan, payable in seven quarterly installments commencing upon the repayment of the Tranche A Term Loan, is due no later than April 1, 2003; interest payable monthly at the commercial paper rate plus 6% (7.99% and 12.535% at December 31, 2001 and 2000, respectively)		3,125			3,500
Possible Dreams Subordinated promissory notes, interest rates from 10-14% (14% and 10% at December 31, 2001 and 2000, respectively), principal due on May 31, 2003; interest payable semi-annually on May 1 and November 1		1,960			1,960
Possible Dreams capital lease for computer equipment payable over a sixty-month lease term commencing with the date of final installation of the equipment, currently scheduled for the first quarter of 2002.		694			0
Pumpkin Tranche B Term Loan, repaid early during 2001; was payable in eight quarterly installments through October 2002; interest was payable monthly at the commercial paper rate plus 6.5% (12.86% at December 31, 2000)		0			2,000
Pumpkin Term Loan, drawn in June of 2001; payable in twenty-four monthly installments through June 2003; interest payable monthly at the prime rate or LIBOR plus 2.5% (4.75% at December 31, 2001)		1,875			0
Primrose Tranche A Term loan, payable in quarterly installments ranging from $562 to $625; interest payable quarterly at LIBOR plus 3.5% (5.43% and 10.16% at December 31, 2001 and 2000, respectively)		7,713			9,900
WC Holdings capital lease for computer equipment payable through May 2003		165			263
WC Holdings note to Community Insurance payable in annual installments of Principal and interest through May 31, 2004 with interest imputed at 8%		1,373			1,873
WC Holdings senior term debt payable in monthly installments through January 2005; interest payable monthly; $8,500 of the principal bears a fixed 7.60% rate expiring in December 2005 but cancelable at the lender's option after December 2003; the remainder of the debt carries a rate of prime minus 1/2% or LIBOR plus 1.75% basis points (3.89% and 7.60% at December 31, 2001 and 2000, respectively)		19,522			17,000
WC Holdings subordinated debt, with a balloon payment due in December 2005 and interest payable monthly at 20% per annum (prepaid in full on February 28, 2002—see Note 22)		6,000			6,000
Pumpkin additional earnout payment obligations, subordinated debt, balloon payment due in June 2004, interest at 8% paid quarterly		1,812			1,865
		44,239			45,161
Less unamortized debt discount (current portion of $186 and -0-, respectively)		(678	)		(934	)

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Less amounts representing interest on capital leases		(97	)		(15	)
Total term debt	$	43,464		$	44,212

        Subsequent to year-end, certain debt obligations of the Company were refinanced. See Note 22 for details and for the Company's maturity schedule reflective of these refinancings.

        Consistent with the bank lines of credit, most of the Company's long-term obligations carry restrictive covenants which prohibit or limit certain actions, including levels of capital expenditures, investments and incurrence of additional debt, and which require the maintenance of defined levels of profitability and tangible net worth. Most borrowings are secured by a pledge of substantially all assets at the subsidiary level, as well as by a pledge of the Company's share ownerships in the subsidiary.

        The Company has a tax sharing agreement with its subsidiaries, under which income tax liabilities at each subsidiary are determined on a stand-alone basis, with amounts payable to Security Capital as the consolidated taxpayer. With respect to Possible Dream's, Pumpkin's, Primrose's and WC Holdings and subsidiaries' term loan and bank credit arrangements, any amounts remitted to Security Capital in excess of amounts approved by the lenders are required to be set aside, and are pledged to the lenders as additional collateral for the borrowings at such subsidiaries. At December 31, 2001, no such amounts were set aside and pledged as collateral under such arrangements.

        On June 13, 2001, Pumpkin entered into a three-year loan agreement with LaSalle Business Credit, Inc. The total credit facility is $10,000, consisting of a maximum term loan amount of $2,500 and a revolving loan commitment of $7,500. On June 14, 2001, Pumpkin used the new financing facilities to retire all amounts owing to Banc of America Commercial Finance Corporation ($3,247, including $900 to repurchase the full amount of outstanding warrants) and to pay the closing costs of the refinancing. The term loan is a 24-month obligation with monthly payments due July 1, 2001 through June 1, 2003. This term note bears interest at the prime rate or LIBOR plus 2.5%. Principal repayments are due as follows: $625 in 2001, $1,250 in 2002 and $625 in 2003. The revolver bears interest at the prime rate or LIBOR rate plus 2.5% and runs for three years through June 2004.

        Management expects to be in compliance with the covenants on all debt in the foreseeable future. Borrowings under the agreements are secured by a pledge of substantially all of the Company's assets as well as a pledge of the Company's share ownerships in the subsidiaries.

        The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 effective January 1, 2001. To manage interest rate risk, the corporation has entered into an interest rate swap on December 20, 2000, that effectively fixes the interest payments of its floating rate debt instruments. The impact of adoption was not material. This derivative instrument is not designated as a hedge for financial accounting purposes. The fair market value is therefore recorded in other long-term obligations, and the change in fair value is recognized in the consolidated statements of income in "other expense".

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        As of December 31, 2001, the unrealized derivative loss was $529 which was determined by quoted market prices. The maturity date of the derivative instrument was December 22, 2005. At December 31, 2001, the notional principal amount of this agreement was $8,500.

        During the first quarter of 2001, Possible Dreams entered into a capital lease for computer equipment that expires in the first quarter of 2007. At December 31, 2001, property and equipment included the equipment under this capital lease with a cost of $607. Possible Dreams will begin amortizing this cost over the sixty-month lease term beginning on the date of final installation of the equipment, currently scheduled for the first quarter of 2002.

        At December 31, 2001, future minimum lease payments under the capital lease obligation for the periods ending December 31 are as follows:

2002	$	127
2003		139
2004		139
2005		139
2006		139
2007		11
		694
Less amounts representing interest		(87	)
	$	607

        WC Holdings leases computer equipment under an agreement which is classified as a capital lease. At December 31, 2001, property and equipment included the equipment under this capital lease with a cost of $173. At December 31, 2001, future minimum lease payments under the capital lease obligations for the periods ending December 31 are as follows:

2002	$	98
2003		67
		165
Less amounts representing interest		(10	)
	$	155

9. Preferred Stock

        The Company has issued and outstanding 500,000 shares of zero coupon, redeemable, preferred stock, that have a stated liquidation value of $10 per share. Such preferred shares are convertible into Class A common stock on a 1:1 basis. The preferred shares are redeemable at the option of the Company at their liquidation value upon the earlier of (1) the date Primrose's earnings before interest, income taxes, depreciation and amortization ("EBITDA") as defined, exceeds $8,500 on a latest twelve month basis on or after April, 2002, or (2) on April 6, 2006. EBITDA for Primrose was $3,242 for the year ended December 31, 2001.

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        The Company has 2,500,000 shares of authorized preferred shares, $.01 par value, of which 2,000,000 shares remain issuable at December 31, 2001 and 2000.

10. Stockholders' Equity

        The authorized capital of the Company consists of Common Stock and Class A Common Stock. The Class A Common Stock shares are identical in rights to the Common Stock shares, except that transfer of shares of the Class A Common Stock is prohibited to a person who is, or would thereby become, a holder of 4.75% or more of the fair market value of the Common Stock and the Class A Common Stock.

        The Company has entered into various financing arrangements at the subsidiary level that may limit the ability to pay dividends to the parent company, thus limiting the parent company's ability to pay dividends to its shareholders.

        During 2000, the Company retired all of the 318,575 shares then held in its treasury, returning them to their status of authorized and unissued shares of Common and Class A Common Stock. During 2001, the Company acquired 7,722 shares of Class A Common Shares when a director who resigned for personal reasons decided to exercise his vested stock options utilizing 7,722 of his previously-owned shares in lieu of cash to pay the option price due to the Company with regard to the 16,000 options he was exercising.

        Pursuant to the provisions of the 2000 Long-Term Incentive Plan (which allows for the grant of up to 966,000 shares), on July 13, 2000, the Company granted options to acquire 549,000 shares of its Class A common stock at market value, which was $6.125. Of the 549,000 options granted, 48,000 vest over a three-year period with one-third vesting immediately upon grant and the remaining two-thirds vesting equally on each of the first and second anniversaries of the grant, while the remaining 501,000 vest over a five-year period in equal 20% amounts beginning on the first anniversary of the grant and annually thereafter. Additional grants, also pursuant to the provisions of the 2000 Long-Term Incentive Plan, were made during the year ended December 31, 2001 as follows: On May 16, 2001, the Company granted options to acquire 24,000 shares of its Class A common stock at an exercise price per share equal to market value, which was $10.31. These 24,000 options vest over a three-year period with one-third vesting immediately upon grant and the remaining two-thirds vesting equally on each of the first and second anniversaries of the grant. On July 19, 2001, the Company granted options to acquire 237,000 shares of its Class A common stock at an exercise price per share equal to market value, which was $10.85. These 237,000 options granted vest over a five-year period in equal 20% amounts beginning on the first anniversary of the grant and annually thereafter. On September 7, 2001, the Company granted options to acquire 24,000 shares of its Class A common stock at an exercise price per share equal to market value, which was $12.69. These 24,000 options vest over a three-year period with one-third vesting immediately upon grant and the remaining two-thirds vesting equally on each of the first and second anniversaries of the grant. The Company, not the holder, has the right to settle the options in cash.

        As mentioned above, pursuant to the provisions of the 2000 Long-Term Incentive Plan, a director who resigned for personal reasons decided to exercise 16,000 vested options to purchase the Company's Class A common stock in October 2001. This resulted in a net increase in Class A shares outstanding of 8,278 when he used 7,722 previously-owned shares in lieu of cash to pay the option price due to the Company. These options would have otherwise expired 90 days after the August 17^th termination of his

43

directorship (November 15, 2001). The remaining 8,000 options held by this former director were not vested and were cancelled on August 17, 2001 pursuant to the provisions of his stock option grant certificate as issued under the 2000 Long-Term Incentive Plan.

11. Minority Interest Ownerships

        The owners of the minority interests in Health Power, Pumpkin and Primrose have each entered into agreements with the Company providing for restrictions on the transfer of such shares, and other related share restrictions.

        The minority shareholders of Pumpkin have the right to put their shares of Pumpkin to the Company for cash and the Company has the right to call the shares for cash upon the earlier of (1) June 2003, (2) payment in full of the acquisition indebtedness or (3) anytime after Pumpkin's average EBITDA exceeds $2,500 for a four year period commencing in 1997. The put and call price is determined by using a formula based on EBITDA. At the mutual agreement of the parties, settlement can occur in Security Capital Common Stock. If the senior lender (see note 9) objects to settlement in cash, the Company may issue a subordinate note. Future cash settlement of such puts and calls would result in additional purchase price consideration payable to the former owners of Pumpkin and would result in the recording of additional goodwill relating to the acquisition.

        On April 3, 2001, the Company exercised its call provision relating to shares of Primrose owned by a then exiting officer. The Company repurchased 100 shares, or 0.3%, of Primrose from this officer for $50, increasing its direct ownership to 98.46%. The additional amount paid was reflected as additional cost of the acquisition of Primrose.

12. Subsidiary Options and Warrants

        WC Holdings—Options to acquire 1,281 shares of Health Power, an 80%-owned subsidiary of WC Holdings, at approximately $694 per share, the fair value at the date of the grant, were granted to subsidiary employees during the first quarter of 2001. All such options vest over a five-year period with the exception of one grant of 360 options which vests over an eight-year period but is subject to certain acceleration provisions. If all such outstanding options had been vested and exercised at December 31, 2001, the Company's ownership share of Health Power would have been 73.47%.

        Possible Dreams—Options to acquire 175 shares of Possible Dreams at approximately $1,900 per share were granted in 1996, which were cancelled on January 1, 2000. Options to acquire 87.5 shares at $1,905 per share (fair value at date of grant) and 87.5 shares at $3,810 per share of Possible Dreams stock were granted on July 1, 2000. Such options vest over five years and expire in 2009. The Company, but not the holder, has the right to settle the options in cash. In addition, warrants to purchase 250 shares of Possible Dreams Class B common shares were issued in 1996 and remain outstanding at December 31, 2001. The warrants are exercisable at the earlier of (1) May 17, 2001 or (2) repayment in full of the acquisition note and any related interest, at a price of $.01 per share and expire in 2006. Such Class B common shares would be non-voting, but would be convertible at the option of the holder into Class A voting common shares. The holder may exercise the warrants for cash. If all such outstanding options and warrants had been exercised for Possible Dream's shares at December 31, 2001, the Company's ownership share of Possible Dreams would have been 77.88%.

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        Pumpkin—Options to acquire a total of 39 Class A common shares of Pumpkin at $1,754 per share (fair value at date of grant) were issued in 1997 and 1998. Of these options, nine were settled for cash at their existing liability value of $82,000 on June 7, 2001 and three were settled for cash at their existing liability value of $17,000 on June 25, 2001 when the holders exercised their rights to settle the options for cash. The remaining 27 options are fully vested and expire in 2007 and 2008. On July 1, 2001, the Company granted options to acquire 27 shares of Pumpkin at the fair market value on the date of the grant, which was $9,111 per share. For all 54 outstanding options, the Company, but not the holder, has the right to settle the options in cash at the earlier of: (1) June 27, 2003 (2) repayment in full of the acquisition note and any related interest or (3) any time after average EBITDA exceeds $2,500 for a four consecutive fiscal year period commencing in 1997. If all such outstanding options had been exercised for Pumpkin shares at December 31, 2001, the Company's ownership share of Pumpkin would have been 75.25%.

        Primrose—Options to acquire 2,311 common shares of Primrose at $500 per share (market value at date of grant) were issued in 1999 and expire in 2009. On June 18, 2001 and September 30, 2001, the Company cancelled 346.67 and 288.89 options, respectively, held by two former officers of Primrose. The options vest 20% per year beginning on the first anniversary of the grant. Of the 1,675.56 options outstanding at December 31, 2001, 670.22 options are fully vested. The Company, but not the holders, has the right to settle the options in cash. Warrants to acquire 2,415.3 shares of Primrose at $.01 per share were issued in connection with the acquisition in 1999. The holder may exercise the warrants at the earlier of (1) April 6, 2004, (2) any public offering of Primrose pursuant to a registration statement, a private placement or otherwise or (3) any private sale of Primrose representing 20% or more of Primrose stock, for shares of Primrose, exchange value of the warrants for an equivalent value of shares of Security Capital, or be paid for the value of the warrants in cash. If all such outstanding options and warrants had been exercised for Primrose shares at December 31, 2001, the Company's ownership share of Primrose would have been 85.08%.

        Compensation expense for the subsidiary options discussed above under SFAS 123 using the minimal value method and assumptions as per Note 14 would be $101, $57 and $0, for the years ended December 31, 2001, 2000, and 1999, respectively.

        Warrants to acquire shares of Possible Dreams and Primrose are redeemable at the election of the warrant holders for cash. The estimated fair value of the warrants are recorded as liabilities and changes in the estimated fair value of the warrants during a period are included in the results of operations. Warrant income (expense), classified as "Other income (expense)" was $74,000, $(559,000) and $(290,000) for the years ended December 31, 2001, 2000 and 1999, respectively (see Note 15). The warrant income for the year ended December 31, 2001 included $176,000 in income recognized when Pumpkin's warrants were repurchased for less than their recorded value as part of Pumpkin's debt refinancing discussed (in Note 8). Long-term warrant liabilities, included in "Other long-term obligations," were $1,334,000 and $2,171,000 at December 31, 2001 and 2000, respectively. Current warrant liabilities included in "Accrued expenses and other liabilities" were $718,000 and $855,000 at December 31, 2001 and 2000, respectively.

13. Employee Benefit Plans

        The Company sponsors defined contribution 401(k) plans at each of its subsidiaries for which qualifying employees of the Company may participate. Employees must be 21 years of age to

45

participate. Under these plans—some of which provide for Company matching contributions—participants may elect to make pre-tax contributions of up to 15% of their eligible earnings. The Company's matching contributions were $424, $25 and $0 for the years ended December 31, 2001, 2000 and 1999, respectively.

14. Long-term Incentive Plan

        Options granted under the 2000 Long-Term Incentive plan are exercisable at the market price at the date of grant and, subject to termination of the grantee's employment or directorship, expire 10 years from the date of grant and are not transferable other than upon death. Of the 810,000 options outstanding at December 31, 2001, 738,000 are exercisable in five equal annual installments commencing one year from the date of grant and 72,000 are exercisable in three equal annual installments commencing on the date of the grant.

        Pro forma information regarding net income and earnings per share as required by Statement 123 has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2001 and 2000: risk-free interest rate of 4% and 5.16%, respectively; dividend yield of 0% and 0%, respectively; volatility factor of the expected market price of the Company's common stock of .238 and .320, respectively; and a weighted-average expected life of the options of 8.5 and 9.5 years, respectively.

        The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

        For the purpose of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows:

(in thousands except per share amounts)		2001		2000
Pro forma net income available to common stockholders		$	2,189	$	1,017
Pro forma earnings per common share:
	Basic	$	0.34	$	0.16
	Diluted	$	0.32	$	0.16

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        A summary of the Company's stock option activity and related information for the year ended December 31:

	2001				2000
	Options (ooo)		Weighted Average Exercise Price		Options (ooo)	Weighted Average Exercise Price
Outstanding at the beginning of the year	549		$	6.125	—		—
Granted	285		$	10.959	549	$	6.125
Exercised	(16	)	$	6.125	—		—
Forfeited	(8	)	$	6.125	—		—
Outstanding at end of the year	810		$	7.826	549		6.125
Exercisable at the end of the year	132		$	6.777	24	$	6.125
Weighted-average fair value of options granted during the year	6.09				2.76

OPTIONS OUTSTANDING

Range of Exercise Prices	Number of Options Outstanding at December 31, 2001	Weighted-Average Remaining Contractual Life	Weighted Average Exercise Price		Number of Options Exercisable at December 31, 2001
$6.125	525,000	8.5	$	6.125	116,200
$10.31 to $12.69	285,000	9.5	$	10.959	16,000

15. Other Expense

	YEARS ENDED DECEMBER 31,
	2001			2000			1999
Interest income	$	103		$	25		$	33
Warrant income (expense)		74			(559	)		(290	)
Loss on derivatives		(529	)		—			—
Other (expense) income		(192	)		27			21
Total	$	(544	)	$	(507	)	$	(236	)

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16. Income Taxes

        The provision (benefit) for income taxes for the years ended December 31 is as follows:

		2001		2000			1999
Current:
	Federal	$	1,021	$	62		$	17
	State		397		318			106
			1,418		380			123
Deferred:
	Federal		1,370		821			(872	)
	State		312		(61	)		(19	)
			1,682		760			(891	)
Total		$	3,100	$	1,140		$	(768	)

        At December 31, 2001, the Company had net operating loss carry-forwards for Federal income tax purposes of approximately $13,500, the expiration dates of which are as follows: 2004—$10,401, 2005—$2,430, 2007—$398, 2008—$132, 2009 and thereafter—$139.

        The items comprising the Company's net deferred tax assets are as follows at:

			DECEMBER 31,
			2001			2000
Deferred tax assets (liabilities):
	Allowance for doubtful accounts and inventory differences		$	1,364		$	2,582
	Net operating loss carry-forwards			5,400			7,367
	Alternative minimum tax carryover			408			241
	Accelerated depreciation and other			(806	)		(1,002	)
				6,366			9,188
	Valuation allowance			(5,400	)		(6,540	)
Net deferred tax asset			$	966		$	2,648
Reconciliation to financial statements:
	Current deferred tax asset		$	1,364		$	1,943
	Long-term deferred tax asset			626			1,074
	Other long-term obligations			(1,024	)		(369	)
		Net deferred tax asset	$	966		$	2,648

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        The valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized. Reconciliations of the income tax provision to income taxes based on the 34% federal statutory rate are as follows:

	2001			2000			1999
Federal income taxes based on 34% of pre-tax income	$	2,646		$	952		$	490
State income taxes, net of federal benefit		468			170			57
Recognition of deferred tax asset for federal net operating loss carry-forwards		—			(204	)		(1,347	)
Other		(14	)		222			32
Income tax provision (benefit)	$	3,100		$	1,140		$	(768	)

17. Earnings Per Share

        Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock. The following reconciles amounts reported in the financial statements:

	2001			2000		1999
Diluted Earnings:
Income available to common stockholders	$	2,483		$	1,116	$	1,729
Subsidiary options		(123	)		—		—
Diluted earnings	$	2,360		$	1,116	$	1,729
Diluted Weighted Average Shares Outstanding:
Common stock		6,444			6,442		6,150
Options		204			42		—
Diluted weighted average shares outstanding		6,648			6,484		6,150
Diluted earnings per share	$	0.35		$	0.17	$	0.28

        At December 31, 2001, 2000 and 1999, 500,000 shares of zero coupon redeemable convertible preferred shares, which were convertible into 500,000 common shares, and its related accretion was excluded from the computation of diluted earnings per share ("EPS") because their inclusion would have had an antidilutive effect on EPS. In addition, certain subsidiary options and warrants were also excluded from the computation of diluted EPS at December 31, 2001, 2000 and 1999 because their inclusion would have had an antidilutive effect on consolidated EPS.

18. Related Party Transactions

        In 1999, the Company sold 1,136,364 shares of Class A Common Stock for $5,000 in a private placement to an affiliate of the Company's controlling stockholder (see Note 3).

        The Company has an agreement with Capital Partners, Inc. ("CPI"), a shareholder of the Company. CPI and its affiliates and principals owned 83% of the Company's common shares at both December 31, 2001 and 2000. Under the agreement, CPI provides certain advisory services and

49

management services related to investments, general administration, corporate development, strategic planning, stockholder relations, financial matters and general business policy. Fees paid by the Company to CPI are based upon the greater of either a fixed dollar amount or 5% of earnings before income taxes, depreciation and amortization, as defined. Subsequent to the acquisition of WC Holdings, the minimum annual fixed dollar amount is $1,085. Fees paid to CPI are generally subordinate to the rights of the lenders to the Company. In addition, the Company has agreed to pay fees to CPI for acquisition opportunities presented to the Company by CPI at usual and customary rates for investment banking fees for transactions of similar size and complexity. The agreement is renewable annually. Fees incurred by the Company to CPI were $1,191, $1,153 and $1,092 in the years ended December 31, 2001, 2000 and 1999, respectively, and are included in selling, general, and administrative expenses in the Consolidated Statements of Income. Amounts due to CPI were $266 and $188 at December 31, 2001 and 2000, respectively.

        A director who joined the Board during 2001 is a senior counsel in a law firm, which the Company engages on a regular basis to perform legal services. Total amounts paid to the law firm were $111, $64 and $437 for the years ended December 31, 2001, 2000 and 1999, respectively.

19. Commitments and Contingencies

        The Company rents showrooms, office space and certain equipment under operating lease agreements. The Company through its subsidiary, WC Holdings, leases a 70,000 square foot office building in Dublin, Ohio that is used as this subsidiary's principal office facilities. The lease for the building is for a term of 15 years, which began in 1997, provides for annual rent payments and requires the Company to pay all operating expenses for the building. The lease also provides for three renewal options of five years each, an option to purchase the building between the fourth and fifth years of the lease term at a price determined under a formula based on the rentable and unimproved square footage of the building, and a right of first offer to purchase the building before the landlord enters into a contract to sell the building to a third party. The lease restricts WC Holdings' subsidiary, CompManagement, Inc., from paying a dividend, or otherwise distributing funds or assets outside the ordinary course of business to Health Power, Inc. or another affiliate unless CompManagement, Inc. meets certain tangible net worth requirements. WC Holdings also leases office space in Akron, Cincinnati, Cleveland and Toledo, Ohio; Richmond and Chantilly, VA; Seattle, Washington; Charleston, West Virginia; and Lexington, Kentucky. These spaces are used as regional offices and service centers for its operations. Certain office and school space with leases expiring in April 2002, included in the following table, is rented by Primrose from Security Capital's redeemable preferred stockholder for which the rental expense will be $46 for 2002. The Company also has operating leases at other subsidiaries which contain renewal options and escalation clauses.

        Future minimum rental commitments at December 31, 2001 are as follows:

2002	$	3,186
2003		2,601
2004		2,185
2005		2,026
2006		2,024
Total	$	12,022

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        The Company had rent expense of $3,670, $563 and $362 for 2001, 2000 and 1999, respectively. Total rent expense includes amounts paid by WC Holdings to related parties of $177 and $174 in 2001 and 2000, respectively.

        Pumpkin and Possible Dreams are parties to agreements with certain artists and inventors which require payment of royalties based upon a percentage of net sales of certain products and other formulas as stated in the agreements. Under these agreements, the Company had royalty expense of $224, $226 and $315 in 2001, 2000 and 1999, respectively.

        The purchase agreement for the Company's 1997 acquisition of Pumpkin provides for additional payments which were contingent upon future Pumpkin's EBITDA. At a minimum, the Company will be required to make additional payments totaling $120 annually with that annual additional payment increasing to $1,600 in any year in which Pumpkin's EBITDA is greater than $2,400. During 2001, 2000 and 1999, Pumpkin's EBITDA exceeded $2,400, and accordingly, during the years ended December 31, 2001, 2000 and 1999, the Pumpkin recorded an additional obligation of $40 annually. Additionally since Pumpkin's four year average EBITDA exceeded the specified threshold, the seller is entitled to an additional $1,812 earnout amount payable in 2004. This amount is shown on the balance sheet in long-term debt and has been recorded as an addition to goodwill.

Concentrations

        Possible Dreams purchased approximately 82% and 76% of its supplies from two companies during 2001 and 2000, respectively. The loss of either supplier could have an adverse effect on future operating results and financial condition.

        Approximately 43% and 35% of Pumpkin's gross sales during 2001 and 2000, respectively, were to their three largest customers. Pumpkin purchased approximately 47% and 50% of its supplies from two companies during 2001 and 2000, respectively. The loss of any of its three largest customers or either of its two largest suppliers could have an adverse effect on Pumpkin's future operating results and financial condition.

        WC Holdings, Inc. subsidiaries earned 84% of its revenues in the state of Ohio.

Contingencies

        The Company is party to several legal actions arising in the ordinary course of business. In management's opinion, the Company has adequate legal defenses to these actions, such that the resolution of such matters will not have a material effect on the financial position or future operating results of the Company.

20. Holding Company Information

        Total assets of Security Capital (the holding company) net of investments in and amounts due from subsidiaries was approximately $474 and 735, which includes approximately $405 and $200, of current assets at December 31, 2001 and 2000, respectively. In addition, the redeemable convertible preferred stock discussed in Note 9 is a holding company obligation. Holding company revenues were: $1,101, $688, and $67 for the years ended December 31, 2001, 2000, and 1999, respectively. Holding company expenses were: $1,730, $1,241, and $1,003 for the years ended December 31, 2001, 2000, and 1999, respectively.

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21. Segment Disclosure

        Following the 2000 acquisition of WC Holdings and the 1999 acquisition of Primrose, the Company has three segments. The employer cost containment-related services segment consists of WC Holdings which, through its subsidiary Health Power, provides services to corporations and their employees primarily relating to industrial health and safety, industrial medical care and workers' compensation insurance. The seasonal products segment consists of Pumpkin and Possible Dreams. The Company's activities principally are in the design, importing and manufacturing of Halloween and Christmas products. The educational services segment consists of Primrose. Management evaluates performance of its segments based upon adjusted EBITDA, defined for the purposes of the segment disclosures as earnings before interest, taxes, depreciation, amortization, minority interest expense, management fees and non-recurring charges or gains. EBITDA is used to evaluate performance because the Company feels that it is the true measurement of its ability to generate cash flow and is a widely-accepted financial indicator of value and ability to incur and service debt. EBITDA is not a substitute for operating income or cash flow from operating activities in accordance with accounting principles generally accepted in the United States. The accounting policies of the segments are the same as those described in Note 1. There are no intersegment sales.

		YEARS ENDED DECEMBER 31,
		2001			2000			1999
Revenues from external customers:
	Employer cost containment-related services	$	53,634		$	1,301		$	—
	Seasonal products		31,900			33,759			33,117
	Educational services		7,652			6,844			4,228
Total revenues		$	93,186		$	41,904		$	37,345
Segment income (adjusted EBITDA):
	Employer cost containment-related services	$	10,850		$	369		$	—
	Seasonal products		6,313			6,704			5,852
	Educational services		3,442			3,204			1,770
Total segment income			20,605			10,277			7,622
Reconciliation to net income:
	Amortization and depreciation expense		(6,066	)		(2,436	)		(1,886	)
	Interest expense		(5,826	)		(3,442	)		(3,122	)
	Income tax (expense)/benefit		(3,100	)		(1,140	)		768
	Minority interest expense		(642	)		(236	)		(273	)
	Management fees		(1,191	)		(700	)		(692	)
	Other expense		(544	)		(507	)		(236	)
	Corporate and other expenses		(401	)		(391	)		(246	)
	Net income	$	2,835		$	1,425		$	1,935

		DECEMBER 31, 2001				DECEMBER 31, 2000
		Total Assets		Long-lived Assets		Total Assets		Long-lived Assets
Segment assets:
	Employer cost containment-related services	$	47,282	$	37,352	$	43,462	$	34,595
	Seasonal products		31,981		14,019		27,563		14,065
	Educational services		27,496		25,501		28,494		27,011
Corporate and other			526		159		1,038		837
Total assets		$	107,285	$	77,031	$	100,557	$	76,508

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22. Subsequent Events

        Pursuant to the provisions of the 2000 Long-Term Incentive Plan, on February 1, 2002, the Company granted options to a director to acquire 24,000 shares of its Class A common stock at an exercise price per share equal to market value, which was $9.65. These 24,000 options vest over a three-year period, with one-third vesting immediately upon grant and the remaining two-thirds vesting equally on each of the first and second anniversaries of the grant. Subject to termination of the grantee's directorship, these options expire ten years from the date of grant and are not transferable other than on death.

        In a loan and security agreement with an effective date of December 31, 2001 and a funded date of January 3, 2002, Possible Dreams entered into a new financing facility with LaSalle Business Credit, Inc. that provides for a $12,700 revolving line of credit and two separate term loans, Term Loan A for $1,500 and Term Loan B for $1,800. Amounts drawn on the new line of credit bear interest at the prime rate or LIBOR plus 2.50%. Term Loan A and Term Loan B are payable in monthly installments through December 2004 and January 2004, respectively, with Term Loan A also requiring a balloon principal payment in December 2004 of $1,075. Both term loans bear interest at the prime rate plus ¹/2% or LIBOR plus 3%. Borrowings under the new facility are secured by substantially all of the assets of Possible Dreams. There were $213 in financing costs which were deferred and will be amortized over the life of the loan.

        On February 28, 2002, WC Holdings fully prepaid its $6,000 subordinated debt with Bank One Mezzanine which carried a 20% per annum interest rate and was due to be repaid in a balloon payment in December 2005. In addition to the principal amount, WC Holdings also was required to pay $431 in prepayment penalties. Cash flow from operations was sufficient to prepay this note and penalties without utilizing the Bank One revolving line of credit. WC Holdings' senior term debt with Bank One was amended to allow prepayment of the subordinated debt prior to repayment of the senior term debt and to concurrently increase the revolving facility from $4,500 to $5,000 effective February 28, 2002.

        The Company refinanced its debt at Primrose on April 5, 2002. The terms of the new debt are as follows: $3,200 term loan repayable at $624 per quarter beginning July 15, 2002 bearing interest at an interest rate of prime plus 2.0%, an additional $4,000 of non-amortizing term debt with a balloon payment due in September 2003 bearing interest at LIBOR plus 1.0% and a revolving facility of $1,000 (of which $681 was drawn at closing) bearing interest at LIBOR plus 3.0% or Prime plus 0.5% expiring in September 2003. To secure this debt, Primrose has pledged all of its assets, Primrose Holdings and the Company has guaranteed the debt and the Chairman of the Company has issued a personal guarantee for $4,000, for which he will receive a guarantee fee of 8% per annum of the declining average quarterly balance of his guarantee. This fee has been approved by both the Audit Committee and the Board of Directors. This guarantee entitles the Chairman to a subordinated interest in Primrose's assets, and Primrose agrees to reimburse the Chairman for any amount paid by him on this guarantee. In addition, the Company agrees to reimburse the Chairman for any amount paid by him on his guarantee in the event Primrose fails to reimburse him. The Company will use its best efforts to relieve the Chairman of his personal guarantee through the Company's setting aside of funds in a designated reserve bank account.

        In the second quarter of 2002, the Company will record a gain on the early extinguishment of debt associated with this Primrose refinancing of approximately $400 relating to the repurchase of warrants net of the write-off of original issue discount and deferred financing costs associated with the original debt.

        Maturities of long-term debt and other obligations for the next five years, reflective of the above refinancings which occurred subsequent to December 31, 2001, are as follows:

        $9,777—2002; $15,215—2003; $5,785—2004; $8,789—2005; $3,889—2006; and $784—thereafter.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

        Not Applicable

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

        The information required by Item 10 is incorporated by reference from the definitive proxy statement to be filed with the Securities and Exchange Commission by April 30, 2002 pursuant to Regulation 14A of the Securities and Exchange Act of 1934.

ITEM 11. EXECUTIVE COMPENSATION.

        The information required by Item 11 is incorporated by reference from the definitive proxy statement to be filed with the Securities and Exchange Commission by April 30, 2002 pursuant to Regulation 14A of the Securities and Exchange Act of 1934.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        The information required by Item 12 is incorporated by reference from the definitive proxy statement to be filed with the Securities and Exchange Commission by April 30, 2002 pursuant to Regulation 14A of the Securities and Exchange Act of 1934.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        The information required by Item 13 is incorporated by reference from the definitive proxy statement to be filed with the Securities and Exchange Commission by April 30, 2002 pursuant to Regulation 14A of the Securities and Exchange Act of 1934.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)(1)	Financial Statements and Financial Statement Schedules
and (2)	See "Index to Consolidated Financial Statements" set forth in Item 8. of this Form 10-K.
(a)(3)	Exhibits Required To Be Filed By Item 601 of Regulation S-K
	The documents required to be filed as exhibits to this Form 10-K are listed below. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K is marked with an asterisk.

EXHIBIT NO.		DESCRIPTION OF DOCUMENT
3.1	—	Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 2 to the Registrant's Form 8-K Current Report dated June 22, 1990), and amendment thereto (incorporated by reference to Exhibit 1 to the Registrant's Form 8-K Current Report dated February 23, 1994).

54

3.1A	—	Certificate of Amendment dated March 27, 1996 to Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1A to the Registrant's Form 10-K Annual Report for the fiscal year ended September 30, 1996).
3.1B	—	Certificate of Amendment dated March 27, 1996 to Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1B to the Registrant's Form 10-K Annual Report for the fiscal year ended September 30, 1996).
3.2	—	By-laws of the Registrant (incorporated by reference to Exhibit 3 to the Registrant's Form 8-K Current Report dated June 22, 1990).
4.2	—	Reference is made to Exhibit 3.1.
10.7	—	Advisory Services Agreement dated as of April 27, 1990 and effective as of January 26, 1990, between Security Capital Corporation and Capital Partners, Inc. (incorporated by reference to Exhibit (10)(B) to the Registrant's Form 10-Q Quarterly Report for the period ended March 31, 1991).
10.20	—	Registration Rights Agreement and Amendment to Stock Purchase Agreement dated as of March 28, 1994 among the Registrant, CP Acquisition and FGS, Inc. (incorporated by reference to Exhibit 10.20 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-74680)).
10.23	—	Loan and Security Agreement dated as of December 31, 2001 (loan funds drawn on January 3, 2002) among Possible Dreams Ltd. and LaSalle Business Credit Inc.
10.24	—	Subordinated Promissory Note dated May 17, 1996 in the amount of $2,128,000 from Possible Dreams to Possible Dreams, Ltd., a Massachusetts corporation (incorporated by reference to Exhibit 2 to the Registrant's Form 8-K Current Report dated May 17, 1996).
10.25	—	Corrective Amendment dated November 25, 1996 to Subordinated Promissory Note dated May 17, 1996 in the amount of $2,128,000 from Possible Dreams to Possible Dreams, Ltd., a Massachusetts corporation (incorporated by reference to Exhibit 10.25 to the Registrant's Form 10-K Annual Report for the fiscal year ended September 30, 1996).
10.26	—	Subordinated Promissory Note dated May 17, 1996 in the amount of $332,000 from Possible Dreams to Columbia National Corporation (incorporated by reference to Exhibit 3 to the Registrant's Form 8-K Current Report dated May 17, 1996).
10.27	—	Corrective Amendment dated November 25, 1996 to Subordinated Promissory Note dated May 17, 1996 in the amount of $332,000 from Possible Dreams to Columbia National Corporation (incorporated by reference to Exhibit 10.27 to the Registrant's Form 10-K Annual Report for the fiscal year ended September 30, 1996).
10.28	—	Credit Agreement dated as of May 17, 1996 among Possible Dreams, P.D. Holdings, Inc., a Delaware corporation ("Holdings"), the Lenders referred to therein and NationsCredit Commercial Corporation ("NationsCredit"), as Agent (incorporated by reference to Exhibit 4 to the Registrant's Form 8-K Current Report dated May 17, 1996).

55

10.29	—	Warrant dated May 17, 1996 from Possible Dreams to NationsCredit (incorporated by reference to Exhibit 5 to the Registrant's Form 8-K Current Report dated May 17, 1996).
10.30	—	Warrantholders Rights Agreement dated as of May 17, 1996 among Possible Dreams, Holdings, Security Capital Corporation ("Security Capital"), Warren Stanley and Arnold Lee and NationsCredit (incorporated by reference to Exhibit 6 to the Registrant's Form 8-K Current Report dated May 17, 1996).
10.31	—	Security Capital Pledge and Guarantee Agreement dated as of May 17, 1996 between Security Capital and NationsCredit, as Agent (incorporated by reference to Exhibit 7 to the Registrant's Form 8-K Current Report dated May 17, 1996).
10.32	—	Holdings Pledge Agreement dated as of May 17, 1996 among Holdings and NationsCredit, as Agent (incorporated by reference to Exhibit 8 to the Registrant's Form 8-K Current Report dated May 17, 1996).
10.33	—	Investors Subordination Agreement dated as of May 17, 1996 among Possible Dreams, the Subordinated Obligations Holders (as defined therein) and NationsCredit, as Agent (incorporated by reference to Exhibit 9 to the Registrant's Form 8-K Current Report dated May 17, 1996).
10.34	—	Sellers Subordination Agreement dated as of May 17, 1996 among Possible Dreams, the Subordinated Obligations Holders (as defined therein) and NationsCredit, as Agent (incorporated by reference to Exhibit 10 to the Registrant's Form 8-K Current Report dated May 17, 1996).
10.38	—	First Amendment to Advisory Services Agreement dated as of May 17, 1996 by and between Security Capital and Capital Partners, Inc. (incorporated by reference to Exhibit 14 to the Registrant's Form 8-K Current Report dated May 17, 1996).
10.39	—	Consolidated Income Tax Sharing Agreement dated as of May 17, 1996 among Possible Dreams, Holdings and Security Capital (incorporated by reference to Exhibit 15 to the Registrant's Form 8-K Current Report dated May 17, 1996).
10.40	—	Asset Purchase Agreement dated as of June 27, 1997 by and among Pumpkin, Ltd. d/b/a Pumpkin Masters, Inc., a Colorado corporation (the "Seller"), Pumpkin Ltd., a Delaware corporation ("Pumpkin"), Pumpkin Masters Holdings,  Inc., a Delaware corporation ("Pumpkin Holdings"), and the Registrant (incorporated by reference to Exhibit 1(c)(1) to the Registrant's Form 8-K Current Report dated June 27, 1977).
10.41	—	Credit Agreement dated as of June 27, 1997 among Pumpkin, Pumpkin Holdings, the Lenders referred to therein and NationsCredit Commercial Corporation ("NationsCredit"), as Agent (incorporated by reference to Exhibit 1(c)(2) to the Registrant's Form 8-K Current Report dated June 27, 1997).
10.42	—	Warrant dated June 27, 1997 from Pumpkin to NationsCredit (incorporated by reference to Exhibit 1(c)(3) to the Registrant's Form 8-K Current Report dated June 27, 1997).
10.43	—	Warrantholders Rights Agreement dated as of June 27, 1997 among Pumpkin, Pumpkin Holdings, the Registrant, Seller and NationsCredit (incorporated by reference to Exhibit 1(c)(4) to the Registrant's Form 8-K Current Report dated June 27, 1997).

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10.44	—	Company Security Agreement dated as of June 27, 1997 between Pumpkin and NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(5) to the Registrant's Form 8-K Current Report dated June 27, 1997).
10.45	—	Pumpkin Holdings Pledge Agreement dated as of June 27, 1997 between Pumpkin Holdings and NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(6) to the Registrant's Form 8-K Current Report dated June 27, 1997).
10.46	—	Security Capital Pledge and Guarantee Agreement dated as of June 27, 1997 between the Registrant and NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(7) to the Registrant's Form 8-K Current Report dated June 27, 1997).
10.47	—	Security Capital Subordination Agreement dated as of June 27, 1997 among Pumpkin, the Subordinated Obligations Holders (as defined therein) and NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(8) to the Registrant's Form 8-K Current Report dated June 27, 1997).
10.48	—	Investors Subordination Agreement dated as of June 27, 1997 among Pumpkin, the Subordinated Obligations Holders (as defined therein) and NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(9) to the Registrant's Form 8-K Current Report dated June 27, 1997).
10.49	—	Seller Subordination Agreement dated as of June 27, 1997 among Pumpkin, Pumpkin Holdings, the Subordinated Obligations Holders (as defined therein) and NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(10) to the Registrant's Form 8-K Current Report dated June 27, 1997).
10.50	—	Stockholders' Agreement dated as of June 27, 1997 among Pumpkin, Pumpkin Holdings and Gay Burke (incorporated by reference to Exhibit 1(c)(11) to the Registrant's Form 8-K Current Report dated June 27, 1997).
10.51	—	Loan and Security Agreement dated June 13, 2001 between Pumpkin and LaSalle Business Credit.
10.55	—	Advisory Services Agreement dated June 27, 1997, by and between Pumpkin and the Registrant (incorporated by reference to Exhibit 1(c)(16) to the Registrant's Form 8-K Current Report dated June 27, 1997).
10.56	—	Second Amendment to Advisory Services Agreement dated June 27, 1997 by and between the Registrant and Capital Partners, Inc. (incorporated by reference to Exhibit 1(c)(17) to the Registrant's Form 8-K Current Report dated June 27, 1997).
10.57	—	Joinder Agreement dated June 27, 1997 among Pumpkin, Pumpkin Holdings and the Registrant to Consolidated Income Tax Sharing Agreement dated as of May 17, 1996 among Possible Dreams, Holdings and the Registrant (incorporated by reference to Exhibit 1(c)(18) to the Registrant's Form 8-K Current Report dated June 27, 1997).
10.61	—	Stock Purchase Agreement, dated as of April 6th, 1999, by and among Primrose Holdings, Inc., a Delaware corporation ("Holdings"), Security Capital Corporation, a Delaware corporation ("Security Capital"), Paul L. Erwin Grantor Retained Annuity Trust (together with Paul L. Erwin, the "Shareholders") Registrant (incorporated by reference to Exhibit 1(c)(1) to the Registrant's Form 8-K Current Report dated April 6, 1999).

57

10.62	—	Credit Agreement, dated as of April 6th, 1997, among Primrose School Franchising Company, ("Primrose"), Holdings, the Lenders referred to therein and Canadian Imperial Bank of Commerce ("CIBC"), as Agent (incorporated by reference to Exhibit 1(c)(2) to the Registrant's Form 8-K Current Report dated April 6, 1999).
10.63	—	Warrant Agreement, dated as of April 6th, 1999 between Security Capital and CIBC (incorporated by reference to Exhibit 1(c)(3) to the Registrant's Form 8-K Current Report dated April 6, 1999).
10.65	—	Management Advisory Services Agreement, dated as of April 6th, 1999, by and among Primrose, Metrocorp, Country Day and Security Capital (incorporated by reference to Exhibit 1(c)(5) to the Registrant's Form 8-K Current Report dated April 6, 1999).
10.66	—	Third Amendment to Advisory Services Agreement, dated April 6th, 1999, by and between Security Capital and Capital Partners, Inc. (incorporated by reference to Exhibit 1(c)(6) to the Registrant's Form 8-K Current Report dated April 6, 1999).
10.67	—	Tax Sharing Joinder Agreement, dated April 6th, 1999, among Holdings, Primrose, Metrocorp, Country Day and Security Capital to Consolidated Income Tax Sharing Agreement, dated as of April 17th, 1996, among Possible Dreams, Ltd., P.D. Holdings, Inc. and Security Capital (incorporated by reference to Exhibit 1(c)(7) to the Registrant's Form 8-K Current Report dated April 6, 1999).
10.68	—	Lease Agreement, dated April 6th, 1999 by and between Erwin Family Partnership, LLLP and Primrose (incorporated by reference to Exhibit 1(c)(8) to the Registrant's Form 8-K Current Report dated April 6, 1999).
10.69	—	Lease Agreement, dated April 6th, 1999 by and between Paul L. Erwin and Country Day (incorporated by reference to Exhibit 1(c)(9) to the Registrant's Form 8-K Current Report dated April 6, 1999).
10.70	—	Stockholders' Agreement dated as of December 21, 2000, by and among Security Capital, WC Holdings, Inc. ("WC Holdings"), HP Acquisition, Health Power, CompManagement, Inc. ("CMI"), CompManagement Health Systems, Inc. ("CHS"), M&N Enterprises, Inc. ("M&NE"), M&N Risk Management, Inc. ("M&NRM") (CMI, CHS, M&NE and M&NRM being collectively referred to with Health Power as the "Companies"), Robert J. Bossart, Jonathan R. Wagner, Richard T. Kurth, Randy E. Jones, Daniel R. Sullivan and Paul A. Miller (incorporated by reference to Exhibit 1(c)(4.1) to the Registrant's Form 8-K Current Report dated December 21, 2000).
10.71	—	Loan Agreement dated as of December 21, 2000, among each of the Companies, as borrowers, WC Holdings, as guarantor, and Bank One, N.A. ("Bank One"), as lender (incorporated by reference to Exhibit 1(c)(99.1) to the Registrant's Form 8-K Current Report dated December 21, 2000).
10.72	—	Note Purchase Agreement dated as of December 21, 2000, among WC Holdings, as borrower, each of the Companies, as a guarantor, and Banc One Mezzanine Corporation ("Banc One Mezzanine"), as purchaser (incorporated by reference to Exhibit 1(c) (99.2) to the Registrant's Form 8-K Current Report dated December 21, 2000).

58

10.73	—	Intercreditor and Subordination Agreement dated as of December 21, 2000, among the Companies, WC Holdings, Bank One and Banc One Mezzanine (incorporated by reference to Exhibit 1(c)(99.3) to the registrant's Form 8-K Current Report dated December 21, 2000).
10.74	—	Capital Contribution Agreement dated as of December 21, 2000, between Security Capital and Banc One Mezzanine (incorporated by reference to Exhibit 1(c)(99.4) to the Registrant's Form 8-K Current report dated December 21, 2000).
10.75	—	Tax Allocation Agreement dated as of December 21, 2000, among Security Capital, WC Holdings and each of the Companies (incorporated by reference to Exhibit 1(c)(99.5) to the Registrant's Form 8-K Current Report dated December 21, 2000).
10.76	—	Management Advisory Services Agreement dated as of December 21, 2000, among each of the Companies and Security Capital (incorporated by reference to Exhibit 1(c)(99.6) to the Registrant's Form 8-K Current Report dated December 21, 2000).
10.77	—	Fourth Amendment to Advisory Services Agreement dated as of December 21, 2000 between Security Capital and Capital Partners, Inc. (incorporated by reference to Exhibit 1(c)(99.7) to the Registrant's Form 8-K Current Report dated December 21, 2000).
10.78	—	Employment Agreement effective as of December 21, 2000, among WC Holdings, Health Power, CMI, CHS and Robert J. Bossart (incorporated by reference to Exhibit 1(c)(99.8) to the Registrant's Form 8-K Current Report dated December 21, 2000).
10.79	—	Employment Agreement effective as of December 21, 2000, among WC Holdings, Health Power, CMI, CHS and Jonathan R. Wagner (incorporated by reference to Exhibit 1(c)(99.9) to the Registrant's Form 8-K Current Report dated December 21, 2000).
10.80	—	Employment Agreement effective as of December 21, 2000, among WC Holdings, Health Power, CMI, CHS and Richard T. Kurth (incorporated by reference to Exhibit 1(c)(99.10) to the Registrant's Form 8-K Current Report dated December 21, 2000).
10.81	—	Employment Agreement effective as of December 21, 2000, among WC Holdings, Health Power, CMI, CHS and Randy E. Jones (incorporated by reference to Exhibit 1(c)(99.11) to the Registrant's Form 8-K Current Report dated December 21, 2000).
10.82	—	Employment Agreement effective as of December 21, 2000, among WC Holdings, Health Power, CMI, CHS and Daniel R. Sullivan (incorporated by reference to Exhibit 1(c)(99.12) to the Registrant's Form 8-K Current Report dated December 21, 2000).
10.83	—	Employment Agreement effective as of December 21, 2000, among WC Holdings, Health Power, CMI, CHS and Paul A. Miller (incorporated by reference to Exhibit 1(c)(99.13) to the Registrant's Form 8-K Current Report dated December 21, 2000).

59

10.84	—	Management Consulting Agreement dated as of December 21, 2000, among WC Holdings and each of the Companies (incorporated by reference to Exhibit 1(c)(99.14) to the Registrant's Form 8-K Current Report dated December 21, 2000).
10.85	—	CompManagement, Inc. Deferred Compensation Plan adopted December 21, 2000 (incorporated by reference to Exhibit 99.15 to the Registrant's Form 8-K Current Report dated December 21, 2000).
10.87	—	Security Capital Corporation's 2000 Long-Term Incentive Plan (incorporated by reference to Exhibit 1(4.5) to the Registrant's Registration Statement on Form S-8 dated February 8, 2001).
21	—	Subsidiaries of the Registrant.
23.1	—	Consent of Ernst & Young LLP.
23.2	—	Consent of Deloitte & Touche LLP.

60

SIGNATURES

        Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereto duly authorized.

	SECURITY CAPITAL CORPORATION
	By:	/s/  BRIAN D. FITZGERALD Brian D. Fitzgerald Chairman of the Board
Date: April 9, 2002

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

SIGNATURE	POSITION	DATE
/s/  BRIAN D. FITZGERALD Brian D. Fitzgerald	Chairman of the Board (Principal Executive Officer)	April 9, 2002
/s/  WILLIAM R. SCHLUETER William R. Schlueter	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	April 9, 2002
/s/  A. GEORGE GEBAUER A. George Gebauer	Vice Chairman	April 9, 2002
/s/  SAMUEL B. FORTENBAUGH Samuel B. Fortenbaugh	Director	April 9, 2002
/s/  JOHN H.F. HASKELL, JR. John H.F. Haskell, Jr.	Director	April 9, 2002
/s/  EDWARD W. KELLEY, JR. Edward W. Kelley, Jr.	Director	April 9, 2002
/s/  M. PAUL KELLY M. Paul Kelly	Director	April 9, 2002

61

QuickLinks

TABLE OF CONTENTS
PART I
Health Power (Employer Cost Containment-Related Services Segment)
Primrose (Educational Services Segment)
Pumpkin (Portion of Seasonal Products Segment)
Possible Dreams (Portion of Seasonal Products Segment)
PART II
Index To Consolidated Financial Statements
REPORT OF INDEPENDENT AUDITORS
INDEPENDENT AUDITORS' REPORT
SECURITY CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
SECURITY CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
SECURITY CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except shares)
SECURITY CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
SECURITY CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 (Amounts in thousands, except share and per share amounts)
OPTIONS OUTSTANDING
PART III
PART IV
SIGNATURES

EX-10.23

                                  EXHIBIT 10.23

                           LOAN AND SECURITY AGREEMENT


                          DATED AS OF DECEMBER 31, 2001


                                      AMONG


                             POSSIBLE DREAMS, LTD.,

                                   AS BORROWER

                                       AND

                         LASALLE BUSINESS CREDIT, INC.,

                            AS A LENDER AND AS AGENT

                                       AND

                       THE INSTITUTIONS FROM TIME TO TIME
                                 A PARTY HERETO

                                   AS LENDERS

                                   $16,000,000



     THIS LOAN AND SECURITY AGREEMENT ("Agreement") is made as of this 31st day
of December, 2001, by and among LASALLE BUSINESS CREDIT, INC., a Delaware
corporation ("LaSalle"), with its principal office at 135 South LaSalle Street,
Chicago, Illinois 60603, the financial institutions which from time to time
become a party hereto (collectively, the "Lenders" and individually, a
"Lender"), LaSalle as agent for Lenders (in such capacity, "Agent") and POSSIBLE
DREAMS, LTD., a Delaware corporation, with its principal office at 6 Perry
Drive, Foxboro, Massachusetts 02035 ("Borrower").

                                   WITNESSETH:

          WHEREAS, from time to time Borrower may request Agent and Lenders to
make loans and advances to and extend certain credit accommodations to Borrower,
and the parties wish to provide for the terms and conditions upon which such
loans, advances and credit accommodations shall be made;

          NOW, THEREFORE, in consideration of any loans, advances and credit
accommodations (including any loans by renewal or extension) hereafter made to
Borrower by Agent and the Lenders, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
Borrower, the parties agree as follows:

     1.   DEFINITIONS.

          (a) GENERAL DEFINITIONS

          "ACCOUNT DEBTOR" shall mean the Person who is obligated on or under an
Account.

          "ACCOUNTS" shall have the meaning given to the term "accounts" in the
UCC and shall in any event include, without limitation, all of Borrower's
presently existing and hereafter arising accounts, accounts receivable, contract
rights, instruments, documents, chattel paper, and all other forms of
obligations owing to Borrower arising out of the sale or lease of goods or the
rendition of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guarantees, letters of credit and other security
therefor, as well as all merchandise returned to or reclaimed by Borrower, and
all products and proceeds of the foregoing.

          "ACCOUNTS ADVANCE RATE" shall have the meaning set forth in paragraph
2(b)(A) hereof.

          "ACCOUNTS TRIAL BALANCE" shall have the meaning set forth in paragraph
12(c) hereof.

          "ADVANCE RATES" shall mean collectively, the Accounts Advance Rate and
the Inventory Advance Rate.

          "AFFILIATE" means any Person: (a) directly or indirectly controlling,
controlled by, or under common control with, Borrower; (b) directly or
indirectly owning or holding five percent (5%) or more of any equity interest in
Borrower; or (c) five percent (5%) or more of whose voting stock or other equity
interest having ordinary voting power for the election of directors or the power
to direct or cause the direction of management, is directly or indirectly owned
or held by Borrower; or (d) which has a senior executive officer who is also a
senior executive officer of Borrower. For purposes of this definition, "control"
(including with correlative meanings, the terms "controlling", "controlled by"
and "under common control with") means the possession directly or indirectly of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities or other equity
interest, or by contract or otherwise.

          "AGENT" shall have the meaning set forth in the introductory paragraph
hereof.

          "APPLICABLE MARGIN" shall mean the percentage set forth below for the
applicable Type and Kind of Loan set forth below:





                       APPLICABLE MARGIN
         Revolving Loans                Term Loan A                 Term Loan B
         ---------------                -----------                 -----------
       Prime         Libor         Prime          Libor         Prime         Libor
       -----         -----         -----          -----         -----         -----
                                                               
       0.00%         2.50%         0.50%          3.00%         0.50%         3.00%


          "AUTHORITY" shall have the meaning set forth in paragraph 15(s)(iv)
hereof.

          "BANC OF AMERICA" shall mean Banc of America Commercial Finance
Corporation (formerly known as NationsCredit Commercial Corporation).

          "BANC OF AMERICA SUBORDINATION AGREEMENT" shall mean that certain
Subordination Agreement dated as of the Closing Date among Agent and Banc of
America which agreement shall be substantially in form and substance attached
hereto as EXHIBIT J.

          "BANC OF AMERICA WARRANT AGREEMENT" shall mean that certain
Warrantholders Rights Agreement dated as of May 17, 1996 among Borrower,
Holdings, SCC, Banc of America, Warren Stanley and Arnold Lee, as in effect on
the Closing Date.

          "BANC OF AMERICA WARRANTS" shall mean those certain Warrants issued by
Borrower in favor of Banc of America that are exercisable for shares of the
Class B Common Stock of Borrower and shall include any rights of Banc of America
under the Banc of America Warrant Agreement.

          "BANK" shall mean LaSalle Bank National Association.

          "BANKRUPTCY CODE" shall mean the Bankruptcy Reform Act of 1978, as
amended, including amendments made by The Bankruptcy Reform Act of 1994, as
codified in Title 11 of the United States Code.

          "BENEFIT PLAN" shall mean an employee pension benefit plan sponsored;
maintained or contributed to by Borrower or an ERISA Affiliate, as defined in
Section 3(2) of ERISA, which is subject to Title IV of ERISA.

          "BORROWER" shall have the meaning set forth in the introductory
paragraph hereof.

          "BORROWING BASE" shall have the meaning specified in paragraph 2(b)(A)
hereof.

          "BORROWING BASE CERTIFICATE" shall mean a certificate duly executed by
an officer of Borrower appropriately completed and in substantially the form of
EXHIBIT C hereto.

          "BREAKAGE COSTS" shall have the meaning specified in paragraph
7(c)(iv) hereof.

          "BUSINESS DAY" shall mean any day other than a Saturday, Sunday, or
such other day as banks in Illinois and/or New York are authorized or required
to be closed for business; PROVIDED, HOWEVER, that with respect to LIBOR Rate
Loans, the term "Business Day" shall also exclude any day that banks in London,
England are authorized or required to be closed for business.

          "BUSINESS INTERRUPTION TRIGGER EVENT" shall have the meaning specified
in paragraph 17(n) hereof.

          "CANADIAN ACCOUNT RESERVE" shall mean a reserve against borrowing base
availability equal to the Specified Percentage of the amount of Eligible
Accounts due and owing to any Borrower from an Account Debtor which is a
resident or citizen of, and is located within, Canada (a "Canadian Eligible
Account"). For purposes hereof, the term "Specified Percentage" means seven
percent (7%) or such other percentage, if any, of a

                                       -2-


Canadian Eligible Account which constitutes a federal and/or provincial tax due
and payable by Borrower with respect to such Account under applicable Canadian
law.

          "CAPITAL ADEQUACY CHARGE" shall have the meaning specified in
paragraph 6(i) hereof.

          "CAPITAL ADEQUACY DEMAND" shall have the meaning specified in
paragraph 6(i) hereof.

          "CAPITAL EXPENDITURES" shall mean, with respect to any period, the
aggregate of all expenditures (whether paid in cash or accrued as liabilities
and including expenditures for capitalized lease obligations) by Borrower during
such period that are required by GAAP to be included in or reflected by the
property, plant or equipment or similar fixed asset accounts (or in intangible
accounts subject to amortization) in the balance sheet of Borrower.

          "CASH EQUIVALENTS" shall mean (a) securities with maturities of one
year or less from the date of acquisition which are issued or fully guaranteed
or insured by the United States Government or any agency thereof, (b)
certificates of deposit and eurodollar time deposits with maturities of one year
or less from the date of acquisition and overnight bank deposits of Agent or of
any commercial bank having capital and surplus in excess of $500,000,000, or (c)
repurchase obligations of Agent or of any commercial bank satisfying the
requirements of clause (b) of this definition, having a term of not more than 30
days with respect to securities issued or fully guaranteed or insured by the
United States Government.

          "CERCLA" shall mean the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sections 9601 ET
SEQ.

          "CHANGE OF CONTROL" shall mean (a) the occurrence of any event
(whether in one or more transactions) which results in an acquisition of (i)
control of Borrower or (ii) control of Holdings, in any such case, by a Person
who is not an Original Owner or directly controlled by an Original Owner, (b)
any merger or consolidation of or with Borrower or sale of all or substantially
all of the property or assets of Borrower or (c) the occurrence of any other
Trigger Event. For purposes of this definition, (a) "control of Borrower" shall
mean the power, direct or indirect to direct or cause the direction of the
management and policies of Borrower by contract or otherwise and (b) "control of
Holdings" shall mean the power, direct or indirect to direct or cause the
direction of the management and policies of Holdings by contract or otherwise.

          "CNC" shall mean Columbia National Corporation, a Delaware
corporation.

          "CNC SUBORDINATED NOTE" shall mean that certain subordinated
promissory note dated May 17, 1996 executed by Borrower in favor of QTIP Trust
(as assignee of CNC) in the original aggregate principal amount of $332,000, as
in effect on the Closing Date.

          "CHATTEL PAPER" shall have the meaning given to the term "chattel
paper" in the UCC and in any event shall include, without limitation, a writing
or writings which evidence both a monetary obligation and a security interest in
or a lease of specific goods.

          "CLOSING DATE" shall mean the date upon which the initial Loan is
made.

          "CLOSING DOCUMENT LIST" shall have the meaning specified in paragraph
16(a)(i) hereof.

          "COLLATERAL" shall mean all of the personal property of Borrower as
described in paragraph 8 hereof and all other real or personal property of any
Obligor or any other Person now or hereafter pledged to Agent for its benefit
and for the ratable benefit of Lenders to secure, either directly or indirectly,
repayment of any of the Liabilities.

          "COMMERCIAL TORT CLAIM" shall have the meaning given to the term
"commercial tort claim" in the UCC and in any event shall include, without
limitation, a claim arising in tort with respect to which: (A) the claimant is
an organization; or (B) the claimant is an individual and the claim: (i) arose
in the course of the

                                       -3-


claimant's business or profession; and (ii) does not include damages arising out
of personal injury to or the death of an individual.

          "COMMITMENT PERCENTAGE" of any Lender shall mean the percentage set
forth below such Lender's name on the signature page hereof as same may be
adjusted upon any assignment by a Lender pursuant to paragraph 25 hereof.

          "COMMITMENT TRANSFER SUPPLEMENT" shall mean a document in the form of
EXHIBIT 25(b) attached hereto and made part hereof, properly completed and
otherwise in form and substance satisfactory to Agent by which a Purchasing
Lender purchases and assumes a portion of the obligation of Lenders to make
Loans under this Agreement.

          "CONFIDENTIAL INFORMATION" shall have the meaning set forth in
paragraph 28(e) hereof.

          "CONSOLIDATED INCOME TAX SHARING AGREEMENT" shall mean the
Consolidated Income Tax Sharing Agreement dated as of May 17, 1996 by and among
SCC, Holdings and Borrower, as the same may be amended, supplemented or
otherwise modified, renewed or replaced from time to time, in each case to the
extent expressly permitted under the terms of this Agreement.

          "CONTINUATION" shall have the meaning specified in paragraph 7(c)(i)
hereof.

          "CONTRACT YEAR" shall mean each period of twelve (12) consecutive
months commencing on the Closing Date and on each anniversary thereafter.

          "CONTROLLED GROUP" shall mean all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with Borrower, are treated as a single employer
under Section 414 of the IRC.

          "CONVERSION" shall have the meaning specified in paragraph 7(c)(ii)
hereof.

          "CURRENT ASSETS" shall mean the sum of (a) cash PLUS (b) cash
equivalents PLUS (c) accounts receivable PLUS (d) inventories, all as reflected
on the Borrower's annual financial statements delivered to Agent in accordance
with the provisions of paragraph 12(d) hereof.

          "CURRENT LIABILITIES" shall mean the sum of (a) the principal amount
of Revolving Loans PLUS (b) accounts payable PLUS (c) accrued expenses PLUS (d)
state income taxes payable PLUS (e) the amount owed to any related party for
income taxes, all as reflected on the Borrower's annual financial statements
delivered to Agent in accordance with the provisions of paragraph 12(d) hereof.

          "CUSTOMER LISTS" shall mean the customer lists of Borrower attached
hereto as EXHIBIT B and made a part hereof, as same shall be updated pursuant to
paragraph 12(h) hereof.

          "CUSTOMS" shall have the meaning set forth in paragraph 4(f) hereof.

          "DEFAULT" shall mean any event, condition or default which with the
giving of notice, the lapse of time or both would be an Event of Default.

          "DEFAULTING LENDER" shall have the meaning set forth in paragraph 7(h)
hereof.

          "DEFAULTING LENDER CURE PERIOD" shall have the meaning specified in
paragraph 7(m) hereof.

          "DEPOSIT ACCOUNT" shall have the meaning given to the term "deposit
account" in the UCC and in any event shall include, without limitation, a
demand, time, savings, passbook or similar account maintained with a bank.

                                       -4-


          "DESIGNATED LENDER" shall have the meaning set forth in paragraph 7(m)
hereof.

          "DILUTION RESERVE" shall mean a reserve against borrowing base
availability, established by Agent in its reasonable discretion, in an amount
equal to (a) the percentage above which the dilution rate with respect to the
Accounts exceeds five (5%) percent multiplied by (b) all Eligible Accounts.

          "DOCUMENTS" shall mean the term "documents" as such term is defined
under Article 9 of the UCC.

          "DOLLAR" and the sign "$" shall mean lawful money of the United
States.

          "EBITDA" shall mean, with respect to any applicable fiscal period, the
following for Borrower each calculated for such period: net income before taxes
for such period (excluding pre-tax gains or losses on the sale of assets (other
than the sales of Inventory in the ordinary course of business) and excluding
other pre-tax extraordinary gains) PLUS interest expense, depreciation,
amortization and other non-cash charges deducted in determining net income for
such period, MINUS interest income calculated in determining net income for such
period.

          "ELIGIBLE ACCOUNT" shall mean an Account owing to Borrower which is
acceptable to Agent in its reasonable discretion for lending purposes. Agent
shall, in general, consider an Account to be an Eligible Account if it meets,
and so long as it continues to meet, the following requirements:

               (i)    it is genuine and in all respects is what it purports to
                      be;

               (ii)   it is owned by Borrower and Borrower has the right to
               subject it to a security interest in favor of Agent;

               (iii)  it arises from (A) the performance of services by Borrower
               and such services have been fully performed and acknowledged and
               accepted by the Account Debtor thereunder or (B) the sale or
               lease of Goods by Borrower, and such Goods have been completed in
               accordance with the Account Debtor's specifications (if any) and
               delivered to and accepted by the Account Debtor, and such Account
               Debtor has not returned, offered to return or given notice of its
               intention to return any of the Goods which are the subject of
               such Account, and Borrower has possession of, or has delivered to
               Agent at Agent's request, shipping and delivery receipts
               evidencing delivery of such Goods;

               (iv)   if the Account Debtor thereunder is not an Extended Term
               Customer or a Preferred Customer, it is evidenced by an invoice
               rendered to such Account Debtor and does not remain unpaid more
               than the earlier of (a) sixty (60) days past the stated due date
               thereof and (b) ninety (90) days past the stated invoice date
               thereof; PROVIDED, HOWEVER, if more than fifty percent (50%) of
               the aggregate dollar amount of invoices owing by such Account
               Debtor remain unpaid for more than (A) sixty (60) days past the
               respective stated due dates thereof or (B) ninety (90) days past
               the respective invoice dates thereof, then all Accounts owing to
               Borrower by such Account Debtor shall be deemed ineligible.

               (v)    if the Account Debtor thereunder is a Preferred Customer,
               it is evidenced by an invoice rendered to such Account Debtor and
               does not remain unpaid more than the earlier of (a) sixty (60)
               days past the stated due date thereof and (b) one hundred and
               twenty (120) days past the stated invoice date thereof; PROVIDED,
               HOWEVER, if more than fifty percent (50%) of the aggregate dollar
               amount of invoices owing by such Account Debtor remain unpaid for
               more than (A) sixty (60) days past the respective stated due
               dates thereof or (B) one hundred and twenty (120) days past the
               respective invoice dates thereof, then all Accounts owing to
               Borrower by such Account Debtor shall be deemed ineligible.

               (vi)   if the Account Debtor thereunder is an Extended Term
               Customer, it is evidenced by an invoice rendered to such Account
               Debtor thereunder and does not remain unpaid more than the
               earlier of (a) thirty (30) days past the stated due date thereof
               and (b) two hundred and seventy (270) days past the stated
               invoice dated thereof (all such Accounts, collectively, "Extended
               Term Accounts"); PROVIDED, HOWEVER, that if more than fifty
               percent (50%) of the aggregate dollar amount of invoices owing by
               such Account Debtor

                                       -5-


               remain unpaid for more than (A) thirty (30) days past the
               respective stated due dates thereof or (B) two hundred and
               seventy (270) days past the respective invoice dates thereof,
               then all Extended Term Accounts owing to Borrower by such Account
               Debtor shall be deemed ineligible;

               (vii)  it is not subject to any prior assignment, offset, claim,
               lien, security interest or encumbrance whatsoever, other than
               Liens in favor of Agent;

               (viii) it is a valid, legally enforceable and unconditional
               obligation of the Account Debtor thereunder, and is not subject
               to setoff, counterclaim, credit, allowance or adjustment by such
               Account Debtor, or to any claim asserted by such Account Debtor
               denying liability thereunder in whole or in part;

               (ix)   it does not arise out of a contract or order which fails
               in any material respect to comply with the requirements of
               applicable law;

               (x)    the Account Debtor thereunder is not a director, officer,
               employee or agent of Borrower, or a Subsidiary, Parent or
               Affiliate of Borrower;

               (xi)   it is not an Account with respect to which the Account
               Debtor is the United States of America or any state or local
               government, or any department, agency or instrumentality thereof
               (each, a "Government Account" and collectively, the "Government
               Accounts"), unless Borrower assigns its right to payment of such
               Government Account to Agent pursuant to, and in full compliance
               with, the Assignment of Claims Act of 1940, as amended or any
               comparable state or local law, provided that no such compliance
               with the Assignment of Claims Act shall be required with respect
               to Government Accounts due and owing to Borrower from a post
               exchange of any branch of the United States Department of Defense
               in an aggregate amount of up to $400,000 per calendar year;

               (xii)  it is not an Account with respect to which the Account
               Debtor is located in a state which requires Borrower, as a
               precondition to commencing or maintaining an action in the courts
               of that state, either to (A) receive a certificate of authority
               to do business and be in good standing in such state, or (B) file
               a notice of business activities report or similar report with
               such state's taxing authority, unless (x) Borrower has taken one
               of the actions described in clauses (A) or (B), (y) the failure
               to take one of the actions described in either clause (A) or (B)
               may be cured retroactively by Borrower at its election, or (z)
               Borrower has proven, to Agent's satisfaction, that it is exempt
               from any such requirements under any such state's laws;

               (xiii) it is an Account which arises out of a sale made in the
               ordinary course of Borrower's business;
               (xiv)  the Account Debtor is a resident or citizen of, and is
               located within, the United States of America, provided that
               Accounts as to which the Account Debtor is a resident or citizen
               of, and is located in, Canada may be included up to a maximum of
               $300,000 in the aggregate outstanding from time to time;

               (xv)   it is not an Account with respect to which the Account
               Debtor's obligation to pay is conditional upon the Account
               Debtor's approval of the Goods or services or is otherwise
               subject to any repurchase obligation or return right, as with
               sales made on a bill-and-hold, guaranteed sale, sale on approval,
               sale or return or consignment basis;

               (xvi)  it is not an Account (A) with respect to which any
               representation or warranty contained in this Agreement is untrue
               or (B) which violates any of the covenants of Borrower contained
               in this Agreement;

               (xvii) it is not an Account which, when added to a particular
               Account Debtor's other indebtedness to Borrower, exceeds the
               lesser of (A) ten percent (10%) of the aggregate of Borrower's
               Accounts or (B) a credit limit determined by Agent in its
               reasonable credit judgment for that Account Debtor as set forth
               on EXHIBIT E attached hereto; PROVIDED, HOWEVER, that Accounts
               excluded from Eligible Accounts solely by reason of this
               subparagraph (xv) shall be Eligible Accounts to the extent of
               such credit limit; PROVIDED, FURTHER, that EXHIBIT E may be
               amended by Agent from time to time in the exercise of its
               reasonable discretion to change limits for existing Account
               Debtors and reflect credit limits for new Account Debtors;

                                       -6-


               (xviii) it is not an Account with respect to which the prospect
               of payment or performance by the Account Debtor is or will be
               impaired, as determined by Agent in its reasonable discretion;

               (xix) it is not an Account arising from progress billings,
               invoices for deposits, samples or tooling;

               (xx) it is not an Account with respect to which the sale is on an
               installment basis, cash on delivery basis, lease or, except for
               Extended Term Customers, other extended payment basis; and

               (xxi) it is not that portion of an Account representing late
               fees, service charges or interest.

          "ELIGIBLE INVENTORY" shall mean Inventory held for sale by Borrower,
normally and currently saleable in the ordinary course of Borrower's business,
and which at all times pertinent hereto is of good and merchantable quality,
free from defects, as to which Inventory Agent has a perfected first priority
security interest and which Inventory is subject to no other Lien other than
Liens in favor of Agent, and which is located at the locations set forth in
EXHIBIT A of this Agreement and is not in transit, provided, however, Inventory
(i) in transit to any Borrower at a location set forth on EXHIBIT A of this
Agreement; (ii) having an aggregate value of less than $2,000,000 for all such
in transit Inventory; (iii) paid for in full in cash or by causing the issuance
of a Letter of Credit by such Borrower; and (iv) for which bills of lading have
been issued in the name of such Borrower and, if requested by Agent, such bills
of lading shall have been delivered and endorsed to Agent in a manner reasonably
satisfactory to Agent, shall not be excluded from Eligible Inventory solely by
reason of such Inventory's being in transit, as that Exhibit may, from time to
time, be amended or supplemented in accordance with the terms of this Agreement,
and as to which Borrower has satisfied all terms, conditions, warranties and
representations of this Agreement and the Other Agreements; but Eligible
Inventory shall not include any of the following: (a) catalogs, packages,
shipping materials, supplies consumed in Borrower's business, shrink wrap and
warranty reserves and other promotional materials of any kind; (b) returned
items (other than items which satisfy each of the following: (1) the return of
which was authorized in advance by Borrower, (2) which have been restocked in
Borrower's inventory, (3) which are free from material defects and (4) which are
able to be sold in the ordinary course of Borrower's business); (c)
work-in-process or raw materials; (d) damaged, defective or recalled items; (e)
obsolete items; (f) items used as demonstrators, prototypes or salesmen's
samples; (g) items of Inventory which have been consigned to Borrower or as to
which a Person claims a security interest, prior assignment claim or encumbrance
whatsoever other than Liens in favor of Agent; (h) items of Inventory which have
been consigned by Borrower to a consignee; (i) Inventory located on premises
leased by Borrower from a landlord with whom Agent has not entered into a
landlord's waiver on terms satisfactory to Agent; (j) Inventory located at a
warehouse premises with respect to which Agent has not received (1) a bailee
letter, acceptable in all respects to Agent, executed by the bailee of such
warehouse or (2) evidence satisfactory in all respects to Agent of such bailee's
receipt of a bailee letter acceptable in all respects to Agent; (k) Inventory
which in the reasonable judgment of Agent is considered to be slow moving or
otherwise not merchantable; (l) Inventory located outside the United States of
America; and (m) Inventory which is subject to a Material License Agreement
unless Agent shall have entered into a licensor consent letter with the licensor
in form and substance satisfactory to Agent; and (n) any Inventory that Agent,
after good faith consultation with Borrower, has reasonably determined is not
acceptable due to age, type, category or quantity.

          "ENVIRONMENTAL COMPLAINT" shall have the meaning set forth in
paragraph 15(s)(iv) hereof.

          "ENVIRONMENTAL LAWS" shall mean all federal, state and local
environmental, land use, zoning, health, chemical use, safety and sanitation
laws, statutes, ordinances and codes relating to the protection of the
environment and/or governing the use, storage, treatment, generation,
transportation, processing, handling, production or disposal of Hazardous
Substances and the rules, regulations, binding policies, guidelines,
interpretations, decisions, binding orders and binding directives of federal,
state and local governmental agencies and authorities with respect thereto.

          "EQUIPMENT" shall have the meaning given to the term "equipment" in
the UCC and shall in any event include, without limitation, the machinery and
equipment of Borrower, including without limitation processing equipment, data
processing and computer equipment with software and peripheral equipment, and
all engineering, processing and manufacturing equipment, office machinery,
furniture, materials handling equipment, tools, molds, dies, attachments,
accessories, automotive equipment, trailers, trucks, motor vehicles, tanks,
cylinders and other equipment of every kind and nature, and fixtures, all
whether now owned or hereafter acquired, and

                                       -7-


wheresoever situated, together with all additions and accessions thereto,
replacements therefor, all parts therefor, and all manuals, drawings,
instructions, warranties, and rights with respect thereto, and all products and
proceeds of the foregoing, and condemnation awards and insurance proceeds with
respect thereto.

          "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and all references to sections thereof shall include such
sections and any predecessor and successor provisions thereto.

          "ERISA AFFILIATE" shall mean each Person which together with the
Borrower would be deemed to be a single employer as determined under Section
414(b), (c), (m), or (o) of the IRC.

          "EVENT OF DEFAULT" shall have the meaning specified in paragraph 17
hereof.

          "EXCESS AVAILABILITY" shall mean, as of any date of determination by
Agent, the excess, if any, of (i) the lesser of (a) the Revolving Loan
Commitment and (b) the Borrowing Base over (ii) the outstanding Revolving Loans,
in each case as of the close of business on such date. For purposes of
calculating Excess Availability of Borrower and the amount of the Borrowing Base
relating thereto, Agent may, in the exercise of its sole discretion, establish a
reserve in an aggregate amount based on the sum of (a) Borrower's outstanding
trade payables which are not current or which are past due beyond Borrower's
normal trade terms in any material respect, PLUS (b) any taxes due and unpaid to
any taxing authority, PLUS (c) transaction fees incurred by Borrower in
connection with the consummation of the transactions contemplated by this
Agreement which are due and remain unpaid, in each case as of such date of
determination, to the extent thereof.

          "EXCESS CASH FLOW" for any Fiscal Year shall mean an amount equal to
(a) the net income of Borrower for such Fiscal Year MINUS (b) non-cash
extraordinary gains and extraordinary losses PLUS (c) depreciation and
amortization which were deducted in determining net income for such Fiscal Year
PLUS (d) long term debt incurred for Capital Expenditures made during such
period MINUS (e) Capital Expenditures made during such Fiscal Year MINUS (f)
scheduled payments of principal and prepayments on indebtedness for such Fiscal
Year (excluding principal payments made with respect to the Term Loan), to the
extent such payments are permitted under this Agreement MINUS (g) the change in
Net Working Accounts during such Fiscal Year.

          "EXHIBIT A" shall mean the exhibit entitled EXHIBIT A - Business and
Collateral Locations which is attached hereto and made a part hereof.

          "EXHIBIT D" shall mean the exhibit entitled EXHIBIT D-Officer's
Certificate which is attached hereto and made a part hereof.

          "EXISTING LOCK BOX" shall have the meaning set forth in paragraph 11
hereof.

          "EXTENDED TERM CUSTOMER" shall mean any Account Debtor to which
Borrower has granted extended dating terms acceptable to Agent and which Agent
has agreed in writing to treat as an Extended Term Customer hereunder. The
Extended Term Customers and extended dating terms approved by Agent are listed
on EXHIBIT F attached hereto; PROVIDED, that EXHIBIT F may be amended by Agent
from time to time in its commercially reasonable discretion exercised in good
faith to reflect new Extended Term Customers and the approved payment terms
therefor, the deletion of existing Extended Term Customers or a change in
payment terms for an existing Extended Term Customer. In the event of any such
amendment to EXHIBIT F, Agent shall provide Borrower prior notice thereof,
except to the extent Agent believes in its commercially reasonable discretion
exercised in good faith that such prior notice is not practicable in light of
the circumstances, in which event Agent shall provide Borrower subsequent notice
of any such amendment.

          "FASB" shall mean Financial Accounting Standards Board which is an
independent board formed in 1973 to succeed and continue the activities of the
Accounting Principles Board and is responsible for establishing and interpreting
generally accepted accounting principles.

          "FISCAL YEAR" shall mean with respect to Borrower, the twelve (12)
month accounting period of Borrower commencing January 1st of each calendar year
and ending December 31st of such calendar year.

                                       -8-


          "FIXED CHARGE COVERAGE RATIO" shall mean and include, with respect to
any applicable fiscal period, the ratio of (a) EBITDA, MINUS non-financed
Capital Expenditures made during such period MINUS cash taxes actually paid
during such period to (b) the sum of (i) scheduled principal payments of
long-term debt paid or scheduled to be paid during such period PLUS (ii)
capitalized leases paid or scheduled to be paid during such period PLUS (iii)
interest expense of Borrower for such period.

          "FUNDED DEBT" shall mean, at the date of determination thereof,
liabilities, as reflected on Borrower's latest internally prepared, GAAP
compliant, balance sheet.

          "GAAP" shall mean generally accepted accounting principles and
policies in the United States as in effect from time to time.

          "GBNF TRUST" shall mean the GBNF Trust, a trust organized under the
laws of the Commonwealth of Massachusetts, together with its successors and
assigns.

          "GENERAL INTANGIBLES" shall have the meaning given to the term
"general intangibles" in the UCC and in any event shall include, without
limitation, all of Borrower's present and future general intangibles and other
personal property, any and all rights of Borrower to all choses or things in
action, tax refund claims, credits, claims, claims against carriers and
shippers, guarantee claims, contract rights, security interests, security rights
and any rights to indemnification, demands, goodwill, licenses, franchise
agreements, subscription costs, patents, patent applications, design rights,
trade names, trademarks, trademark applications, copyrights, registrations,
rights to royalties, blueprints, drawings, customer lists, purchase orders,
computer programs, computer discs, computer tapes, literature, reports,
catalogs, methods, sales literature, video tapes, confidential information and
trade secrets, consulting agreements, employment agreements, leasehold interests
in real and personal property, insurance policies, deposits with insurers
relating to worker's compensation liabilities, Deposit Accounts and tax refunds,
other than Equipment, Inventory, Investment Property and Accounts, as well as
Borrower's books and records relating to any of the foregoing, and all products
and proceeds of the foregoing.

          "GOODS" shall have the meaning given to the term "goods" in the UCC
and in any event shall include, without limitation, all of Borrower's tangible
assets and tangible properties which are moveable at the time the security
interest attaches or which are fixtures.

          "GUARANTORS" shall mean any Person which executes and becomes
obligated under a Guaranty.

          "GUARANTY" shall mean individually and collectively each Guaranty
executed by a Guarantor in favor of Agent and Lenders.

          "HAZARDOUS DISCHARGE" shall have the meaning set forth in paragraph
15(s)(iv) hereof.

          "HAZARDOUS SUBSTANCE" shall mean, without limitation, any flammable
explosives, radon, radioactive materials, asbestos, urea formaldehyde foam
insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, Hazardous Wastes, hazardous or Toxic Substances or
related materials as defined in CERCLA, the Hazardous Materials Transportation
Act, as amended (49 U.S.C. Sections 1801, ET SEQ.), RCRA, Articles 15 and 27 of
the New York State Environmental Conservation Law or any other applicable
Environmental Law and in the regulations adopted pursuant thereto.

          "HAZARDOUS WASTES" shall mean all waste materials subject to
regulation under CERCLA, RCRA or applicable state law, and any other applicable
Federal and state laws now in force or hereafter enacted relating to hazardous
waste disposal.

          "HEALTH-CARE-INSURANCE RECEIVABLE" shall have the meaning given to the
term "health-care-insurance-receivable" in the UCC and in any event shall
include, without limitation, an interest in or claim under a policy of insurance
which is a right to payment of a monetary obligation for health-care goods or
services provided.

          "HOLDINGS" shall mean PD Holdings, Inc., a Delaware corporation.

                                       -9-


          "INDEMNIFIED PARTY" shall have the meaning specified in paragraph 19
hereof.

          "INSTRUMENTS" shall have the meaning given to the term "instruments"
in the UCC and shall include, without limitation, a negotiable instrument or a
certificated security or any other writing which evidences a right to the
payment of money.

          "INTERCREDITOR AGREEMENT" shall mean the Intercreditor Agreement dated
as of the Closing Date among Agent, Softech and Borrower.

          "INTEREST PERIOD" shall mean for any LIBOR Rate Loan the period
commencing on the date of the borrowing thereof and ending one, three or six
months thereafter, provided, however, that Borrower may not select any Interest
Period that ends after the Term. Whenever the last day of an Interest Period
would otherwise occur on a day other than a Business Day, the last day of such
Interest Period shall be extended to occur on the next succeeding Business Day;
provided, that if such extension would cause the last day of such Interest
Period to occur in the next following calendar month, the last day of such
Interest Period shall occur on the next preceding Business Day.

          "INVENTORY" shall have the meaning given to the term "inventory" in
the UCC and in any event shall include, without limitation, all present and
future inventory in which Borrower has any interest, including, but not limited
to, goods held by Borrower for sale or lease or to be furnished under a contract
of service and all of Borrower's present and future raw materials, work in
process, finished goods, supplies and packing and shipping materials, wherever
located, any and all merchandise returned to or reclaimed by Borrower, and any
documents of title representing any of the above.

          "INVENTORY ADVANCE RATE" shall mean (i) sixty-five percent (65%)
during a period of four consecutive months (not otherwise within or part of a
Fifty Percent Period (as hereafter defined)) during each Contract Year (each
such period, a "Sixty-Five Percent Period"), each such Sixty-Five Percent Period
to be designated in advance by Borrower to Agent in writing and approved by
Agent in its sole discretion PROVIDED, that (A) if Borrower fails to designate a
Sixty-Five Percent Period on or before the 180th day of any Contract Year, there
shall be no Sixty-Five Percent Period during such Contract Year (it being
understood that a Sixty-Five Percent Period may occur after the 180th day of a
Contract Year PROVIDED that any such Sixty-Five Percent Period is designated
prior to such 180th day) and (B) no Sixty-Five Percent Period may occur during
more than one (1) of the following months: November, December, January or
February, (ii) fifty percent (50%) during a period of three consecutive months
(not otherwise within or part of a Sixty-Five Percent Period) during each
Contract Year (each such period, a "Fifty Percent Period"), each such Fifty
Percent Period to be designated in advance by Borrower to Agent in writing and
approved by Agent in its sole discretion PROVIDED, that, notwithstanding
anything to the contrary contained herein, if Borrower fails to designate a
Fifty Percent Period on or before the 271st day of any Contract Year, the Fifty
Percent Period for such Contract Year shall automatically commence on the 270th
day of such Contract Year and end on the last day of such Contract Year and
(iii) sixty percent (60%) at all other times.

          "INVESTMENT PROPERTY" shall have the meaning given to the term
"investment property" in the UCC, and in any event shall include, without
limitation, all of Borrower's now owned or hereafter acquired securities,
whether certificated or uncertificated, securities entitlements, securities
accounts, commodity and futures contracts and commodity and futures accounts.

          "IRC" shall mean the Internal Revenue Code of 1986, as amended from
time to time.

          "ISP 98" shall mean the International Standby Practices which applies
to standby letters of credit, prepared by the Institute of International Banking
Law and Practice, as amended from time to time.

          "KIND" shall mean, with respect to any Loan, whether such Loan is a
Revolving Loan or a Term Loan.

          "L/C ISSUER" shall mean the Bank or such other bank as may be selected
by Agent in its sole discretion.

                                      -10-


          "LENDER DEFAULT" shall have the meaning set forth in paragraph 7(h)
hereof.

          "LENDER(S)" shall have the meaning set forth in the introductory
paragraph hereof.

          "LETTER OF CREDIT FEE" shall have the meaning set forth in paragraph
6(d) hereof.

          "LETTER OF CREDIT OBLIGATIONS" shall mean, as of any date of
determination, the sum of (i) the aggregate undrawn amount of all Letters of
Credit and (ii) the aggregate unreimbursed amount of all drawn Letters of
Credit.

          "LETTER-OF-CREDIT RIGHT" shall have the meaning given to the term
"letter-of-credit-right" in the UCC and in any event shall include, without
limitation, a right to payment or performance under a letter of credit, whether
or not the beneficiary has demanded or is at the time entitled to demand payment
or performance.

          "LETTERS OF CREDIT" shall mean those documentary letters of credit and
stand-by letters of credit issued for Borrower's account in accordance with the
terms of paragraph 4 hereof.

          "LEVERAGE RATIO" shall mean and include, with respect to any
applicable fiscal period of Borrower, the ratio of (a) Funded Debt to (b) EBITDA
MINUS non-financed Capital Expenditures made during such period.

          "LIABILITIES" shall mean all Loans and any and all other obligations,
liabilities and indebtedness of Borrower to Agent and/or Lenders or to any
parent, affiliate or subsidiary of Agent and/or Lenders of any and every kind
and nature, howsoever created, arising or evidenced and howsoever owned, held or
acquired, and any and all other Loans, obligations, liabilities and indebtedness
of Borrower to Agent and/or Lenders of any kind and nature, howsoever created,
arising or evidenced under this Agreement and/or the Other Agreements, in each
case whether now or hereafter existing, whether now due or to become due,
whether primary, secondary, direct, indirect, absolute, contingent or otherwise
(including, without limitation, obligations of performance), whether several,
joint or joint and several, and whether arising or existing under written or
oral agreement or by operation of law.

          "LICENSE AGREEMENT" shall mean each license agreement now or hereafter
entered into by Borrower as licensee, with respect to any trademarks, patents or
other intellectual property.

          "LICENSE AGREEMENTS" shall mean all License Agreements which any
Borrower enters into with a Person pursuant to which such Borrower licenses any
intellectual property.

          "LIBOR RATE" shall mean, with respect to the Interest Period
applicable to the borrowing of a LIBOR Rate Loan, the rate obtained (rounded
upwards to the nearest 1/100 of 1%) by dividing (i) the rate of interest per
annum offered to Bank in the London interbank foreign currency deposits market
as of approximately 9:00 A.M. (Chicago time) two (2) Business Days prior to the
commencement of such Interest Period for U.S. dollar deposits of amounts in
immediately available funds comparable to the principal amount of the LIBOR Rate
Loan for which the LIBOR Rate is being determined with maturities comparable to
the Interest Period for which such LIBOR Rate will apply, by (ii) a percentage
equal to 1 minus the stated reserve (expressed as a decimal), if any, required
to be maintained against "Eurocurrency liabilities" as specified in Regulation D
of the Board of Governors of the Federal Reserve System as from time to time
shall be in effect (or against any other category of liabilities, which includes
deposits, by reference to which the interest rate on LIBOR Rate Loans is
determined or any category of extensions of credit on other assets, which
includes loans by a non-U.S. office of Bank to U.S. Residents). In the absence
of manifest error, each determination by Bank of the applicable LIBOR Rate shall
be deemed conclusive.

          "LIBOR RATE LOAN" shall mean a Revolving Loan or portion of a Term
Loan that bears interest based on the LIBOR Rate.

          "LIBOR RATE REVOLVING LOAN" shall mean a Revolving Loan that bears
interest based on the LIBOR Rate.

                                      -11-


          "LIBOR RATE TERM LOAN" shall mean that portion of a Term Loan that
bears interest based on the LIBOR Rate.

          "LOAN" OR "LOANS" shall mean any and all Revolving Loans and each Term
Loan made by Agent and Lenders to Borrower pursuant to paragraphs 2 and 3 hereof
and all other loans, advances and financial accommodations made by Agent and
Lenders to or on behalf of Borrower hereunder.

          "LOCK BOX" and "BLOCKED ACCOUNT" shall have the meanings specified in
paragraph 11 hereof.

          "MANAGEMENT AGREEMENT" shall mean the Management Advisory Services
Agreement dated as of May 17, 1996, between the Borrower and SCC as amended by
that certain Amendment to Management Advisory Services Agreement dated as of the
Closing Date, as the same may be further amended, restated, or otherwise
modified, renewed or replaced from time to time, in each case to the extent
expressly permitted under the terms of this Agreement.

          "MANAGEMENT PAYMENT DATE" shall have the meaning specified in
paragraph 15(j) hereof.

          "MANAGEMENT SUBORDINATION AGREEMENT" shall mean the Management
Subordination Agreement dated as of the Closing Date among Borrower, SCC and
Agent which agreement shall be substantially in form and substance attached
hereto as Exhibit I.

          "MATERIAL ADVERSE EFFECT" shall mean a material adverse change in, or
a material adverse effect upon, the business, property, assets, operations,
condition (financial or otherwise) or prospects of Borrower taken as a whole,
related to any event, act, condition or occurrence of whatever nature (including
any adverse determination in any litigation, arbitration or governmental
investigation or proceeding), whether singly or in conjunction with any other
event or events, act or acts, condition or conditions, occurrence or
occurrences, whether or not related.

          "MATERIAL LICENSE AGREEMENT" shall mean a License Agreement which
relates to Inventory having a value (calculated on the basis of the lower of
cost or market value on a first in, first out basis) of more than $150,000 in
the aggregate.

          "MAXIMUM TERM LOAN A AMOUNT" shall mean an amount equal to $1,500,000.

          "MAXIMUM TERM LOAN B AMOUNT" shall mean an amount equal to $1,800,000.

          "MORTGAGE" shall mean each mortgage or deed of trust executed by
Borrower in favor of Agent for its benefit and for the ratable benefit of
Lenders.

          "MULTIEMPLOYER PLAN" shall mean a plan described in Section 4001(a)(3)
of ERISA which covers employees of Borrower or any ERISA Affiliate.

          "NET WORKING ACCOUNTS" at a particular date, shall mean the difference
between Current Assets MINUS Current Liabilities at such date.

          "NET WORTH" shall mean with respect to any applicable fiscal period,
the following for Borrower, each calculated for such period: shareholders'
equity (including retained earnings), less prepaid expenses, reasonably
determined by Agent on a consistent basis, plus the amount of any debt
subordinated to Agent on terms and conditions reasonably acceptable to Agent in
its sole judgment, all as determined in accordance with GAAP, consistently
applied.

          "NON-DEFAULTING LENDER" shall have the meaning specified in paragraph
7(i) hereof.

          "NOTE" shall mean individually and collectively, the Revolving Note
and each Term Note.

                                      -12-


          "OBLIGOR" shall mean Borrower and each Person who is or shall become
pursuant to a document, instrument or agreement executed by such Person in favor
of the Agent and/or any Lender primarily or secondarily liable for any of the
Liabilities (including, without limitation any Person who provides security to
Agent for any Liability), PROVIDED, HOWEVER, that such term shall not include
any Account Debtor.

          "ORGANIZATIONAL DOCUMENTS" shall mean, collectively, as the case may
be, articles of incorporation, certificate of incorporation, certificate of
partnership, certificate of limited partnership, certificate of formation,
by-laws, operating agreement, partnership agreement, limited partnership
agreement and/or any other agreement, certificate, document and/or instrument
associated with the organization and/or governance of the applicable entity or
the conduct of its business.

          "ORIGINAL OWNER" shall mean (a) with respect to Borrower, Holdings and
(b) with respect to Holdings, SCC.

          "OTHER AGREEMENTS" shall mean all agreements, instruments and
documents including, without limitation, guaranties, mortgages, trust deeds,
pledges, powers of attorney, consents, assignments, contracts, notices, security
agreements, leases, financing statements and all other writings heretofore, now
or from time to time hereafter executed by or on behalf of Borrower or any other
Person and delivered to Agent or any Lender or to any parent, affiliate or
subsidiary of Agent or any Lender in connection with the Liabilities or the
transactions contemplated hereby.

          "PARENT" shall mean any Person now or at any time or times hereafter
owning or controlling (alone or with any other Person) at least a majority of
the issued and outstanding stock of Borrower or any Subsidiary.

          "PARTICIPANT" shall mean each Person who shall be granted the right by
any Lender to participate in any of the Loans.

          "PAYMENT INTANGIBLE" shall have the meaning given to the term "payment
intangible" in the UCC and in any event shall include, without limitation, a
General Intangible under which the Account Debtor's principle obligation is a
monetary obligation.

          "PAYMENT OFFICE" shall mean initially 135 South LaSalle Street,
Chicago, Illinois 60603, thereafter, such other office of Agent, if any, which
Agent may designate by notice to Borrower to be the Payment Office.

          "PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor agency.

          "PDL MASSACHUSETTS" shall mean Possible Dreams, Ltd., a Massachusetts
corporation.

          "PDL SUBORDINATED NOTE" shall mean that certain subordinated
promissory note executed by Borrower in favor of the GBNF Trust (as assignee of
PDL Massachusetts) in the aggregate original principal amount of $2,128,000, as
in effect on the Closing Date.

          "PERMITTED LIENS" shall mean (i) statutory liens of landlords,
carriers, warehousemen, processors, mechanics, materialmen or suppliers incurred
in the ordinary course of business and securing amounts not yet due or declared
to be due by the claimant thereunder, (ii) liens or security interests in favor
of Agent, (iii) zoning restrictions and easements, rights of way, licenses,
covenants and other restrictions affecting the use of real property that do not
individually or in the aggregate have a Material Adverse Effect on Borrower's
ability to use such real property for its intended purpose in connection with
Borrower's business, (iv) liens securing the payment of taxes or other
governmental charges not yet delinquent or being contested in good faith and by
appropriate proceedings, (v) liens incurred or deposits made in the ordinary
course of Borrower's business in connection with capitalized leases or purchase
money security interests for purchase of, and applying only to, Equipment
included in the permitted borrowings under paragraph 14(q)(ii) or permitted as
Capital Expenditures under paragraph 15(p)(iv), the documents relating to such
liens to be in form and substance acceptable to Agent, (vi) liens securing
indebtedness

                                      -13-


owing by any Subsidiary to Borrower to the extent such indebtedness
is permitted under paragraph 14(q), or to any other Subsidiary of Borrower,
(vii) deposits to secure performance of bids, trade contracts, leases and
statutory obligations (to the extent not excepted elsewhere herein); (viii)
liens specifically permitted by Agent in writing as set forth on SCHEDULE 1(a)
attached hereto; (ix) any lien arising out of the refinancing, extension,
renewal or refunding of any indebtedness secured by any lien permitted by any of
the foregoing sections (v), (vi) and (viii) PROVIDED THAT (a) such indebtedness
is not secured by any additional assets, and (b) the amount of such indebtedness
is not increased; (x) pledges or deposits in connection with worker's
compensation, unemployment insurance and other social security legislation; (xi)
grants of security and rights of setoff in Deposit Accounts, securities and
other properties held at banks or financial institutions to secure the payment
or reimbursement under overdraft, acceptance and other facilities, and (xii)
rights of setoff, banker's lien and other similar rights arising solely by
operation of law.

          "PERSON" shall mean any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, entity, party or foreign or United States
government (whether federal, state, county, city, municipal or otherwise),
including, without limitation, any instrumentality, division, agency, body or
department thereof.

          "PREFERRED CUSTOMER" shall mean any Account Debtor to which Borrower
has granted extended dating terms acceptable to Agent in its sole discretion and
which Agent has agreed in its sole discretion in writing to treat as a Preferred
Customer hereunder. The Preferred Customers and extended dating terms approved
by Agent are listed on EXHIBIT G attached hereto; PROVIDED, that EXHIBIT G may
be amended by Agent from time to time to reflect new Preferred Customers and the
approved payment terms therefor, the deletion of existing Preferred Customers or
a change in payment terms for an existing Preferred Customer.

          "PRIME RATE" shall mean the publicly announced prime rate of the Bank,
in effect from time to time. The Prime Rate is not intended to be the lowest or
most favorable rate of the Bank in effect at any time.

          "PRIME RATE LOAN" shall mean a Revolving Loan or portion of a Term
Loan that bears interest based on the Prime Rate.

          "PRIME RATE REVOLVING LOAN" shall mean a Revolving Loan that bears
interest based on the Prime Rate.

          "PRIME RATE TERM LOAN" shall mean that portion of a Term Loan that
bears interest based on the Prime Rate.

          "PRO FORMA BALANCE SHEET" shall have the meaning specified paragraph
14(a)(i).

          "PROHIBITED TRANSACTION" shall mean a prohibited transaction described
in Section 406 of ERISA or Section 4975 of the IRC.

          "PURCHASING LENDER" shall have the meaning specified in paragraph
25(b) hereof.

          "QTIP TRUST" shall mean the Leonard I. Miller QTIP Trust A, a trust
organized under the by laws of the Commonwealth of Massachusetts, together with
its successors and assigns.

          "RCRA" shall mean the Resource Conservation and Recovery Act 42 U.S.C.
Sections 6901 ET SEQ., as same may be amended from time to time.

          "REAL PROPERTY" shall mean all of Borrower's right, title and interest
in and to the owned and leased premises identified on SCHEDULE 1(b) hereto.

          "RELEASE" shall have the meaning set forth in paragraph 14(bb) hereof.

                                      -14-


          "REPORTABLE EVENT" shall mean a reportable event described in Section
4043(b) of ERISA or the regulations promulgated thereunder for which the 30-day
notice of such event has not been waived pursuant to such regulations.

          "REQUIRED LENDERS" shall mean Lenders holding at least fifty one
percent (51%) of the Loans, or if no Loans are outstanding, Lenders holding at
least fifty one percent (51%) of the Commitment Percentages.

          "REVOLVING LOANS" shall have the meaning specified in paragraph 2
hereof.

          "REVOLVING LOAN COMMITMENT" shall mean the sum of $12,700,000.

          "REVOLVING NOTE" shall mean the promissory note(s) in the aggregate
original principal amount of the Revolving Loan Commitment, executed by Borrower
to the order of Agent for its benefit and for the benefit of Lenders, or to each
Lender, as applicable, dated as of the Closing Date, together with all
replacements and substitutions thereof.

          "ROYALTY RESERVE" shall mean a reserve against borrowing base
availability in an amount equal to $13,317, which such amount may be adjusted by
Agent in the exercise of its reasonable discretion upon the occurrence of any
one or more of the following events: (a) at any time following the occurrence
and during the continuance of an Event of Default and/or (b) upon the completion
of any Collateral examination performed or caused to be performed by Agent in
accordance with the terms of this Agreement, each such adjustment to be based on
the aggregate amount of contracted and estimated payments required to be then
paid by Borrower under each License Agreement, based on the value of the
Inventory subject to each such License Agreement (calculated on the basis of the
lower of cost or market value on a first in, first out basis).

          "SCC" shall mean Security Capital Corporation, a Delaware corporation.

          "SCC MANAGEMENT FEE" shall have the meaning specified in paragraph
15(j) hereof.

          "SCC PAYMENT CONDITIONS" shall mean (A) no Event of Default has
occurred or would occur as a result of the payment of the then applicable SCC
Management Fee and (B) the applicable SCC Management Fee would be permitted to
be made pursuant to the terms and conditions of the Subordinated Notes and the
Management Subordination Agreement.

          "SELLER SUBORDINATION AGREEMENT" shall mean that certain Seller
Subordination Agreement dated as of the Closing Date among Agent, the GBNF Trust
and QTIP Trust pursuant to which the indebtedness evidenced by the Subordinated
Notes is subordinated to the Liabilities, which agreement shall be substantially
in form and substance attached hereto as EXHIBIT H.

          "SETTLEMENT DATE" shall mean the Closing Date and thereafter every
Wednesday of each Week unless such day is not a Business Day in which case it
shall be the next succeeding Business Day.

          "SOFTECH" shall mean Softech Financial, a division of EAB Leasing
Corp.

          "SPECIFIED EXTENDED TERM ACCOUNTS" shall mean those Eligible Accounts
due from an Extended Term Customer which remain unpaid more than one hundred and
eighty days (180) past the stated invoice date thereof.

          "SUBORDINATED DEBT DOCUMENTS" shall mean the Subordinated Notes, the
Banc of America Warrants and all other documents, agreements and instruments
executed in connection therewith.

          "SUBORDINATED NOTES" shall mean, collectively, the PDL Massachusetts
Note and the CNC Note.

          "SUBSIDIARY" shall mean (i) any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such

                                      -15-


corporation (irrespective of whether at the time stock of any other class of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time, directly or indirectly, owned by
Borrower, (ii) any partnership, limited liability company, entity or joint
venture of which more than fifty percent (50%) of the outstanding equity
interests is at the time, directly or indirectly, owned by Borrower or (iii) any
partnership of which Borrower is general partner.

          "SUPPORTING OBLIGATION" shall have the meaning given to the term
"supporting obligation" in the UCC and in any event shall include, without
limitation, a Letter-of-Credit Right or secondary obligation that supports the
payment or performance of an Account, Chattel Paper, a Document, a General
Intangible, an Instrument or Investment Property.

          "TAX PAYMENT CONDITIONS" shall mean (a) the date of such payment shall
be on or after January 1, 2003, (b) no Event of Default shall have occurred and
be continuing, after giving effect to such tax payment, (c) Agent shall have
received statements of income and statements of cash flow of Borrower and
balance sheets of Borrower (the "Internal Annual Financial Statements") prepared
by Borrower's controller, in each case for the Fiscal Year for which such tax
payment is being made, (d) based on the Internal Annual Financial Statements for
such Fiscal Year, after giving effect to such tax payment, Borrower would be in
compliance with paragraph 15(p)(ii) hereof as of the fiscal quarter ended
December 31 of such Fiscal Year (each such compliance, a "Financial Covenant
Compliance") and (e) Agent shall have received a certificate executed by
Borrower's controller certifying such Financial Covenant Compliance.

          "TERM" shall have the meaning specified in paragraph 13 hereof.

          "TERM LOAN" shall mean, individually and collectively, Term Loan A and
Term Loan B.

          "TERM LOAN A" shall have the meaning specified in paragraph 3(a)
hereof.

          "TERM LOAN B" shall have the meaning specified in paragraph 3(b)
hereof.

          "TERM NOTE A" shall mean the promissory note(s) in the aggregate
original principal amount equal to the Maximum Term Loan A Amount, executed by
Borrower to the order of Agent for its benefit and for the ratable benefit of
Lenders or to each Lender, as applicable, and dated as of the Closing Date,
together with all replacements and substitutions therefor.

          "TERM NOTE B" shall mean the promissory note(s) in the aggregate
original principal amount equal to the Maximum Term Loan B Amount, executed by
Borrower to the order of Agent for its benefit and for the ratable benefit of
Lenders or to each Lender, as applicable, and dated as of the Closing Date,
together with all replacements and substitutions therefor.

          "TERM NOTES" shall mean, collectively, Term Note A and Term Note B.

          "TERMINATION EVENT" shall mean (i) a Reportable Event with respect to
any Benefit Plan or Multiemployer Plan; (ii) the withdrawal of Borrower or any
member of the Controlled Group from a Benefit Plan or Multiemployer Plan during
a plan year in which such entity was a "substantial employer" as defined in
Section 4001(a)(2) of ERISA; (iii) the providing of notice of intent to
terminate a Benefit Plan in a distress termination described in Section 4041(c)
of ERISA; (iv) the institution by the PBGC of proceedings to terminate a Benefit
Plan or Multiemployer Plan; (v) any event or condition (a) which might
reasonably constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Benefit Plan or
Multiemployer Plan, or (b) that may reasonably result in termination of a
Multiemployer Plan pursuant to Section 4041A of ERISA; or (vi) the partial or
complete withdrawal within the meaning of Section 4203 or 4205 of ERISA,
respectively, of Borrower or an ERISA Affiliate from a Multiemployer Plan.

          "TOTAL CREDIT FACILITY" shall mean the sum of $16,000,000.

                                      -16-


          "TOXIC SUBSTANCE" shall mean and include any material present on the
Real Property which has been shown to have significant adverse effect on human
health and which is subject to regulation under the Toxic Substances Control Act
(TSCA), 15 U.S.C. Sections 2601 ET SEQ., applicable state law, or any other
applicable Federal or state laws relating to toxic substances. "Toxic Substance"
includes but is not limited to asbestos, polychlorinated biphenyls (PCBs) and
lead-based paints.

          "TRANSACTIONS" shall mean the transactions contemplated under this
Agreement.

          "TRANSFEREE" shall have the meaning set forth in paragraph 25(a)
hereof.

          "TRIGGER EVENT" shall have the meaning given to such term in the CNC
Subordinated Note.

          "TYPE" shall mean, with respect to (i) any Revolving Loan, whether
such Revolving Loan is a LIBOR Rate Revolving Loan or a Prime Rate Revolving
Loan and (ii) a Term Loan, whether any portion thereof is a LIBOR Rate Term Loan
or a Prime Rate Term Loan.

          "UCC" shall mean the Uniform Commercial Code as in effect on the date
hereof in the State of New York, as amended from time to time, and any successor
statute; provided, that, in the event that, by reason of mandatory provisions of
law, any or all of the attachment, perfection or priority of Agent's security
interest in any Collateral is governed by the Uniform Commercial Code as in
effect in a jurisdiction other that the State of New York, the term "Code" shall
mean the Uniform Commercial Code as in effect in such other jurisdiction for
purposes of the provisions of this Agreement relating to such attachment,
perfection or priority and for purposes of definitions related to such
provisions.

          "UNPAID MANAGEMENT FEE" shall have the meaning specified in paragraph
15(j) hereof.

          "WEEK" shall mean the time period commencing with a Wednesday and
ending on the following Tuesday.

(b)  ACCOUNTING TERMS AND DEFINITIONS. Unless otherwise defined or specified
herein, all accounting terms used in this Agreement shall be construed in
accordance with GAAP, applied on a basis consistent in all material respects
with the financial statements delivered by Borrower to Agent on or before the
Closing Date or as otherwise agreed to by Agent. The definitions of "Current
Assets" and "Current Liabilities" set forth in paragraph 1(a) are solely for use
in the definition of "Net Working Accounts". All other references to the terms
"current assets" or "current liabilities" used in this Agreement shall be
construed in accordance with GAAP, applied on a basis consistent in all material
respects with the financial statements delivered by Borrower to Agent on or
before the Closing Date or as otherwise agreed to by Agent. All accounting
determinations for purposes of determining compliance with the financial
covenants contained in paragraph 15(p) shall be made in accordance with GAAP as
in effect on the Closing Date and applied on a basis consistent in all material
respects with the audited financial statements of Borrower delivered to Agent by
Borrower on or before the Closing Date (provided, however, that such
determinations may be affected by any write downs of goodwill taken in response
to FASB releases existing on the Closing Date or issued at any date thereafter).
The financial statements required to be delivered hereunder from and after the
Closing Date, and all financial records, shall be maintained in accordance with
GAAP. If GAAP shall change from the basis used in preparing the audited
financial statements delivered to Agent by Borrower on or before the Closing
Date, the certificates required to be delivered pursuant to paragraph 12
demonstrating compliance with the covenants contained herein shall include, at
the election of Borrower or upon the request of Agent, calculations setting
forth the adjustments necessary to demonstrate how Borrower is in compliance
with the financial covenants based upon GAAP as in effect on the Closing Date.

     2. REVOLVING LOANS. Subject to the terms and conditions of this Agreement
and the Other Agreements, during the Term, absent the existence of a Default or
Event of Default:

          (a) REVOLVING LOAN COMMITMENT. Each Lender, severally and not jointly,
shall make such revolving loans and advances (the "Revolving Loans") to Borrower
in aggregate amounts outstanding at any time equal to such Lender's Commitment
Percentage as Borrower shall from time to time request, in accordance with the

                                      -17-


terms of paragraph 2(b) hereof. The aggregate unpaid principal amount of all
Revolving Loans outstanding at any one time made to Borrower shall not exceed
the lesser of (A) the Borrowing Base and (B) the Revolving Loan Commitment, in
each case minus the outstanding Letter of Credit Obligations. All Revolving
Loans shall be repaid in full upon the earlier to occur of (i) the end of the
Term and (ii) the acceleration of the Liabilities pursuant to paragraph 18 of
this Agreement. If at any time the outstanding principal balance of the
Revolving Loans made to Borrower exceeds (A) the Borrowing Base or (B) the
Revolving Loan Commitment, in each case minus the outstanding Letter of Credit
Obligations, Borrower shall immediately, and without the necessity of a demand
by Agent, pay to Agent such amount as may be necessary to eliminate such excess,
and Agent shall apply such payment pro rata according to the Commitment
Percentage of each Lender against the outstanding principal balance of the
Revolving Loans. In addition, if at any time the sum of (i) the outstanding
principal balance of the Loans and (ii) the outstanding Letter of Credit
Obligations exceeds the Total Credit Facility, Borrower shall immediately and
without the necessity of a demand by Agent pay to Agent such amount as may be
necessary to eliminate such excess, and Agent shall apply such payment against
the outstanding principal balance of the Loans in such order as Agent shall
determine in its sole discretion. Borrower hereby authorizes Agent to charge any
of Borrower's accounts to make any payments of principal or interest required by
this Agreement. All Revolving Loans shall, in Agent's sole discretion, be
evidenced by one or more Revolving Notes in substantially the form attached
hereto as EXHIBIT 2(a). However, if such Revolving Loans are not so evidenced,
such Revolving Loans may be evidenced solely by entries upon the books and
records maintained by Agent.

          (b) BORROWING LIMITS. Each Lender, severally and not jointly, shall
make Revolving Loans to Borrower up to its Commitment Percentage of the lesser
of clause (A) or (B) below, the amount calculated pursuant to clause (A) below
being the "Borrowing Base":

               A. an amount equal to the sum of (i) eighty-five percent (85%)
          (the "Standard Accounts Advance Rate") multiplied by the face amount
          of Eligible Accounts (other than Specified Extended Term Accounts),
          PLUS (ii) the lesser of (x) $1,250,000 or (y) fifty percent (50%) (the
          "Extended Accounts Advance Rate", and together with the Standard
          Accounts Advance Rate, collectively the "Accounts Advance Rate")
          multiplied by the face amount of Specified Extended Term Accounts,
          PLUS (iii) the lesser of (x) $3,500,000; (y) the Inventory Advance
          Rate multiplied by the value of Eligible Inventory calculated on the
          basis of the lower of cost or market value on a first in, first out
          basis or (z) the sum of (I) sixty percent (60%) of the value
          multiplied by Eligible Inventory calculated on the basis of the lower
          of cost or market value on a first in, first out basis plus (II)
          $250,000 MINUS (iv) the Dilution Reserve MINUS (v) the Royalty Reserve
          MINUS (vi) the Canadian Account Reserve MINUS (vii) such other
          reserves as Agent may establish from time to time in the exercise of
          its commercially reasonable discretion MINUS (viii) the outstanding
          amount of all Letter of Credit Obligations; or

               B. the Revolving Loan Commitment, minus the outstanding amount of
          all Letter of Credit Obligations.

               C. Borrower acknowledges that the Agent's imposition of the
          reserves described in (A) may limit or restrict Loans requested by
          Borrower.

     3. ADDITIONAL LOANS.

               (a) TERM LOAN A. On the Closing Date, each Lender, severally and
not jointly, shall make a term loan ("Term Loan A") to Borrower in an amount
equal to its Commitment Percentage of the Maximum Term Loan A Amount. Principal
payable on account of Term Loan A shall be payable in successive monthly
installments payable, (i) on the first day of each month, the first of which
installments shall be due and payable on the first day of the month immediately
following the 30th day after the Closing Date and (ii) in equal and level
payments of $12,500 each month during the Term, PROVIDED, HOWEVER, that the
entire unpaid principal balance of Term Loan A shall be due and payable in full
upon the expiration of the Term. Notwithstanding anything hereinabove to the
contrary, the entire unpaid principal balance of Term Loan A, and any accrued
and unpaid interest thereon, shall be immediately due and payable upon the
earlier to occur of (i) the last day of the Term and (ii) the acceleration of
the Liabilities pursuant to paragraph 18 of this Agreement. Term Loan A shall be
evidenced by one or more Term Notes in substantially the form attached hereto as
EXHIBIT 3(a).

                                      -18-


               (b) TERM LOAN B. On the Closing Date, each Lender, severally and
not jointly, shall make a term loan ("Term Loan B") to Borrower in an amount
equal to its Commitment Percentage of the Maximum Term Loan B Amount. Principal
payable on account of Term Loan B shall be payable in successive monthly
installments payable, (i) on the first day of each month, the first of which
installments shall be due and payable on the first day of the month immediately
following the 30th day after the Closing Date and (ii) in twenty-four (24) equal
and level payments of $75,000 each month until the principal balance of Term
Loan B is paid in full, PROVIDED, HOWEVER, that the entire unpaid principal
balance of Term Loan B shall be due and payable in full upon the expiration of
the Term. Notwithstanding anything hereinabove to the contrary, the entire
unpaid principal balance of Term Loan B, and any accrued and unpaid interest
thereon, shall be immediately due and payable upon the earlier to occur of (i)
the last day of the Term and (ii) the acceleration of the Liabilities pursuant
to paragraph 18 of this Agreement. Term Loan B shall be evidenced by one or more
Term Notes in substantially the form attached hereto as EXHIBIT 3(a).

     4. LETTER OF CREDIT. (a) Subject to the terms and conditions hereof, Agent
shall (a) from time to time issue or cause the L/C Issuer to issue Letters of
Credit for the account of Borrower; PROVIDED, HOWEVER, that Agent will not be
required to issue or cause to be issued any Letters of Credit to the extent that
the issuance of such Letters of Credit would then cause the sum of (i) the
outstanding Revolving Loans PLUS (ii) the Letter of Credit Obligations (with the
requested Letter of Credit being deemed to be outstanding for purposes of this
calculation) to exceed the lesser of (x) the Revolving Loan Commitment or (y)
the Borrowing Base in effect prior to the issuance of the requested Letter of
Credit. The maximum amount of outstanding Letters of Credit shall not exceed One
Million Five Hundred Thousand Dollars ($1,500,000) in the aggregate at any time.
Each disbursement or payment by the L/C Issuer or Agent related to Letters of
Credit shall be deemed to be a Revolving Loan and shall bear interest as a Prime
Rate Revolving Loan. Letters of Credit that have not been drawn upon shall not
bear interest.

               (b) Borrower may from time to time upon notice not later than
12:00 Noon, Chicago time, at least three (3) Business Days in advance, request
Agent to assist Borrower in establishing or opening a Letter of Credit by
delivering to Agent at the Payment Office, the L/C Issuer's standard form of
letter of credit application (the "Letter of Credit Application") completed to
the satisfaction of the L/C Issuer; and, such other certificates, documents and
other papers and information as Agent may reasonably request.

               (c) Each Letter of Credit shall, among other things, (i) provide
for the payment of sight drafts when presented for honor thereunder in
accordance with the terms thereof and when accompanied by the documents
described therein and (ii) have an expiry date not later than twelve (12) months
after such Letter of Credit's date of issuance and in no event later than the
last day of the Term. Each Letter of Credit Application and each Letter of
Credit shall be subject to (x) the Uniform Customs and Practice for Documentary
Credits (1993 Revision), International Chamber of Commerce Publication No. 500,
and any amendments or revision thereof in connection with any documentary letter
of Credit and (y) ISP 98 in connection with any standby Letter of Credit, or
with respect to any Letter of Credit Application or Letter of Credit, any other
rules, regulations and customs prevailing at the place where any such Letter of
Credit Application is made or where any such Letter of Credit is available or
the drafts are drawn or negotiated and, to the extent not inconsistent
therewith, the laws of the State of New York.

               (d) In connection with the issuance of any Letter of Credit,
Borrower shall indemnify, save and hold Agent, each Lender and each L/C Issuer
harmless from any loss, cost, expense or liability, including, without
limitation, payments made by Agent, any Lender or any L/C Issuer, and expenses
and reasonable attorneys' fees incurred by Agent, any Lender or any L/C Issuer
arising out of, or in connection with, any Letter of Credit to be issued for the
account of Borrower. Borrower shall be bound by the L/C Issuer's regulations and
good faith interpretations of any Letter of Credit issued or created for
Borrower's account, although this interpretation may be different from
Borrower's own; and, neither Agent nor any Lender, any L/C Issuer, nor any of
its correspondents shall be liable for any error, negligence, or mistakes,
whether of omission or commission, in following Borrower's instructions or those
contained in any Letter of Credit or of any modifications, amendments or
supplements thereto or in issuing or paying any Letter of Credit, except for
Agent's or any Lender's or such correspondents' gross (not mere) negligence or
willful misconduct.

               (e) Borrower shall authorize and direct the L/C Issuer to name
Borrower as the "Account Party" therein and to deliver to Agent all instruments,
documents, and other writings and property received by the L/C Issuer pursuant
to the Letter of Credit and to accept and rely upon Agent's instructions and
agreements with respect to all matters arising in connection with the Letter of
Credit and the application therefor.

                                      -19-


               (f) In connection with all Letters of Credit issued or caused to
be issued by Agent under this Agreement, Borrower hereby appoints Agent, or its
designee, as its attorney, with full power and authority, exercisable after the
occurrence and continuance of an Event of Default (i) to sign and/or endorse
Borrower's name upon any warehouse or other receipts, letter of credit
applications and acceptances; (ii) to sign Borrower's name on bills of lading;
(iii) to clear Inventory through the United States of America Customs Department
("Customs") in the name of Borrower or Agent or Agent's designee, and to sign
and deliver to Customs officials powers of attorney in the name of Borrower for
such purpose; (iv) to complete in the name of Agent, or Agent's designee, any
order, sale or transaction, obtain the necessary documents in connection
therewith, and collect the proceeds thereof; (v) to clear and resolve any
questions of non-compliance of documents; (vi) to give any instructions as to
acceptance or rejection of any documents or goods; (vii) to execute any and all
applications for steamship or airways guarantees, indemnities or delivery
orders; (viii) to grant any extensions of the maturity of, time of payment for,
or time of presentation of, any drafts, acceptances, or documents; and (ix) to
agree to any amendments, renewals, extensions, modifications, changes or
cancellation of any of the terms or conditions of any of the applications,
Letters of Credit, drafts or acceptances; all in Agent's sole name, and the L/C
Issuer shall be entitled to comply with and honor any and all such documents or
instruments executed by or received solely from Agent; all without notice to or
consent from Borrower. Neither Agent nor its attorneys will be liable for any
acts or omissions nor for any error of judgment or mistakes of fact or law,
except for Agent's or its attorney's gross (not mere) negligence or willful
misconduct. This power, being coupled with an interest, is irrevocable as long
as any Letters of Credit remain outstanding.

               (g) Neither Agent nor any Lender shall be responsible for: the
existence, character, quality, quantity, condition, packing, value or delivery
of the goods purporting to be represented by any documents; any differences or
variation in the character, quality, quantity, condition, packing, value or
delivery of the goods from that expressed in the documents; the validity,
sufficiency or genuineness of any documents or of any endorsements thereon, even
if such documents should in fact prove to be in any or all respects invalid,
insufficient, fraudulent, or forged; the time, place, manner or order in which
shipment is made; partial or incomplete shipment, or failure or omission to ship
any or all of the goods referred to in the Letters of Credit or documents; any
deviation from instructions, delay, default, or fraud by the shipper and/or any
one else in connection with the Collateral or the shipping thereof; or any
breach of contract between the shipper or vendors and Borrower.

               (h) Any necessary import, export or other licenses or
certificates for the import or handling of the Collateral will have been
promptly procured; all foreign and domestic governmental laws and regulations in
regard to the shipment and importation of the Collateral or the financing
thereof will have been promptly and fully complied with; any certificates in
that regard that Agent may at any time request will be promptly furnished. In
this connection, Borrower warrants and represents that all shipments made under
any such Letters of Credit are in accordance with the governmental laws and
regulations of the countries in which the shipments originate and terminate, and
are not prohibited by any such law and regulations. Borrower assumes all risk,
liability and responsibility for, and agrees to pay and discharge all present
and future local, state, federal or foreign taxes, duties, or levies. Any
embargo, restriction, laws, customs or regulations of any country, state, city
or other political subdivision where the Collateral is or may be located or
wherein payments are to be made or wherein drafts may be drawn, negotiated,
accepted, or paid shall be solely at Borrower's risk, liability and
responsibility.

               (i) Each Lender shall to the extent of the percentage amount
equal to the product of such Lender's Commitment Percentage times the aggregate
amount of all disbursements made with respect to the Letters of Credit be deemed
to have irrevocably purchased an undivided participation in each Revolving Loan
made as a consequence of such disbursement. In the event that at the time a
disbursement is made the unpaid balance of Revolving Loans exceeds or would
exceed, with the making of such disbursement, the lesser of the Revolving Loan
Commitment or the Borrowing Base, and such disbursement is not reimbursed by
Borrower within two (2) Business Days, Agent shall promptly notify each Lender
and upon Agent's demand each Lender shall pay to Agent such Lender's
proportionate share of such unreimbursed disbursement together with such
Lender's proportionate share of Agent's unreimbursed costs and expenses relating
to such unreimbursed disbursement. Upon receipt by Agent of a repayment from
Borrower of any amount disbursed by Agent for which Agent had already been
reimbursed by the Lenders, Agent shall deliver to each of the Lenders that
Lender's pro rata share of such repayment. Each Lender's participation
commitment shall continue until the last to occur of any of the following
events: (A) Agent ceases to be obligated to issue or cause the issuance of
Letters of Credit hereunder; (B) no Letter of Credit issued hereunder

                                      -20-


remains outstanding and uncancelled or (C) all Persons (other than Borrower)
have been fully reimbursed for all payments made under or relating to Letters of
Credit.

          (j)  The obligations of a Lender to make payments to the Agent for the
account of the Agent or the L/C Issuer with respect to a Letter of Credit shall
be irrevocable, without any qualification or exception whatsoever and shall be
made in accordance with the terms and conditions of this Agreement under all
circumstances, including, without limitation, any of the following
circumstances:

               (i)   any lack of validity or enforceability of this Agreement or
any of the Other Agreements;

               (ii)  the existence of any claim, setoff, defense or other right
which Borrower may have at any time against a beneficiary named in such Letter
of Credit or any transferee of such Letter of Credit (or any Person for which
any such transferee may be acting), the Agent, L/C Issuer, any Lender, or any
other person, whether in connection with this Agreement, such Letter of Credit,
the transactions contemplated herein or any related transactions (including any
underlying transactions between Borrower or any other party and the beneficiary
named in such Letter of Credit);

               (iii) any draft, certificate or any other document presented
under such Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or inaccurate
in any respect;

               (iv)  the surrender or impairment of any security for the
performance or observance of any of the terms of this Agreement or any of the
Other Agreements;

               (v)   any failure by the Agent to provide any notices required
pursuant to this Agreement relating to such Letter of Credit;

               (vi)  any payment by the L/C Issuer under any of the Letters of
Credit against presentation of a draft or certificate which does not comply with
the terms of such Letter of Credit (if, in the good faith opinion of the L/C
Issuer, such prepayment is deemed to be appropriate); or

               (vii) the occurrence of any Default or Event of Default,

PROVIDED, HOWEVER, that after paying in full its reimbursement obligation
hereunder, nothing herein shall adversely affect the right of Borrower or any
Lender, as the case may be, to commence any proceeding against such L/C Issuer
for any wrongful disbursement made by such L/C Issuer under a Letter of Credit
as a result of acts or omissions constituting gross (not mere) negligence or
willful misconduct on the part of such L/C issuer.

     5.   MANDATORY PREPAYMENTS.

          (a)  SALE, DAMAGE, DESTRUCTION, ETC. If Borrower sells any Equipment,
or if Borrower sells any Real Property subject to a Mortgage, or if any of the
Collateral is damaged, destroyed or taken by condemnation, Borrower shall pay to
Agent for its benefit and for the ratable benefit of Lenders, unless otherwise
specifically provided herein or otherwise agreed to by Agent, as and when
received by Borrower and as a mandatory prepayment of the Loans, to be applied
first against the last maturing installments of principal of Term Loan B in the
inverse order thereof, second against the last maturing installments of
principal of Term Loan A in the inverse order thereof and then to the Revolving
Loans, subject to Borrower's ability to reborrow Revolving Loans in accordance
with the terms hereof (or, at Agent's option, such of the other Liabilities of
Borrower as Agent may elect), a sum equal to the proceeds received by Borrower
from (i) such sale or (ii) such damage, destruction or condemnation, PROVIDED,
HOWEVER, that without Agent's consent, unless and until an Event of Default has
occurred and is continuing:

               (i)   obsolete or worn out Equipment may be sold or otherwise
               disposed of by Borrower and the proceeds thereof may be retained
               by Borrower, so long as the fair

                                      -21-


               market value of any such Equipment sold or otherwise disposed of
               in any single transaction is less than $100,000, and the fair
               market value, in the aggregate, of all such Equipment sold or
               otherwise disposed of by Borrower during any twelve-month period
               is less than $250,000; and

               (ii)  proceeds of Collateral arising from the damage, destruction
               or condemnation thereof may be retained by Borrower and used by
               Borrower to repair, restore or replace such Collateral, as the
               case may be, so long as the fair market value of any such
               Collateral damaged, destroyed or condemned in any single incident
               is less than $100,000 and the fair market value, in the
               aggregate, of all such Collateral owned by Borrower and damaged,
               destroyed or condemned during any twelve-month period is less
               than $250,000.

          (b)  EXCESS CASH FLOW RECAPTURE. (i) Borrower shall, each Fiscal Year,
pay to Agent for its benefit and for the ratable benefit of Lenders a prepayment
of the outstanding amount of the Loans in an amount equal to twenty-five percent
(25%) of Excess Cash Flow for the immediately preceding Fiscal Year commencing
with the Fiscal Year ending December 31, 2002 payable upon delivery of the
annual financial statements to Agent referred to in and required by paragraph
12(d) for the applicable Fiscal Year but in no event later than ninety (90) days
after the end of such Fiscal Year. Such payments shall be applied first against
the last maturing installments of principal of Term Loan B in the inverse order
thereof until Term Loan B is paid in full, second against the last maturing
installments of principal of Term Loan A in the inverse order thereof until Term
Loan A is paid in full and then to the Revolving Loans, subject to Borrower's
ability to reborrow Revolving Loans in accordance with the terms hereof. In the
event that the annual financial statements referred to and required by paragraph
12(d) are not timely delivered, then a calculation based upon estimated amounts
shall be made by Agent upon which calculation Borrower shall make the prepayment
required by this paragraph 5(b), subject to adjustment, as applicable, when the
annual financial statements are delivered to Agent as required hereby. The
calculation made by Agent shall not be deemed a waiver of any rights Agent or
any Lender may have as a result of the failure of Borrower to deliver such
financial statements.

               (ii)  After the annual computation of Excess Cash Flow for the
               immediately preceding Fiscal Year and payments to Agent in
               accordance with clause (i) above, Borrower may (subject to the
               last sentence of this clause (ii)) distribute in any Fiscal Year
               up to fifty (50%) percent of Excess Cash Flow for the immediately
               preceding Fiscal Year in such manner and to such Persons as
               Borrower may reasonably determine, including, without limitation,
               notwithstanding any restriction set forth in paragraph 15(j)
               hereof, payments to be made by Borrower pursuant to the
               Consolidated Income Tax Sharing Agreement, the Management
               Agreement, the Subordinated Debt Documents (other than the Banc
               of America Warrants), other shareholder distributions or any
               other distribution; PROVIDED, HOWEVER, that no such payment or
               distribution shall be (x) permitted after the occurrence and
               continuance of an Event of Default hereunder or if after giving
               effect to the payment of any such distribution an Event of
               Default would occur hereunder and (y) used to make a payment or
               distribution with respect to the Banc of America Warrants.
               Borrower shall retain during each Fiscal Year as working capital
               an amount equal to or greater than twenty-five (25%) percent of
               Excess Cash Flow for the immediately preceding Fiscal Year.

          (c)  LIFE INSURANCE PROCEEDS. If Agent or Borrower receives any
proceeds of life insurance on the life of Dawn McCormack, as and when received
by Agent or Borrower, as applicable, Agent shall apply such proceeds as a
mandatory prepayment of the Loans, to be applied first against the last maturing
installments of principal of Term Loan B until Term Loan B is paid in full,
second to the last maturing installments of principal of Term Loan A until Term
Loan A is paid in full and then to the outstanding Revolving Loans as a
permanent reduction in the Revolving Loan Commitment.

     6.   INTEREST, FEES AND CHARGES.

          (a)  RATES OF INTEREST. Interest accrued on the Loans shall be due on
the earliest of (i) in the case of a LIBOR Rate Loan, the first day of each
month (for the immediately preceding month), computed through the last calendar
day of the preceding month and at the end of the Interest Period applicable
thereto and in the case of a Prime Rate Loan, the first day of each month (for
the immediately preceding month), computed through the last calendar day of the
preceding month, (ii) the occurrence of an Event of Default in consequence of
which Agent
                                      -22-


elects to accelerate the maturity and payment of the Liabilities, or (iii)
termination of this Agreement pursuant to paragraph 13 hereof. Interest shall
accrue on (1) the principal amount of the Revolving Loans made to Borrower
outstanding at the end of each day at (A) with respect to Prime Rate Revolving
Loans, a fluctuating rate per annum equal to the Applicable Margin above the
Prime Rate or (B) with respect to LIBOR Rate Revolving Loans, a fixed rate per
annum equal to the Applicable Margin above the LIBOR Rate, (2) the unpaid
principal balance of Term Loan A at (A) with respect to Prime Rate Term Loans, a
fluctuating rate per annum equal to the Applicable Margin above the Prime Rate
or (B) with respect to LIBOR Rate Term Loans, a fixed rate per annum equal to
the Applicable Margin above the LIBOR Rate and (3) the unpaid principal amount
of Term Loan B made to Borrower outstanding at the end of each day at (A) with
respect to Prime Rate Term Loans, a fixed rate per annum equal to the Applicable
Margin above the Prime Rate or (B) with respect to LIBOR Rate Term Loans, a
fixed rate per annum equal to the Applicable Margin above the LIBOR Rate. The
rate of interest payable on Prime Rate Loans shall increase or decrease by an
amount equal to any increase or decrease in the Prime Rate, effective as of the
opening of business on the day that any such change in the Prime Rate occurs.
Upon and after the occurrence of an Event of Default, and during the
continuation thereof, the principal amount of all Loans shall bear interest on
demand at a rate per annum equal to the rate of interest then in effect under
this paragraph 6(a) plus two percent (2%).

          (b)  COMPUTATION OF INTEREST AND FEES. Interest and collection charges
hereunder shall be calculated daily and shall be computed on the actual number
of days elapsed over a year consisting of three hundred and sixty (360) days.
For the purpose of computing interest hereunder, all items of payment received
by Agent shall be deemed applied by Agent on account of the Liabilities (subject
to final payment of such items) on the second Business Day after receipt by
Agent of good funds in Agent's account located in Chicago, Illinois.

          (c)  MAXIMUM INTEREST. It is the intent of the parties that the rate
of interest and the other charges to Borrower under this Agreement shall be
lawful; therefore, if for any reason the interest or other charges payable under
this Agreement are found by a court of competent jurisdiction, in a final
determination, to exceed the limit which Agent may lawfully charge Borrower,
then the obligation to pay interest and other charges shall automatically be
reduced to such limit and, if any amount in excess of such limit shall have been
paid, then such amount shall be refunded to Borrower.

          (d)  LETTER OF CREDIT FEES. Borrower shall remit to Agent for its own
account a letter of credit fee equal to two and one-half percent (2.50%) per
annum (the "Letter of Credit Fee") on the aggregate undrawn face amount of all
outstanding Letters of Credit issued for the account of Borrower, which fee
shall be payable monthly in arrears on each day that interest is payable
hereunder. Borrower shall also pay on demand the normal and customary
administrative charges for issuance, amendment, negotiation, renewal or
extension of any Letter of Credit imposed by the L/C Issuer. Upon the occurrence
and during the continuance of an Event of Default, all Letter of Credit Fees
shall be payable on demand at a rate equal to the Letter of Credit Fees under
this paragraph 6(d) then in effect plus two percent (2%) on the aggregate
undrawn face amount thereof.

          (e)  CLOSING FEE. Borrower shall pay to Agent for its own account a
closing fee of eighty thousand dollars($80,000), which fee shall be deemed fully
earned, non refundable and due on the Closing Date.

          (f)  UNUSED LINE FEE. Borrower shall pay to Agent for the ratable
benefit of Lenders at the end of each month, in arrears, and on the last day of
the Term an Unused Line Fee equal to one-half of one percent (0.5%) per annum on
the daily average amount by which the Revolving Loan Commitment exceeds the sum
of (i) the outstanding principal balance of the Revolving Loans, and (ii) the
outstanding Letter of Credit Obligations. The Unused Line Fee shall accrue from
the Closing Date until the last day of the Term.

          (g)  COLLATERAL MANAGEMENT FEE. Borrower shall pay to Agent for its
own account an annual collateral management fee (the "Annual Collateral
Management Fee") of $15,000 per annum, which fee shall be deemed earned in full
on the Closing Date and on each anniversary thereafter and shall not be subject
to rebate or proration for any reason. Each Annual Collateral Management Fee
shall be paid and due on the earlier of (i) in equal quarterly installments of
$3,750 each, on the Closing Date (and each anniversary thereafter) and each
January 1, April 1 and July 1 during the Term, (ii) in full upon the occurrence
of an Event of Default in consequence of which Agent elects to accelerate the
maturity and payment of the Liabilities, or (iii) in full upon the termination
of this Agreement pursuant to paragraph 13 hereof.

                                      -23-


          (h)  EXAMINATION AND APPRAISAL FEES. In addition to the costs and
expenses described in paragraph 6(g) hereof, Borrower shall pay to Agent for its
own account an examination fee of $750 per Person per day charged by Agent for
each examination performed by or at Agent's direction of Borrower's books and
records and Collateral and such other matters as Agent shall deem appropriate in
its commercially reasonable judgment together with each such Person's out of
pocket expenses incurred in connection with each such examination, each such fee
and out of pocket expenses to be paid upon the completion of each such
examination.

          (i)  CAPITAL ADEQUACY CHARGE. If Agent or any Lender shall have
determined that the adoption of any law, rule or regulation regarding capital
adequacy, or any change therein or in the interpretation or application thereof,
or compliance by Agent or any Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any central bank
or governmental authority enacted after the Closing Date, does or shall have the
effect of reducing the rate of return on Agent's or any Lender's capital as a
consequence of its obligations hereunder to a level below that which Agent could
have achieved but for such adoption, change or compliance (taking into
consideration Agent's or such Lender's policies with respect to capital
adequacy) by a material amount, then from time to time, after submission by
Agent to Borrower of a written demand therefor ("Capital Adequacy Demand")
together with the certificate described below, Borrower shall pay to Agent or
such Lender such additional amount or amounts ("Capital Adequacy Charge") as
will compensate Agent or such Lender for such reduction, such Capital Adequacy
Demand to be made with reasonable promptness following such determination. A
certificate of Agent claiming entitlement to payment as set forth above shall be
conclusive in the absence of manifest error. Such certificate shall set forth
the nature of the occurrence giving rise to such reduction, the amount of the
Capital Adequacy Charge to be paid to Agent or such Lender, and the method by
which such amount was determined. In determining such amount, Agent or such
Lender may use any reasonable averaging and attribution method, applied on a
non-discriminatory basis.

     7.   LOAN ADMINISTRATION.

          (a)  LOAN REQUESTS. A request for a Revolving Loan shall be made or
shall be deemed to be made, each in the following manner: (i) Borrower shall
give Agent same day notice, no later than 10:30 A.M. (Chicago time) of such day,
of its intention to borrow, a Prime Rate Revolving Loan, and at least three (3)
Business Days prior notice of its intention to borrow a LIBOR Rate Revolving
Loan, in which notice Borrower shall specify the amount of the proposed
borrowing and the proposed borrowing date, PROVIDED, however, that no such
request may be made at a time when there exists a Default or an Event of
Default; and (ii) the coming due of any amount required to be paid under this
Agreement or any Note, whether on account of interest or for any other
Liability, shall be deemed irrevocably to be a request for a Prime Rate
Revolving Loan on the due date thereof in the amount required to pay such
interest or other Liability. As an accommodation to Borrower, Agent may permit
telephone requests for Revolving Loans and electronic transmittal of
instructions, authorizations, agreements or reports to Agent by Borrower. Unless
Borrower specifically directs Agent in writing not to accept or act upon
telephonic or electronic communications from Borrower, neither Agent nor any
Lender shall have any liability to Borrower for any loss or damage suffered by
Borrower as a result of Agent's honoring of any requests, execution of any
instructions, authorizations or agreements or reliance on any reports
communicated to it telephonically or electronically and purporting to have been
sent to Agent by Borrower and Agent shall have no duty to verify the origin of
any such communication or the authority of the Person sending it. Each notice of
borrowing shall be irrevocable by and binding on Borrower, and if such notice
requests the borrowing of a LIBOR Rate Revolving Loan, such notice shall state
the Interest Period with respect thereto. Borrower, at its option, may choose
Prime Rate Revolving Loans or LIBOR Rate Revolving Loans, provided that any
LIBOR Rate Revolving Loan shall be in a minimum amount of $1,000,000 or an
integral multiple of $100,000 in excess thereof, and provided further that the
right of Borrower to choose any LIBOR Rate Loan is subject to the provisions of
paragraph 7(c) hereof.

          (b)  DISBURSEMENT. Borrower hereby irrevocably authorizes Agent to
disburse the proceeds of each Revolving Loan requested by Borrower, or deemed to
be requested by Borrower, as follows: (i) the proceeds of each Revolving Loan
requested under paragraph 7(a)(i) shall be disbursed by Agent in lawful money of
the United States of America in immediately available funds, in the case of the
initial borrowing, in accordance with the terms of the written disbursement
letter from Borrower, and in the case of each subsequent borrowing, by wire
transfer to such bank account as may be agreed upon by Borrower and Agent from
time to time, or elsewhere if pursuant to a written direction from Borrower; and
(ii) the proceeds of each Revolving Loan requested under paragraph 7(a)(ii)
shall be disbursed by Agent by way of direct payment of the relevant interest or
other Liability. Each borrowing of

                                      -24-


Revolving Loans shall be advanced according to the Commitment Percentages of the
Lenders. The Term Loan shall be advanced according to the Commitment Percentages
of the Lenders.

     (c)  NOTICE OF CONTINUATION AND NOTICE OF CONVERSION.

          (i)  Subject to the provisions of clause (iii) hereof, Borrower may
     elect to maintain any borrowing by it consisting of the same Kind of LIBOR
     Rate Loans, or any portion thereof, as a LIBOR Rate Loan by selecting a new
     Interest Period for such borrowing, which new Interest Period shall
     commence on the last day of the then existing Interest Period. Each
     selection of a new Interest Period (a "Continuation") shall be made on
     three (3) Business Days prior notice, given by Borrower to Agent not later
     than 9:30 A.M. (Chicago time) on the third Business Day preceding the date
     of any proposed Continuation. If Borrower elects to maintain more than one
     borrowing consisting of LIBOR Rate Loans of the same Kind by combining such
     borrowings into one borrowing and selecting a new Interest Period pursuant
     to this clause, each of the borrowings so combined shall consist of Loans
     of the same Kind having Interest Periods ending on the same date. If
     Borrower shall fail to select a new Interest Period for any borrowing by it
     consisting of LIBOR Rate Loans of the same Kind in accordance with this
     clause, such LIBOR Rate Loans will automatically convert into Prime Rate
     Loans.

          (ii) Subject to the provisions of clause (iii) hereof, Borrower may on
     three (3) Business Days prior notice given to Agent convert the entire
     amount of or a portion of all Loans of the same Kind and Type into Loans of
     the same Kind and another Type (a "Conversion"); PROVIDED that no Default
     or Event of Default shall have occurred and be continuing, and PROVIDED
     FURTHER that any Conversion of any LIBOR Rate Loans into Prime Rate Loans
     may only be made on the last day of the Interest Period for such LIBOR Rate
     Loans, and upon Conversion of any Prime Rate Loans into LIBOR Rate Loans,
     Borrower shall pay accrued interest to the date of Conversion on the
     principal amount converted on the first day of the following month. Each
     such notice shall be given not later than 9:30 A.M. (Chicago time) on the
     third Business Day preceding the date of any proposed Conversion. Each
     Conversion shall be in an aggregate amount of not less than $1,000,000 or
     an integral multiple of $100,000 in excess thereof. Borrower may elect to
     convert the entire amount of or a portion of all Loans made to Borrower of
     the same Kind and Type comprising more than one borrowing into Loans of the
     same Kind and another Type by combining such borrowings into one borrowing
     consisting of Loans of the same Kind and another Type; PROVIDED, HOWEVER,
     that if the borrowings so combined consist of LIBOR Rate Loans, such LIBOR
     Rate Loans shall have Interest Periods ending on the same date.

          (iii) Notwithstanding anything contained in clauses (i) and (ii) above
     to the contrary:

               A.    if Agent is unable to determine the LIBOR Rate for LIBOR
          Rate Loans comprising any requested borrowing, Continuation or
          Conversion, the right of Borrower to select or maintain LIBOR Rate
          Loans for such borrowing or any subsequent borrowing shall be
          suspended until Agent shall notify Borrower that the circumstances
          causing such suspension no longer exist, and each Loan comprising such
          borrowing shall be automatically converted into a Prime Rate Loan;

               B.    if at any time Agent shall notify Borrower that the LIBOR
          Rate for Loans comprising such borrowing by Borrower will not
          adequately reflect the cost to Agent of making such Loans, the right
          of Borrower to select, maintain, continue or convert to LIBOR Rate
          Loans for such borrowing shall be suspended until Agent shall notify
          Borrower that the circumstances causing such suspension no longer
          exist, and each Loan comprising such borrowing shall be automatically
          converted into a Prime Rate Loan;

               C.    there shall not be outstanding at any one time more than an
          aggregate of four (4) LIBOR Rate Loans;

                                      -25-


               D.    any LIBOR Rate Loan shall be in a minimum amount of
          $1,000,000 or an integral multiple of $100,000 in excess thereof; and

               E.    interest shall be calculated and paid by Borrower on the
          full amount of each LIBOR Rate Loan borrowed by Borrower at the
          commencement of the applicable Interest Period, regardless of any
          reductions in the principal amount of such LIBOR Rate Loan which occur
          during such Interest Period, and Borrower shall not be credited for
          any part of such interest until such interest is actually paid by
          Borrower. To the extent the aggregate repayments of principal on
          Revolving Loans received by Agent during the pendency of an Interest
          Period applicable to a then outstanding LIBOR Rate Revolving Loan
          exceed the aggregate unpaid principal amount of all Prime Rate
          Revolving Loans outstanding during such Interest Period, Agent shall,
          to the extent of such excess, credit to a special suspense account the
          amount of such repayments received during such Interest Period, and at
          the expiration of such Interest Period, Agent shall apply all such
          amounts credited to such account against the unpaid principal balance
          of the LIBOR Rate Revolving Loans then outstanding. Borrower shall not
          earn interest on any credit balance which may be deemed to exist in
          favor of Borrower by virtue of this clause (E).

               F.    there shall not be outstanding at any time LIBOR Rate Loans
          with an outstanding principal amount exceeding eighty percent (80%) of
          the outstanding principal amount of all Loans.

          (iv) Each notice of Continuation or Conversion shall be irrevocable
     and binding on Borrower. In the case of (w) any borrowing of a Loan,
     Continuation, or Conversion that the related notice of borrowing, notice of
     Continuation or notice of Conversion specifies is to be comprised of LIBOR
     Rate Loans, or (x) any payment of principal of, or Conversion or
     Continuation of, any LIBOR Rate Loan made other than on the last day of the
     Interest Period for such Loan as a result of a payment, prepayment,
     Conversion or Continuation of such Loan or acceleration of the maturity of
     any of the Liabilities pursuant to paragraph 18 hereof, or for any other
     reason, then in any such case, upon Agent's demand, Borrower shall pay to
     Lenders and indemnify Lenders from and against the following (collectively
     "Breakage Costs"): (y) any loss, cost or expense incurred by Lenders as a
     result of any failure to fulfill, on or before the date for such borrowing,
     Continuation or Conversion, the applicable conditions set forth in
     paragraph 16(b) hereof, and (z) any additional losses, costs or expenses
     which Agent or any Lender may reasonably incur as a result of such payment,
     including, without limitation in each such case, any loss (excluding loss
     of anticipated profits), cost or expense incurred by reason of the
     liquidation or redeployment of deposits or other funds acquired by Agent or
     any Lender to fund the Loan to be made as part of such borrowing,
     Continuation or Conversion.

     (d)  Each payment (including each prepayment) by Borrower on account of the
principal of and interest on the Revolving Note or any Term Note shall be
applied to the Revolving Loans and Term Loans or, as applicable, pro rata
according to the Commitment Percentages of the Lenders. Except as expressly
provided herein, all payments (including prepayments) to be made by Borrower on
account of principal, interest and fees shall be made without set-off or
counterclaim and shall be made to Agent on behalf of the Lenders to the Payment
Office, in each case on or prior to 1:00 P.M. (Chicago time), in Dollars and in
immediately available funds. Notwithstanding anything to the contrary contained
herein, each payment (including each prepayment) by Borrower on account of the
principal of the Revolving Note shall be applied to the Revolving Loans in the
inverse order of the date on which such Revolving Loans were advanced.

     (e)  (i)  Notwithstanding anything to the contrary contained in Sections
(b), (c) and (d) hereof, commencing with the first Business Day following the
Closing Date, each borrowing of Revolving Loans shall be advanced by Agent and
each payment by Borrower on account of Revolving Loans shall be applied first to
those Revolving Loans made by Agent. On or before 1:00 P.M. (Chicago time) on
each Settlement Date commencing with the first Settlement Date following the
Closing Date, Agent and Lenders shall make certain payments as follows: (I) if
the aggregate amount of new Revolving Loans made by Agent during the preceding
Week exceeds the aggregate amount of repayments applied to outstanding Revolving
Loans during such preceding Week, then each Lender shall provide Agent with
funds in an amount equal to its Commitment Percentage of the

                                      -26-


difference between (w) such Revolving Loans and (x) such repayments and (II) if
the aggregate amount of repayments applied to outstanding Revolving Loans during
such Week exceeds the aggregate amount of new Revolving Loans made during such
Week, then Agent shall provide each Lender with its Commitment Percentage of the
difference between (y) such repayments and (z) such Revolving Loans.

               (ii)  Each Lender shall be entitled to earn interest at the
interest rate provided in paragraph 6(a) on outstanding Loans which it has
funded.

               (iii) Promptly following each Settlement Date, Agent shall submit
to each Lender a certificate with respect to payments received and Loans made
during the Week immediately preceding such Settlement Date. Such certificate of
Agent shall be conclusive in the absence of manifest error.

          (f)  If any Lender or Participant (a "benefited Lender") shall at any
time receive any payment of all or part of its Loans, or interest thereon, or
receive any Collateral in respect thereof (whether voluntarily or involuntarily
or by set-off) in a greater proportion than any such payment to and Collateral
received by any other Lender, if any, in respect of such other Lender's Loans,
or interest thereon, and such greater proportionate payment or receipt of
Collateral is not expressly permitted hereunder, such benefited Lender shall
purchase for cash from the other Lenders such portion of each such other
Lender's Loans, or shall provide such other Lender with the benefits of any such
Collateral, or the proceeds thereof, as shall be necessary to cause such
benefited Lender to share the excess payment or benefits of such Collateral or
proceeds ratably with each of the Lenders; PROVIDED, HOWEVER, that if all or any
portion of such excess payment or benefits is thereafter recovered from such
benefited Lender, such purchase shall be rescinded, and the purchase price and
benefits returned, to the extent of such recovery, but without interest. Each
Lender so purchasing a portion of another Lender's Loans may exercise all rights
of payment (including, without limitation, rights of set-off) with respect to
such portion as fully as if such Lender were the direct holder of such portion.

          (g)  Unless Agent shall have been notified by telephone, confirmed in
writing, by any Lender that such Lender will not make the amount which would
constitute its Commitment Percentage of the Loans available to Agent, Agent may
(but shall not be obligated to) assume that such Lender shall make such amount
available to Agent and, in reliance upon such assumption, make available to
Borrower a corresponding amount. Agent will promptly notify Borrower of its
receipt of any such notice from a Lender. If such amount is made available to
Agent on a date after a Settlement Date, such Lender shall pay to Agent on
demand an amount equal to the product of (i) the daily average federal funds
rate (computed on the basis of a year of 360 days) during such period as quoted
by Agent, times (ii) such amount, times (iii) the number of days from and
including such Settlement Date to the date on which such amount becomes
immediately available to Agent. A certificate of Agent submitted to any Lender
with respect to any amounts owing under this paragraph 7(g) shall be conclusive,
in the absence of manifest error. If such amount is not in fact made available
to Agent by such Lender within three (3) Business Days after such Settlement
Date, Agent shall be entitled to recover such an amount, with interest thereon
at the rate per annum then applicable to Revolving Loans hereunder, on demand
from Borrower; PROVIDED, HOWEVER, that Agent's right to such recovery shall not
prejudice or otherwise adversely affect Borrower's rights (if any) against such
Lender.

          (h)  Notwithstanding anything to the contrary contained herein, in the
event any Lender (x) has refused (which refusal constitutes a breach by such
Lender of its obligations under this Agreement) to make available its Commitment
Percentage of any Loan or (y) notifies either Agent or Borrower that it does not
intend to make available its Commitment Percentage of any Loan (if the actual
refusal would constitute a breach by such Lender of its obligations under this
Agreement) (each, a "Lender Default"), all rights and obligations hereunder of
such Lender (a "Defaulting Lender") as to which a Lender Default is in effect
and of the other parties hereto shall be modified to the extent of the express
provisions of this paragraph 7(h) while such Lender Default remains in effect.

          (i)  Revolving Loans shall be allocated PRO RATA among Lenders (the
"Non-Defaulting Lenders") which are not Defaulting Lenders in accordance with
their respective Commitment Percentages, and no Commitment Percentage of any
Lender or any PRO RATA share of any Revolving Loans required to be advanced by
any Lender shall be increased as a result of such Lender Default. Amounts
received in respect of principal of Loans shall be applied to reduce Loans of
each Lender PRO RATA based on the aggregate of the outstanding Loans of all
Lenders at the time of such application; PROVIDED, that, such amount shall not
be applied to any Loans of a

                                      -27-


Defaulting Lender at any time when, and to the extent that, the aggregate amount
of Loans of any Lender that is not a Defaulting Lender exceeds such Lender's
Commitment Percentage of all Loans then outstanding.

          (j)  A Defaulting Lender shall not be entitled to (i) give
instructions to Agent or to approve, disapprove, consent to or vote on any
matters relating to this Agreement or the Other Agreements or (ii) receive or
earn unused line fees which are due and payable during the continuation of a
Lender Default. All amendments, waivers and other modifications of this
Agreement and the Other Agreement may be made without regard to a Defaulting
Lender and, solely for purposes of the definition of "Required Lenders", a
Defaulting Lender shall be deemed not to be a Lender and not to have Loans
outstanding.

          (k)  Other than as expressly set forth in this paragraph 7(k), the
rights and obligations of a Defaulting Lender (including the obligation to
indemnify Agent) and the other parties hereto shall remain unchanged. Nothing in
this paragraph 7(k) shall be deemed to release any Defaulting Lender from its
obligations under this Agreement or the Other Agreements, shall alter such
obligations, shall operate as a waiver of any default by such Defaulting Lender
hereunder, or shall prejudice any rights which Borrower, Agent or any Lender may
have against any Defaulting Lender as a result of any default by such Defaulting
Lender hereunder.

          (l)  In the event a Defaulting Lender retroactively cures, to the
satisfaction of Agent, the breach which caused such Lender to become a
Defaulting Lender, such Defaulting Lender shall no longer be a Defaulting Lender
and shall be treated as a Lender under this Agreement.

          (m)  In the event a Defaulting Lender fails to retroactively cure, to
the satisfaction of Agent and Borrower, the breach which caused a Lender to
become a Defaulting Lender within five (5) Business Days of the occurrence of
such default (the "Defaulting Lender Cure Period"), then Agent may, but shall
not be obligated to, require such Defaulting Lender to assign its interest in
the Loans to Agent or to another financial institution designated by Agent (the
"Designated Lender") for a purchase price equal to the outstanding principal
amount of all Loans made by such Defaulting Lender plus accrued and unpaid
interest and fees (other than any unused line fees due during the continuance of
such Lender Default) due to such Defaulting Lender, which interest and fees
shall be paid to the Defaulting Lender when collected from Borrower. In the
event Agent so elects to require any Defaulting Lender to assign its interest to
Agent or to the Designated Lender, as applicable, Agent will notify such
Defaulting Lender at any time after the expiration of the Defaulting Lender Cure
Period, and such Defaulting Lender shall assign its interest to Agent or the
Designated Lender, as applicable, no later than five (5) days following receipt
of such notice pursuant to a Commitment Transfer Supplement executed by such
Defaulting Lender, Agent or the Designated Lender, as applicable, and Agent.
Upon (i) the execution of the Commitment Transfer Supplement, (ii) payment of
the purchase price set forth above, (iii) recordation of the assignment in the
Register by Agent pursuant to paragraph 25(c) hereof, and (iv) if so requested
by Agent or the Designated Lender (as applicable), receipt by such Person of
replacement Notes, Agent or the Designated Lender (as applicable) shall increase
its Commitment Percentage hereunder or shall become a Lender hereunder, as
applicable, and the Defaulting Lender shall cease to be a Lender hereunder
except with respect to indemnification provisions set forth herein.

     8.   GRANT OF SECURITY INTEREST TO AGENT. As security for the payment of
all Loans now or in the future made by Agent and Lenders to Borrower hereunder
and for the payment or other satisfaction of all other Liabilities, Borrower
hereby assigns and grants to Agent for its benefit and for the ratable benefit
of Lenders a continuing security interest in all assets of Borrower, whether now
or hereafter owned, existing, acquired or arising and wherever now or hereafter
located including without limitation: (a) all Accounts (whether or not Eligible
Accounts including, without limitation, Health Care Insurance Receivables)) and
all Goods whose sale, lease or other disposition by Borrower has given rise to
Accounts and have been returned to or repossessed or stopped in transit by
Borrower; (b) all Chattel Paper, Instruments (including without limitation,
Promissory Notes), Documents and General Intangibles (including, without
limitation, Payment Intangibles); (c) all Inventory (whether or not Eligible
Inventory); (d) all Goods (other than Inventory) including, without limitation,
Equipment, vehicles and fixtures; (e) all deposits and cash and any other
property of Borrower now or hereafter in the possession, custody or control of
Agent, any Lender or any agent or any parent, affiliate or subsidiary of Agent
or such Lender or any participant with Agent or such Lender in the Loans for any
purpose (whether for safekeeping, deposit, collection, custody, pledge,
transmission or otherwise); (f) all Investment Property; (g) all Customer Lists;
(h) all Real Property; (i) all Deposit Accounts; (j) all Supporting Obligations;
(k) all Letter of Credit Rights; and (l) all additions and accessions to,
substitutions for, and replacements, products and proceeds of the foregoing
property,

                                      -28-


including, without limitation, proceeds of all insurance policies insuring the
foregoing property, and all of Borrower's books and records relating to any of
the foregoing and to Borrower's business.

     8A.  CONCERNING REVISED ARTICLE 9 OF THE UNIFORM COMMERCIAL CODE. (a) The
Borrower hereby acknowledges that none of its assets constituting Collateral
are, as of the Closing Date, located in the states of Florida, Mississippi or
Alabama.

     (b)  ATTACHMENT. If Borrower shall at any time, acquire a Commercial Tort
Claim, Borrower shall immediately notify Agent in a writing signed by Borrower
of the brief details thereof and grant to Agent in such writing a security
interest therein and in the proceeds thereof, all upon the terms of this
Agreement, with such writing to be in form and substance satisfactory to Agent.

     (c)  PERFECTION BY FILING. Agent may at any time and from time to time,
pursuant to the provisions of paragraph 9 hereof, file financing statements,
continuation statements and amendments thereto that describe the Collateral as
all assets of Borrower or words of similar effect and which contain any other
information required by the UCC for the sufficiency or filing office acceptance
of any financing statement, continuation statement or amendment, including
whether Borrower is an organization, the type of organization and any
organization identification number issued to Borrower. Borrower agrees to
furnish any such information to Agent promptly upon Agent's request therefor.
Any such financing statements, continuation statements and/or amendments may be
signed by Agent on behalf of Borrower, as provided in this Agreement, and may be
filed at any time in any jurisdiction.

     (d)  OTHER PERFECTION, ETC. Borrower shall at any time and from time to
time take such steps as Agent may request in its reasonable discretion (a) for
Agent to obtain an acknowledgement, in form and substance satisfactory to Agent,
of each bailee having possession of any Collateral that such bailee holds such
Collateral for the benefit of Agent, (b) for Agent to obtain "control" of any
investment property, deposit accounts, letter-of-credit rights or electronic
chattel paper (as such terms are defined in Article 9 of the UCC relating to
what constitutes "control" for such items of Collateral), with any agreements
establishing control to be in form and substance satisfactory to Agent, and (c)
to insure the continued perfection and priority of Agent's security interest in
any of the Collateral and the preservation of its rights therein.

     (e)  SAVINGS CLAUSE. Nothing contained in this paragraph 8A shall be
construed to narrow the scope of Agent's security interest in any of the
Collateral or the perfection or priority thereof or to impair or otherwise limit
any of the rights, powers, privileges or remedies of Agent or any Lender
hereunder except mandated by the applicable provisions of the UCC.

     9.   PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS
THEREIN. Borrower shall, at Agent's request, at any time and from time to time,
execute and deliver to Agent such financing statements, documents and other
agreements and instruments (and pay the cost of filing or recording the same in
all public offices deemed reasonably necessary or desirable by Agent) and do
such other acts and things as Agent may deem necessary or desirable in order to
establish and maintain a valid, attached and perfected security interest in the
Collateral in favor of Agent for its benefit and for the ratable benefit of
Lenders (free and clear of all other liens, claims and rights of third parties
whatsoever, whether voluntarily or involuntarily created, except Permitted
Liens) to secure payment of the Liabilities, and in order to facilitate the
collection of the Collateral. Borrower irrevocably hereby makes, constitutes and
appoints Agent (and all Persons designated by Agent for that purpose) as
Borrower's true and lawful attorney and agent-in-fact to execute and/or file
such financing statements, documents and other agreements and instruments and do
such other acts and things as may be necessary to preserve and perfect Agent's
security interest in the Collateral. Borrower further agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement shall be sufficient as a financing statement.

     10.  POSSESSION OF COLLATERAL AND RELATED MATTERS. Unless an Event of
Default has occurred and be continuing, Borrower shall have the right, except as
otherwise provided for in this Agreement, in the ordinary course of Borrower's
business, to (a) sell, lease or furnish under contracts of service any of
Borrower's Inventory normally held by Borrower for any such purpose, and (b) use
and consume any raw materials,

                                      -29-


work in process or other materials normally held by Borrower for such purpose,
PROVIDED, HOWEVER, that a sale in the ordinary course of business shall not
include any transfer or sale in satisfaction, partial or complete, of a debt
owed by Borrower.

     11.  COLLECTIONS.

          (a)  ESTABLISHMENT OF LOCKBOX AND BLOCKED ACCOUNT. Borrower shall
direct all of its Account Debtors to make all payments on the Accounts directly
to a post office box ("Lock Box") with a financial institution acceptable to,
and in the name and under exclusive control of Agent PROVIDED, that Borrower (i)
may continue to utilize the lockbox account maintained at Fleet National Bank in
Boston, Massachusetts (the "Existing Lock Box") for a period not to exceed sixty
(60) days following the Closing Date and (ii) shall not be obligated to
re-direct any Account Debtor to make any payments on Accounts (A) which arose
and were invoiced prior to the Closing Date and (B) pursuant to which Borrower
prior to the Closing Date directed such Account Debtor to make payments directly
to the Existing Lock Box. Borrower shall establish an account ("Blocked
Account") in Agent's name for the benefit of Borrower with a financial
institution acceptable to Agent, into which all payments received in the Lock
Box shall be deposited, and into which Borrower will immediately deposit all
payments received by Borrower for Inventory or services sold, leased or rendered
by Borrower and received by Borrower in the identical form in which such
payments were received, whether by cash or check. If Borrower, any Affiliate or
Subsidiary of Borrower, or any shareholder, officer, director, employee or agent
of Borrower or any Affiliate or Subsidiary, or any other Person acting for or in
concert with Borrower shall receive any monies, checks, notes, drafts or other
payments relating to or as proceeds of Accounts or other Collateral, Borrower
and each such Person shall receive all such items in trust for, and as the sole
and exclusive property of, Agent for its benefit and for the ratable benefit of
Lenders and, immediately upon receipt thereof, shall remit the same (or cause
the same to be remitted) in kind to the Blocked Account. Each financial
institution with which a Lock Box or Blocked Account is established shall
acknowledge and agree, in a manner satisfactory to Agent for its benefit and for
the ratable benefit of Lenders, that the amounts on deposit in such Lock Box and
such Blocked Account are the sole and exclusive property of Agent, that such
financial institution has no right to setoff against such Lock Box or Blocked
Account or against any other account maintained by such financial institution
into which the contents of such Blocked Account are transferred, and that such
financial institution shall wire, or otherwise transfer in immediately available
funds in a manner satisfactory to Agent, funds deposited in the Blocked Account
on a daily basis as such funds are collected. Borrower agrees that all payments
made to the Blocked Account established by Borrower or otherwise received by
Agent, whether in respect of the Accounts of Borrower or as proceeds of other
Collateral of Borrower or otherwise, will be applied on account of the Revolving
Loans and also on account of such other due and payable Liabilities of Borrower
as Agent shall determine in accordance with the terms of this Agreement.
Borrower agrees to pay all fees, costs and expenses which Borrower incurs in
connection with opening and maintaining a Lock Box and Blocked Account. All of
such fees, costs and expenses which remain unpaid by Borrower pursuant to any
Lock Box or Blocked Account Agreement with Borrower, to the extent same shall
have been paid by Agent hereunder, shall constitute Revolving Loans hereunder,
shall be payable to Agent for its benefit and for the ratable benefit of Lenders
by Borrower upon demand, and, until paid, shall bear interest at the highest
rate then applicable to Revolving Loans hereunder. All checks, drafts,
instruments and other items of payment or proceeds of Collateral delivered to
Agent in kind shall be endorsed by Borrower to Agent, and, if that endorsement
of any such item shall not be made for any reason, Agent is hereby irrevocably
authorized to endorse the same on Borrower's behalf. For the purpose of this
paragraph, Borrower irrevocably hereby makes, constitutes and appoints Agent
(and all Persons designated by Agent for that purpose) as Borrower's true and
lawful attorney and agent-in-fact (i) to endorse Borrower's name upon said items
of payment and/or proceeds of Collateral of Borrower and upon any Chattel Paper,
document, instrument, invoice or similar document or agreement relating to any
Account of Borrower or goods pertaining thereto; (ii) to take control in any
manner of any item of payment or proceeds thereof; (iii) to have access to any
lock box or postal box into which any of Borrower's mail is deposited; and (iv)
open and process all mail addressed to Borrower and deposited therein, PROVIDED,
HOWEVER, that Agent shall not exercise any such powers described in clauses (ii)
and (iv) unless and until an Event of Default has occurred.

          (b)  COLLECTION OF ACCOUNTS. Agent may, at any time and from time to
time after the occurrence and during the continuation of an Event of Default,
whether before or after notification to any Account Debtor and whether before or
after the maturity of any of the Liabilities, (i) enforce collection of any of
Borrower's Accounts, other amounts owed to Borrower or contract rights by suit
or otherwise; (ii) exercise all of Borrower's rights and remedies with respect
to proceedings brought to collect any Accounts or other amounts owed to

                                      -30-


Borrower; (iii) surrender, release or exchange all or any part of any Accounts
of Borrower or other amounts owed to Borrower, or compromise or extend or renew
for any period (whether or not longer than the original period) any indebtedness
thereunder; (iv) sell or assign any Account of Borrower or other amounts owed to
Borrower upon such terms, for such amount and at such time or times as Agent
deems advisable; (v) prepare, file and sign Borrower's name on any proof of
claim in bankruptcy or other similar document against any Account Debtor
indebted on an Account of Borrower or other Person obligated to Borrower; and
(vi) do all other acts and things which are necessary, in Agent's sole
discretion, to fulfill Borrower's obligations under this Agreement and to allow
Agent to collect the Accounts or other amounts owed to Borrower. In addition to
any other provision hereof, Agent may at any time on or after the occurrence and
during the continuation of an Event of Default, at Borrower's expense, notify
any parties obligated on any of the Accounts of Borrower to make payment
directly to Agent of any amounts due or to become due thereunder.

          (c)  APPLICATION OF PROCEEDS. Agent shall, within two (2) Business
Days after receipt by Agent at its office in Chicago, Illinois of cash or other
immediately available funds from collections of items of payment and proceeds of
any Collateral, apply the whole or any part of such collections or proceeds
against the Liabilities in such order as Agent shall determine in its sole
discretion. With respect to the application of such collections and proceeds to
the outstanding Revolving Loans, Agent shall apply such collections and proceeds
to the Revolving Loans in the inverse order of the date on which such Revolving
Loans were advanced.

          (d)  ACCEPTANCE OF ASSIGNMENT. In its sole credit judgment, without
waiving or releasing any obligation, liability or duty of Borrower under this
Agreement or the Other Agreements or any Event of Default, at any time or times
hereafter, Agent may (but shall not be obligated to) pay, acquire or accept an
assignment of any security interest, lien, encumbrance or claim asserted by any
Person in, upon or against the Collateral. All sums paid by Agent in respect
thereof and all costs, fees and expenses (including without limitation
reasonable attorney fees, all court costs and all other charges relating
thereto) incurred by Agent shall constitute Revolving Loans, payable by Borrower
to Agent on demand and, until paid, shall bear interest at the highest rate then
applicable to Revolving Loans hereunder.

          (e)  DELIVERY OF DOCUMENTS AND INSTRUMENTS. Immediately upon
Borrower's receipt of any portion of the Collateral evidenced by an agreement,
instrument or document including, without limitation, any Chattel Paper,
Borrower shall deliver the original thereof to Agent together with an
appropriate endorsement or other specific evidence of assignment thereof to
Agent (in form and substance acceptable to Agent). If an endorsement or
assignment of any such items shall not be made for any reason, Agent is hereby
irrevocably authorized, as Borrower's attorney and agent-in-fact, to endorse or
assign the same on Borrower's behalf.

     12.  SCHEDULES AND REPORTS.

     Borrower shall furnish or cause to be furnished to Agent the following:

          (a)  Borrower shall provide Agent with a written report on Tuesday of
each week hereafter, reflecting the activity of Borrower with respect to sales,
collections of Accounts and credits issued by Borrower for the immediately
preceding week. Such report shall be in a form and with such specificity as is
satisfactory to Agent and shall contain such additional information as Agent may
reasonably require concerning Accounts and Inventory included, described or
referred to in such weekly report and any other documents in connection
therewith requested by Agent, including without limitation but only if
specifically requested by Agent, copies of all invoices prepared in connection
with such Accounts.

          (b)  As soon as practicable and in any event within thirty (30) days
following the end of each calendar month, (i) statements of income and
statements of cash flow of Borrower for each such month and for the period from
the beginning of the then current Fiscal Year to the end of such month, (ii)
balance sheets of Borrower as of the end of such month, and (iii) with respect
to such statements of income and balance sheets, in comparative form, figures
for the corresponding periods in the preceding Fiscal Year, all in reasonable
detail and certified by the chief financial officer of Borrower that such
statements fairly present the financial condition of Borrower in accordance with
GAAP, subject to changes resulting from normal and recurring year-end
adjustments that individually and in the aggregate are not material to the
business of Borrower and the absence of footnotes, together with detailed
computations of Borrower's compliance with the covenants set forth in this
Agreement.

                                      -31-


          (c)  As soon as practicable and in any event (1) on Tuesday of each
week, a Borrowing Base Certificate (which shall be calculated as of the last day
of the immediately preceding week and which shall not be binding upon Agent or
restrictive of Agent's rights under this Agreement), and (2) within fifteen (15)
days following the end of each calendar month and at such other times as may be
requested by Agent from time to time, (i) when requested by Agent, a schedule
identifying by age each Account of Borrower together with copies of the invoices
(with evidence of shipment attached) pertaining to each such Account and a
schedule identifying by age each account payable of Borrower, (ii) a detailed
aged trial balance of Borrower's Accounts ("Accounts Trial Balance") in form and
substance satisfactory to Agent in its reasonable discretion, including, without
limitation, the names and addresses of all Account Debtors of Borrower, (iii) a
summary and detail of accounts payable (such Accounts and accounts payable
divided into such time intervals as Agent may require in its reasonable
discretion), including a listing of any held checks, (iv) such additional
schedules, certificates, reports and information with respect to the Collateral
as Agent may from time to time require; (v) a copy of any statement received by
Borrower in connection with the Lockbox and/or the Blocked Account; (vi) an
assignment of any or all items of Collateral to Agent and (vii) the general
ledger inventory account balance, a perpetual inventory report and Agent's
standard form of Inventory report then in effect, for Borrower by each category
of Inventory, together with a description of the change in each category of
Inventory, in each case, for such immediately preceding month (or other
applicable period). Agent, through its officers, employees or agents, shall have
the right, at any time and from time to time in Agent's name, in the name of a
nominee of Agent or in Borrower's name, to verify the validity, amount or any
other matter relating to any of Borrower's Accounts, by mail, telephone,
telegraph or otherwise. Borrower shall reimburse Agent, on demand, for all
reasonable costs, fees and expenses incurred by Agent in this regard. Borrower
shall immediately notify Agent of any event causing loss or depreciation in
value of Borrower's Inventory (other than normal depreciation occurring in the
ordinary course of business).

          (d)  As soon as practicable and in any event within ninety (90) days
after the end of each Fiscal Year commencing with the Fiscal Year ending
December 31, 2001 (i) statements of income of Borrower for such Fiscal Year, and
a balance sheet of Borrower as of the end of such Fiscal Year, and (ii)
statements of cash flow of Borrower for such Fiscal Year, all setting forth in
comparative form, corresponding figures for the period covered by the preceding
annual audit and as of the end of the preceding Fiscal Year, such statements to
be presented in accordance with Borrower's normal method of accounting for
Inventory and (if Borrower uses the LIFO method) on a pre-tax FIFO basis, all in
reasonable detail and in accordance with GAAP and examined and reported on by
independent certified public accountants of recognized national standing
selected by Borrower and satisfactory to Agent, whose opinion shall be
unqualified and shall be in accordance GAAP, in form and substance satisfactory
to Agent.

          (e)  As soon as practicable and in any event not later than thirty
(30) days prior to the beginning of each Fiscal Year commencing with the Fiscal
Year ending December 31, 2002 projected balance sheets, statements of income and
cash flow for Borrower, for each of the twelve (12) months during such Fiscal
Year, which shall include the assumptions used therein, together with
appropriate supporting details as requested by Agent (hereinafter referred to as
"Projections").

          (f)  As soon as practicable and in any event within ten (10) days of
delivery to Borrower, a copy of any letter issued by Borrower's independent
public accountants or other management consultants with respect to Borrower's
financial or accounting systems or controls, including all so-called "management
letters".

          (g)  In conjunction with the delivery of the annual presentation of
projections or budgets referred to in subparagraph (e) above, a letter signed by
the president or a vice president of Borrower and by the treasurer, controller
or chief financial officer of Borrower, describing, comparing and analyzing, in
detail, all changes and developments between the anticipated financial results
included in such projections or budgets and the historical financial statements
of Borrower.

          (h)  As soon as practicable and in any event at the end of each Fiscal
Year or as Agent may otherwise reasonably request (but, prior to the occurrence
of an Event of Default, not more frequently than quarterly), a complete and
accurate update of the Customer Lists.

          (i)  With reasonable promptness, such other business or financial
data, reports, appraisals and projections as Agent may reasonably request.

                                      -32-


          All financial statements delivered to Agent pursuant to the
requirements of this paragraph 12 (except where otherwise expressly indicated)
shall be prepared in accordance with GAAP as provided in this Agreement.
Together with each delivery of financial statements required by SUBPARAGRAPHS
(b) AND (d) above, Borrower shall deliver to Agent an officer's certificate in
the form attached hereto as EXHIBIT D, which shall include a calculation of
financial covenants in the schedule attached to such Officer's Certificate in
form satisfactory to Agent. Together with each delivery of annual financial
statements required by SUBPARAGRAPH (d) above, Borrower shall deliver to Agent a
certificate of the accountants who performed the audit in connection with such
statements stating that in making the audit necessary to the issuance of a
report on such financial statements, they have obtained no knowledge of any
Event of Default, or, if such accountants have obtained knowledge of an Event of
Default, specifying the nature and period of existence thereof and such
certificates shall contain or have appended thereto calculations which set forth
Borrower's compliance with the financial covenants set forth herein.

          (j)  All schedules, certificates, reports and assignments and other
items delivered by Borrower to Agent hereunder shall be executed by an
authorized representative of Borrower and shall be in such form and contain such
information as Agent shall reasonably request. Borrower shall deliver from time
to time such other schedules and reports pertaining to the Collateral of
Borrower as Agent may reasonably request.

     13.  TERM.

          (a)  This Agreement shall be in effect from the date hereof until
December 31, 2004 (the "TERM") (provided, that, the last day of the Term shall
be automatically accelerated to March 17, 2003 following the occurrence of an
Event of Default under paragraph 17(b) as a result of Borrower's failure to
comply with paragraph 15(u) hereof) unless the due date of the Liabilities is
accelerated pursuant to paragraph 18 hereof, in which case this Agreement shall
terminate on the date thereafter that the Liabilities are paid in full,
PROVIDED, HOWEVER, that the security interests and liens created under this
Agreement and the Other Agreements shall survive such termination until the date
upon which payment and satisfaction in full of the Liabilities shall have
occurred. At such time as Borrower has repaid all of the Liabilities and this
Agreement has terminated, Borrower shall deliver to Agent a release, in form and
substance reasonably satisfactory to Agent, of all obligations and liabilities
of Agent, Lenders and their officers, directors, employees, agents, parents,
subsidiaries and affiliates to Borrower, and if Borrower is obtaining new
financing from another lender, Borrower shall deliver such lender's
indemnification of Agent and each Lender, in form and substance reasonably
satisfactory to Agent, for checks which Agent has credited to Borrower's
account, but which subsequently are dishonored for any reason.

          (b)  If, for any reason, this Agreement is terminated prior to the end
of the Term and Borrower prepays all or any portion of the Liabilities (which
prepayment by Borrower must be upon forty-five (45) days' prior written notice
to Agent), Borrower agrees to pay to Agent for its benefit and for the ratable
benefit of Lenders, as a prepayment fee, in addition to the payment of all other
Liabilities owing by Borrower, an amount equal to (x) one percent (1%) of the
Total Credit Facility if this Agreement is terminated during the first Contract
Year; and (y) one-half of one percent (0.5%) of the Total Credit Facility if
this Agreement is terminated during the second Contract Year. In light of the
extreme difficulty of accurately calculating actual damages arising out of any
early termination and prepayment, Agent, Lenders and Borrower have agreed that
the prepayment fee provided for above is a reasonable estimate of actual damages
that would be incurred by Agent and Lenders.

     14.  REPRESENTATIONS AND WARRANTIES. Borrower hereby makes the following
representations, warranties and covenants:

          (a)  (i)   Borrower has furnished to Agent a balance sheet of Borrower
as of the Closing Date ("Pro Forma Balance Sheet") as set forth on EXHIBIT
14(a)(i) attached hereto and made a part hereof. The Pro Forma Balance Sheet is
accurate, complete and correct and fairly reflects the financial condition of
Borrower as of the Closing Date after giving effect to the Transactions, and has
been prepared in accordance with GAAP, consistently applied. The Pro Forma
Balance Sheet has been certified by the President and controller of Borrower as
accurate, complete and correct and fairly reflecting of the financial condition
of the Borrower on the Closing Date after giving effect to the Transactions and
as prepared in accordance with GAAP, consistently applied.

               (ii)  Borrower has furnished to Agent (1) balance sheets, income
statements and cash flow projections of Borrower reflected monthly for the
period beginning December 1, 2001 and ending November

                                      -33-


30, 2002 as set forth on EXHIBIT 14(a)(ii)(1) attached hereto and made a part
hereof, (2) balance sheets, income statements and cash flow projections of
Borrower reflected annually for the second and third Contract Years as set forth
on EXHIBIT 14(a)(ii)(2) attached hereto and made a part hereof, and (3) an
availability schedule for the period ending November 30, 2001 in the form
attached hereto as SCHEDULE 14(a)(ii)(3). The financial statements described in
clauses (1) and (2) of the first sentence of this paragraph were prepared by or
under the directions of the Controller of Borrower and reflect, as of the
Closing Date, the reasonable estimates of Borrower of the information projected
therein, based on the assumptions accompanying such projections.

               (b)   the office where Borrower keeps its books, records and
accounts (or copies thereof) concerning the Collateral, Borrower's principal
place of business and all of Borrower's other places of business, locations of
Collateral and post office boxes are as set forth in EXHIBIT A; Borrower shall
promptly (but in no event less than thirty (30) days prior thereto) advise Agent
in writing of the proposed opening of any new place of business, the closing of
any existing place of business, any change in the location of Borrower's books,
records and accounts (or copies thereof) or the opening or closing of any post
office box of Borrower;

               (c)   the Collateral, including without limitation the Equipment
(except any part thereof which prior to the date of this Agreement Borrower
shall have advised Agent in writing consists of Collateral normally used in more
than one state) is and shall be kept, or, in the case of vehicles, based, only
at the addresses set forth on the first page of this Agreement or on EXHIBIT A,
and at other locations within the continental United States of which Agent has
been advised by Borrower pursuant to thirty (30) days prior written notice;

               (d)   Borrower shall immediately give written notice to Agent of
any use of any such Goods in any state or county other than a state or county in
which Borrower has previously advised Agent such Goods shall be used (as of the
Closing Date, such states or counties being set forth on EXHIBIT 14(d) hereto,
and such Goods shall not, unless Agent shall otherwise consent in writing, be
used outside of the continental United States (other than Inventory which is in
transit from Borrower to an Account Debtor in Canada);

               (e)   no security agreement, financing statement or analogous
instrument exists or shall exist with respect to any of the Collateral other
than any security agreement, financing statement or analogous instrument
evidencing Permitted Liens;

               (f)   each Account or item of Inventory which Borrower shall,
expressly or by implication, request Agent to classify as an Eligible Account or
as Eligible Inventory, respectively, shall, as of the time when such request is
made, conform in all respects to the requirements of such classification as set
forth in the respective definitions of Eligible Account and Eligible Inventory
and as otherwise established by Agent from time to time, and Borrower shall
promptly notify Agent in writing if any such Eligible Account or Eligible
Inventory shall subsequently become ineligible;

               (g)   Borrower is and shall at all times during the Term be the
lawful owner of all Collateral now purportedly owned or hereafter purportedly
acquired by Borrower, free from all liens, claims, security interests and
encumbrances whatsoever, whether voluntarily or involuntarily created and
whether or not perfected, other than the Permitted Liens;

               (h)   Borrower has the right and power and is duly authorized and
empowered to enter into, execute and deliver this Agreement and the Other
Agreements and perform its obligations hereunder and thereunder; Borrower's
execution, delivery and performance of this Agreement and the Other Agreements
does not and shall not conflict with the provisions of any statute, regulation,
ordinance or rule of law, or any agreement, contract or other document which may
now or hereafter be binding on Borrower, or Borrower's Organizational Documents,
and Borrower's execution, delivery and performance of this Agreement and the
Other Agreements shall not result in the imposition of any lien or other
encumbrance upon any of Borrower's property under any existing indenture,
mortgage, deed of trust, loan or credit agreement or other agreement or
instrument by which Borrower or any of its property may be bound or affected,
other than in favor of Agent;

               (i)   there are no actions or proceedings which are pending or,
to the best of Borrower's knowledge, threatened against Borrower which are
reasonably likely to have a Material Adverse Effect and

                                      -34-


Borrower shall, promptly upon becoming aware of any such pending or threatened
action or proceeding, give written notice thereof to Agent;

               (j)   Borrower has obtained and shall maintain all consents,
franchises, certificates, licenses, authorizations, approvals and permits, the
lack of which would have a Material Adverse Effect, and Borrower is and shall
remain in compliance in all material respects with all applicable federal,
state, local and foreign statutes, orders, regulations, rules and ordinances
(including, without limitation, statutes, orders, regulations, rules and
ordinances relating to taxes, employer and employee contributions and similar
items, securities, employee retirement and welfare benefits, employee health and
safety or environmental matters), the failure to comply with which would be
reasonably likely to have a Material Adverse Effect;

               (k)   all written information now, heretofore or hereafter
furnished by Borrower to Agent is and shall be true and correct in all material
respects as of the date with respect to which such information was or is
furnished (except for financial projections, which have been prepared in good
faith based upon reasonable assumptions);

               (l)   Borrower is not conducting, permitting or suffering to be
conducted, nor shall it conduct, permit or suffer to be conducted, any
activities pursuant to or in connection with which any of the Collateral is now,
or will (while any Liabilities remain outstanding) be owned by any Affiliate;

               (m)   Borrower's name has always been as set forth on the first
page of this Agreement and Borrower uses no tradenames, assumed names,
fictitious names or division names in the operation of its business, except as
otherwise set forth on Schedule 14(m); Borrower shall notify Agent in writing at
least thirty (30) days prior to the change of its name or the use of any
tradenames, assumed names, fictitious names or division names not previously set
forth in Schedule 14(m);

               (n)   with respect to Borrower's Equipment: (i) Borrower has good
and indefeasible and marketable title to and ownership of all Equipment;
delivered to Agent prior to the date of this Agreement; (ii) Borrower shall keep
and maintain the Equipment in good operating condition and repair and shall make
all necessary replacements thereof and renewals thereto so that the value and
operating efficiency thereof shall at all times be preserved and maintained,
ordinary wear and tear excepted; (iii) Borrower shall not permit any such items
to become a fixture to real estate or an accession to other personal property;
(iv) from time to time Borrower may sell, exchange or otherwise dispose of
obsolete, unused or worn out Equipment, but only to the extent provided in
paragraph 5(a)(i) hereof; and (v) Borrower, immediately on demand by Agent,
shall deliver to Agent any and all evidence of ownership of, including, without
limitation, certificates of title and applications of title to, any of the
Equipment;

               (o)   this Agreement and the Other Agreements to which Borrower
is a party are the legal, valid and binding obligations of Borrower and are
enforceable against Borrower in accordance with their respective terms, except
to the extent that such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting the rights of
creditors generally;

               (p)   Borrower is solvent, is able to pay its debts as they
become due and has capital sufficient to carry on its business, now owns
property having a value both at fair valuation and at present fair saleable
value greater than the amount required to pay its debts, and will not be
rendered insolvent by the execution and delivery of this Agreement or any of the
Other Agreements or by completion of the transactions contemplated hereunder or
thereunder;

               (q)   Borrower is not now obligated, whether directly or
indirectly, for any loans or other indebtedness for borrowed money other than
(i) the Liabilities; (ii) indebtedness disclosed to Agent on SCHEDULE 14(q);
(iii) unsecured indebtedness to trade creditors arising in the ordinary course
of Borrower's business; (iv) indebtedness due to the GBNF Trust or the QTIP
Trust under the Subordinated Debt Documents as in effect on the Closing Date (or
as amended to the extent expressly permitted under the terms hereof) so long as
such indebtedness is subject to the terms of the Seller Subordination Agreement
and (v) unsecured indebtedness arising from the endorsement of drafts and other
instruments for collection, in the ordinary course of Borrower's business;

                                      -35-


               (r)   Borrower does not own any margin securities, and none of
the proceeds of the Loans hereunder shall be used for the purpose of purchasing
or carrying any margin securities or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase any margin securities or
for any other purpose not permitted by Regulation U of the Board of Governors of
the Federal Reserve System as in effect from time to time;

               (s)   except as otherwise disclosed on SCHEDULE 14(s), Borrower
has no Parents, Subsidiaries or divisions, nor is Borrower engaged in any joint
venture or partnership with any other Person;

               (t)   Borrower is duly organized, validly existing and in good
standing in its state of organization and Borrower is duly qualified and in good
standing in all states where the nature and extent of the business transacted by
it or the ownership of its assets makes such qualification necessary, except for
such other states in which the failure to so qualify would not have a Material
Adverse Effect, and Borrower has delivered to Agent true and complete copies of
its Organizational Documents as in effect on the Closing Date;

               (u)   Borrower is not in default under any material contract,
lease or commitment to which it is a party or by which it is bound, nor does
Borrower know of any dispute regarding any contract, lease or commitment which
is material to the continued financial success and well-being of Borrower;

               (v)   there are no controversies pending or threatened between
Borrower and any of its employees, other than employee grievances arising in the
ordinary course of business which are not, in the aggregate, material to the
continued financial success and well-being of Borrower, and Borrower is in
compliance in all material respects with all federal and state laws respecting
employment and employment terms, conditions and practices, except where the
failure to so comply would not have a Material Adverse Effect;

               (w)   Borrower possesses, and shall continue to possess, adequate
licenses, patents, patent applications, copyrights, service marks, trademarks,
trademark applications, tradestyles and tradenames to continue to conduct its
business as heretofore conducted by it;

               (x)   Borrower has delivered to Agent complete copies of the
Subordinated Debt Documents (including all schedules, exhibits and disclosure
letters referred to therein or delivered pursuant thereto, if any) and all
amendments thereto, waivers relating thereto and other side letters or
agreements affecting the terms thereof. None of such agreements and documents
has been amended or supplemented, nor have any of the provisions thereof been
waived, except pursuant to a written agreement or agreement which has heretofore
been delivered to Agent;

               (y)   The proceeds of the Loans shall be used (i) to pay
indebtedness of Borrower due to Banc of America in a maximum aggregate amount of
$13,300,000, and (ii) for Borrower's general working capital purposes.

               (z)   Except as set forth on SCHEDULE 14(z), no Benefit Plan was
in violation in any material respect of any of the provisions of ERISA or any of
the qualification requirements of Section 401(a) of the IRC within the
immediately preceding five year period, no non-exempt Prohibited Transaction or
Reportable Event has occurred with respect to any Benefit Plan, no Benefit Plan
has been the subject of a waiver of the minimum funding standard under Section
412 of the IRC, no Benefit Plan has experienced an accumulated funding
deficiency under Section 412 of the IRC, no Lien has been imposed upon the
Borrower or any ERISA Affiliate under Section 412(n) of the IRC, no Benefit Plan
has been amended in such a way that the security requirements of Section
401(a)(29) of the IRC apply, no notice of intent to terminate a Benefit Plan has
been distributed to affected parties or filed with the PBGC under Section 4041
of ERISA, and no Benefit Plan has been terminated under Section 4041(e) of
ERISA, the PBGC has not instituted proceedings to terminate, or appoint a
trustee to administer, a Benefit Plan and no event has occurred or condition
exists which might reasonably constitute grounds under Section 4042 of ERISA for
the termination of, or the appointment of a trustee to administer, any Benefit
Plan, neither Borrower nor any ERISA Affiliate would be liable for any amount in
the aggregate pursuant to Sections 4062, 4063 or 4064 of ERISA if all Benefit
Plans terminated as of the most recent valuation dates of such Benefit Plans
which would be reasonably likely to result in a Material Adverse Effect; neither
Borrower nor any ERISA Affiliate of Borrower maintains any employee welfare
benefit plan, as defined in Section 3(1) of ERISA, which provides any benefits
to an employee or the employee's dependents with respect to claims incurred
after the employee separates from service other than is

                                      -36-


required by applicable law; and neither Borrower nor any ERISA Affiliate of
Borrower has incurred or expects to incur any withdrawal liability to any
Multiemployer Plan and after the Closing Date, none of the above-described
events shall occur which are reasonably likely to result in Material Adverse
Effect;

               (aa)  On the Closing Date, Borrower has no material liabilities
(accrued, absolute, contingent, unliquidated or otherwise, including, without
limitation, any tax, warranty or product liabilities) which are, or indebtedness
which is, not fully reflected or provided for in accordance with GAAP on the Pro
Forma Balance Sheet as of the Closing Date and the Borrower does not know of any
basis for the assertion against Borrower of any material liabilities of Borrower
which are not adequately reflected or reserved against on the Pro Forma Balance
Sheet;

               (bb)  Except as set forth on SCHEDULE 14(bb) attached hereto,

                     (i)   Borrower has duly complied with, and its facilities,
business, assets, property, leaseholds and Equipment are in compliance in all
material respects with, the provisions of the Federal Occupational Safety and
Health Act, the Environmental Protection Act, RCRA and all other Environmental
Laws; there have been no outstanding citations, notices or orders of
non-compliance issued to Borrower or relating to its business, assets, property,
leaseholds or Equipment under any such laws, rules or regulations;

                     (ii)  Borrower has been issued all required federal, state
and local licenses, certificates or permits required under applicable
Environmental Laws to operate its business;

                     (iii) (1) There are no visible signs of releases, spills,
discharges, leaks or disposal (collectively referred to as "Releases") of
Hazardous Substances at, upon, under or within any Real Property; (2) there are
no underground storage tanks or polychlorinated biphenyls on the Real Property;
(3) the Real Property has never been used as a treatment, storage or disposal
facility of Hazardous Waste; and (4) no Hazardous Substances are present on the
Real Property or any premises leased by Borrower, excepting such quantities as
are handled in accordance with all applicable manufacturer's instructions and
governmental regulations and in proper storage containers and as are necessary
for the operation of the commercial business of Borrower or of its tenants;

               (cc)  Borrower is not involved in any labor dispute, there are no
strikes or walkouts or union organization of Borrower's employees threatened or
in existence and no labor contract is scheduled to expire during the Term other
than as set forth on SCHEDULE 14(cc) attached hereto; and

               (dd)  Upon and after the Closing Date, Borrower does not propose
to engage in any business other than designing, importing, finishing and
distributing fine quality collectibles and other specialty giftware and
activities necessary to conduct such business. On the Closing Date, Borrower
will own and possess all of the rights and consents necessary for the conduct of
the business of Borrower.

               Borrower represents, warrants and covenants to Agent and each
Lender that all representations, warranties and covenants of Borrower contained
in this Agreement (whether appearing in paragraphs 14 or 15 hereof or elsewhere)
shall be true at the time of Borrower's execution of this Agreement, shall
survive the execution, delivery and acceptance hereof by the parties hereto and
the closing of the transactions described herein or related hereto, shall remain
true until the repayment in full of all of the Liabilities and termination of
this Agreement, and shall (other than the representation set forth in clause
(aa) above) be remade by Borrower at the time each Revolving Loan is made and
each Letter of Credit is issued pursuant to this Agreement.

     15.  COVENANTS. Until payment or satisfaction in full of all Liabilities
and termination of this Agreement, unless Borrower obtains Agent's prior written
consent waiving or modifying any of Borrower's covenants hereunder in any
specific instance, Borrower agrees as follows:

          (a)  Borrower shall at all times keep accurate and complete books,
records and accounts with respect to all of Borrower's business activities, in
accordance with sound accounting practices and generally accepted accounting
principles consistently applied, and shall keep such books, records and
accounts, and any copies thereof, only at the addresses indicated for such
purpose on EXHIBIT A;

                                      -37-


          (b)  Agent, or any Persons designated by it, shall have the right, at
any time upon not less than three (3) Business Days notice (provided that no
such prior notice shall be required if an Event of Default shall have occurred
or in the event Agent believes in the exercise of its reasonable discretion such
access is required to preserve or protect the Collateral), in the exercise of
its commercially reasonable credit judgment, to call at Borrower's places of
business at any reasonable times during Borrower's normal business hours, and,
without hindrance or delay, to inspect the Collateral and to inspect, audit,
check and make extracts from Borrower's books, records, journals, orders,
receipts and any correspondence and other data relating to Borrower's business,
the Collateral or any transactions between the parties hereto, and shall have
the right to make such verification concerning Borrower's business as Agent may
consider reasonable under the circumstances. Borrower shall furnish to Agent
such information relevant to Agent's rights under this Agreement as Agent shall
at any time and from time to time reasonably request. Borrower authorizes Agent
to discuss the affairs, finances and business of Borrower with any officers or
directors of Borrower, any Guarantor, any shareholder of a Borrower or any
Affiliate of a Borrower and/or any Subsidiary of a Borrower or with those
employees of any of the foregoing with whom Agent has determined in its
commercially reasonable judgment to be necessary or desirable to converse, and
to discuss the financial condition of Borrower with Borrower's independent
public accountants. Any such discussions shall be without liability to Agent or
to such accountants. Borrower shall pay to or reimburse Agent for all reasonable
fees, costs, and out-of-pocket expenses incurred by Agent in the exercise of its
rights hereunder (in addition to the fees payable by Borrower pursuant to
paragraphs 6(g) and 6(h) in connection with Agent's examination of Borrower's
books and records and Collateral) and all of such costs, fees and expenses shall
constitute Revolving Loans hereunder, shall be payable on demand and, until
paid, shall bear interest at the highest rate then applicable to Revolving Loans
hereunder;

          (c)  (i) Borrower shall: keep the Collateral properly housed and shall
keep the Collateral insured against such risks and in such amounts as are
customarily insured against by Persons engaged in businesses similar to that of
Borrower with such companies, in such amounts and under policies in such form as
shall be reasonably satisfactory to Agent. Originals or certified copies of such
policies of insurance have been or shall be delivered to Agent on the Closing
Date, together with evidence of payment of all premiums therefor, and shall
contain an endorsement, in form and substance acceptable to Agent, showing loss
under such insurance policies payable to Agent. Such endorsement, or an
independent instrument furnished to Agent, shall provide that the insurance
company shall give Agent at least thirty (30) days prior written notice before
any such policy of insurance is altered or cancelled and that no act, whether
willful or negligent, or default of Borrower or any other Person shall affect
the right of Agent to recover under such policy of insurance in case of loss or
damage. Borrower hereby directs all insurers under such policies of insurance to
pay all proceeds payable thereunder directly to Agent for its benefit and for
the ratable benefit of Lenders as their respective interests may appear.
Borrower irrevocably, makes, constitutes and appoints Agent (and all officers,
employees or agents designated by Agent) as Borrower's true and lawful attorney
(and agent-in-fact) for the purpose of making, settling and adjusting claims
under such policies of insurance, endorsing the name of Borrower on any check,
draft, instrument or other item of payment for the proceeds of such policies of
insurance and making all determinations and decisions with respect to such
policies of insurance, PROVIDED, HOWEVER, that Agent shall exercise such rights
only upon the occurrence and continuance of an Event of Default;

               (ii)  Borrower shall maintain, at its expense, such public
               liability and third party property damage insurance as is
               customary for Persons engaged in businesses similar to that of
               Borrower with such companies and in such amounts, with such
               deductibles and under policies in such form as shall be
               reasonably satisfactory to Agent and originals or certified
               copies of such policies have been or shall be delivered to Agent
               on the Closing Date, together with evidence of payment of all
               premiums therefor; each such policy shall contain an endorsement
               showing Agent as additional insured thereunder and providing that
               the insurance company shall give Agent at least thirty (30) days
               prior written notice before any such policy shall be altered or
               cancelled;

               (iii) Borrower shall maintain at its expense, key person life
               insurance on the life of Dawn McCormack in the amount of at least
               $1,000,000; such policy shall be assigned to Agent for its
               benefit and for the ratable benefit of Lenders as collateral
               security for the payment of the Liabilities pursuant to a
               collateral assignment of life insurance policy in form and
               substance acceptable to Agent, and such assignment shall be duly
               recorded with the applicable life insurance company; and

                                      -38-


               (iv) If Borrower at any time or times hereafter shall fail to
               obtain or maintain any of the policies of insurance required
               above or to pay any premium in whole or in part relating thereto,
               then Agent, without waiving or releasing any obligation or
               default by Borrower hereunder, may (but shall be under no
               obligation to) obtain and maintain such policies of insurance and
               pay such premiums and take such other actions with respect
               thereto as Agent reasonably deems advisable. All sums disbursed
               by Agent in connection with any such actions, including, without
               limitation, court costs, expenses, other charges relating thereto
               and reasonable attorneys' fees, shall constitute Revolving Loans
               hereunder and, until paid, shall bear interest at the highest
               rate then applicable to Revolving Loans hereunder;

          (d)  Borrower shall not use the Collateral, or any part thereof, in
any unlawful business or for any unlawful purpose or use or maintain any of the
Collateral in any manner that does or could reasonably be expected to result in
material damage to the environment or a violation of any applicable
Environmental Laws; Borrower shall keep the Collateral in commercially
reasonable condition, repair and order, ordinary wear and tear excepted;
Borrower shall not permit the Collateral, or any part thereof, to be levied upon
under execution, attachment, distraint or other legal process; Borrower shall
not sell, lease, grant a security interest in or otherwise dispose of any of the
Collateral except as expressly permitted by this Agreement; and Borrower shall
not secrete or abandon any of the Collateral, or remove or permit removal of any
of the Collateral from any of the locations listed on EXHIBIT A or in any
written notice to Agent pursuant to paragraph 14 hereof, except for the removal
of Inventory sold in the ordinary course of Borrower's business as permitted
herein and sales or other dispositions of Collateral contemplated by paragraph
5(a);

          (e)  all monies and other property obtained by Borrower from Agent
pursuant to this Agreement will be used solely for the purposes set forth
herein;

          (f)  Borrower shall, at the request of Agent, indicate on its records
concerning the Collateral a notation, in form satisfactory to Agent, of the
security interest of Agent hereunder, and Borrower shall not maintain duplicates
or copies of such records at any address other than Borrower's principal place
of business set forth on the first page of this Agreement; PROVIDED, HOWEVER,
that Borrower, in the ordinary course of its business, may furnish copies of
such records to its accountants, attorneys and other agents or advisors as it
may determine to be necessary or desirable, in the exercise of its commercially
reasonable judgment;

          (g)  Borrower shall file all required tax returns and pay all of its
taxes when due, including, without limitation, taxes imposed by federal, state
or municipal agencies, and shall cause any liens for taxes to be promptly
released; provided, that Borrower shall have the right to contest the payment of
such taxes in good faith by appropriate proceedings so long as (i) the amount so
contested is shown on Borrower's financial statements, (ii) the contesting of
any such payment does not give rise to a lien for taxes, (iii) upon the
occurrence of an Event of Default, Borrower keeps on deposit with Agent (such
deposit to be held without interest) an amount of money which, in the sole
judgment of Agent, is sufficient to pay such taxes and any interest or penalties
that may accrue thereon, and (iv) if Borrower fails to prosecute such contest
with reasonable diligence, Agent may apply the money so deposited in payment of
such taxes. If Borrower fails to pay any such taxes and in the absence of any
such contest by Borrower, Agent may (but shall be under no obligation to)
advance and pay any sums required to pay any such taxes and/or to secure the
release of any lien therefor, and any sums so advanced by Agent shall constitute
Revolving Loans hereunder, shall be payable by Borrower to Agent on demand, and,
until paid, shall bear interest at the highest rate then applicable to Revolving
Loans hereunder;

          (h)  Borrower shall not (i) incur, create, assume or suffer to exist
any indebtedness other than (A) indebtedness arising under this Agreement, (B)
unsecured indebtedness owing in the ordinary course of business to trade
suppliers arising on or after the Closing Date, and (C) any other indebtedness
described in paragraphs 14(q)(ii), (iii), (iv) and (v) hereof; or (ii) assume,
guarantee or endorse, or otherwise become liable in connection with, the
obligations of any Person, except by endorsement of instruments for deposit or
collection or similar transactions in the ordinary course of business;

          (i)  Borrower shall not enter into any merger or consolidation, or
sell, lease or otherwise dispose of all or substantially all of its assets;
Borrower shall not create or acquire any new Subsidiary or Affiliate or

                                      -39-


issue any shares of, or warrants or other rights to receive or purchase any
shares of, any class of its stock; Borrower shall not enter into any transaction
outside the ordinary course of Borrower's business;

          (j)  Except as expressly permitted by paragraph 5(b)(ii) above,
Borrower shall not (i) except as expressly permitted below declare or pay any
dividend or other distribution (whether in cash or in kind) on, purchase, redeem
or retire any shares of any class of its stock including, without limitation, in
connection with the Banc of America Warrants, or make any payment on account of,
or set apart assets for the repurchase, redemption, defeasance or retirement of,
any class of its stock equity or other interest including, without limitation,
in connection with the Banc of America Warrants; (ii) make any optional payment
or prepayment on or redemption (including without limitation by making payments
to a sinking fund or analogous fund) or repurchase of any indebtedness for
borrowed money other than indebtedness pursuant to this Agreement; (iii) make
any payments whatsoever on the indebtedness owing to the GBNF Trust or the QTIP
Trust, except as permitted under the Seller Subordination Agreement; (iv) pay
any management or similar fees to any Person; provided Borrower may pay to SCC a
management fee plus applicable expenses incurred by SCC, in accordance with the
terms and conditions of the Management Agreement as in effect on the Closing
Date (such fees and expenses, collectively, the "SCC Management Fee"), on the
26th day of each January, April, July and October of each calendar year (each
such date, a "Management Payment Date") as and for the three (3) month period
immediately preceding each such Management Payment Date, in an amount not to
exceed, in each case, $43,750 with respect to fees and $15,000 with respect to
expenses (exclusive of those expenses incurred by SCC on Borrower's behalf
relating to tax and auditing services and insurance coverage, in each case
attributable to Borrower) (provided further, that payment of such expenses by
the Borrower pursuant to the Management Agreement shall not exceed $30,000 in
the aggregate during any calendar year) so long as the SCC Payment Conditions
shall have been satisfied after giving effect to each such payment and to the
payment of any Unpaid Management Fees (as defined herein) paid to SCC on such
Management Payment Date; provided further, if any SCC Management Fee or portion
thereof is not paid to SCC solely due to Borrower's failure to satisfy the SCC
Payment Conditions (such unpaid SCC Management Fee, an "Unpaid Management Fee"),
then Borrower shall be permitted to pay to SCC such Unpaid Management Fees on
any subsequent Management Payment Date so long as (A) such Unpaid Management
Fees are paid to SCC on such Management Payment Date and (B) at the time of such
payment the SCC Payment Conditions shall have been satisfied after giving effect
to the payment of such Unpaid Management Fees and all SCC Management Fees, if
any, paid on such Management Payment Date; or (v) make any loan in excess of
$1,000.00 to any Person except travel, entertainment and relocation advances to
Borrower's employees in the ordinary course of business consistent with past
practices. Notwithstanding the foregoing, Borrower shall be permitted to make
payments to SCC with respect to its federal income tax obligations pursuant to
the provisions of the Consolidated Income Tax Sharing Agreement with respect to
any Fiscal Year so long as (A) the federal income tax returns and obligations of
Borrower, for such Fiscal Year have been consolidated with the federal tax
returns and obligations of SCC for such Fiscal Year and (B) the Tax Payment
Conditions shall have been satisfied prior to and immediately after giving
effect to any such payment. If the failure to satisfy all of the Tax Payment
Conditions restricts Borrower from making any payment pursuant to the
Consolidated Income Tax Sharing Agreement, Borrower shall be permitted to make a
payment pursuant to the Consolidated Income Tax Sharing Agreement for the
applicable Fiscal Year so long as the aggregate amount of cash payments made,
directly or indirectly, by Borrower to SCC, with respect to such Fiscal Year
shall not exceed the lesser of (x) the aggregate amount of federal income taxes
("Income Taxes") which would have been payable by Borrower with respect to such
Fiscal Year but for the fact that federal income tax returns of Borrower for
such Fiscal Year have been consolidated with corresponding returns of SCC with
respect to such Fiscal Year and (y) the aggregate amount of Income Taxes
actually payable by Borrower, Holdings, SCC and any other Person party to the
Consolidated Income Tax Sharing Agreement during such Fiscal Year; provided,
further that the foregoing shall not limit the distributions permitted to be
made pursuant to paragraph 5(b)(ii) above;

          (k)  Borrower shall not make any investment in any Person, whether in
cash, securities or other property of any kind, other than an investment in Cash
Equivalents;

          (l)  Borrower shall not (i) change its jurisdiction of organization,
(ii) amend its Organizational Documents or any shareholder's or similar
agreement including, without limitation, amend its name or (iii) change its
Fiscal Year;

          (m)  Borrower shall not enter into or maintain any transaction or
agreement with its Affiliates, except in the ordinary course of business in a
manner and to an extent consistent with past practices of Borrower and

                                      -40-


necessary or desirable for the prudent operation of its business and upon fair
and reasonable terms no less favorable to Borrower than would be obtained by
Borrower in a comparable arms-length transaction with a Person who is not an
Affiliate of Borrower;

          (n)  Borrower shall not enter into any amendment, waiver or
modification of the Subordinated Debt Documents, the Management Agreement or the
Consolidated Income Tax Sharing Agreement other than any amendment, waiver or
modification which decreases the principal, interest, fees, expenses, costs or
other amounts payable by Borrower, or extends the due date of any payment
thereunder, pursuant to any of the foregoing agreements;

          (o)  Borrower shall not (i) (x) maintain, or permit any ERISA
Affiliate to maintain, or (y) become obligated to contribute, or permit any
ERISA Affiliate to become obligated to contribute, to any Benefit Plan, (ii)
engage, or permit any ERISA Affiliate to engage, in any non-exempt "prohibited
transaction", (iii) incur, or permit any ERISA Affiliate to incur, any
"accumulated funding deficiency", as that term is defined in Section 302 of
ERISA or Section 412 of the IRC, (iv) terminate, or permit any ERISA Affiliate
to terminate, any Benefit Plan in a manner which could result in any material
liability of Borrower or any ERISA Affiliate or the imposition of a lien on the
property of Borrower or any ERISA Affiliate pursuant to Section 4068 of ERISA,
(v) assume, or permit any ERISA Affiliate to assume, any obligation to
contribute to any Multiemployer Plan, (vi) incur, or permit any ERISA Affiliate
to incur, any withdrawal liability to any Multiemployer Plan; (vii) fail
promptly to notify Agent of the occurrence of any Termination Event, (viii) fail
to comply, in all material respects, or permit a ERISA Affiliate to fail to
comply, in all material respects, with the requirements of ERISA or IRC or other
applicable laws in respect of any Benefit Plan, (ix) fail to meet, or permit any
ERISA Affiliate to fail to meet, all minimum funding requirements under ERISA or
IRC or postpone or delay or allow any ERISA Affiliate to postpone or delay any
funding requirement with respect of any Benefit Plan except as permitted by
applicable laws, in each event set forth in clauses (i) through (ix) which would
be reasonably likely to result in a Material Adverse Effect;

          (p)  Borrower shall maintain and keep in full force and effect each
of the financial covenants set forth below. The calculation and determination of
each such financial covenant, and all accounting terms contained therein, shall
be so calculated and construed in accordance with GAAP, applied on a basis
consistent with the financial statements of Borrower delivered on or before the
Closing Date (provided, however, that such calculations may be affected by any
write downs of goodwill taken in response to FASB releases existing on the
Closing Date or issued at any date thereafter):

                 (i)    NET WORTH. Borrower shall maintain as of the end of (A)
                 the fiscal quarter ending December 31, 2001 (the "base
                 quarter") a Net Worth of not less than four million seven
                 hundred fifty thousand dollars ($4,750,000) and (B) each fiscal
                 quarter thereafter (each a "current quarter"), a Net Worth of
                 not less than the sum of (1) four million seven hundred fifty
                 thousand dollars ($4,750,000) and (2) an aggregate amount equal
                 to eighty-five percent (85%) of the net income after taxes of
                 Borrower for each fiscal quarter commencing with the base
                 quarter through and including the then current quarter,
                 provided, however, that such aggregate amount shall not be
                 reduced by the amount of any net loss before taxes of Borrower
                 for any preceding fiscal quarter.

                 (ii)   FIXED CHARGE COVERAGE RATIO. Borrower shall maintain as
                 of the end of each fiscal quarter a Fixed Charge Coverage Ratio
                 of not less than the ratio shown opposite such fiscal quarter
                 with respect to the four (4) fiscal quarters then ended,
                 provided that the applicable period being tested on the fiscal
                 quarter ending September 30, 2002 will be for the three (3)
                 fiscal quarters then ended:



- ---------------------------------------------------------------------------------------
                   FISCAL QUARTER ENDED                     FIXED CHARGE COVERAGE RATIO
- ---------------------------------------------------------------------------------------
                                                                 
September 30, 2002                                                  1.00 to 1.00
- ---------------------------------------------------------------------------------------
December 31, 2002                                                   1.00 to 1.00
- ---------------------------------------------------------------------------------------
March 31, 2003                                                      1.00 to 1.00
- ---------------------------------------------------------------------------------------
June 30, 2003 and each fiscal quarter thereafter                    1.10 to 1.00
- ---------------------------------------------------------------------------------------


                                      -41-


                 (iii)  LEVERAGE RATIO. Borrower shall maintain as of the end of
                 each fiscal quarter a Leverage Ratio of not greater than the
                 ratio shown opposite such fiscal quarter with respect to the
                 four (4) fiscal quarters then ended, provided that the
                 applicable period being tested on the fiscal quarter ending (i)
                 December 31, 2001 will be for the one (1) fiscal quarter then
                 ended, (ii) March 31, 2002 will be for the two (2) fiscal
                 quarters then ended and (iii) June 30, 2002 will be for the
                 three (3) fiscal quarters then ended:



- ------------------------------------------------------------------------------
                   FISCAL QUARTER ENDED                        LEVERAGE RATIO
- ------------------------------------------------------------------------------
                                                             
September 30, 2002                                              6.00 to 1.00
- ------------------------------------------------------------------------------
December 31, 2002                                               3.50 to 1.00
- ------------------------------------------------------------------------------
March 31, 2003                                                  3.50 to 1.00
- ------------------------------------------------------------------------------
June 30, 2003                                                   4.50 to 1.00
- ------------------------------------------------------------------------------
September 30, 2003                                              5.00 to 1.00
- ------------------------------------------------------------------------------
December 31, 2003                                               3.50 to 1.00
- ------------------------------------------------------------------------------
March 31, 2004                                                  3.50 to 1.00
- ------------------------------------------------------------------------------
June 30, 2004                                                   4.50 to 1.00
- ------------------------------------------------------------------------------
September 30, 2004                                              5.00 to 1.00
- ------------------------------------------------------------------------------
December 31, 2004 and each fiscal quarter thereafter            3.50 to 1.00
- ------------------------------------------------------------------------------


                 (iv)   CAPITAL EXPENDITURES. Borrower shall not make Capital
                 Expenditures of an aggregate amount of more than two hundred
                 fifty thousand dollars ($250,000) during any Fiscal Year.

                 (v)    MINIMUM EBITDA. Borrower shall maintain EBITDA of not
                 less than the amounts shown opposite such fiscal quarter with
                 respect to the four (4) quarters then ended, provided that the
                 applicable period being tested on the fiscal quarter ending (i)
                 March 31, 2002 will be for the one (1) fiscal quarter then
                 ended, (ii) June 30, 2002 will be for the two (2) fiscal
                 quarters then ended and (iii) September 30, 2002 will be for
                 the three (3) fiscal quarters then ended:



- -------------------------------------------------------------------------
                   FISCAL QUARTER ENDED                  MINIMUM EBITDA
- -------------------------------------------------------------------------
                                                            
March 31, 2002                                                 ($326,000)
- -------------------------------------------------------------------------
June 30, 2002                                                  $  500,000
- -------------------------------------------------------------------------
September 30, 2002                                             $2,150,000
- -------------------------------------------------------------------------
December 31, 2002                                              $2,550,000
- -------------------------------------------------------------------------
March 31, 2003 and each fiscal quarter thereafter              $2,750,000
- -------------------------------------------------------------------------


          (q)  Borrower shall reimburse Agent for all costs and expenses
including, without limitation, legal expenses and reasonable attorneys' fees
(both in-house and outside counsel), incurred by Agent in connection with the
documentation and consummation of this transaction and any other transactions
between Borrower and Agent, including, without limitation, UCC and other public
record searches, lien filings, Federal Express or similar express or messenger
delivery, appraisal costs, surveys, title insurance and environmental audit or
review costs, and in seeking to collect, protect or enforce any rights in or to
the Collateral or incurred by Agent in seeking to collect any Liabilities and to
administer and enforce any of Agent's rights under this Agreement. Borrower
shall also pay all normal service charges with respect to accounts maintained by
Agent for the benefit of Borrower. All such costs, expenses and charges shall
constitute Revolving Loans hereunder, shall be payable by Borrower to Agent on
demand, and, until paid, shall bear interest at the highest rate then applicable
to Revolving Loans hereunder;

          (r)  Borrower shall promptly notify Agent in writing of the
occurrence of a (i) Default or an Event of Default; (ii) any default under the
Subordinated Debt Documents, the Management Agreement or the Consolidated Income
Tax Sharing Agreement; (ii) any event which with the giving of notice or lapse
of time, or both, would constitute an event of default under the Subordinated
Debt Documents, the Management Agreement or the Consolidated Income Tax Sharing
Agreement; (iii) any event, development or circumstance whereby any financial
statements furnished to Agent fail in any material respect to present fairly, in
accordance with GAAP consistently applied, the financial condition or operating
results of Borrower as of the date of such statements or

                                      -42-


whereby any reports furnished to Agent fail in any material respect to present
fairly the financial condition or operating results of Borrower as of the date
of such reports; (v) any accumulated retirement plan funding deficiency which,
if such deficiency continued for two plan years and was not corrected as
provided in Section 4971 of IRC, could subject Borrower to a tax imposed by
Section 4971 of IRC; (vi) each and every default by Borrower which might result
in the acceleration of the maturity of any Indebtedness, including the names and
addresses of the holders of such Indebtedness with respect to which there is a
default existing or with respect to which the maturity has been or could be
accelerated, and the amount of such Indebtedness; and (vii) any other
development in the business or affairs of Borrower which could reasonably be
expected to have a Material Adverse Effect; in each case describing the nature
thereof and the action Borrower proposes to take with respect thereto;

          (s)  (i)    Borrower shall ensure that the Real Property remains
in compliance with all Environmental Laws and shall not place or permit to be
placed any Hazardous Substances on any Real Property except as not prohibited by
applicable law or appropriate governmental authorities;

               (ii)   Borrower shall establish and maintain a system to assure
and monitor continued compliance with all applicable Environmental Laws which
system shall include periodic reviews of such compliance;

               (iii)  Borrower shall (i) employ in connection with the use of
the Real Property appropriate technology necessary to maintain compliance with
any applicable Environmental Laws and (ii) dispose of any and all Hazardous
Waste generated at the Real Property only at facilities and with carriers that
maintain valid permits under RCRA and any other applicable Environmental Laws.
Borrower shall use its best efforts to obtain certificates of disposal, such as
hazardous waste manifest receipts, from all treatment, transport, storage or
disposal facilities or operators employed by Borrower in connection with the
transport or disposal of any Hazardous Waste generated at the Real Property;

               (iv)   In the event Borrower obtains, gives or receives notice
of any Release or threat of Release of a reportable quantity of any Hazardous
Substances at the Real Property (any such event being hereinafter referred to as
a "Hazardous Discharge") or receives any notice of violation, request for
information or notification that it is potentially responsible for investigation
or cleanup of environmental conditions at the Real Property, demand letter or
complaint, order, citation, or other written notice with regard to any Hazardous
Discharge or violation of Environmental Laws affecting the Real Property or
Borrower's interest therein (any of the foregoing is referred to herein as an
"Environmental Complaint") from any Person, including any state agency
responsible in whole or in part for environmental matters in the state in which
the Real Property is located or the United States Environmental Protection
Agency (any such person or entity hereinafter the "Authority"), then Borrower
shall, within five (5) Business Days, give written notice of same to Agent
detailing facts and circumstances of which Borrower is aware giving rise to the
Hazardous Discharge or Environmental Complaint. Such information is to be
provided to allow Agent to protect its security interest in the Real Property
and is not intended to create nor shall it create any obligation upon Agent or
any Lender with respect thereto;

               (v)    Borrower shall promptly forward to Agent copies of any
request for information, notification of potential liability, demand letter
relating to potential responsibility with respect to the investigation or
cleanup of Hazardous Substances at any other site owned, operated or used by
Borrower to dispose of Hazardous Substances and shall continue to forward copies
of correspondence between Borrower and the Authority regarding such claims to
Agent until the claim is settled. Borrower shall promptly forward to Agent
copies of all documents and reports concerning a Hazardous Discharge at the Real
Property that Borrower is required to file under any Environmental Laws. Such
information is to be provided solely to allow Agent to protect Agent's security
interest in the Real Property and the Collateral;

               (vi)   Borrower shall respond promptly to any Hazardous
Discharge or Environmental Complaint and take all necessary action in order to
safeguard the health of any Person and to avoid subjecting the Collateral or
Real Property to any lien. If Borrower shall fail to respond promptly to any
Hazardous Discharge or Environmental Complaint or Borrower shall fail to comply
with any of the requirements of any Environmental Laws, Agent on behalf of
Lenders may, but without the obligation to do so, for the sole purpose of
protecting Agent's interest in Collateral: (A) give such notices or (B) enter
onto the Real Property (or authorize third parties to enter onto the Real
Property) and take such actions as Agent (or such third parties as directed by
Agent) deem

                                      -43-


reasonably necessary or advisable, to clean up, remove, mitigate or otherwise
deal with any such Hazardous Discharge or Environmental Complaint. All
reasonable costs and expenses incurred by Agent and Lenders (or such third
parties) in the exercise of any such rights, including any sums paid in
connection with any judicial or administrative investigation or proceedings,
fines and penalties, together with interest thereon from the date expended at
the Default Rate for Prime Rate Revolving Loans shall be paid upon demand by
Borrower, and until paid shall be added to and become a part of the Liabilities
secured by the liens created by the terms of this Agreement or any other
agreement between Agent, any Lender and Borrower;

               (vii)  Promptly upon the written request of Agent from time to
time, (but prior to the occurrence of an Event of Default not more frequently
than annually), Borrower shall provide Agent, at Borrower's expense, with an
environmental site assessment or environmental audit report prepared by an
environmental engineering firm acceptable in the reasonable opinion of Agent, to
assess with a reasonable degree of certainty the existence of a Hazardous
Discharge and the potential costs in connection with abatement, cleanup and
removal of any Hazardous Substances found on, under, at or within the Real
Property. Any report or investigation of such Hazardous Discharge proposed and
acceptable to an appropriate Authority that is charged to oversee the clean-up
of such Hazardous Discharge shall be acceptable to Agent. If such estimates,
individually or in the aggregate, exceed $100,000, Agent shall have the right to
require Borrower to post a bond, letter of credit or other security reasonably
satisfactory to Agent to secure payment of these costs and expenses;

               (viii) Borrower shall defend and indemnify Agent and Lenders
and hold Agent, Lenders and their respective employees, agents, directors and
officers harmless from and against all loss, liability, damage and expense,
claims, costs, fines and penalties, including attorney's fees, suffered or
incurred by Agent or Lenders under or on account of any Environmental Laws,
including, without limitation, the assertion of any lien thereunder, with
respect to any Hazardous Discharge, the presence of any Hazardous Substances
affecting the Real Property, whether or not the same originates or emerges from
the Real Property or any contiguous real estate, including any loss of value of
the Real Property as a result of the foregoing except to the extent such loss,
liability, damage and expense is attributable to any Hazardous Discharge
resulting from actions on the part of Agent or any Lender. Borrower's
obligations under this paragraph 15(s)(viii) shall arise upon the discovery of
the presence of any Hazardous Substances at the Real Property, whether or not
any federal, state, or local environmental agency has taken or threatened any
action in connection with the presence of any Hazardous Substances. Borrower's
obligation and the indemnifications hereunder shall survive the termination of
this Agreement; and

               (ix)   For purposes of paragraphs 14(bb) and 15(s), all
references to Real Property shall be deemed to include all of Borrower's right,
title and interest in and to its owned and leased premises.

          (t)  Neither Borrower or any Affiliate of Borrower shall use any
portion of the proceeds of the Loans, either directly or indirectly, for the
purpose of (i) purchasing any securities underwritten or privately placed by ABN
AMRO Securities (USA) Inc. ("AASI"), an affiliate of Agent, (ii) purchasing from
AASI any securities in which AASI makes a market, or (iii) refinancing or making
payments of principal, interest or dividends on any securities issued by
Borrower or any Affiliate, and underwritten, privately placed or dealt in by
AASI.

          (u)  Borrower shall, in form and substance satisfactory to Agent in
its sole discretion, on or before March 17, 2003 (i) extend the maturity date of
the principal balance of the Subordinated Notes until a date after March 31,
2005 or (ii) (A) refinance the principal balance of the Subordinated Notes on
substantially the same terms and conditions but in any event not any more
adverse to Agent and/or any Lender, as determined by Agent in its sole
discretion, and (B) in connection with such refinancing extend the maturity date
of the principal balance of the Subordinated Notes until a date after March 31,
2005.

          (v)  On or before one hundred and eighty (120) days following the
Closing Date, Borrower shall create an automated system to identify Extended
Term Customers and Preferred Customers, which system shall be satisfactory to
Agent in its reasonable discretion.

     16.  CONDITIONS PRECEDENT.

                                      -44-


          (a)  The obligation of Agent and each Lender to fund the Term Loan,
to fund the initial Revolving Loan on the Closing Date and to co-sign as
applicant for the initial Letter of Credit on the Closing Date is subject to the
satisfaction or waiver on or before the Closing Date of the following conditions
precedent:

               (i)    Agent shall have received each of the agreements,
               opinions, reports, approvals, consents, certificates and other
               documents set forth on the closing document list attached
               hereto as SCHEDULE A (the "Closing Document List").

               (ii)   Since December 31, 2000, no event shall have occurred
               which has had or could reasonably be expected to have a
               Material Adverse Effect, as determined by Agent in its
               reasonable business judgment.

               (iii)  Agent shall have received payment in full of all fees
               and expenses set forth herein payable to it by Borrower on or
               before the Closing Date.

               (iv)   Agent shall have determined that immediately after
               giving effect to (A) the making of the initial Loans requested
               to be made on the Closing Date and (B) the issuance of the
               initial Letters of Credit, if any, requested to be made on the
               Closing Date and (C) the payment or reimbursement by Borrower
               of Agent for all closing costs and expenses incurred in
               connection with the transactions contemplated hereby, on a pro
               forma basis the Excess Availability of Borrower shall not be
               less than Five Hundred Thousand Dollars ($500,000).

               (v)    Agent shall have received a certificate from Borrower's
               chief executive officer or chief financial officer, pursuant to
               which such officer shall certify that in calculating the Excess
               Availability described in clause (iv) above, the outstanding
               trade payables of Borrower were and are current and not past
               due in any material respect.

               (vi)   The Obligors shall have executed and delivered to Agent
               all documents which Agent determines are reasonably necessary
               to consummate the transactions contemplated hereby.

               (vii)  Agent shall have received duly executed agreements
               establishing the Lock Box and Blocked Accounts with financial
               institutions acceptable to Agent for the collection or
               servicing of the Accounts and proceeds of the Collateral.

               (viii) Agent shall have completed Collateral examinations and
received appraisals, the results of which shall be satisfactory in form and
substance to the Agent, of the Accounts, Inventory, General Intangibles,
Investment Property, Real Property and Equipment of Borrower and all books and
records in connection therewith.

               (ix)   Agent shall have received and be satisfied with the
               audited financial statements of Borrower for the Fiscal Year
               ended December 31, 2000.

               (x)    There shall exist no default in any obligations or in
               compliance with any applicable legal requirement of Borrower
               (other than those disclosed to Agent in writing on or prior to
               the date hereof).

               (xi)   Agent shall be satisfied with its due diligence review of
               the business and financial affairs of Borrower and its
               management and its pre-closing audit of Borrower.

               (xii)  Agent shall have received the executed legal opinion(s)
               of Morgan, Lewis & Bockius, LLP, Carvin, Delaney & Bryson, LLP
               and Seegel, Lipshutz & Wilchins, P.C. in form and substance
               satisfactory to Agent which shall cover such matters incident
               to the transactions contemplated by this Agreement, the Notes,
               the Mortgage and related agreements as Agent may reasonably
               require (including, without limitation, enforceability and
               perfection issues with respect to the Collateral and the Real
               Property) and Borrower hereby authorizes and directs such
               counsel to deliver such opinions to Agent and Lenders.

               (xiii) Agent shall have received landlord, processor or
               warehouseman agreements satisfactory to Agent with respect to
               all premises leased by Borrower or controlled by any of its
               processors, suppliers or customers at which books and records,
               Inventory and Equipment are located.

               (xiv)  Agent shall have received licensor consent letters
               satisfactory to Agent with respect to the trademarks licensed
               to Borrower pursuant to a license agreement.

                                      -45-


               (xv)   Agent shall have received in form and substance
               satisfactory to Agent, certified copies of Borrower's casualty
               insurance policies, together with loss payable endorsements on
               Agent's standard form of loss payee endorsement naming Agent as
               lender loss payee, certified copies of Borrower's liability
               insurance policies, together with endorsements naming Agent as
               a co-insured, and certified copies of Borrower's key person
               life insurance policies on the life of Dawn McCormack, together
               with collateral assignments of such policies and each such
               insurance policy shall be in an aggregate amount of at least
               $1,000,000.

               (xvi)  Each document (including, without limitation, any
Uniform Commercial Code financing statement and filings with the United State
Patent and Trademark Office or any similar state authority) required by this
Agreement, any Other Agreement or under law or reasonably requested by the Agent
to be filed, registered or recorded in order to create, in favor of Agent, a
perfected security interest in or lien upon the Collateral shall have been
properly filed, registered or recorded in each jurisdiction in which the filing,
registration or recordation thereof is so required or requested, and Agent shall
have received an acknowledgment copy, or other evidence satisfactory to it, of
each such filing, registration or recordation and satisfactory evidence of the
payment of any necessary fee, tax or expense relating thereto.

               (xvii) No litigation, investigation or proceeding before or by
any arbitrator or governmental body shall be continuing or threatened against
Borrower or against the officers or directors of Borrower (A) in connection with
this Agreement or the Other Agreements or any of the Transactions and which, in
the reasonable opinion of Agent, is deemed material or (B) which if adversely
determined, could, in the reasonable opinion of Agent, have a Material Adverse
Effect on Borrower; and (ii) no injunction, writ, restraining order or other
order of any nature materially adverse to Borrower or the conduct of its
business or inconsistent with the due consummation of the transactions
contemplated by this Agreement or the Other Agreements shall have been issued by
any governmental body.

               (xviii)Agent shall have received all environmental studies and
reports prepared by independent environmental engineering firms regarding the
Real Property, the results of which shall be satisfactory to Agent in all
respects.

               (xix)  Agent shall have reviewed all material contracts of
Borrower including, without limitation, leases, union contracts, labor
contracts, vendor supply contracts, license agreements and distributorship
agreements and such contracts and agreements shall be satisfactory in all
respects to Agent.

               (xx)   Borrower shall be in compliance with all applicable laws
and regulations.

               (xxi)  No Default or Event of Default shall exist.

               (xxii) All corporate and other proceedings, and all documents,
instruments and other legal matters in connection with the transactions
contemplated by this Agreement shall be satisfactory in form and substance to
Agent, Lenders and their counsel.

               (xxiii)Agent shall have received and reviewed the Pro Forma
Balance Sheet and monthly projections of the Borrower for the first Contract
Year, together with financial projections for the second and third Contract
Year, calculated on an annual basis, and such balance sheet and projections
shall be in form and substance satisfactory to the Agent.

               (xxiv) Agent shall have received copies of the executed
Subordinated Debt Documents, each of which shall be in form and substance
satisfactory to Agent, and Agent shall have entered into (a) the Seller
Subordination Agreement with PDL Massachusetts and CNC, (b) the Intercreditor
Agreement with Softech which shall be in form and substance satisfactory to
Agent and (c) the Banc of America Subordination Agreement with Banc of America.

               (xxv)  Agent shall have entered into the Management
Subordination Agreement with SCC and Borrower and SCC shall have entered into an
amendment to the Management Agreement in form and substance satisfactory to
Agent.

                                      -46-


               (xxvi) Agent shall have received fully paid mortgage title
insurance policies (or binding commitments to issue title insurance policies,
marked to Agent's satisfaction to evidence the form of such policies to be
delivered with respect to the Mortgage), in standard ALTA form, issued by a
title insurance company satisfactory to Agent, each in an amount equal to not
less than the fair market value of the Real Property subject to the Mortgage,
insuring the Mortgage to create a valid Lien on the Real Property with no
exceptions which Agent shall not have approved in writing and no survey
exceptions and a survey of the Real Property in a form and substance
satisfactory to Agent.

               (xxvii)Agent shall have received approval from its credit
committee for all of the Transactions.

          (b)  The obligation of Agent or any Lender to make any requested
Loan, or to issue or cause the issuance of any requested Letter of Credit
whether on or at any time after the Closing Date, is subject to the satisfaction
of the conditions precedent set forth below. Each such request shall constitute
a representation and warranty that such conditions are satisfied:

               (i)    All representations and warranties contained in this
               Agreement and the Other Agreements shall be true and correct on
               and as of the date of such request, as if then made, other than
               representations and warranties that relate solely to an earlier
               date;

               (ii)   No Default or Event of Default shall have occurred, or
               would result from the making of the requested Loan or the
               issuance of the requested Letter of Credit, which has not been
               waived in writing by Agent; and

               (iii)  Since December 31, 2000, no event has occurred which has
               had or could reasonably be expected to have a Material Adverse
               Effect.

     17.  DEFAULT. The occurrence of any one or more of the following events
shall constitute an "EVENT OF DEFAULT" hereunder:

          (a)  the failure of any Obligor to pay when due, declared due, or
demanded by Agent in accordance with the terms hereof, any of the Liabilities;

          (b)  the failure of any Obligor to perform, keep or observe any of
the covenants, conditions, promises, agreements or obligations of such Obligor
under this Agreement or any of the Other Agreements;

          (c)  (i) the making or furnishing by any Obligor to Agent or any
Lender of any representation, warranty, certificate, schedule, report or other
communication within or in connection with this Agreement or the Other
Agreements or in connection with any other agreement between such Obligor and
Agent or such Lender, which is untrue or misleading in any material respect, or
(ii) the failure of any Obligor to perform, keep or observe any of the
covenants, conditions, promises, agreements of such Obligor under any other
agreement with any Person if such failure has or is reasonably likely to have a
Material Adverse Effect;

          (d)  the creation (whether voluntary or involuntary) of, or any
attempt to create, any lien or other encumbrance upon any of the Collateral,
other than the Permitted Liens, or the making or any attempt to make any levy,
seizure or attachment thereof;

          (e)  the commencement of any proceedings (i) in bankruptcy by or
against any Obligor, (ii) for the liquidation or reorganization of any Obligor,
(iii) alleging that such Obligor is insolvent or unable to pay its debts as they
mature, or (iv) for the readjustment or arrangement of any Obligor's debts,
whether under the United States Bankruptcy Code or under any other law, whether
state or federal, now or hereafter existing for the relief of debtors, or the
commencement of any analogous statutory or non-statutory proceedings involving
any Obligor; PROVIDED, HOWEVER, that if such commencement of proceedings against
such Obligor is involuntary, such action shall not constitute an Event of
Default unless such proceedings are not dismissed within forty-five (45) days
after the commencement of such proceedings;

          (f)  the appointment of a receiver or trustee for any Obligor, for
any of the Collateral or for any substantial part of any Obligor's assets or the
institution of any proceedings for the dissolution, or the full or

                                      -47-


partial liquidation, or the merger or consolidation, of any Obligor which is a
corporation or a partnership; provided, however, that if such appointment or
commencement of proceedings against such Obligor is involuntary, such action
shall not constitute an Event of Default unless such appointment is not revoked
or such proceedings are not dismissed within forty-five (45) days after the
commencement of such proceedings;

          (g)  the entry of any judgment or order in excess of $250,000
against any Obligor which remains unsatisfied or undischarged and in effect for
thirty-five (35) days after such entry without a stay of enforcement or
execution;

          (h)  the occurrence of a default or event of default under, or the
revocation or termination of, any agreement, instrument or document executed and
delivered by any Person to Agent pursuant to which such Person has guaranteed to
Agent for its benefit and for the ratable benefit of Lenders the payment of all
or any of the Liabilities or has granted Agent for its benefit and for the
ratable benefit of Lenders a security interest in or lien upon some or all of
such Person's real and/or personal property to secure the payment of all or any
of the Liabilities;

          (i)  the occurrence of a default or event of default under any other
agreement or instrument evidencing indebtedness for borrowed money in excess of
$250,000 executed or delivered by Borrower or pursuant to which agreement or
instrument Borrower or its properties is or may be bound including, without
limitation, the Subordinated Debt Documents;

          (j)  the occurrence of any event or condition which has or is
reasonably likely to have a Material Adverse Effect;

          (k)  the occurrence of a Change of Control;

          (l)  if any Reportable Event shall have occurred or any Benefit Plan
shall be terminated within the meaning of Title IV of ERISA, a trustee shall be
appointed by the appropriate United States District Court to administer any
Benefit Plan, or the PBGC shall institute proceedings to terminate any Benefit
Plan, or there shall be a withdrawal from any Multiemployer Plan, and there
shall be a Material Adverse Effect in the case of any event described in this
paragraph 17(l);

          (m)  the occurrence of any event specified in Borrower's
Organizational Documents that may result in Borrower's dissolution or
liquidation or Borrower shall file a certificate of dissolution or shall be
liquidated, dissolved or wound-up or shall commence or have commenced against it
any action or proceeding for dissolution, winding up or liquidation; or

          (n)  the operations of Borrower's manufacturing facility are
interrupted at any time for more than five (5) consecutive Business Days and
such interruption is reasonably likely to have a Material Adverse Effect (as
determined by Agent in its commercially reasonable discretion exercised in good
faith) (a "Business Interruption Trigger Event"), unless Borrower shall (i) be
entitled to receive for such period of interruption, proceeds of business
interruption insurance sufficient to assure that its per diem cash needs during
such period is at least equal to its average per diem cash needs for the
consecutive three month period immediately preceding the initial date of
interruption and (ii) receive such proceeds in the amount described in clause
(i) preceding not later than forty-five (45) days following the initial date of
any such interruption; provided, however, that notwithstanding the provisions of
clauses (i) and (ii) of this paragraph 17(n), an Event of Default shall be
deemed to have occurred based upon a Business Interruption Trigger Event if
Borrower shall be receiving the proceeds of business interruption insurance for
a period of thirty (30) consecutive days.

          Notwithstanding anything contained in this paragraph 17 or contained
in any other provision of this Agreement or the Other Agreements to the
contrary, in the event of the institution of any proceeding or appointment
described in paragraph 17(e) or paragraph 17(f) hereof against Borrower, Agent
and Lenders shall not be obligated to make advances to Borrower during the
forty-five (45) day grace period provided in paragraph 17(e) or paragraph 17(f).

     18.  REMEDIES UPON AN EVENT OF DEFAULT.

                                      -48-


          (a)  Upon the occurrence of an Event of Default described in
paragraph 17(e) or paragraph 17 (f) hereof, all of the Liabilities shall
immediately and automatically become due and payable, without notice of any
kind. Upon the occurrence of any other Event of Default, all of the Liabilities
may, at the option of Agent at the direction of Required Lenders, and without
demand, notice or legal process of any kind, be declared, and immediately shall
become, due and payable.

          (b)  Upon the occurrence of an Event of Default, Agent may exercise
from time to time any rights and remedies available to it under the UCC and
under any other applicable law in addition to, and not in lieu of, any rights
and remedies expressly granted in this Agreement or in any of the Other
Agreements and all of Agent's rights and remedies shall be cumulative and
non-exclusive to the extent permitted by law. In particular, but not by way of
limitation of the foregoing, Agent may, without notice, demand or legal process
of any kind, take possession of any or all of the Collateral (in addition to
Collateral of which it already has possession), wherever it may be found, and
for that purpose may pursue the same wherever it may be found, and may enter
into any of Borrower's premises where any of the Collateral may be, and search
for, take possession of, remove, keep and store any of the Collateral until the
same shall be sold or otherwise disposed of, and Agent shall have the right to
store the same at any of Borrower's premises without cost to Agent. At Agent's
request, Borrower shall, at Borrower's expense, assemble the Collateral and make
it available to Agent at one or more places to be designated by Agent and
reasonably convenient to Agent and Borrower. Borrower recognizes that if
Borrower fails to perform, observe or discharge any of its Liabilities under
this Agreement or the Other Agreements, no remedy at law will provide adequate
relief to Agent or Lenders, and Borrower agrees that Agent and Lenders shall be
entitled to temporary and permanent injunctive relief in any such case without
the necessity of proving actual damages. Any notification of intended
disposition of any of the Collateral required by law will be deemed reasonably
and properly given if given at least ten (10) calendar days before such
disposition. Any proceeds of any disposition by Agent of any of the Collateral
may be applied by Agent to the payment of expenses in connection with the
Collateral including, without limitation, legal expenses and reasonable
attorneys' fees (both in-house and outside counsel) and any balance of such
proceeds may be applied by Agent toward the payment of such of the Liabilities,
and in such order of application, as Agent may from time to time elect.

     19.  INDEMNIFICATION. Borrower agrees to defend (with counsel reasonably
satisfactory to Agent), protect, indemnify and hold harmless Agent and each
Lender, each affiliate or subsidiary of Agent or such Lender, and each of their
respective officers, directors, employees, attorneys and agents (each an
"Indemnified Party") from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs, expenses
and disbursements of any kind or nature (including, without limitation, the
disbursements and the reasonable fees of counsel for each Indemnified Party in
connection with any investigative, administrative or judicial proceeding,
whether or not the Indemnified Party shall be designated a party thereto and any
fees associated with a broker or similar Person), which may be imposed on,
incurred by, or asserted against, any Indemnified Party (whether direct,
indirect or consequential and whether based on any federal, state or local laws
or regulations including, without limitation, securities, Environmental Laws and
commercial laws and regulations, under common law or in equity, or based on
contract or otherwise) in any manner relating to or arising out of this
Agreement or any Other Agreement, or any act, event or transaction related or
attendant thereto, the making and the management of the Loans or any Letters of
Credit or the use or intended use of the proceeds of the Loans or any Letters of
Credit; PROVIDED, HOWEVER, that Borrower shall not have any obligation hereunder
to any Indemnified Party with respect to matters caused by or resulting from the
willful misconduct or gross negligence of such Indemnified Party. To the extent
that the undertaking to indemnify set forth in the preceding sentence may be
unenforceable because it is violative of any law or public policy, Borrower
shall satisfy such undertaking to the maximum extent permitted by applicable
law. Any liability, obligation, loss, damage, penalty, cost or expense covered
by this indemnity shall be paid to each Indemnified Party on demand, and,
failing prompt payment, shall, together with interest thereon at the highest
rate then applicable to Revolving Loans hereunder from the date incurred by each
Indemnified Party until paid by Borrower, be added to the Liabilities of
Borrower and be secured by the Collateral. The provisions of this paragraph 19
shall survive the satisfaction and payment of the other Liabilities and the
termination of this Agreement.

     20.  REGARDING AGENT.

          (a)  APPOINTMENT. Each Lender hereby designates LaSalle to act as
Agent for such Lender under this Agreement and the Other Agreements. Each Lender
hereby irrevocably authorizes Agent to take such

                                      -49-


action on its behalf under the provisions of this Agreement and the Other
Agreements and to exercise such powers and to perform such duties hereunder and
thereunder as are specifically delegated to or required of Agent by the terms
hereof and thereof and such other powers as are reasonably incidental thereto
and Agent shall hold all Collateral, payments of principal and interest, fees
(except the fees set forth in subparagraphs 6(d), 6(e), 6(g) and 6(h)), charges
and collections (without giving effect to any collection days) received pursuant
to this Agreement, for the ratable benefit of Lenders. Agent may perform any of
its duties hereunder by or through its agents or employees. As to any matters
not expressly provided for by this Agreement, Agent shall not be required to
exercise any discretion or take any action, but shall be required to act or to
refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the instructions of the Required Lenders, and such
instructions shall be binding; PROVIDED, however, that Agent shall not be
required to take any action which exposes Agent to liability or which is
contrary to this Agreement or the Other Agreements or applicable law unless
Agent is furnished with an indemnification reasonably satisfactory to Agent with
respect thereto.

          (b)  NATURE OF DUTIES. Agent shall have no duties or
responsibilities except those expressly set forth in this Agreement and the
Other Agreements. Neither Agent nor any of its officers, directors, employees or
agents shall be (i) liable for any action taken or omitted by them as such
hereunder or in connection herewith, unless caused by their gross (not mere)
negligence or willful misconduct, or (ii) responsible in any manner for any
recitals, statements, representations or warranties made by Borrower or any
officer thereof contained in this Agreement, or in any Other Agreement or in any
certificate, report, statement or other document referred to or provided for in,
or received by Agent under or in connection with, this Agreement or any Other
Agreement or for the value, validity, effectiveness, genuineness, enforceability
or sufficiency of this Agreement, or any Other Agreement or for any failure of
Borrower to perform its obligations hereunder. Agent shall not be under any
obligation to any Lender to ascertain or to inquire as to the observance or
performance of any of the agreements contained in, or conditions of, this
Agreement or any Other Agreement, or to inspect the properties, books or records
of Borrower. The duties of Agent as respects the Loans to Borrower shall be
mechanical and administrative in nature; Agent shall not have by reason of this
Agreement a fiduciary relationship in respect of any Lender; and nothing in this
Agreement, expressed or implied, is intended to or shall be so construed as to
impose upon Agent any obligations in respect of this Agreement except as
expressly set forth herein.

          (c)  LACK OF RELIANCE ON AGENT AND RESIGNATION.

               (i)    Independently and without reliance upon Agent or any
               other Lender, each Lender has made and shall continue to make
               (A) its own independent investigation of the financial
               condition and affairs of Borrower in connection with the making
               and the continuance of the Loans hereunder and the taking or
               not taking of any action in connection herewith, and (B) its
               own appraisal of the creditworthiness of Borrower. Agent shall
               have no duty or responsibility, either initially or on a
               continuing basis, to provide any Lender with any credit or
               other information with respect thereto, whether coming into its
               possession before making of the Loans or at any time or times
               thereafter except as shall be provided by Borrower pursuant to
               the terms hereof. Agent shall not be responsible to any Lender
               for any recitals, statements, information, representations or
               warranties herein or in any agreement, document, certificate or
               a statement delivered in connection with or for the execution,
               effectiveness, genuineness, validity, enforceability,
               collectability or sufficiency of this Agreement or any Other
               Agreement, or of the financial condition of Borrower, or be
               required to make any inquiry concerning either the performance
               or observance of any of the terms, provisions or conditions of
               this Agreement, the Notes, the Other Agreements or the
               financial condition of Borrower, or the existence of any Event
               of Default or any Default.

               (ii)   Agent may resign on sixty (60) days' written notice to
               each of Lenders and Borrower and upon such resignation, the
               Required Lenders will promptly designate a successor Agent
               reasonably satisfactory to Borrower.

               (iii)  Any such successor Agent shall succeed to the rights,
               powers and duties of Agent, and the term "Agent" shall mean
               such successor agent effective upon its appointment, and the
               former Agent's rights, powers and duties as Agent shall be
               terminated, without any other or further act or deed on the
               part of such former Agent. After any Agent's resignation as
               Agent, the provisions of this paragraph 20, shall inure to

                                      -50-


               its benefit as to any actions taken or omitted to be taken by
               it while it was Agent under this Agreement.

          (d)  CERTAIN RIGHTS OF AGENT. If Agent shall request instructions
from Lenders with respect to any act or action (including failure to act) in
connection with this Agreement or any Other Agreement, Agent shall be entitled
to refrain from such act or taking such action unless and until Agent shall have
received instructions from the Required Lenders; and Agent shall not incur
liability to any Person by reason of so refraining. Without limiting the
foregoing, Lenders shall not have any right of action whatsoever against Agent
as a result of its acting or refraining from acting hereunder in accordance with
the instructions of the Required Lenders.

          (e)  RELIANCE. Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, statement,
certificate, telex, teletype or telecopier message, cablegram, order or other
document or telephone message believed by it to be genuine and correct and to
have been signed, sent or made by the proper person or entity, and, with respect
to all legal matters pertaining to this Agreement and the Other Agreements and
its duties hereunder, upon advice of counsel selected by it. Agent may employ
agents and attorneys-in-fact and shall not be liable for the default or
misconduct of any such agents or attorneys-in-fact selected by Agent with
reasonable care.

          (f)  NOTICE OF DEFAULT. Agent shall not be deemed to have knowledge
or notice of the occurrence of any Default or Event of Default hereunder or
under the Other Agreements, unless Agent has received notice from a Lender or
Borrower referring to this Agreement or the Other Agreements, describing such
Default or Event of Default and stating that such notice is a "notice of
default". In the event that Agent receives such a notice, Agent shall give
notice thereof to Lenders. Agent shall take such action with respect to such
Default or Event of Default as shall be reasonably directed by the Required
Lenders; provided, THAT, unless and until Agent shall have received such
directions, Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable in the best interests of Lenders.

          (g)  INDEMNIFICATION. To the extent Agent is not reimbursed and
indemnified by Borrower, each Lender will reimburse and indemnify Agent in
proportion to its respective portion of the Loans (or, if no Loans are
outstanding, according to its Commitment Percentage), from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever which
may be imposed on, incurred by or asserted against Agent in performing its
duties hereunder, or in any way relating to or arising out of this Agreement or
any Other Agreement; PROVIDED THAT, Lenders shall not be liable for any portion
of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from Agent's gross
(not mere) negligence or willful misconduct.

          (h)  AGENT IN ITS INDIVIDUAL CAPACITY. With respect to the
obligation of Agent to lend under this Agreement, the Loans made by it shall
have the same rights and powers hereunder as any other Lender and as if it were
not performing the duties as Agent specified herein; and the term "Lender" or
any similar term shall, unless the context clearly otherwise indicates, include
Agent in its individual capacity as a Lender. Agent may engage in business with
Borrower as if it were not performing the duties specified herein, and may
accept fees and other consideration from Borrower for services in connection
with this Agreement or otherwise without having to account for the same to
Lenders.

          (i)  DELIVERY OF DOCUMENTS. To the extent Agent receives documents
and written information from Borrower pursuant to paragraphs 12(c), (d), (e),
(f) or (g) of this Agreement, Agent will promptly furnish such documents and
information to Lenders.

          (j)  BORROWER'S UNDERTAKING TO AGENT. Without prejudice to its
obligations to the Lenders under the other provisions of this Agreement,
Borrower hereby undertakes with Agent to pay to Agent from time to time on
demand all amounts from time to time due and payable by it for the account of
Agent or the Lenders or any of them pursuant to this Agreement to the extent not
already paid. Any payment made pursuant to any such demand shall PRO TANTO
satisfy Borrower's obligations to make payments for the account of the Lenders
or the relevant one or more of them pursuant to this Agreement.

                                      -51-


     21.  NOTICES. All written notices and other written communications with
respect to this Agreement shall be sent by ordinary, certified or overnight
mail, by telecopy or delivered by reputable courier or in person to: LaSalle
Business Credit, Inc., 565 Fifth Avenue, New York, New York 10017, Attention:
District Credit Manager,

     with a copy to:

     Lowenstein Sandler PC
     65 Livingston Avenue
     Roseland, New Jersey 07068-1791
     Attention: Lowell Citron, Esq.
     Telephone: (212) 262-6700
     Facsimile: (973) 422-2929

     LaSalle Business Credit, Inc.
     135 South LaSalle Street
     Suite 425
     Chicago, Illinois 60603-4105
     Attention: Michael Carsella, Esq.
     Telephone: (312) 904-7805
     Facsimile: (312) 904-7425

and in the case of Borrower shall be sent to Borrower at its principal place of
business as set forth on the first page of this Agreement, with copies to
Capital Partners, One Pickwick Plaza, Suite 310, Greenwich, Connecticut 06830,
Attention: Brian D. Fitzgerald/William Schlueter (facsimile no. (203) 625-0423)
and to Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, New York
10178-0060, Attention: Samuel B. Fortenbaugh III (facsimile no. (212) 309-6273)
and in the case of any Lender shall be sent to such Lender at its address set
forth on the signature page hereto or in a Commitment Transfer Supplement or at
such other address as may be designated by any party from time to time in a
notice complying as to delivery with the terms of this paragraph to the other
parties. Any notice, if mailed or delivered via reputable courier or by hand
delivery and properly addressed with postage or delivery costs prepaid, shall be
deemed given when received; any notice, if transmitted by telecopy, shall be
deemed given when transmitted, provided receipt is confirmed.

     22.  CHOICE OF GOVERNING LAW AND CONSTRUCTION. This Agreement and the Other
Agreements are submitted by Borrower to Agent for Agent's acceptance or
rejection at Agent's principal place of business as an offer by Borrower to
borrow monies from Agent and Lenders now and from time to time hereafter, and
shall not be binding upon Agent or any Lender or become effective until accepted
by Agent on behalf of Lenders, in writing, at said place of business. If so
accepted by Agent on behalf of Lenders, this Agreement and the Other Agreements
shall be deemed to have been made at said place of business. THIS AGREEMENT AND
THE OTHER AGREEMENTS SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF
THE STATE OF NEW YORK AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION,
EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING, WITHOUT LIMITATION, THE LEGALITY
OF THE INTEREST RATE AND OTHER CHARGES, BUT EXCLUDING PERFECTION OF THE SECURITY
INTERESTS IN THE COLLATERAL, WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS
OF THE RELEVANT JURISDICTION. If any provision of this Agreement shall be held
to be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or remaining provisions of this
Agreement.

     23.  FORUM SELECTION AND SERVICE OF PROCESS. To induce Agent on behalf of
Lenders to accept this Agreement, Borrower irrevocably agrees that, subject to
Agent's sole and absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY,
MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE
OTHER AGREEMENTS OR THE COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS
WITHIN THE CITY OF NEW YORK, STATE OF NEW YORK. BORROWER HEREBY CONSENTS AND
SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN
SAID CITY AND STATE. Borrower hereby irrevocably appoints and designates the
Secretary of State of New York, whose address is Albany, New York (or

                                      -52-


any other person having and maintaining a place of business in such state whom
Borrower may from time to time hereafter designate upon ten (10) days written
notice to Agent and who Agent has agreed in writing in its sole discretion is
satisfactory and who has executed an agreement in form and substance
satisfactory to Agent agreeing to act as such attorney and agent), as Borrower's
true and lawful attorney and duly authorized agent for acceptance of service of
legal process. Borrower agrees that service of such process upon such person
shall constitute personal service of such process upon Borrower. BORROWER HEREBY
WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION
BROUGHT AGAINST BORROWER BY AGENT OR ANY LENDER IN ACCORDANCE WITH THIS
PARAGRAPH.

     24.  MODIFICATION AND BENEFIT OF AGREEMENT.

          (a)    This Agreement and the Other Agreements may not be modified,
altered or amended except by an agreement in writing signed by Borrower, Agent
and Required Lenders as provided in subparagraph (b) below. Borrower may not
sell, assign or transfer this Agreement, or the Other Agreements or any portion
thereof including, without limitation, Borrower's rights, titles, interest,
remedies, powers or duties thereunder.

          (b)    The Required Lenders, Agent with the consent in writing of the
Required Lenders, and Borrower may, subject to the provisions of this paragraph
24(b), from time to time enter into written supplemental agreements to this
Agreement, the Notes or the Other Agreements executed by Borrower, for the
purpose of adding or deleting any provisions or otherwise changing, varying or
waiving in any manner the rights of Lenders, Agent or Borrower thereunder or the
conditions, provisions or terms thereof of waiving any Event of Default
thereunder, but only to the extent specified in such written agreements;
PROVIDED, HOWEVER, that no such supplemental agreement shall, without the
consent of all the Lenders and with respect to clause (v) below, the consent of
Agent:

                 (i)    increase the Commitment Percentage of any Lender.

                 (ii)   extend the maturity of any Note or the due date for any
                 amount payable hereunder, or increase any of the Advance Rates,
                 or decrease the rate of interest or reduce any principal
                 payment due on the Loans or fee payable by Borrower to Lenders
                 pursuant to this Agreement (it being understood and agreed,
                 however, that any vote to rescind any acceleration of the
                 Liabilities made pursuant to paragraph 18 hereof shall only
                 require the vote of the Required Lenders).

                 (iii)  alter the definition of the term Required Lenders or
                 alter, amend or modify this paragraph 24(b).

                 (iv)   release any Collateral during any calendar year having
                 an aggregate value in excess of $2,000,000, other than
                 Collateral which is permitted to be sold or otherwise disposed
                 of pursuant to paragraph 5(a) hereof.

                 (v) change the rights and duties of Agent.

                 (vi) permit any Revolving Loan to be made if after giving
                 effect thereto the total of Revolving Loans outstanding
                 hereunder would exceed one hundred and ten percent (110%) of
                 the Borrowing Base for more than sixty (60) consecutive
                 Business Days.

     Any such supplemental agreement shall apply equally to each of the Lenders
and shall be binding upon Borrower, the Lenders and Agent and all future holders
of the Liabilities. In the case of any waiver, Borrower, Agent and Lenders shall
be restored to their former positions and rights, and any Event of Default
waived shall be deemed to be cured and not continuing, but no waiver of a
specific Event of Default shall extend to any subsequent Event of Default
(whether or not the subsequent Event of Default is the same as the Event of
Default which was waived), or impair any right consequent thereon.

     Notwithstanding the foregoing, Agent may at its discretion and without the
consent of the Required Lenders, voluntarily permit the outstanding Revolving
Loans at any time to exceed the Borrowing Base by up to one hundred and ten
percent (110%) of the Borrowing Base for up to sixty (60) consecutive Business
Days. For purposes of the preceding sentence, the discretion granted to Agent
hereunder shall not preclude involuntary overadvances that may result from time
to time due to the fact that the Borrowing Base was unintentionally exceeded for
any reason, including, but not limited to, Collateral previously deemed to be
either "Eligible Accounts" or "Eligible Inventory", as applicable, becomes
ineligible, collections of Accounts applied to reduce outstanding Revolving
Loans are thereafter returned for insufficient funds or overadvances are made to
protect or preserve the Collateral. In the event Agent involuntarily permits the
outstanding Revolving Loans to exceed

                                      -53-


the Borrowing Base by more than ten percent (10%), Agent shall decrease such
excess in as expeditious a manner as practicable under the circumstances and not
inconsistent with the reason for such excess. Revolving Loans made after Agent
has determined the existence of involuntary overadvances shall be deemed to be
involuntary overadvances and shall be decreased in accordance with the preceding
sentence.

     In the event that Agent requests the consent of a Lender pursuant to this
paragraph 24 and such consent is denied, then Agent may, at its option, require
such Lender to assign its interest in the Loans to Agent or to a Designated
Lender for a price equal to the then outstanding principal amount thereof plus
accrued and unpaid interest and fees (including prepayment fees, if any) due
such Lender, which interest and fees shall be paid upon consummation of such
assignment. In the event Agent elects to require any Lender to assign its
interest to Agent or to the Designated Lender, Agent will so notify such Lender
in writing within forty five (45) days following such Lender's denial, and such
Lender will assign its interest to Agent or the Designated Lender, as
applicable, no later than five (5) days following receipt of such notice
pursuant to a Commitment Transfer Supplement executed by such Lender, Agent or
the Designated Lender, as appropriate, and Agent.

     25.  PARTICIPATIONS AND ASSIGNMENT.

          (a)    Borrower acknowledges that in the regular course of commercial
banking business one or more Lenders may at any time and from time to time sell
participating interests in the Loans to other financial institutions (each such
transferee or purchaser of a participating interest, a "Transferee"). Each
Transferee may exercise all rights of payment (including without limitation
rights of set-off) with respect to the portion of such Loans held by it or other
Liabilities payable hereunder as fully as if such Transferee were the direct
holder thereof provided that Borrower shall not be required to pay to any
Transferee more than the amount which it would have been required to pay to the
Lender which granted an interest in its Loans or other Liabilities payable
hereunder to such Transferee had such Lender retained such interest in the Loans
hereunder or other Liabilities payable hereunder and in no event shall Borrower
be required to pay any such amount arising from the same circumstances and with
respect to the same Loans or other Liabilities payable hereunder to both such
Lender and such Transferee. Borrower hereby grants to any Transferee a
continuing security interest in any deposits, moneys or other property actually
or constructively held by such Transferee as security for the Transferee's
interest in the Loans.

          (b)    Any Lender may with the consent of Agent which shall not be
unreasonably withheld or delayed sell, assign or transfer all or any part of its
rights under this Agreement and the Other Agreements to one or more additional
banks or financial institutions and one or more additional banks or financial
institutions may commit to make Loans hereunder (each a "Purchasing Lender"), in
minimum amounts of not less than $5,000,000, pursuant to a Commitment Transfer
Supplement in the form of EXHIBIT 25(b) attached hereto, executed by a
Purchasing Lender, the transferor Lender, and Agent and delivered to Agent for
recording. Upon such execution, delivery, acceptance and recording, from and
after the transfer effective date determined pursuant to such Commitment
Transfer Supplement, (i) a Purchasing Lender thereunder shall be a party hereto
and, to the extent provided in such Commitment Transfer Supplement, have the
rights and obligations of a Lender hereunder with a Commitment Percentage as set
forth therein, and (ii) the transferor Lender thereunder shall, to the extent
provided in such Commitment Transfer Supplement, be released from its
obligations under this Agreement, the Commitment Transfer Supplement creating a
novation for that purpose. Such Commitment Transfer Supplement shall be deemed
to amend this Agreement to the extent, and only to the extent, necessary to
reflect the addition of such Purchasing Lender and the resulting adjustment of
the Commitment Percentages arising from the purchase by such Purchasing Lender
of all or a portion of the rights and obligations of such transferor Lender
under this Agreement and the Other Agreements. Borrower hereby consents to the
addition of such Purchasing Lender and the resulting adjustment of the
Commitment Percentages arising from the purchase by such Purchasing Lender of
all or a portion of the rights and obligations of such transferor Lender under
this Agreement and the Other Agreements. Borrower shall execute and deliver such
further documents and do such further acts and things in order to effectuate the
foregoing.

          (c)    Agent shall maintain at its address a copy of each Commitment
Transfer Supplement delivered to it and a register (the "Register") for the
recordation of the names and addresses of the Loans owing to each Lender from
time to time. The entries in the Register shall be conclusive, in the absence of
manifest error, and Borrower, Agent and Lenders may treat each Person whose name
is recorded in the Register as the owner of the Loans recorded therein for the
purposes of this Agreement. The Register shall be available for inspection by
Borrower or any Lender at any reasonable time and from time to time upon
reasonable prior notice. Agent shall

                                      -54-


receive a fee in the amount of $3,500 payable by the Purchasing Lender upon the
transfer or assignment to such Purchasing Lender.

          (d)    Borrower authorizes each Lender to disclose to any Transferee
or Purchasing Lender and any prospective Transferee or Purchasing Lender any and
all financial information in such Lender's possession concerning Borrower which
has been delivered to such Lender by or on behalf of Borrower pursuant to this
Agreement or in connection with such Lender's credit evaluation of Borrower;
provided such Transferee or Purchasing Lender agrees in writing to keep all such
information confidential in accordance with the terms of paragraph 28(e) hereof.

     26.  HEADINGS OF SUBDIVISIONS. The headings of subdivisions in this
Agreement are for convenience of reference only, and shall not govern the
interpretation of any of the provisions of this Agreement.

     27.  POWER OF ATTORNEY. Borrower acknowledges and agrees that its
appointment of Agent as its attorney-in-fact for the purposes specified in this
Agreement is an appointment coupled with an interest and shall be irrevocable
until all of the Liabilities are paid in full and this Agreement is terminated.

     28.  WAIVER OF JURY TRIAL; OTHER WAIVERS; CONFIDENTIALITY.

          (a)    AGENT, EACH LENDER AND BORROWER HEREBY WAIVE ALL RIGHTS TO
TRIAL BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY
TO THIS AGREEMENT, ANY OF THE OTHER AGREEMENTS, THE LIABILITIES, THE COLLATERAL,
ANY ALLEGED TORTIOUS CONDUCT OF BORROWER, AGENT OR LENDERS OR WHICH, IN ANY WAY,
DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP AMONG
BORROWER, AGENT AND/OR LENDERS. IN NO EVENT SHALL AGENT OR ANY LENDER BE LIABLE
FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.

          (b)    BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY
KIND PRIOR TO THE EXERCISE BY AGENT OF ITS RIGHTS TO REPOSSESS THE COLLATERAL OF
BORROWER WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH
COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.

          (c)    Borrower hereby waives demand, presentment, protest and notice
of nonpayment, and further waives the benefit of all valuation, appraisal and
exemption laws.

          (d)    Agent's or any Lender's failure, at any time or times
hereafter, to require strict performance by Borrower of any provision of this
Agreement or any of the Other Agreements shall not waive, affect or diminish any
right of Agent or any Lender, thereafter to demand strict compliance and
performance therewith. Any suspension or waiver by Agent or any Lender, of an
Event of Default under this Agreement or any default under any of the Other
Agreements shall not suspend, waive or affect any other Event of Default under
this Agreement or any other default under any of the Other Agreements, whether
the same is prior or subsequent thereto and whether of the same or of a
different kind or character. No delay on the part of Agent or any Lender in the
exercise of any right or remedy under this Agreement or any Other Agreement
shall preclude other or further exercise thereof or the exercise of any right or
remedy. None of the undertakings, agreements, warranties, covenants and
representations of Borrower contained in this Agreement or any of the Other
Agreements and no Event of Default under this Agreement or default under any of
the Other Agreements shall be deemed to have been suspended or waived by Agent
or any Lender unless such suspension or waiver is in writing in compliance with
Paragraph 24(b) hereof.

          (e)    Borrower has furnished and will furnish to Agent certain
information concerning Borrower which Borrower has advised is non-public,
proprietary or confidential in nature ("CONFIDENTIAL INFORMATION"). Agent
confirms to the Borrower that it is Agent's policy and practice to maintain in
confidence all Confidential Information which is provided to it under agreements
providing for the extension of credit and which is identified to it as such, and
that it will protect the confidentiality of Confidential Information submitted
to it with

                                      -55-


respect to Borrower under this Agreement, commensurate with its efforts to
maintain the confidentiality of its own Confidential Information, PROVIDED,
HOWEVER, that (i) nothing contained herein shall prevent Agent from disclosing
Confidential Information (A) to its affiliates and their respective directors,
officers, and employees and to any legal counsel, auditors, appraisers,
consultants or other persons retained by it or its affiliates as professional
advisors, on the condition that such information not be further disclosed except
in compliance with this paragraph 28(e); (B) under color of legal authority,
including, without limitation, to any regulatory authority having jurisdiction
over it or its operations or to, or under the authority of, any court deemed by
it to be of competent jurisdiction; (C) to any actual or potential Transferee or
Purchasing Lender in Agent's rights and obligations under this Agreement to the
extent such actual or potential Transferee or Purchasing Lender has agreed to
maintain such information in confidence on the basis set forth in this paragraph
28(e); and (D) as necessary in connection with the exercise of its remedies
under this Agreement or any of the Other Agreements; (ii) the terms of this
paragraph 28(e) shall be inapplicable to any information furnished to it which
is in possession prior to the delivery to it of such information by Borrower or
any other authorized Person, or otherwise has been obtained by it on a
non-confidential basis, or which was or becomes available to the public or
otherwise part of the public domain (other than as a result of Agent's failure
or any prospective participant's or assignee's failure to abide hereby), or
which was not non-public, proprietary or confidential when Borrower or any other
authorized Person delivered it to Agent; and (iii) the determination by Agent as
to the application of any of the circumstances described in the foregoing
clauses (i) and (ii) will be conclusive and binding if made in good faith.

          (f)    Notwithstanding subparagraph (e) above, Borrower consents to
Agent publishing a tombstone or similar advertising material relating to the
financing transaction contemplated by this Agreement.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                      -56-


          IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the 31st day of December, 2001.

                                                LASALLE BUSINESS CREDIT, INC.,
                                                AS A LENDER AND AS AGENT


                                                By: /s/ ANTHONY J. VEITH
                                                    Name: Anthony J. Veith
                                                    Title: Senior Vice President

                                                Commitment Percentage:     100%


                                                POSSIBLE DREAMS, LTD.


                                                By: /s/ DAWN MCCORMACK
                                                    Name: Dawn McCormack
                                                    Title: President and CEO

Agreed and Acknowledged solely
with respect to the provisions
related to the Consolidated Income
Tax Sharing Agreement set forth in
paragraph 15(j):

SECURITY CAPITAL CORPORATION


By: /s/ A. GEORGE GEBAUER
    Name: A. George Gebauer
    Title: Vice Chairman

PD HOLDINGS, INC.


By: /s/ A. GEORGE GEBAUER
    Name: A. George Gebauer
    Title: President

                                      -57-

EX-10.51

                                  EXHIBIT 10.51


                           LOAN AND SECURITY AGREEMENT

                            DATED AS OF JUNE 13, 2001

                                     BETWEEN

                                  PUMPKIN LTD.

                                   AS BORROWER

                                       AND

                         LASALLE BUSINESS CREDIT, INC.,

                                    AS LENDER

                                   $10,000,000



        THIS LOAN AND SECURITY AGREEMENT ("Agreement") is made as of this 13th
day of June, 2001, by and between LASALLE BUSINESS CREDIT, INC., a Delaware
corporation ("Lender"), with its principal office at 135 South LaSalle Street,
Chicago, Illinois 60603, and PUMPKIN LTD., a Delaware corporation, with its
principal office at 1905 Sherman Street, Denver, Colorado 80203 ("Borrower").

                                   WITNESSETH:

                  WHEREAS, from time to time Borrower may request Lender to make
loans and advances to and extend certain credit accommodations to Borrower, and
the parties wish to provide for the terms and conditions upon which such loans,
advances and credit accommodations shall be made;

                  NOW, THEREFORE, in consideration of any loans, advances and
credit accommodations (including any loans by renewal or extension) hereafter
made to Borrower by Lender, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by Borrower, the
parties agree as follows:

          1.      DEFINITIONS.

                  (a)  GENERAL DEFINITIONS

                  "ABN AMRO" shall mean ABN AMRO North America, Inc. and ABN
AMRO Bank, N.V.

                  "ACCOUNT DEBTOR" shall mean the Person who is obligated on or
under an Account.

                  "ACCOUNTS" shall mean all of Borrower's presently existing and
hereafter arising accounts, accounts receivable, contract rights, instruments,
documents, chattel paper, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods or the rendition of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guarantees, letters of credit and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower, and all products and
proceeds of the foregoing.

                  "ACCOUNTS ADVANCE RATE" shall have the meaning set forth in
paragraph 2(b)(A) hereof.

                  "ACCOUNTS TRIAL BALANCE" shall have the meaning set forth in
paragraph 12(c) hereof.

                  "ADVANCE RATES" shall mean collectively, the Accounts Advance
Rate and the Inventory Advance Rate.

                  "AFFILIATE" means any Person: (a) directly or indirectly
controlling, controlled by, or under common control with, Borrower; or (b)
directly or indirectly owning or holding five percent (5%) or more of any equity
interest in Borrower; or (c) five percent (5%) or more of whose voting stock or
other equity interest having ordinary voting power for the election of directors
or the power to direct or cause the direction of management, is directly or
indirectly owned or held by Borrower; or (d) which has a senior executive
officer who is also a senior executive officer of Borrower. For purposes of this
definition, "control" (including with correlative meanings, the terms
"controlling", "controlled by" and "under common control with") means the
possession directly or indirectly of the power to direct or cause the direction
of the management and policies of

 

a Person, whether through the ownership of voting securities or other equity
interest, or by contract or otherwise.

                  "AUTHORITY" shall have the meaning set forth in paragraph
15(r)(iv) hereof.

                  "BANK" shall mean LaSalle Bank National Association.

                  "BANKRUPTCY CODE" shall mean the Bankruptcy Reform Act of
1978, as amended, including amendments made by The Bankruptcy Reform Act of
1994, as codified in Title 11 of the United States Code.

                  "BENEFIT PLAN" shall mean an employee pension benefit plan
sponsored, maintained or contributed to by Borrower or an ERISA Affiliate, as
defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA.

                  "BORROWER" shall have the meaning set forth in the
introductory paragraph hereof.

                  "BORROWING BASE" shall have the meaning specified in paragraph
2(b) hereof.

                  "BORROWING BASE CERTIFICATE" shall mean a certificate duly
executed by an officer of Borrower appropriately completed and in substantially
the form of EXHIBIT C hereto.

                  "BREAKAGE COSTS" shall have the meaning specified in paragraph
7(c)(iv) hereof.

                  "BUSINESS DAY" shall mean any day other than a Saturday,
Sunday, or such other day as banks in Illinois or London, England are authorized
or required to be closed for business.

                  "CAPITAL ADEQUACY CHARGE" shall have the meaning specified in
paragraph 6(i) hereof.

                  "CAPITAL ADEQUACY DEMAND" shall have the meaning specified in
paragraph 6(i) hereof.

                  "CAPITAL EXPENDITURES" shall mean, with respect to any period,
the aggregate of all expenditures (whether paid in cash or accrued as
liabilities and including expenditures for capitalized lease obligations) by
Borrower during such period that are required by GAAP to be included in or
reflected by the property, plant or equipment or similar fixed asset accounts
(or in intangible accounts subject to amortization) in the balance sheet of
Borrower.

                  "CASH EQUIVALENTS" shall mean (a) securities with maturities
of one year or less from the date of acquisition which are issued or fully
guaranteed or insured by the United States Government or any agency thereof, (b)
certificates of deposit and eurodollar time deposits with maturities of one year
or less from the date of acquisition and overnight bank deposits of the Lender
or of any commercial bank having capital and surplus in excess of $500,000,000,
or (c) repurchase obligations of Lender or of any commercial bank satisfying the
requirements of CLAUSE (b) of this definition, having a term of not more than 30
days with respect to securities issued or fully guaranteed or insured by the
United States Government.

 

                  "CERCLA" shall mean the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sections 9601 ET
SEQ.

                  "CHANGE OF CONTROL" shall mean (a) the occurrence of any event
(whether in one or more transactions) which results in an acquisition of control
of Borrower by a Person who is not an Original Owner or directly controlled by
an Original Owner or (b) any merger or consolidation of or with Borrower or sale
of all or substantially all of the property or assets of Borrower. For purposes
of this definition, "control of Borrower" shall mean the power, direct or
indirect to direct or cause the direction of the management and policies of
Borrower by contract or otherwise.

                  "CHATTEL PAPER" shall mean a writing or writings which
evidence both a monetary obligation and a security interest in or a lease of
specific goods.

                  "CLOSING DATE" shall mean the date upon which the initial Loan
is made.

                  "CLOSING DOCUMENT LIST" shall have the meaning specified in
paragraph 16(a)(i) hereof.

                  "COLLATERAL" shall mean all of the personal property of
Borrower described in paragraph 8 hereof and all other real or personal property
of any Obligor or any other Person now or hereafter pledged to Lender to secure,
either directly or indirectly, repayment of any of the Liabilities.

                  "COMMITMENT PERCENTAGE" of any Purchasing Lender shall mean
the percentage set forth for such Purchasing Lender in the applicable Commitment
Transfer Supplement as the same may be adjusted upon any assignment pursuant to
paragraph 24 hereof.

                  "COMMITMENT TRANSFER SUPPLEMENT" shall mean a document in the
form of EXHIBIT 24(B) attached hereto and made a part thereof, properly
completed and otherwise in form and substance satisfactory to Lender by which a
Purchasing Lender purchases and assumes a portion of the obligation of Lender to
make Loans under this Agreement.

                  "CONFIDENTIAL INFORMATION" shall have the meaning set forth in
paragraph 27(e) hereof.

                  "CONTINUATION" shall have the meaning specified in paragraph
7(c)(i) hereof.

                  "CONTRACT YEAR" shall mean each period of twelve (12)
consecutive months during the Term, commencing on the Closing Date and on each
of the first two anniversaries thereof.

                  "CONTROLLED GROUP" shall mean all members of a controlled
group of corporations and all trades or businesses (whether or not incorporated)
under common control which, together with Borrower, are treated as a single
employer under Section 414 of the IRC.

                  "CONVERSION" shall have the meaning specified in paragraph
7(c)(ii) hereof.

                  "CUSTOMER LISTS" shall mean the customer lists of Borrower
attached hereto as EXHIBIT B and made a part hereof, as same shall be updated
pursuant to paragraph 12(i) hereof.

 

                  "CUSTOMS" shall have the meaning set forth in paragraph 4(e)
hereof.

                  "DEBT SERVICE COVERAGE RATIO" shall mean, with respect to any
applicable fiscal period, the following for Borrower: the ratio of (A) EBITDA,
MINUS, taxes deducted from the calculation of net income for such period, MINUS
non-financed Capital Expenditures made during such period, TO (B) principal
payments of long term debt paid or scheduled to be paid during such period,
capitalized leases paid or scheduled to be paid during such period and
Additional Payments pursuant to and as defined in the Asset Purchase Agreement
dated June 27, 1997 among Pumpkin Ltd. d/b/a Pumpkin Masters, Inc., Borrower,
Pumpkin Masters Holdings, Inc. and Security Capital Corporation paid or
scheduled to be paid during such period and interest expense.

                  "DEFAULT" shall mean any event, condition or default which
with the giving of notice, the lapse of time or both would be an Event of
Default.

                  "DOCUMENTS" shall mean the term "documents" as such term is
defined under Article 9 of the UCC.

                  "DOLLAR" and the sign "$" shall mean lawful money of the
United States.

                  "EBITDA" shall mean, with respect to any applicable fiscal
period, the following for Borrower each calculated for such period: net income
before taxes for such period (excluding pre-tax gains or losses on the sale of
assets (other than the sales of Inventory in the ordinary course of business)
and excluding other pre-tax extraordinary gains) PLUS interest expense,
depreciation, amortization and other non-cash charges deducted in determining
net income for such period, MINUS interest income calculated in determining net
income for such period.

                  "ELIGIBLE ACCOUNT" shall mean an Account owing to Borrower
which is acceptable to Lender in its reasonable discretion for lending purposes.
Lender shall consider an Account to be an Eligible Account if it meets, and so
long as it continues to meet, the following requirements:

                       (i)      it is genuine and in all respects is what it
                                purports to be;

                       (ii)     it is owned by Borrower and Borrower has the
                                right to subject it to a security interest in
                                favor of Lender;

                       (iii)    it arises from (A) the performance of
                                services by Borrower and such services have
                                been fully performed and acknowledged and
                                accepted by the Account Debtor thereunder or
                                (B) the sale or lease of Goods by Borrower,
                                and such Goods have been completed in
                                accordance with the Account Debtor's
                                specifications (if any) and delivered to and
                                accepted by the Account Debtor, and such
                                Account Debtor has not returned or offered
                                to return any of the Goods which are the
                                subject of such Account, and Borrower has
                                possession of, or has delivered to Lender at
                                Lender's request, shipping and delivery
                                receipts evidencing delivery of such Goods;



                       (iv)     if the Account Debtor thereunder is not an
                                Extended Term Customer, it is evidenced by an
                                invoice rendered to the Account Debtor
                                thereunder, does not remain unpaid more than
                                sixty (60) days after the stated due date
                                thereof and does not remain unpaid more than
                                ninety (90) days past the stated invoice date
                                thereof; PROVIDED, HOWEVER, that if more than
                                twenty-five percent (25%) of the aggregate
                                dollar amount of invoices owing by a particular
                                Account Debtor remain unpaid for more than (A)
                                sixty (60) days past the respective stated due
                                dates thereof or (B) ninety (90) days past the
                                respective invoice dates thereof, then all
                                Accounts owing to Borrower by that Account
                                Debtor shall be deemed ineligible;

                       (v)      if the Account Debtor thereunder is an
                                Extended Term Customer, it is evidenced by an
                                invoice rendered to the Account Debtor
                                thereunder and does not remain unpaid more than
                                thirty (30) days after the stated due date
                                thereof; PROVIDED, HOWEVER, that if more than
                                twenty-five percent (25%) of the aggregate
                                dollar amount of invoices owing by particular
                                Extended Term Customer remain unpaid for more
                                than thirty (30) days past the respective stated
                                due dates thereof, then all Accounts owing to
                                Borrower by that Extended Term Customer shall be
                                deemed ineligible;

                       (vi)     it is not subject to any prior assignment,
                                claim, lien, security interest, offset or
                                encumbrance whatsoever, other than Liens in
                                favor of Lender;

                       (vii)    it is a valid, legally enforceable and
                                unconditional obligation of the Account Debtor
                                thereunder, and is not subject to setoff,
                                counterclaim, credit, allowance or adjustment by
                                such Account Debtor, or to any claim by such
                                Account Debtor denying liability thereunder in
                                whole or in part;

                       (viii)   it does not arise out of a contract or
                                order which fails in any material respect to
                                comply with the requirements of applicable law;

                       (ix)     the Account Debtor thereunder is not a director,
                                officer, employee or agent of Borrower, or a
                                Subsidiary, Parent or Affiliate of Borrower;

                       (x)      it is not an Account with respect to which the
                                Account Debtor is the United States of America
                                or any department, agency or instrumentality
                                thereof, unless Borrower assigns its right to
                                payment of such Account to Lender pursuant to,
                                and in full compliance with, the Assignment of
                                Claims Act of 1940, as amended;

                       (xi)     it is not an Account with respect to which the
                                Account Debtor is located in a state which
                                requires Borrower, as a precondition to



                                commencing or maintaining an action in the
                                courts of that state, either to (A) receive a
                                certificate of authority to do business and be
                                in good standing in such state, or (B) file a
                                notice of business activities report or similar
                                report with such state's taxing authority,
                                unless (x) Borrower has taken one of the actions
                                described in clauses (A) or (B), (y) the failure
                                to take one of the actions described in either
                                clause (A) or (B) may be cured retroactively by
                                Borrower at its election, or (z) Borrower has
                                proven, to Lender's satisfaction, that it is
                                exempt from any such requirements under any such
                                state's laws;

                       (xii)    it is an Account which arises out of a sale made
                                in the ordinary course of Borrower's business;

                       (xiii)   the Account Debtor is a resident or citizen of,
                                and is located within, the United States of
                                America, provided that Accounts as to which the
                                Account Debtor is a resident or citizen of, and
                                is located within Canada may be included up to a
                                maximum of $1,000,000.00;

                       (xiv)    it is not an Account with respect to which the
                                Account Debtor's obligation to pay is
                                conditional upon the Account Debtor's approval
                                of the Goods or services (unless such approval
                                has been obtained) or is otherwise subject to
                                any repurchase obligation or return right, as
                                with sales made on a bill-and-hold, guaranteed
                                sale, sale on approval, sale or return or
                                consignment basis;

                       (xv)     it is not an Account (A) with respect to which
                                any representation or warranty contained in this
                                Agreement is untrue or (B) which violates any of
                                the covenants of Borrower contained in this
                                Agreement;

                       (xvi)    it is not an Account which, when added to a
                                particular Account Debtor's other indebtedness
                                to Borrower, exceeds the lesser of (A) ten
                                percent (10%) of the aggregate of Borrower's
                                Accounts or (B) a credit limit determined by
                                Lender in its reasonable credit judgment for
                                that Account Debtor as set forth on EXHIBIT E
                                attached hereto; PROVIDED, HOWEVER, that
                                Accounts excluded from Eligible Accounts solely
                                by reason of this subparagraph (xvi) shall be
                                Eligible Accounts to the extent of such credit
                                limit; PROVIDED, FURTHER, that EXHIBIT E may be
                                amended by Lender from time to time to reflect
                                credit limits for new Account Debtors and
                                changes in credit limits for Account Debtors;

                       (xvii)   it is not an Account with respect to which the
                                prospect of payment or performance by the
                                Account Debtor is or will be impaired, as
                                determined by Lender in its sole and reasonable
                                discretion;



                       (xviii)  it is not an Account arising from progress
                                billings, invoices for deposits, samples or
                                tooling;

                       (xix)    it is not an Account with respect to which the
                                sale is on an installment basis, lease or,
                                except for Extended Term Customers, other
                                extended payment basis;

                       (xx)     it is not that portion of an Account
                                representing late fees, service charges or
                                interest; and

                       (xxi)    any and all insurance thereon shall have been
                                assigned to Lender.

              "ELIGIBLE INVENTORY" shall mean Inventory held for sale by
Borrower, normally and currently saleable in the ordinary course of Borrower's
business and Inventory consisting of raw materials of types and quality and in
amounts usable by Borrower in the production of its finished goods in the
ordinary course of Borrower's business, and which in all cases and at all times
pertinent hereto is of good and merchantable quality, free from defects, as to
which Inventory Lender has a perfected first priority security interest and
which Inventory is subject to no other Lien other than Liens in favor of Lender,
and which is located at the locations set forth in EXHIBIT A of this Agreement
and is either not in transit or, if in transit, is the subject of a negotiable
document issued by the party in possession thereof which negotiable document, if
so requested by Lender, has been delivered to Lender, as that Exhibit may, from
time to time, be amended or supplemented in accordance with the terms of this
Agreement, and as to which Borrower has satisfied all terms, conditions,
warranties and representations of this Agreement and the Other Agreements
pertinent thereto; but Eligible Inventory shall not include any of the
following: (a) catalogs and other promotional materials of any kind; (b)
returned items (other than items the return of which was authorized in advance
by Borrower and which are free from material defects and able to be sold in the
ordinary course of Borrower's business); (c) work-in-process; (d) damaged,
defective or recalled items; (e) obsolete items; (f) items used as
demonstrators, prototypes or salesmen's samples; (g) items of Inventory which
have been consigned to Borrower or as to which a Person claims a security
interest, prior assignment claim or encumbrance whatsoever other than Liens in
favor of Lender; (h) items of Inventory which have been consigned by Borrower to
a consignee; (i) Inventory located on premises leased by Borrower from a
landlord with whom Lender has not entered into a landlord's waiver on terms
satisfactory to Lender; (j) Inventory located at a warehouse premises with
respect to which Lender has not received (1) a bailee letter, acceptable in all
respects to Lender, executed by the bailee of such warehouse or (2) evidence
satisfactory in all respects to Lender of such bailee's receipt of a bailee
letter acceptable in all respects to Lender; (k) Inventory which in the
reasonable judgment of Lender after good faith consultation with Borrower is
considered to be slow moving or otherwise not merchantable; (l) Inventory which
is subject to a license agreement unless Lender shall have entered into a
licensor consent letter with the licensor in form and substance satisfactory to
Lender; and (m) any Inventory that Lender after good faith consultation with
Borrower has reasonably determined is not acceptable due to age, type, category
or quantity.

              "ENVIRONMENTAL COMPLAINT" shall have the meaning set forth in
paragraph 15(r)(iv) hereof.

              "ENVIRONMENTAL LAWS" shall mean all applicable federal, state and
local laws, statutes, ordinances and codes relating to the protection of the
environment and/or governing the use, storage, treatment, generation,
transportation, processing, handling, production or disposal of Hazardous
Substances and the rules, regulations, binding decisions, binding orders and
binding directives of federal, state and local governmental agencies and
authorities with respect thereto.

              "EQUIPMENT" shall mean the machinery and equipment of Borrower,
including without limitation processing equipment, data processing and computer
equipment with software and peripheral equipment, and all engineering,
processing and manufacturing equipment, office machinery, furniture, materials
handling equipment, tools, molds, dies, attachments, accessories,



automotive equipment, trailers, trucks, motor vehicles, tanks, cylinders and
other equipment of every kind and nature, and fixtures, all whether now owned or
hereafter acquired, and wheresoever situated, together with all additions and
accessions thereto, replacements therefor, all parts therefor, and all manuals,
drawings, instructions, warranties, and rights with respect thereto, and all
products and proceeds of the foregoing, and condemnation awards and insurance
proceeds with respect thereto.

              "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and all references to sections thereof shall include such
sections and any predecessor and successor provisions thereto.

              "ERISA AFFILIATE" shall mean each person which together with the
Borrower would be deemed to be a single employer as determined under Section
414(b) or (c) of the IRC, and for the purpose of Section 302 of ERISA and/or
Section 412, 4971, 4977 and/or each "applicable section" under Section 414(t)(2)
of the IRC, as determined under Section 414(b), (c), (m), or (o) of the IRC.

              "EVENT OF DEFAULT" shall have the meaning specified in paragraph
17 hereof.

              "EXCESS AVAILABILITY" shall mean, as of any date of determination
by Lender, the excess, if any, of (i) the lesser of (a) the Revolving Loan
Commitment and (b) the Borrowing Base over (ii) the outstanding Revolving Loans,
in each case as of the close of business on such date. For purposes of
calculating Excess Availability of Borrower and the amount of the Borrowing Base
relating thereto, Lender may, in the exercise of its sole discretion, establish
a reserve in an aggregate amount based on the sum of (a) Borrower's outstanding
trade payables which are not current or which are past due beyond Borrower's
normal trade terms in any material respect, PLUS (b) any taxes due and unpaid to
any taxing authority, in each case as of such date of determination, to the
extent thereof.

              "EXCESS CASH FLOW" for any Fiscal Year shall mean an amount equal
to (a) the net income of Borrower for such Fiscal Year MINUS (b) non-cash
extraordinary gains and extraordinary losses PLUS (c) depreciation and
amortization which were deducted in determining net income for such Fiscal Year
PLUS (d) long term debt incurred for Capital Expenditures made during such
period MINUS (e) Capital Expenditures made during such Fiscal Year MINUS (f)
scheduled payments of principal and prepayments on indebtedness for such Fiscal
Year, to the extent such payments are permitted under this Agreement.

              "EXHIBIT A" shall mean the exhibit entitled Exhibit A - Business
and Collateral Locations which is attached hereto and made a part hereof.

              "EXHIBIT D" shall mean the exhibit entitled Exhibit D-Officer's
Certificate which is attached hereto and made a part hereof.

              "EXTENDED TERM CUSTOMER" shall mean any Account Debtor to which
Borrower has granted extended dating terms acceptable to Lender and which Lender
has agreed in writing to treat as an Extended Term Customer hereunder. The
Extended Term Customers and the extended dating terms approved by Lender are
listed on EXHIBIT F attached hereto; PROVIDED, FURTHER, that EXHIBIT F may be
amended by Lender from time to time to reflect new Extended Term Customers and
the approved payment terms therefor, the deletion of existing Extended Term
Customers



and the approved payment terms therefor, the deletion of exisitng Extended Term
Customers or a change in payment terms for an existing Extended Term Customer.

              "FISCAL YEAR" shall mean with respect to Borrower, the twelve (12)
month accounting period of Borrower commencing January 1st of each calendar year
and ending December 31st of such calendar year.

              "GAAP" shall mean generally accepted accounting principles and
policies in the United States as in effect from time to time.

              "GENERAL INTANGIBLES" shall mean all of Borrower's present and
future general intangibles and other personal property, any and all rights of
Borrower to all choses or things in action, tax refund claims, credits, claims,
claims against carriers and shippers, guarantee claims, contract rights,
security interests, security rights and any rights to indemnification, demands,
goodwill, licenses, franchise agreements, subscription costs, patents, patent
applications, design rights, trade names, trademarks, trademark applications,
copyrights, registrations, rights to royalties, blueprints, drawings, customer
lists, purchase orders, computer programs, computer discs, computer tapes,
literature, reports, catalogs, methods, sales literature, video tapes,
confidential information and trade secrets, consulting agreements, employment
agreements, leasehold interests in real and personal property, insurance
policies, deposits with insurers relating to worker's compensation liabilities,
deposit accounts and tax refunds, other than Equipment, Inventory, Investment
Property and Accounts, as well as Borrower's books and records relating to any
of the foregoing, and all products and proceeds of the foregoing.

              "GOODS" shall mean all of Borrower's tangible assets and tangible
properties which are moveable at the time the security interest attaches or
which are fixtures.

              "HAZARDOUS DISCHARGE" shall have the meaning set forth in
paragraph 15(r)(iv) hereof.

              "HAZARDOUS SUBSTANCE" shall mean, without limitation, any
flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde
foam insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, Hazardous Wastes, hazardous or Toxic Substances as
defined in CERCLA, the Hazardous Materials Transportation Act, as amended (49
U.S.C. Sections 1801, ET SEQ.), RCRA, Articles 15 and 27 of the New York State
Environmental Conservation Law or any other applicable Environmental Law and in
the regulations adopted pursuant thereto.

              "HAZARDOUS WASTES" shall mean all waste materials subject to
regulation under CERCLA, RCRA or applicable state law, and any other applicable
Federal and state laws now in force or hereafter enacted relating to hazardous
waste disposal.

              "INDEMNIFIED PARTY" shall have the meaning specified in paragraph
19 hereof.

              "INSTRUMENTS" shall mean a negotiable instrument or a certificated
security or any other writing which evidences a right to the payment of money.



              "INTEREST PERIOD" shall mean for any LIBOR Rate Loan the period
commencing on the date of the borrowing thereof (or the date of the Continuation
or Conversion thereof as described below) and ending one, three or six months
thereafter, provided, however, that Borrower may not select any Interest Period
that ends after the Term. Whenever the last day of an Interest Period would
otherwise occur on a day other than a Business Day, the last day of such
Interest Period shall be extended to occur on the next succeeding Business Day;
PROVIDED, that if such extension would cause the last day of such Interest
Period to occur in the next following calendar month, the last day of such
Interest Period shall occur on the next preceding Business Day.

              "INVENTORY" shall mean all present and future inventory in which
Borrower has any interest, including, but not limited to, goods held by Borrower
for sale or lease or to be furnished under a contract of service and all of
Borrower's present and future raw materials, work in process, finished goods,
supplies and packing and shipping materials, wherever located, and any documents
of title representing any of the above.

              "INVENTORY ADVANCE RATE" shall have the meaning set forth in
paragraph 2(b)(A) hereof.

              "INVESTMENT PROPERTY" shall have the meaning set forth in the UCC,
and shall mean and include all of Borrower's now owned or hereafter acquired
securities, whether certificated or uncertificated, securities entitlements,
securities accounts, commodity and futures contracts and commodity and futures
accounts.

              "IRC" shall mean the Internal Revenue Code of 1986, as amended
from time to time.

              "KIND" shall mean, with respect to any Loan, whether such Loan is
a Revolving Loan or a Term Loan.

              "L/C ISSUER" shall mean the Bank or such other bank as may be
selected by Lender in its sole discretion.

              "LENDER" shall have the meaning set forth in the introductory
paragraph hereof.

              "LETTER OF CREDIT FEE" shall have the meaning set forth in
paragraph 6(d) hereof.

              "LETTER OF CREDIT OBLIGATIONS" shall mean, as of any date of
determination, the sum of (i) the aggregate undrawn amount of all Letters of
Credit and (ii) the aggregate unreimbursed amount of all drawn Letters of
Credit.

              "LETTERS OF CREDIT" shall mean those documentary letters of credit
issued for Borrower's account in accordance with the terms of paragraph 4
hereof.

              "LIABILITIES" shall mean all Loans and any and all other
obligations, liabilities and indebtedness of Borrower to Lender or to the Bank
or to ABN AMRO of any and every kind and nature, howsoever created, arising or
evidenced and howsoever owned, held or acquired, and any and all other Loans,
obligations, liabilities and indebtedness of Borrower of any kind and nature,
howsoever created, arising or evidenced under this Agreement and/or the Other
Documents, in each



case whether now or hereafter existing, whether now due or to become due,
whether primary, secondary, direct, indirect, absolute, contingent or otherwise
(including, without limitation, obligations of performance), whether several,
joint or joint and several, and whether arising or existing under written or
oral agreement or by operation of law.

              "LIBOR RATE" shall mean, with respect to the Interest Period
applicable to the borrowing of a LIBOR Rate Loan, the rate obtained (rounded
upwards to the nearest 1/100 of 1%) by dividing (i) the rate of interest per
annum offered to Bank in the London interbank foreign currency deposits market
as of approximately 9:00 A.M. (Central Standard time) two (2) Business Days
prior to the commencement of such Interest Period for U.S. dollar deposits of
amounts in immediately available funds comparable to the principal amount of the
LIBOR Rate Loan for which the LIBOR Rate is being determined with maturities
comparable to the Interest Period for which such LIBOR Rate will apply, by (ii)
a percentage equal to 1 minus the stated reserve (expressed as a decimal), if
any, required to be maintained against "Eurocurrency liabilities" as specified
in Regulation D of the Board of Governors of the Federal Reserve System as from
time to time shall be in effect (or against any other category of liabilities,
which includes deposits, by reference to which the interest rate on LIBOR Rate
Loans is determined or any category of extensions of credit on other assets,
which includes loans by a non-U.S. office of Bank to U.S. Residents). In the
absence of manifest error, each determination by Bank of the applicable LIBOR
Rate shall be deemed conclusive.

              "LIBOR RATE LOAN" shall mean a LIBOR Rate Revolving Loan or a
LIBOR Rate Term Loan.

              "LIBOR RATE REVOLVING LOAN" shall mean a Revolving Loan that bears
interest based on the LIBOR Rate.

              "LIBOR RATE TERM LOAN" shall mean a Term Loan that bears interest
based on the LIBOR Rate.

              "LOAN" OR "LOANS" shall mean any and all Revolving Loans or the
Term Loan made by Lender to Borrower pursuant to paragraphs 2 and 3 hereof and
all other loans, advances and financial accommodations made by Lender to or on
behalf of Borrower hereunder.

              "LOCK BOX" and "BLOCKED ACCOUNT" shall have the meanings specified
in paragraph 11(a) hereof.

              "MATERIAL ADVERSE EFFECT" shall mean a material adverse change in,
or a material adverse effect upon the business, property, assets, operations,
condition (financial or otherwise) or prospects of Borrower taken as a whole,
related to any event, act, condition or occurrence of whatever nature (including
any adverse determination in any litigation, arbitration or governmental
investigation or proceeding), whether singly or in conjunction with any other
event or events, act or acts, condition or conditions, occurrence or
occurrences, whether or not related.

              "MAXIMUM TERM LOAN AMOUNT" shall mean an amount equal to TWO
MILLION, FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($2,500,000.)



              "MULTIEMPLOYER PLAN" shall mean a plan described in Section
4001(a)(3) of ERISA which covers employees of Borrower or any ERISA Affiliate.

              "NET WORTH" shall mean with respect to any applicable fiscal
period, the following for Borrower, each calculated for such period:
shareholders' equity (including retained earnings) and less prepaid expenses,
reasonably determined by Lender on a consistent basis, plus the amount of any
debt subordinated to Lender on terms and conditions reasonably acceptable to
Lender in its sole judgment, all as determined in accordance with GAAP,
consistently applied.

              "NOTE" shall mean individually and collectively, the Revolving
Note and Term Note.

              "OTHER AGREEMENTS" shall mean all agreements, instruments and
documents including, without limitation, guaranties, mortgages, trust deeds,
pledges, powers of attorney, consents, assignments, contracts, notices, security
agreements, leases, financing statements and all other writings heretofore, now
or from time to time hereafter executed by or on behalf of Borrower or any other
Person and delivered to Lender or to any parent, affiliate or subsidiary of
Lender in connection with the Liabilities or the transactions contemplated
hereby.

              "ORIGINAL OWNER" shall mean Pumpkin Masters Holdings, Inc., a
Delaware Corporation.

              "PARENT" shall mean any Person now or at any time or times
hereafter owning or controlling (alone or with any other Person) at least a
majority of the issued and outstanding stock of Borrower or any Subsidiary.

              "PARTICIPANT" shall mean each Person who shall be granted the
right by any Lender to participate in any of the Loans in accordance with
Paragraph 24.

              "PAYMENT OFFICE" shall mean initially 135 South LaSalle Street,
Chicago, Illinois 60603, and thereafter such other office of Lender, if any,
which Lender may designate by notice to Borrower to be the Payment Office.

              "PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor agency.

              "PERMITTED LIENS" shall mean (i) statutory liens of landlords,
carriers, warehousemen, mechanics, materialmen or suppliers incurred in the
ordinary course of business and securing amounts not yet due or declared to be
due by the claimant thereunder, (ii) liens or security interests in favor of
Lender, (iii) zoning restrictions and easements, rights of way, licenses,
covenants and other restrictions affecting the use of Real Property that do not
individually or in the aggregate have a Material Adverse Effect on Borrower's
ability to use such real property for its intended purpose in connection with
Borrower's business, (iv) liens securing the payment of taxes or other
governmental charges not yet delinquent or being contested in good faith and by
appropriate proceedings, (v) liens incurred or deposits made in the ordinary
course of Borrower's business in connection with capitalized leases or purchase
money security interests for purchase of, and applying only to, Equipment
included in the permitted borrowings under paragraph 14(q)(ii) or permitted as
Capital Expenditures under paragraph 15(o)(iii), the documents relating to such
liens



to be in form and substance acceptable to Lender, (vi) liens securing
indebtedness owing by any Subsidiary to Borrower to the extent such indebtedness
is permitted under paragraph 14(q), or to any other Subsidiary of Borrower,
(vii) deposits to secure performance of bids, trade contracts, leases and
statutory obligations (to the extent not excepted elsewhere herein); (viii)
liens specifically permitted by Lender in writing as set forth on SCHEDULE 1(a)
attached hereto; (ix) any lien arising out of the refinancing, extension,
renewal or refunding of any indebtedness secured by any lien permitted by any of
the foregoing sections (v), (vi) and (viii) PROVIDED THAT (a) such indebtedness
is not secured by any additional assets, and (b) the amount of such indebtedness
is not increased; (x) pledges or deposits in connection with worker's
compensation, unemployment insurance and other social security legislation; (xi)
grants of security and rights of setoff in deposit accounts, securities and
other properties held at banks or financial institutions to secure the payment
or reimbursement under overdraft, acceptance and other facilities, and (xii)
rights of setoff, banker's lien and other similar rights arising solely by
operation of law.

              "PERSON" shall mean any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, entity, party or foreign or
United States government (whether federal, state, county, city, municipal or
otherwise), including, without limitation, any instrumentality, division,
agency, body or department thereof.

              "PRIME RATE" shall mean the publicly announced prime rate of the
Bank, in effect from time to time. The Prime Rate is not intended to be the
lowest or most favorable rate of the Bank in effect at any time.

              "PRIME RATE LOAN" shall mean a Prime Rate Revolving Loan, or a
Prime Rate Term Loan.

              "PRIME RATE REVOLVING LOAN" shall mean a Revolving Loan that bears
interest based on the Prime Rate.

              "PRIME RATE TERM LOAN" shall mean a Term Loan that bears interest
based on the Prime Rate.

              "PRO FORMA BALANCE SHEET" shall have the meaning specified
paragraph 14(a)(i).

              "PROHIBITED TRANSACTION" shall mean a prohibited transaction
described in Section 406 of ERISA or Section 4975 of the IRC.

              "RCRA" shall mean the Resource Conservation and Recovery Act 42
U.S.C.Sections 6901 ET SEQ., as same may be amended from time to time.

              "REAL PROPERTY" shall mean all of Borrower's right, title and
interest in and to the owned and leased premises identified on SCHEDULE 1(b)
hereto.

              "RELEASE" shall have the meaning set forth in paragraph
14(aa)(iii) hereof.



              "REPORTABLE EVENT" shall mean a reportable event described in
Section 4043(c) of ERISA or the regulations promulgated thereunder for which the
30-day notice of such event has not been waived pursuant to such regulations.

              "REVOLVING LOANS" shall have the meaning specified in paragraph 2
hereof.

              "REVOLVING LOAN COMMITMENT" shall mean the sum of SEVEN MILLION,
FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($7,500,000.)

              "REVOLVING NOTE" shall mean the promissory note(s) in the
aggregate original principal amount of the Revolving Loan Commitment, executed
by Borrower to the order of Lender for its benefit, dated as of the Closing
Date, together with all replacements and substitutions thereof.

              "SEASONAL OVERADVANCE AMOUNT" shall mean for the period from the
date hereof through July 31, 2001, both inclusive, $1,000,000.00; for the period
from April 1, 2002 through July 31, 2002, both inclusive, $750,000.00; and for
the period from April 1, 2003 through July 31, 2003, both inclusive,
$500,000.00.

              "SETTLEMENT DATE" shall mean the Closing Date and thereafter every
Wednesday of each Week unless such day is not a Business Day in which case it
shall be the next succeeding Business Day.

              "SUBSIDIARY" shall mean any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective of
whether at the time stock of any other class of such corporation shall have or
might have voting power by reason of the happening of any contingency) is at the
time, directly or indirectly, owned by Borrower or by any partnership or joint
venture of which more than fifty percent (50%) of the outstanding equity
interests are at the time, directly or indirectly, owned by Borrower.

              "TERM" shall have the meaning specified in paragraph 13 hereof.

              "TERMINATION EVENT" shall mean (i) a Reportable Event with respect
to any Benefit Plan or Multiemployer Plan; (ii) the withdrawal of Borrower or
any ERISA Affiliate from a Benefit Plan or Multiemployer Plan during a plan year
in which such entity was a "substantial employer" as defined in Section
4001(a)(2) of ERISA; (iii) the providing of notice of intent to terminate a
Benefit Plan in a distress termination described in Section 4041(c) of ERISA;
(iv) the institution by the PBGC of proceedings to terminate a Benefit Plan or
Multiemployer Plan; (v) any event or condition (a) which might reasonably
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan,
or (b) that may reasonably result in termination of a Multiemployer Plan
pursuant to Section 4041A of ERISA; or (vi) the partial or complete withdrawal
within the meaning of Section 4203 or 4205 of ERISA, respectively of Borrower or
an ERISA Affiliate from a Multiemployer Plan.

              "TERM LOAN" shall have the meaning specified in paragraph 3
hereof.



              "TERM NOTE" shall mean the promissory note(s) in the aggregate
original principal amount equal to the Maximum Term Loan Amount, executed by
Borrower to the order of Lender for its benefit, as applicable, and dated as of
the Closing Date, together with all replacements and substitutions thereof.

              "TOTAL CREDIT FACILITY" shall mean the sum of TEN MILLION AND
00/100 DOLLARS ($10,000,000.00).

              "TOXIC SUBSTANCE" shall mean any material present on the Real
Property which has been shown to have significant adverse effect on human health
which is subject to regulation under the Toxic Substances Control Act (TSCA), 15
U.S.C. Sections 2601 ET seq., applicable state law, or any other applicable
Federal or state laws relating to toxic substances. "Toxic Substance" includes
but is not limited to asbestos, polychlorinated biphenyls (PCBs) and lead-based
paints.

              "TRANSACTIONS" shall mean the transactions contemplated by this
Agreement.

              "TRANSFEREE" shall have the meaning set forth in paragraph 24(a)
hereof.

              "TYPE" shall mean, with respect to (i) any Revolving Loan, whether
such Revolving Loan is a LIBOR Rate Revolving Loan or a Prime Rate Revolving
Loan, and (ii) the Term Loan, whether such Term Loan is a LIBOR Rate Term Loan
or a Prime Rate Term Loan.

              "UCC" shall mean the Uniform Commercial Code as in effect on the
date hereof in the State of Illinois, as amended from time to time, and any
successor statute.

              "WEEK" shall mean the time period commencing with a Wednesday and
ending on the following Tuesday.

              (b) ACCOUNTING TERMS AND DEFINITIONS. Unless otherwise defined or
specified herein, all accounting terms used in this Agreement shall be construed
in accordance with GAAP, applied on a basis consistent in all material respects
with the financial statements delivered by Borrower to Lender on or before the
Closing Date. All accounting determinations for purposes of determining
compliance with the financial covenants contained in paragraph 15(o) shall be
made in accordance with GAAP as in effect on the Closing Date and applied on a
basis consistent in all material respects with the audited financial statements
of Borrower delivered to Lender by Borrower on or before the Closing Date. The
financial statements required to be delivered hereunder from and after the
Closing Date, and all financial records, shall be maintained in accordance with
GAAP. If GAAP shall change from the basis used in preparing the audited
financial statements delivered to Lender by Borrower on or before the Closing
Date, the certificates required to be delivered pursuant to paragraph 12
demonstrating compliance with the covenants contained herein shall include, at
the election of Borrower or upon the request of Lender, calculations setting
forth the adjustments necessary to demonstrate how Borrower is in compliance
with the financial covenants based upon GAAP as in effect on the Closing Date.

              2. REVOLVING LOANS. Subject to the terms and conditions of
this Agreement and the Other Agreements, during the Term, absent the existence
of a Default or Event of Default:


             (a)  REVOLVING LOAN COMMITMENT. Lender shall make such revolving
loans and advances (the "Revolving Loans") to Borrower, as Borrower shall from
time to time request, in accordance with the terms of paragraph 2(b) hereof. The
aggregate unpaid principal amount of all Revolving Loans outstanding at any one
time made to Borrower shall not exceed the lesser of (A) the Borrowing Base and
(B) the Revolving Loan Commitment minus the outstanding amount of all Letter of
Credit Obligations. All Revolving Loans shall be repaid in full upon the earlier
to occur of (i) the end of the Term and (ii) the acceleration of the Liabilities
pursuant to paragraph 18 of this Agreement. If at any time the outstanding
principal balance of the Revolving Loans made to Borrower exceeds (A) the
Borrowing Base or (B) the Revolving Loan Commitment, in each case minus the
outstanding Letter of Credit Obligations, Borrower shall immediately, and
without the necessity of a demand by Lender, pay to Lender such amount as may be
necessary to eliminate such excess, and Lender shall apply such payment against
the outstanding principal balance of the Revolving Loans. In addition, if at any
time the sum of (i) the outstanding principal balance of the Loans and (ii) the
outstanding Letter of Credit Obligations exceeds the Total Credit Facility,
Borrower shall immediately and without the necessity of a demand by Lender pay
to Lender such amount as may be necessary to eliminate such excess, and Lender
shall apply such payment against the outstanding principal balance of the Loans
in such order as Lender shall determine in its sole discretion. Borrower hereby
authorizes Lender to charge any of Borrower's accounts to make any payments of
principal or interest required by this Agreement. All Revolving Loans shall, in
Lender's sole discretion, be evidenced by one or more Revolving Notes in
substantially the form attached hereto as EXHIBIT 2(a). However, if such
Revolving Loans are not so evidenced, such Revolving Loans may be evidenced
solely by entries upon the books and records maintained by Lender.

             (b) BORROWING LIMITS. Lender shall make Revolving Loans to Borrower
in an amount equal to the lesser of clause (A) or (B) below, the amount
calculated pursuant to clause (A) below being the "Borrowing Base":

              A. an amount equal to the sum of (i) up to eighty-five percent
          (85%)(the "Accounts Advance Rate") of the face amount of Eligible
          Accounts, PLUS (ii) the lesser of (x) $3,000,000, or (y) the sum of up
          to sixty percent (60%) (the "Inventory Advance Rate") of the value of
          Eligible Inventory calculated on the basis of the lower of cost or
          market value on a first in, first out basis plus fifty percent (50%)
          of the aggregate undrawn amount of all outstanding Letters of Credit
          issued in connection with Borrower's purchase of inventory from the
          beneficiaries thereof, PLUS (iii) the Seasonal Overadvance Amount, if
          any, MINUS (iv) such reserves as Lender may establish from time to
          time in the exercise of its sole and reasonable discretion, MINUS (v)
          the full outstanding amount of all Letter of Credit Obligations; or

              B. the Revolving Loan Commitment, minus the outstanding amount
          of all Letter of Credit Obligations.

       3. TERM LOAN. On the Closing Date, Lender shall make a term loan (the
"Term Loan") to Borrower in an amount up to the Maximum Term Loan Amount.
Principal payable on account of the Term Loan shall be payable in successive
monthly installments payable, (i) on the first day of each month, the first of
which installments shall be due and payable on the first day of



the month immediately following the 30th day after the Closing Date and (ii) in
equal and level payments of ONE HUNDRED FOUR THOUSAND ONE HUNDRED SIXTY SEVEN
AND 00/100 DOLLARS ($104,167.00) each month during the Term until the Term Loan
is repaid in full, PROVIDED, HOWEVER, that the entire unpaid principal balance
of the Term Loan shall be due and payable in full on July 1, 2003.
Notwithstanding anything hereinabove to the contrary, the entire unpaid
principal balance of the Term Loan, and any accrued and unpaid interest thereon,
shall be immediately due and payable upon the earlier to occur of (i) the last
day of the Term and (ii) the acceleration of the Liabilities pursuant to
paragraph 18 of this Agreement. The Term Loan shall be evidenced by one or more
Term Notes in substantially the form attached hereto as EXHIBIT 3(a).

       4. LETTERS OF CREDIT. (a) Subject to the terms and conditions hereof,
Lender shall (a) from time to time issue Letters of Credit for the account of
Borrower; PROVIDED, HOWEVER, that Lender will not be required to issue or cause
to be issued any Letters of Credit to the extent that the issuance of such
Letters of Credit would then cause the sum of (i) the outstanding Revolving
Loans PLUS (ii) the Letter of Credit Obligations (with the requested Letter of
Credit being deemed to be outstanding for purposes of this calculation) to
exceed the lesser of (x) the Revolving Loan Commitment or (y) the Borrowing Base
in effect prior to the issuance of the requested Letter of Credit. The maximum
amount of outstanding Letters of Credit shall not exceed TWO MILLION AND 00/100
DOLLARS ($2,000,000.00) in the aggregate at any time. Each disbursement or
payment by the Lender related to Letters of Credit shall be deemed to be a
Revolving Loan and shall bear interest as a Prime Rate Revolving Loan. Letters
of Credit that have not been drawn upon shall not bear interest.

          (b) Borrower may from time to time upon notice not later than 12:00
Noon, Central Standard Time, at least three (3) Business Days in advance,
request Lender to assist Borrower in establishing or opening a Letter of Credit
by delivering to Lender at the Payment Office, the Lender's standard form of
letter of credit application (the "Letter of Credit Application") completed to
the satisfaction of the Lender; and, such other certificates, documents and
other papers and information as Lender may reasonably request.

          (c) Each Letter of Credit shall, among other things, (i) provide for
the payment of sight drafts when presented for honor thereunder in accordance
with the terms thereof and when accompanied by the documents described therein
and (ii) have an expiry date not later than twelve (12) months after such Letter
of Credit's date of issuance and in no event later than the last day of the
Term. Each Letter of Credit Application and each Letter of Credit shall be
subject to the Uniform Customs and Practice for Documentary Credits (1993
Revision), International Chamber of Commerce Publication No. 500, and any
amendments or revision thereof and, to the extent not inconsistent therewith,
the laws of the State of Illinois.

          (d) In connection with the issuance of any Letter of Credit, Borrower
shall indemnify, save and hold Lender harmless from any loss, cost, expense or
liability, including, without limitation, payments made by Lender and expenses
and reasonable attorneys' fees incurred by Lender arising out of, or in
connection with, any Letter of Credit to be issued for the account of Borrower.
Borrower shall be bound by the Lender's regulations and good faith
interpretations of any Letter of Credit issued or created for Borrower's
account, although this interpretation may be different from Borrower's own; and,
neither Lender, nor any of its correspondents shall be liable for any error,
negligence, or mistakes, whether of omission or commission, in following



Borrower's instructions or those contained in any Letter of Credit or of any
modifications, amendments or supplements thereto or in issuing or paying any
Letter of Credit, except for Lender's or such correspondents' gross (not mere)
negligence or willful misconduct.

          (e) In connection with all Letters of Credit issued or caused to be
issued by Lender under this Agreement, Borrower hereby appoints Lender, or its
designee, as its attorney, with full power and authority exercisable after the
occurrence of an Event of Default (i) to sign and/or endorse Borrower's name
upon any warehouse or other receipts, letter of credit applications and
acceptances; (ii) to sign Borrower's name on bills of lading; (iii) to clear
Inventory through the United States of America Customs Department ("Customs") in
the name of Borrower or Lender or Lender's designee, and to sign and deliver to
Customs officials powers of attorney in the name of Borrower for such purpose;
(iv) to complete in the name of Lender, or Lender's designee, any order, sale or
transaction, obtain the necessary documents in connection therewith, and collect
the proceeds thereof; (v) to clear and resolve any questions of non-compliance
of documents; (vi) to give any instructions as to acceptance or rejection of any
documents or goods; (vii) to execute any and all applications for steamship or
airways guarantees, indemnities or delivery orders; (viii) to grant any
extensions of the maturity of, time of payment for, or time of presentation of,
any drafts, acceptances, or documents; and (ix) to agree to any amendments,
renewals, extensions, modifications, changes or cancellation of any of the terms
or conditions of any of the applications, Letters of Credit, drafts or
acceptances; all in Lender's sole name. Neither Lender nor its attorneys will be
liable for any acts or omissions nor for any error of judgment or mistakes of
fact or law, except for Lender's or its attorney's gross (not mere) negligence
or willful misconduct. This power, being coupled with an interest, is
irrevocable as long as any Letters of Credit remain outstanding.

          (f) Lender shall not be responsible for: the existence, character,
quality, quantity, condition, packing, value or delivery of the goods purporting
to be represented by any documents; any differences or variation in the
character, quality, quantity, condition, packing, value or delivery of the goods
from that expressed in the documents; the validity, sufficiency or genuineness
of any documents or of any endorsements thereon, even if such documents should
in fact prove to be in any or all respects invalid, insufficient, fraudulent, or
forged; the time, place, manner or order in which shipment is made; partial or
incomplete shipment, or failure or omission to ship any or all of the goods
referred to in the Letters of Credit or documents; any deviation from
instructions, delay, default, or fraud by the shipper and/or any one else in
connection with the Collateral or the shipping thereof; or any breach of
contract between the shipper or vendors and Borrower.

          (g) Any necessary import, export or other licenses or certificates for
the import or handling of the Collateral will have been promptly procured; all
foreign and domestic governmental laws and regulations in regard to the shipment
and importation of the Collateral or the financing thereof will have been
promptly and fully complied with; any certificates in that regard that Lender
may at any time request will be promptly furnished. In this connection, Borrower
warrants and represents that all shipments made under any such Letters of Credit
are in accordance with the governmental laws and regulations of the countries in
which the shipments originate and terminate, and are not prohibited by any such
law and regulations. Borrower assumes all risk, liability and responsibility
for, and agrees to pay and discharge all present and future local, state,
federal or foreign taxes, duties, or levies. Any embargo, restriction, laws,
customs or regulations of any country, state, city or other political
subdivision where the Collateral is or may be located or wherein payments are to
be made or wherein drafts may be drawn, negotiated, accepted, or paid shall be
solely at Borrower's risk, liability and responsibility.

          (h) Lender may establish a reserve against the Revolving Loan for all
amounts that may be payable by Lender pursuant to that certain letter agreement
by and between Lender and Banc of America Commercial Finance Corporation dated
on or about June 13, 2001 pertaining to reimbursement with respect to letter of
credit No. B-209354, as determined by Lender in its sole discretion. Borrower
(i) consents to such agreement and any and all payments by Lender thereunder;
(ii) agrees that Lender may make payments pursuant to such agreement without
further consent of or notice to Borrower and notwithstanding any contrary
instructions from Borrower; and (iii) agrees that all such payments by Lender
shall constitute Prime Rate Revolving Loans.

     5.   MANDATORY PREPAYMENTS.



          (a) SALE, DAMAGE, DESTRUCTION, ETC. If Borrower sells any Equipment,
or if any of the Collateral is damaged, destroyed or taken by condemnation,
Borrower shall pay to Lender for its benefit, unless otherwise specifically
provided herein or otherwise agreed to by Lender, as and when received by
Borrower and as a mandatory prepayment of the Loans, to be applied first against
the last maturing installments of principal of the Term Loan in the inverse
order thereof, and then to the Revolving Loans, subject to Borrower's ability to
reborrow Revolving Loans in accordance with the terms hereof (or, at Lender's
option, such of the other Liabilities of Borrower as Lender may elect), a sum
equal to the proceeds received by Borrower from (i) such sale or (ii) such
damage, destruction or condemnation, PROVIDED, HOWEVER, that without Lender's
consent, unless and until an Event of Default has occurred and is continuing:

              (i)   obsolete or worn out Equipment may be sold or otherwise
                    disposed of by Borrower and the proceeds thereof may be
                    retained by Borrower, so long as the fair market value of
                    any such Equipment sold or otherwise disposed of in any
                    single transaction is less than $100,000.00, and the fair
                    market value, in the aggregate, of all such Equipment sold
                    or otherwise disposed of by Borrower during any twelve-month
                    period is less than $250,000.00; and

              (ii)  proceeds of Collateral arising from the damage,
                    destruction or condemnation thereof may be retained by
                    Borrower and used by Borrower to repair, restore or replace
                    such Collateral, as the case may be, so long as the fair
                    market value of any such Collateral damaged, destroyed or
                    condemned in any single incident is less than $100,000.00
                    and the fair market value, in the aggregate, of all such
                    Collateral owned by Borrower and damaged, destroyed or
                    condemned during any twelve-month period is less than
                    $250,000.00; PROVIDED FURTHER that, if the Term Loan has
                    been fully repaid and no Seasonal Overadvance Amount is in
                    effect, notwithstanding herein to the contrary, proceeds of
                    Collateral comprised of Inventory which arise from any of
                    the events described in clause (ii) and which exceed the
                    amounts permitted to be retained by Borrower and used in
                    accordance with the terms thereof shall be applied to the
                    Revolving Loans and subject to Borrower's ability to
                    reborrow Revolving Loans in accordance with the terms
                    hereof.

          (b) EXCESS CASH FLOW RECAPTURE.

              (i)   Borrower shall, each Fiscal Year, pay to Lender for its
                    benefit a prepayment of the outstanding amount of the Loans
                    in an amount equal to twenty-five percent (25%) of Excess
                    Cash Flow for the immediately preceding Fiscal Year
                    commencing with the Fiscal Year ending December 31, 2001
                    payable upon delivery of the annual financial statements to
                    Lender referred to in and required by paragraph 12(d) for
                    the applicable Fiscal Year but in no event later than ninety
                    (90) days after the end of such Fiscal Year. Such payments
                    shall be applied first against the last maturing
                    installments



                    of principal of the Term Loan in the inverse order thereof
                    until the Term Loan is paid in full, and then to the
                    Revolving Loans, subject to Borrower's ability to reborrow
                    Revolving Loans in accordance with the terms hereof. In the
                    event that the annual financial statements referred to and
                    required by paragraph 12(d) are not timely delivered, then a
                    calculation based upon estimated amounts shall be made by
                    Lender upon which calculation Borrower shall make the
                    prepayment required by this paragraph 5(b), subject to
                    adjustment, as applicable, when the annual financial
                    statements are delivered to Lender as required hereby. The
                    calculation made by Lender shall not be deemed a waiver of
                    any rights Lender may have as a result of the failure of
                    Borrower to deliver such financial statements.

              (ii)  After the annual computation of Excess Cash Flow and
                    payment to Lender of a portion thereof pursuant to and in
                    accordance with clause (i) above, Borrower may distribute up
                    to fifty (50%) percent of Excess Cash Flow in such manner
                    and to such Persons as Borrower may reasonably determine,
                    including without limitation payments on the Earnout Amount
                    (as defined in the Asset Purchase Agreement dated June 27,
                    1997 among Pumpkin Ltd. d/b/a/ Pumpkin Masters, Inc.,
                    Borrower, Pumpkin Masters Holdings, Inc. and Security
                    Capital Corporation) payable to PCG, Inc., shareholder
                    distributions or other distributions; PROVIDED, HOWEVER,
                    that no such distribution shall be permitted after the
                    occurrence of an Event of Default hereunder or if such
                    distribution would cause an Event of Default hereunder.
                    Borrower shall retain on an annual basis as working capital
                    an amount equal to or greater than twenty-five (25%) percent
                    of Excess Cash Flow.

          (c) LIFE INSURANCE PROCEEDS. If Borrower receives any proceeds of life
insurance on the life of Gay Burke, as and when received by Borrower, as
applicable, Borrower shall apply such proceeds as a mandatory prepayment of the
Loans, to be applied first against the last maturing installments of principal
of the Term Loan until the Term Loan is paid in full, and then to the
outstanding Revolving Loans as a permanent reduction in the Revolving Loan
Commitment.

     6.   INTEREST, FEES AND CHARGES.

          (a) RATES OF INTEREST. Interest accrued on the Loans shall be due on
the earliest of (i) in the case of a LIBOR Rate Loan, the first day of each
month (for the immediately preceding month), computed through the last calendar
day of the preceding month and at the end of the Interest Period applicable
thereto, and in the case of a Prime Rate Loan, the first day of each month (for
the immediately preceding month), computed through the last calendar day of the
preceding month, (ii) the occurrence of an Event of Default in consequence of
which Lender elects to accelerate the maturity and payment of the Liabilities,
or (iii) termination of this Agreement pursuant to paragraph 13 hereof. Interest
shall accrue on (1) the principal amount of the Revolving Loans made to Borrower
outstanding at the end of each day at (A) with respect to Prime Rate Revolving
Loans, a fluctuating rate per annum equal to the Prime Rate or (B) with respect
to



LIBOR Rate Revolving Loans, a fixed rate per annum equal to two and one-half
percent (2.5%) above the LIBOR Rate, (2) the unpaid principal balance of the
Term Loan at (A) with respect to Prime Rate Term Loans, a fluctuating rate per
annum equal to the Prime Rate or (B) with respect to LIBOR Rate Term Loans, a
fixed rate per annum equal to two and one half percent (2.5%) above the LIBOR
Rate. The rate of interest payable on Prime Rate Loans shall increase or
decrease by an amount equal to any increase or decrease in the Prime Rate,
effective as of the opening of business on the day that any such change in the
Prime Rate occurs. Upon and after the occurrence of an Event of Default, and
during the continuation thereof, the principal amount of all Loans shall bear
interest on demand at a rate per annum equal to the rate of interest then in
effect under this paragraph 6(a) plus two percent (2%).

          (b) COMPUTATION OF INTEREST AND FEES. Interest and collection charges
hereunder shall be calculated daily and shall be computed on the actual number
of days elapsed over a year consisting of three hundred and sixty (360) days.
For the purpose of computing interest hereunder, all items of payment received
by Lender shall be deemed applied by Lender on account of the =Liabilities
(subject to final payment of such items) on the second Business Day after
receipt by Lender of good funds in Lender's account located in Chicago,
Illinois.

          (c) MAXIMUM INTEREST. It is the intent of the parties that the rate of
interest and the other charges to Borrower under this Agreement shall be lawful;
therefore, if for any reason the interest or other charges payable under this
Agreement are found by a court of competent jurisdiction, in a final
determination, to exceed the limit which Lender may lawfully charge Borrower,
then the obligation to pay interest and other charges shall automatically be
reduced to such limit and, if any amount in excess of such limit shall have been
paid, then such amount shall be refunded to Borrower.

          (d) LETTER OF CREDIT FEES. Borrower shall remit to Lender for its own
account a letter of credit fee equal to one and three quarters percent (1.75%)
per annum (the "Letter of Credit Fee") on the aggregate undrawn face amount of
all outstanding Letters of Credit issued for the account of Borrower, which fee
shall be payable monthly in arrears on each day that interest is payable
hereunder. Borrower shall also pay on demand the normal and customary
administrative charges for issuance, amendment, negotiation, renewal or
extension of any Letter of Credit imposed by the L/C Issuer. Upon the occurrence
and during the continuance of an Event of Default, all Letter of Credit Fees
shall be payable on demand at a rate equal to three and three quarters percent
(3.75%) per annum on the aggregate undrawn face amount thereof.

          (e) CLOSING FEE. Borrower shall pay to Lender for its own account a
closing fee of FIFTY THOUSAND AND 00/100 DOLLARS ($50,000.00), which fee shall
be deemed fully earned, nonrefundable and due on the Closing Date.

          (f) UNUSED LINE FEE. Borrower shall pay to Lender for its benefit, at
the end of each month, in arrears, and on the last day of the Term an Unused
Line Fee equal to one half of one percent (.50%) per annum on the daily average
amount by which the Revolving Loan Commitment exceeds the sum of (i) the
outstanding principal balance of the Revolving Loans, and (ii) the outstanding
Letter of Credit Obligations. The Unused Line Fee shall accrue from the Closing
Date until the last day of the Term.



          (g) COLLATERAL MANAGEMENT FEE. Borrower shall pay to Lender for its
own account an annual collateral management fee of FIFTEEN THOUSAND AND 00/100
DOLLARS ($15,000.00) per annum payable on the Closing Date and on each
anniversary thereafter, subject to the earlier termination of this Agreement,
which fee shall be deemed earned in full on the Closing Date and on each
anniversary thereafter and shall not be subject to rebate or proration for any
reason.

          (h) EXAMINATION AND APPRAISAL FEES. In addition to the collateral
management fees described in paragraph 6(g) hereof, Borrower shall reimburse
Lender for all out-of-pocket costs and expenses incurred by Lender in connection
with each examination performed by or at Lender's direction of Borrower's books
and records and Collateral and such other matters as Lender shall deem
appropriate in its commercially reasonable judgment, each such fee to be paid
upon the completion of each such examination.

          (i) CAPITAL ADEQUACY CHARGE. If Lender shall have determined that the
adoption of any law, rule or regulation regarding capital adequacy, or any
change therein or in the interpretation or application thereof, or compliance by
Lender with any request or directive regarding capital adequacy (whether or not
having the force of law) from any central bank or governmental authority enacted
after the Closing Date, does or shall have the effect of reducing the rate of
return on Lender's capital as a consequence of its obligations hereunder to a
level below that which Lender could have achieved but for such adoption, change
or compliance (taking into consideration Lender's policies with respect to
capital adequacy) by a material amount, then from time to time, after submission
by Lender to Borrower of a written demand therefor ("Capital Adequacy Demand")
together with the certificate described below, Borrower shall pay to Lender such
additional amount or amounts ("Capital Adequacy Charge") as will compensate
Lender for such reduction, such Capital Adequacy Demand to be made with
reasonable promptness following such determination. A certificate of Lender
claiming entitlement to payment as set forth above shall be conclusive in the
absence of manifest error. Such certificate shall set forth the nature of the
occurrence giving rise to such reduction, the amount of the Capital Adequacy
Charge to be paid to Lender, and the method by which such amount was determined.
In determining such amount, Lender may use any reasonable averaging and
attribution method, applied on a non-discriminatory basis.

     7.   LOAN ADMINISTRATION.

          (a) LOAN REQUESTS. (1) A request for a Revolving Loan shall be made or
shall be deemed to be made, each in the following manner: (i) Borrower shall
give Lender same day notice, no later than 10:30 A.M. (Central Standard time) of
such day, of its intention to borrow, a Prime Rate Revolving Loan, and at least
three (3) Business Days prior notice of its intention to borrow a LIBOR Rate
Revolving Loan, in which notice Borrower shall specify the amount of the
proposed borrowing and the proposed borrowing date, PROVIDED, however, that no
such request may be made at a time when there exists a Default or an Event of
Default; and (ii) the coming due of any amount required to be paid under this
Agreement or any Note, whether on account of interest or for any other
Liability, shall be deemed irrevocably to be a request for a Prime Rate
Revolving Loan on the due date thereof in the amount required to pay such
interest or other Liability. As an accommodation to Borrower, Lender may permit
telephone requests for Revolving Loans and electronic transmittal of
instructions, authorizations, agreements or reports to Lender by Borrower.
Unless Borrower specifically directs Lender in writing not to accept or act upon
telephonic or electronic communications from Borrower, Lender shall not have any
liability to Borrower for any loss or damage suffered by Borrower as a result of
Lender's honoring of any requests, execution of any instructions, authorizations
or agreements or reliance on any reports communicated to it



telephonically or electronically and purporting to have been sent to Lender by
Borrower and Lender shall have no duty to verify the origin of any such
communication or the authority of the Person sending it. Each notice of
borrowing shall be irrevocable by and binding on Borrower, and if such notice
requests the borrowing of a LIBOR Rate Revolving Loan, such notice shall state
the Interest Period with respect thereto. Borrower, at its option, may choose
Prime Rate Revolving Loans or LIBOR Rate Revolving Loans, provided that any
LIBOR Rate Revolving Loan shall be in a minimum amount of $1,000,000 or an
integral multiple of $100,000 in excess thereof, and provided further that the
right of Borrower to choose any LIBOR Rate Loan is subject to the provisions of
paragraph 7(c) hereof.

          (b) DISBURSEMENT. Borrower hereby irrevocably authorizes Lender to
disburse the proceeds of each Revolving Loan requested by Borrower, or deemed to
be requested by Borrower, as follows: (i) the proceeds of each Revolving Loan
requested under paragraph 7(a)(i) shall be disbursed by Lender in lawful money
of the United States of America in immediately available funds, in the case of
the initial borrowing, in accordance with the terms of the written disbursement
letter from Borrower, and in the case of each subsequent borrowing, by wire
transfer to such bank account as may be agreed upon by Borrower and Lender from
time to time, or elsewhere if pursuant to a written direction from Borrower; and
(ii) the proceeds of each Revolving Loan requested under paragraph 7(a)(ii)
shall be disbursed by Lender by way of direct payment of the relevant interest
or other Liability.

          (c) NOTICE OF CONTINUATION AND NOTICE OF CONVERSION.

              (i)   Subject to the provisions of clause (iii) hereof and
                    PROVIDED no Event of Default shall have occurred hereunder,
                    Borrower may elect to maintain any borrowing by it
                    consisting of the same Kind of LIBOR Rate Loans, or any
                    portion thereof, as a LIBOR Rate Loan by selecting a new
                    Interest Period for such borrowing, which new Interest
                    Period shall commence on the last day of the then existing
                    Interest Period. Each selection of a new Interest Period (a
                    "Continuation") shall be made on three (3) Business Days
                    prior notice, given by Borrower to Lender not later than
                    9:30 A.M. (Central Standard time) on the third Business Day
                    preceding the date of any proposed Continuation. If Borrower
                    elects to maintain more than one borrowing consisting of
                    LIBOR Rate Loans of the same Kind by combining such
                    borrowings into one borrowing and selecting a new Interest
                    Period pursuant to this clause, each of the borrowings so
                    combined shall consist of Loans of the same Kind having
                    Interest Periods ending on the same date. If Borrower shall
                    fail to select a new Interest Period for any borrowing by it
                    consisting of LIBOR Rate Loans of the same Kind in
                    accordance with this clause, such LIBOR Rate Loans will
                    automatically convert into Prime Rate Loans.

              (ii)  Subject to the provisions of clause (iii) hereof,
                    Borrower may on three (3) Business Days prior notice given
                    to Lender convert the entire amount of or a portion of all
                    Loans of the same Kind and Type into Loans of the same Kind
                    and another Type (a "Conversion"); PROVIDED that no Default
                    or Event of Default shall have occurred



                    hereunder, and PROVIDED FURTHER that any Conversion of any
                    LIBOR Rate Loans into Prime Rate Loans may only be made on
                    the last day of the Interest Period for such LIBOR Rate
                    Loans, and upon Conversion of any Prime Rate Loans into
                    LIBOR Rate Loans, Borrower shall pay accrued interest to the
                    date of Conversion on the principal amount converted on the
                    first day of the following month. Each such notice shall be
                    given not later than 9:30 A.M. (Central Standard time) on
                    the third Business Day preceding the date of any proposed
                    Conversion. Each Conversion of a Prime Rate Loan into a
                    LIBOR Rate Loan shall be in an aggregate amount of not less
                    than $1,000,000 or an integral multiple of $100,000 in
                    excess thereof. Each partial Conversion of a LIBOR Rate Loan
                    into a Prime Rate Loan shall be in such an amount so that
                    the remaining unconverted portion of such LIBOR Rate Loan
                    shall be in an aggregate amount not less than $1,000,000.00
                    or an integral multiple of $100,00.00 in excess thereof.
                    Borrower may elect to convert the entire amount of or a
                    portion of all Loans made to Borrower of the same Kind and
                    Type comprising more than one borrowing into Loans of the
                    same Kind and another Type by combining such borrowings into
                    one borrowing consisting of Loans of the same Kind and
                    another Type; PROVIDED, HOWEVER, that if the
                    borrowings so combined consist of LIBOR Rate Loans, such
                    LIBOR Rate Loans shall have Interest Periods ending
                    on the same date.

              (iii) Notwithstanding anything contained in clauses (i) and
                    (ii) above to the contrary:

                    A. if Lender is unable to determine the LIBOR Rate for LIBOR
               Rate Loans comprising any requested borrowing, Continuation or
               Conversion, the right of Borrower to select or maintain LIBOR
               Rate Loans for such borrowing or any subsequent borrowing shall
               be suspended until Lender shall notify Borrower that the
               circumstances causing such suspension no longer exist, and each
               Loan comprising such borrowing shall be automatically converted
               into a Prime Rate Loan;

                    B. if at any time Lender shall notify Borrower that the
               LIBOR Rate for Loans comprising such borrowing by Borrower will
               not adequately reflect the cost to Lender of making such Loans,
               the right of Borrower to select, maintain, continue or convert to
               LIBOR Rate Loans for such borrowing shall be suspended until
               Lender shall notify Borrower that the circumstances causing such
               suspension no longer exist, and each Loan comprising such
               borrowing shall be automatically converted into a Prime Rate
               Loan;

                    C. there shall not be outstanding at any one time more than
               an aggregate of four (4) LIBOR Rate Loans;

                    D. any LIBOR Rate Loan shall be in a minimum amount of
               $1,000,000 or an integral multiple of $100,000 in excess thereof;

                    E. interest shall be calculated and paid by Borrower on the
               full amount of each LIBOR Rate Loan borrowed by Borrower at the
               commencement of the applicable Interest Period, regardless of any
               reductions in the principal amount of such LIBOR Rate Loan which
               occur during such Interest Period, and Borrower shall not be
               credited for any part of such interest until such interest is
               actually paid by Borrower. To the extent the aggregate repayments
               of principal on Revolving Loans received by Lender during the
               pendency of an Interest Period applicable to a then outstanding
               LIBOR Rate Revolving Loan exceed the aggregate unpaid principal
               amount of all Prime Rate Revolving Loans outstanding during such
               Interest Period, Lender shall, to the extent of such excess,
               credit to a special suspense account the amount of such
               repayments received during such Interest Period, and at the
               expiration of such Interest Period, Lender shall apply all such
               amounts credited to such account against the unpaid principal
               balance of the LIBOR Rate Revolving



               Loans then outstanding. Borrower shall not earn interest on any
               credit balance which may be deemed to exist in favor of Borrower
               by virtue of this clause (E); and

                    F. there shall not be outstanding at any time LIBOR Rate
               Loans with an outstanding principal amount exceeding eighty
               percent (80%) of the outstanding principal amount of all Loans.

               (iv) Each notice of Continuation or Conversion shall be
                    irrevocable and binding on Borrower. In the case of (w) any
                    borrowing of a Loan, Continuation, or Conversion that the
                    related notice of borrowing, notice of Continuation or
                    notice of Conversion specifies is to be comprised of LIBOR
                    Rate Loans, or (x) any payment of principal of, or
                    Conversion or Continuation of, any LIBOR Rate Loan made
                    other than on the last day of the Interest Period for such
                    Loan as a result of a payment, prepayment, Conversion or
                    Continuation of such Loan or acceleration of the maturity of
                    any of the Liabilities pursuant to paragraph 18 hereof, or
                    for any other reason, then in any such case, upon Lender's
                    demand, Borrower shall pay to Lender and indemnify Lender
                    from and against the following (collectively "Breakage
                    Costs"): (y) any loss, cost or expense incurred by Lender as
                    a result of any failure to fulfill, on or before the date
                    for such borrowing, Continuation or Conversion, the
                    applicable conditions set forth in paragraph 16(b) hereof,
                    and (z) any additional losses, costs or expenses which
                    Lender may reasonably incur as a result of such payment,
                    including, without limitation in each such case, any loss
                    (excluding loss of anticipated profits), cost or expense
                    incurred by reason of the liquidation or redeployment of
                    deposits or other funds acquired by Lender to fund the Loan
                    to be made as part of such borrowing, Continuation or
                    Conversion.

          (d) Each payment (including each prepayment) by Borrower on account of
the principal of and interest on the Revolving Note or Term Note shall be
applied to the Revolving Loans and Term Loans as applicable. Except as expressly
provided herein, all payments (including prepayments) to be made by Borrower on
account of principal, interest and fees shall be made without set-off or
counterclaim and shall be made to Lender to the Payment Office, in each case on
or prior to 1:00 P.M. (Central Standard time), in Dollars and in immediately
available funds.

     8.   GRANT OF SECURITY INTEREST TO LENDER. As security for the payment of
all Loans now or in the future made by Lender to Borrower hereunder and for the
payment or other satisfaction of all other Liabilities, Borrower hereby assigns
and grants to Lender for its benefit a continuing security interest in the
following property of Borrower, whether now or hereafter owned, existing,
acquired or arising and wherever now or hereafter located: (a) all Accounts
(whether or not Eligible Accounts) and all Goods whose sale, lease or other
disposition by Borrower has given rise to Accounts and have been returned to or
repossessed or stopped in transit by Borrower; (b) all Chattel Paper,
Instruments, Documents and General Intangibles; (c) all Inventory (whether or
not Eligible Inventory); (d) all Goods (other than Inventory) including, without
limitation, Equipment, vehicles and fixtures; (e) all deposits and cash and any
other property of Borrower now or hereafter in the possession, custody or
control of Lender or any agent



or any parent, affiliate or subsidiary of Lender or any participant with Lender
in the Loans for any purpose (whether for safekeeping, deposit, collection,
custody, pledge, transmission or otherwise); (f) all Investment Property; (g)
all Customer Lists; (h) all Real Property, (i) all of Borrower's right, title
and interest, present and future, in and to (1) all patents, trademarks,
copyrights, trade names, trade styles, service marks, prints and labels on which
said patents, trademarks, copyrights, trade names, trade styles and service
marks have appeared or appear, designs and general intangibles of like nature,
now existing or hereafter adopted or acquired, all right, title and interest
therein and thereto, and all registrations and recordings thereof, including,
without limitation, applications, registrations, and recordings in the United
States Patent and Trademark Office or in any similar office or agency of the
United States, and State thereof, or any other country or any political
subdivision thereof, all whether now owned or hereafter acquired by Borrower,
(2) all reissues, extensions or renewals thereof and all licenses thereof ("(1)"
and "(2)" collectively called "Intellectual Property"), and (3) the goodwill of
the business symbolized by each of the Intellectual Property, and all customer
lists and other records of Borrower relating to the distribution of products
bearing the Intellectual Property; and all additions and accessions to,
substitutions for, and replacements, products and proceeds of the foregoing
property, including, without limitation, proceeds of all insurance policies
insuring the foregoing property, and all of Borrower's books and records
relating to any of the foregoing and to Borrower's business.

     9.    PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS
THEREIN. Borrower shall, at Lender's request, at any time and from time to time,
execute and deliver to Lender such financing statements, documents and other
agreements and instruments (and pay the cost of filing or recording the same in
all public offices deemed reasonably necessary or desirable by Lender) and do
such other acts and things as Lender may deem necessary or desirable in order to
establish and maintain a valid, attached and perfected security interest in the
Collateral in favor of Lender for its benefit (free and clear of all other
liens, claims and rights of third parties whatsoever, whether voluntarily or
involuntarily created, except Permitted Liens) to secure payment of the
Liabilities, and in order to facilitate the collection of the Collateral.
Borrower irrevocably hereby makes, constitutes and appoints Lender (and all
Persons designated by Lender for that purpose) as Borrower's true and lawful
attorney and agent-in-fact to execute such financing statements, documents and
other agreements and instruments and do such other acts and things as may be
reasonably necessary to preserve and perfect Lender's security interest in the
Collateral. Borrower further agrees that a carbon, photographic, photostatic or
other reproduction of this Agreement or of a financing statement shall be
sufficient as a financing statement.

     10.   POSSESSION OF COLLATERAL AND RELATED MATTERS. Until an Event of
Default has occurred, Borrower shall have the right, except as otherwise
provided for in this Agreement, in the ordinary course of Borrower's business,
to (a) sell, lease or furnish under contracts of service any of Borrower's
Inventory normally held by Borrower for any such purpose, (b) use and consume
any raw materials, work in process or other materials normally held by Borrower
for such purpose, PROVIDED, HOWEVER, that a sale in the ordinary course of
business shall not include any transfer or sale in satisfaction, partial or
complete, of a debt owed by Borrower; and (c) continue to use the Collateral for
any lawful purposes consistent with past practices of Borrower.



     11.   COLLECTIONS.

           (a)   ESTABLISHMENT OF LOCKBOX AND BLOCKED ACCOUNT. Borrower shall
direct all of its Account Debtors to make all payments on the Accounts directly
to a post office box ("Lock Box") with a financial institution acceptable to,
and in the name and under exclusive control of Lender. Borrower shall establish
an account ("Blocked Account") in Lender's name for the benefit of Borrower with
a financial institution acceptable to Lender, into which all payments received
in the Lock Box shall be deposited, and into which Borrower will immediately
deposit all payments made for Inventory or services sold, leased or rendered by
Borrower and received by Borrower in the identical form in which such payments
were made, whether by cash or check. If Borrower, any Affiliate or Subsidiary of
Borrower, or any shareholder, officer, director, employee or agent of Borrower
or any Affiliate or Subsidiary, or any other Person acting for or in concert
with Borrower shall receive any monies, checks, notes, drafts or other payments
relating to or as proceeds of Accounts or other Collateral, Borrower and each
such Person shall receive all such items in trust for, and as the sole and
exclusive property of, Lender for its benefit and, immediately upon receipt
thereof, shall remit the same (or cause the same to be remitted) in kind to the
Blocked Account. Each financial institution with which a Lock Box or Blocked
Account is established shall acknowledge and agree, in a manner satisfactory to
Lender for its benefit that the amounts on deposit in such Lock Box and such
Blocked Account are the sole and exclusive property of Lender, that such
financial institution has no right to setoff against such Lock Box or Blocked
Account or against any other account maintained by such financial institution
into which the contents of such Blocked Account are transferred, and that such
financial institution shall wire, or otherwise transfer in immediately available
funds in a manner satisfactory to Lender, funds deposited in the Blocked Account
on a daily basis as such funds are collected. Borrower agrees that all payments
made to the Blocked Account established by Borrower or otherwise received by
Lender, whether in respect of the Accounts of Borrower or as proceeds of other
Collateral of Borrower or otherwise, will be applied on account of the Revolving
Loans and also on account of such other due and payable Liabilities of Borrower
as Lender shall determine in accordance with the terms of this Agreement.
Borrower agrees to pay all fees, costs and expenses which Borrower incurs in
connection with opening and maintaining a Lock Box and Blocked Account. All of
such fees, costs and expenses which remain unpaid by Borrower pursuant to any
Lock Box or Blocked Account Agreement with Borrower, to the extent same shall
have been paid by Lender hereunder, shall constitute Revolving Loans hereunder,
shall be payable to Lender for its benefit by Borrower upon demand, and, until
paid, shall bear interest at the highest rate then applicable to Revolving Loans
hereunder. All checks, drafts, instruments and other items of payment or
proceeds of Collateral delivered to Lender in kind shall be endorsed by Borrower
to Lender, and, if that endorsement of any such item shall not be made for any
reason, Lender is hereby irrevocably authorized to endorse the same on
Borrower's behalf. For the purpose of this paragraph, Borrower irrevocably
hereby makes, constitutes and appoints Lender (and all Persons designated by
Lender for that purpose) as Borrower's true and lawful attorney and
agent-in-fact (i) to endorse Borrower's name upon said items of payment and/or
proceeds of Collateral of Borrower and upon any Chattel Paper, document,
instrument, invoice or similar document or agreement relating to any Account of
Borrower or goods pertaining thereto; (ii) to take control in any manner of any
item of payment or proceeds thereof; (iii) to have access to any lock box or
postal box into which any of Borrower's mail is deposited; and (iv) open and
process all mail addressed to Borrower and deposited therein, PROVIDED, HOWEVER,
that Lender shall not exercise any such powers described in clauses (ii) and
(iv) unless and until an Event of Default has occurred.



           (b)   COLLECTION OF ACCOUNTS. Lender may, at any time and from time
to time after the occurrence of an Event of Default, whether before or after
notification to any Account Debtor and whether before or after the maturity of
any of the Liabilities, (i) enforce collection of any of Borrower's Accounts or
contract rights by suit or otherwise; (ii) exercise all of Borrower's rights and
remedies with respect to proceedings brought to collect any Accounts; (iii)
surrender, release or exchange all or any part of any Accounts of Borrower, or
compromise or extend or renew for any period (whether or not longer than the
original period) any indebtedness thereunder; (iv) sell or assign any Account of
Borrower upon such terms, for such amount and at such time or times as Lender
deems advisable; (v) prepare, file and sign Borrower's name on any proof of
claim in bankruptcy or other similar document against any Account Debtor
indebted on an Account of Borrower; and (vi) do all other acts and things which
are necessary, in Lender's sole discretion, to fulfill Borrower's obligations
under this Agreement and to allow Lender to collect the Accounts. In addition to
any other provision hereof, Lender may at any time on or after the occurrence of
an Event of Default, at Borrower's expense, notify any parties obligated on any
of the Accounts of Borrower to make payment directly to Lender of any amounts
due or to become due thereunder.

           (c)   APPLICATION OF PROCEEDS. Lender shall, within two (2) Business
Days after receipt by Lender at its office in Chicago, Illinois of cash or other
immediately available funds from collections of items of payment and proceeds of
any Collateral, apply the whole or any part of such collections or proceeds
against the Liabilities in such order as Lender shall determine in its sole
discretion.

           (d)   ACCEPTANCE OF ASSIGNMENT. In its sole credit judgment, without
waiving or releasing any obligation, liability or duty of Borrower under this
Agreement or the Other Agreements or any Event of Default, at any time or times
hereafter, Lender may (but shall not be obligated to) pay, acquire or accept an
assignment of any security interest, lien, encumbrance or claim asserted by any
Person in, upon or against the Collateral. All sums paid by Lender in respect
thereof and all costs, fees and expenses (including without limitation
reasonable attorney fees, all court costs and all other charges relating
thereto) incurred by Lender shall constitute Revolving Loans, payable by
Borrower to Lender on demand and, until paid, shall bear interest at the highest
rate then applicable to Revolving Loans hereunder.

           (e)   DELIVERY OF DOCUMENTS AND INSTRUMENTS. Immediately upon
Borrower's receipt of any portion of the Collateral evidenced by an agreement,
Instrument or Document including, without limitation, any Chattel Paper,
Borrower shall deliver the original thereof to Lender together with an
appropriate endorsement or other specific evidence of assignment thereof to
Lender (in form and substance acceptable to Lender). If an endorsement or
assignment of any such items shall not be made for any reason, Lender is hereby
irrevocably authorized, as Borrower's attorney and agent-in-fact, to endorse or
assign the same on Borrower's behalf.

     12.   SCHEDULES AND REPORTS.

     Borrower shall furnish or cause to be furnished to Lender the following:

           (a)   Borrower shall provide Lender with a written report by
Wednesday of each week, and on such more frequent basis (which may include
daily) as Lender shall request hereafter, reflecting the activity of Borrower
with respect to sales, collections of Accounts and credits issued



by Borrower for the immediately preceding week (or other period as requested by
Lender). Such report shall be in a form and with such specificity as is
satisfactory to Lender and shall contain such additional information as Lender
may reasonably require concerning Accounts and Inventory included, described or
referred to in such daily report and any other documents in connection therewith
requested by Lender, including without limitation but only if specifically
requested by Lender, copies of all invoices prepared in connection with such
Accounts.

           (b)   As soon as practicable and in any event within thirty (30) days
following the end of each calendar month, (i) statements of income and
statements of cash flow of Borrower for each such month and for the period from
the beginning of the then current Fiscal Year to the end of such month, (ii)
balance sheets of Borrower as of the end of such month, and (iii) with respect
to such statements of income and balance sheets, in comparative form, figures
for the corresponding periods in the preceding Fiscal Year, all in reasonable
detail and certified by the chief financial officer of Borrower that such
statements fairly present the financial condition of Borrower in accordance with
GAAP, subject to changes resulting from normal and recurring year-end
adjustments that individually and in the aggregate are not material to the
business of Borrower and the absence of footnotes, together with detailed
computations of Borrower's compliance with the covenants set forth in this
Agreement.

           (c)   As soon as practicable and in any event (1) on Tuesday of each
week, a Borrowing Base Certificate (which shall be calculated as of Saturday of
the immediately preceding week and which shall not be binding upon Lender or
restrictive of Lender's rights under this Agreement), and (2) within fifteen
(15) days following the end of each calendar month and at such other times as
may be requested by Lender from time to time (but, prior to the occurrence of an
Event of Default, not more frequently than twice in any calendar month), (i) a
schedule identifying by age each Account of Borrower together with copies of the
invoices when requested by Lender (with evidence of shipment attached)
pertaining to each such Account and a schedule identifying by age each account
payable of Borrower, (ii) a detailed aged trial balance of Borrower's Accounts
("Accounts Trial Balance") in form and substance satisfactory to Lender in its
reasonable discretion, including, without limitation, the names and addresses of
all Account Debtors of Borrower, (iii) a summary and detail of accounts payable
(such Accounts and accounts payable divided into such time intervals as Lender
may require in its reasonable discretion), including a listing of any held
checks, (iv) such additional schedules, certificates, reports and information
with respect to the Collateral as Lender may from time to time reasonably
require; (v) a copy of any statement received by Borrower in connection with the
Lockbox and/or the Blocked Account; (vi) an assignment of any or all items of
Collateral to Lender and (vii) the general ledger inventory account balance, a
perpetual inventory report and Lender's standard form of Inventory report then
in effect, for Borrower by each category of Inventory, together with a
description of the change in each category of Inventory, in each case, for such
immediately preceding month (or other applicable period). Lender, through its
officers, employees or agents, shall have the right, at any time and from time
to time in Lender's name, in the name of a nominee of Lender or in Borrower's
name, to verify the validity, amount or any other matter relating to any of
Borrower's Accounts, by mail, telephone, telegraph or otherwise. Borrower shall
reimburse Lender, on demand, for all reasonable costs, fees and expenses
incurred by Lender in this regard. Borrower shall immediately notify Lender of
any event causing material loss or depreciation in value of Borrower's Inventory
(other than normal depreciation occurring in the ordinary course of business).



           (d)   As soon as practicable and in any event within ninety (90) days
after the end of each Fiscal Year commencing with the Fiscal Year ending
December 31, 2001 (i) statements of income of Borrower for such Fiscal Year, and
a balance sheet of Borrower as of the end of such Fiscal Year, and (ii)
statements of cash flow of Borrower for such Fiscal Year, all setting forth in
comparative form, corresponding figures for the period covered by the preceding
annual audit and as of the end of the preceding Fiscal Year, such statements to
be presented in accordance with Borrower's normal method of accounting for
Inventory and (if Borrower uses the LIFO method) on a pre-tax FIFO basis, all in
reasonable detail and in accordance with GAAP and examined and reported on by
independent certified public accountants of recognized national standing
selected by Borrower and satisfactory to Lender, whose opinion shall be
unqualified and shall be in accordance GAAP, in form and substance reasonably
satisfactory to Lender.

           (e)   As soon as practicable and in any event not later than thirty
(30) days prior to the beginning of each Fiscal Year commencing with the Fiscal
Year ending December 31, 2002 projected balance sheets, statements of income and
cash flow for Borrower, for each of the twelve (12) months during such Fiscal
Year, which shall include the assumptions used therein, together with
appropriate supporting details as requested by Lender (hereinafter referred to
as "Projections").

           (f)   As soon as practicable and in any event within ten (10) days of
delivery to Borrower, a copy of any letter issued by Borrower's independent
public accountants or other management consultants with respect to Borrower's
financial or accounting systems or controls, including all so-called "management
letters".

           (g)   In conjunction with the delivery of the annual presentation of
projections or budgets referred to in subparagraph (e) above, a letter signed by
the president or a vice president of Borrower and by the treasurer or chief
financial officer of Borrower, describing, comparing and analyzing, in detail,
all changes and developments between the anticipated financial results included
in such projections or budgets and the historical financial statements of
Borrower.

           (h)   As soon as practicable and in any event at the end of each
Fiscal Year or as Lender may otherwise reasonably request (but, prior to the
occurrence of an Event of Default, not more frequently than quarterly), a
complete and accurate update of the Customer Lists.

           (i)   With reasonable promptness, such other business or financial
data, reports, appraisals and projections as Lender may reasonably request.

           All financial statements delivered to Lender pursuant to the
requirements of this paragraph (except where otherwise expressly indicated)
shall be prepared in accordance with GAAP as provided in this Agreement.
Together with each delivery of financial statements required by SUBPARAGRAPHS
(b) AND (d) above, Borrower shall deliver to Lender an officer's certificate in
the form attached hereto as EXHIBIT D, which shall include a calculation of
financial covenants in the schedule attached to such Officer's Certificate in
form satisfactory to Lender. Together with each delivery of annual financial
statements required by PARAGRAPH (d) above, Borrower shall deliver to Lender a
certificate of the accountants who performed the audit in connection with such
statements stating that in making the audit necessary to the issuance of a
report on such financial statements, they have obtained no knowledge of any
Event of Default, or, if such accountants have obtained



knowledge of an Event of Default, specifying the nature and period of existence
thereof and such certificates shall contain or have appended thereto
calculations which set forth Borrower's compliance with the financial covenants
set forth herein.

           (j)   All schedules, certificates, reports and assignments and other
items delivered by Borrower to Lender hereunder shall be executed by an
authorized representative of Borrower and shall be in such form and contain such
information as Lender shall reasonably request. Borrower shall deliver from time
to time such other schedules and reports pertaining to the Collateral of
Borrower as Lender may reasonably request.

     13.   TERM.

           (a)   This Agreement shall be in effect from the date hereof until
June 13, 2004 (the "Term") unless the due date of the Liabilities is accelerated
pursuant to paragraph 18 hereof, in which case this Agreement shall terminate on
the date thereafter that the Liabilities are paid in full, PROVIDED, HOWEVER,
that the security interests and liens created under this Agreement and the Other
Agreements shall survive such termination until the date upon which payment and
satisfaction in full of the Liabilities shall have occurred. At such time as
Borrower has repaid all of the Liabilities and this Agreement has terminated,
Borrower shall deliver to Lender a release, in form and substance reasonably
satisfactory to Lender, of all obligations and liabilities of Lender and its
officers, directors, employees, agents, parents, subsidiaries and affiliates to
Borrower, and if Borrower is obtaining new financing from another lender,
Borrower shall deliver such lender's indemnification of Lender, in form and
substance reasonably satisfactory to Lender, for checks which Lender has
credited to Borrower's account, but which subsequently are dishonored for any
reason.

           (b)   If, for any reason, this Agreement is terminated prior to the
end of the Term and Borrower prepays all or any portion of the Liabilities
(which prepayment by Borrower must be upon ninety (90) days' prior written
notice to Lender), Borrower agrees to pay to Lender for its benefit, as a
prepayment fee, in addition to the payment of all other Liabilities owing by
Borrower, an amount equal to (x) one percent (1%) of the Total Credit Facility
if this Agreement is terminated during the first Contract Year; and (y) one half
percent (.50%) of the Total Credit Facility if this Agreement is terminated
during the second Contract Year. In light of the extreme difficulty of
accurately calculating actual damages arising out of any early termination and
prepayment, Lender and Borrower have agreed that the prepayment fee provided for
above is a reasonable estimate of actual damages that would be incurred by
Lender.

     14.   REPRESENTATIONS AND WARRANTIES.  Borrower hereby makes the following
representations, warranties and covenants:

           (a)   (i)     Borrower has furnished to Lender a balance sheet of
                         Borrower as of the Closing Date ("Pro Forma Balance
                         Sheet") as set forth on EXHIBIT 14(a)(i) attached
                         hereto and made a part hereof. The Pro Forma Balance
                         Sheet is accurate, complete and correct and fairly
                         reflects the financial condition of Borrower as of the
                         Closing Date after giving effect to the Transactions,
                         and has been prepared in accordance with GAAP,
                         consistently applied. The Pro Forma Balance Sheet has
                         been certified by the President and Chief Financial
                         Officer of Borrower as accurate, complete and correct
                         and fairly reflecting of the financial condition of the
                         Borrower on the



                         Closing Date after giving effect to the Transaction and
                         as prepared in accordance with GAAP, consistently
                         applied.

                 (ii)    Borrower has furnished to Lender (1) balance sheets,
                         income statements and cash flow projections of Borrower
                         reflected monthly for the period beginning June 1, 2001
                         and ending May 31, 2002 as set forth on EXHIBIT
                         14(a)(ii)(1) attached hereto and made a part hereof,
                         (2) balance sheets, income statements and cash flow
                         projections of Borrower reflected annually for 2002,
                         2003 and the first six months of 2004 as set forth on
                         EXHIBIT 14(a)(ii)(2) attached hereto and made a part
                         hereof, and (3) an availability schedule for the period
                         ending May 31, 2001 in the form attached hereto as
                         SCHEDULE 14(a)(ii)(3). The financial statements
                         described in clauses (1) and (2) of the first sentence
                         of this paragraph were prepared by or under the
                         directions of the Controller of Borrower and reflect,
                         as of the Closing Date, the reasonable estimates of
                         Borrower of the information projected therein, based on
                         the assumptions accompanying such projections.

           (b)   the office where Borrower keeps its books, records and accounts
(or copies thereof) concerning the Collateral, Borrower's principal place of
business and all of Borrower's other places of business, locations of Collateral
(including locations where Borrower's raw materials, work in process and
finished goods are regularly or periodically manufactured, stored or otherwise
located) and post office boxes are as set forth in EXHIBIT A; Borrower shall
promptly (but in no event less than ten (10) days prior thereto) advise Lender
in writing of the proposed opening of any new place of business, the closing of
any existing place of business, any change in the location of Borrower's books,
records and accounts (or copies thereof) or the opening or closing of any post
office box of Borrower;

           (c)   the Collateral, including without limitation the Equipment
(except any part thereof which prior to the date of this Agreement Borrower
shall have advised Lender in writing consists of Collateral normally used in
more than one state) is and shall be kept, or, in the case of vehicles, based,
only at the addresses set forth on the first page of this Agreement or on
EXHIBIT A, and at other locations within the continental United States of which
Lender has been advised by Borrower in writing;

           (d)   Borrower shall immediately give written notice to Lender of any
use of any Goods in any state or county other than a state or county in which
Borrower has previously advised Lender such Goods shall be used, and such Goods
shall not, unless Lender shall otherwise consent in writing, be used outside of
the continental United States;

           (e)   no security agreement, financing statement or analogous
instrument exists or shall exist with respect to any of the Collateral other
than any security agreement, financing statement or analogous instrument
evidencing Permitted Liens;

           (f)   each Account or item of Inventory which Borrower shall,
expressly or by implication, request Lender to classify as an Eligible Account
or as Eligible Inventory, respectively, shall, as of the time when such request
is made, conform in all respects to the requirements of such classification as
set forth in the respective definitions of Eligible Account and Eligible
Inventory and as otherwise established by Lender from time to time, and Borrower
shall promptly notify Lender in writing if any such Eligible Account or Eligible
Inventory shall subsequently become ineligible;



           (g)   Borrower is and shall at all times during the Term be the
lawful owner of all Collateral now purportedly owned or hereafter purportedly
acquired by Borrower, free from all liens, claims, security interests and
encumbrances whatsoever, whether voluntarily or involuntarily created and
whether or not perfected, other than the Permitted Liens;

           (h)   Borrower has the right and power and is duly authorized and
empowered to enter into, execute and deliver this Agreement and the Other
Agreements and perform its obligations hereunder and thereunder; Borrower's
execution, delivery and performance of this Agreement and the Other Agreements
does not and shall not conflict with the provisions of any statute, regulation,
ordinance or rule of law, or any agreement, contract or other document which may
now or hereafter be binding on Borrower, or Borrower's certificate of
incorporation, by-laws or other applicable documents relating to Borrower's
organization or to the conduct of Borrower's business, and Borrower's execution,
delivery and performance of this Agreement and the Other Agreements shall not
result in the imposition of any lien or other encumbrance upon any of Borrower's
property under any existing indenture, mortgage, deed of trust, loan or credit
agreement or other agreement or instrument by which Borrower or any of its
property may be bound or affected other than pursuant to this Agreement and the
Other Agreements;

           (i)   there are no actions or proceedings which are pending or, to
the best of Borrower's knowledge, threatened against Borrower which are
reasonably likely to have a Material Adverse Effect and Borrower shall, promptly
upon becoming aware of any such pending or threatened action or proceeding, give
written notice thereof to Lender;

           (j)   Borrower has obtained all licenses, authorizations, approvals
and permits, the lack of which would have a material adverse effect on the
operation of its business, and Borrower is and shall remain in compliance in all
material respects with all applicable federal, state, local and foreign
statutes, orders, regulations, rules and ordinances (including, without
limitation, statutes, orders, regulations, rules and ordinances relating to
taxes, employer and employee contributions and similar items, securities,
employee retirement and welfare benefits, employee health and safety or
environmental matters), the failure to comply with which would be reasonably
likely to have a Material Adverse Effect;

           (k)   all written information now, heretofore or hereafter furnished
by Borrower to Lender is and shall be true and correct in all material respects
as of the date with respect to which such information was or is furnished
(except for financial projections, which have been prepared in good faith based
upon reasonable assumptions);

           (l)   Borrower is not conducting, permitting or suffering to be
conducted, nor shall it conduct, permit or suffer to be conducted, any
activities pursuant to or in connection with which any of the Collateral is now,
or will (while any Liabilities remain outstanding) be owned by any Affiliate;

           (m)   Borrower's name has always been as set forth on the first page
of this Agreement and Borrower uses no tradenames or division names in the
operation of its business, except as otherwise set forth on Schedule (14)(m);
Borrower shall notify Lender in writing thirty (30) days prior to the change of
its name or the use of any tradenames or division names not set forth in
Schedule 14(m);



           (n)   with respect to Borrower's Equipment: (i) Borrower has good and
indefeasible and marketable title to and ownership of all Equipment; (ii)
Borrower shall keep and maintain all material Equipment in good operating
condition and repair and shall make all necessary replacements thereof and
renewals thereto so that the value and operating efficiency thereof shall at all
times be preserved and maintained, ordinary wear and tear excepted; (iii)
Borrower shall not permit any such items to become a fixture to real estate or
an accession to other personal property; (iv) from time to time Borrower may
sell, exchange or otherwise dispose of obsolete, unused or worn out Equipment,
but only to the extent provided in paragraph 5(a)(i) hereof; and (v) Borrower,
immediately on demand by Lender, shall deliver to Lender any and all evidence of
ownership of, including, without limitation, certificates of title and
applications of title to, any material Equipment;

           (o)   this Agreement and the Other Agreements to which Borrower is a
party are the legal, valid and binding obligations of Borrower and are
enforceable against Borrower in accordance with their respective terms, except
to the extent that such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting the rights of
creditors generally;

           (p)   Borrower is solvent, is able to pay its debts as they become
due and has capital sufficient to carry on its business, now owns property
having a value both at fair valuation and at present fair saleable value greater
than the amount required to pay its debts, and will not be rendered insolvent by
the execution and delivery of this Agreement or any of the Other Agreements or
by completion of the transactions contemplated hereunder or thereunder;

           (q)   Borrower is not now obligated, whether directly or indirectly,
for any loans or other indebtedness for borrowed money other than (i) the
Liabilities; (ii) indebtedness disclosed to Lender on SCHEDULE 14(q); (iii)
unsecured indebtedness to trade creditors arising in the ordinary course of
Borrower's business; and (iv) unsecured indebtedness arising from the
endorsement of drafts and other instruments for collection, in the ordinary
course of Borrower's business;

           (r)   Borrower does not own any margin securities, and none of the
proceeds of the Loans hereunder shall be used for the purpose of purchasing or
carrying any margin securities or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase any margin securities or
for any other purpose not permitted by Regulation U of the Board of Governors of
the Federal Reserve System as in effect from time to time;

           (s)   except as otherwise disclosed on SCHEDULE 14(s), Borrower has
no Parents, Subsidiaries or divisions, nor is Borrower engaged in any joint
venture or partnership with any other Person;

           (t)   Borrower is duly organized and in good standing in its state of
organization and Borrower is duly qualified and in good standing in all states
where the nature and extent of the business transacted by it or the ownership of
its assets makes such qualification necessary, except for such other states in
which the failure to so qualify would not have a Material Adverse Effect, and
Borrower has delivered to Lender true and complete copies of its Certificate of
Incorporation and By-Laws as in effect on the Closing Date;



           (u)   Borrower is not in default under any material contract,
lease or commitment to which it is a party or by which it is bound, nor does
Borrower know of any dispute regarding any contract, lease or commitment which
is material to the continued financial success and well-being of Borrower;

           (v)   there are no controversies pending or threatened between
Borrower and any of its employees, other than employee grievances arising in the
ordinary course of business which are not, in the aggregate, material to the
continued financial success and well-being of Borrower, and Borrower is in
compliance in all material respects with all federal and state laws respecting
employment and employment terms, conditions and practices, except where the
failure to so comply would not have a Material Adverse Effect;

           (w)   Borrower possesses, and shall continue to possess, adequate
licenses, patents, patent applications, copyrights, service marks, trademarks,
trademark applications, tradestyles and tradenames to continue to conduct its
business as heretofore conducted by it and all of such items currently owned or
utilized by Borrower are listed on SCHEDULE 14(w);

           (x)   The proceeds of the Loans shall be used (i) to pay indebtedness
(including warrant obligations) of Borrower due to Bank of America in a maximum
aggregate amount of $3,800,000.00, and (ii) for Borrower's general working
capital purposes.

           (y)   Except to the extent that the failure of any of the following
to be true and accurate, would not be reasonably likely to result in a Material
Adverse Effect, no Benefit Plan was in violation in any material respect of any
of the provisions of ERISA or any of the qualification requirements of Section
401(a) of the IRC within the immediately preceding five year period, no
non-exempt Prohibited Transaction or Reportable Event has occurred with respect
to any Benefit Plan, no Benefit Plan has been the subject of a waiver of the
minimum funding standard under Section 412 of the IRC, no Benefit Plan has
experienced an accumulated funding deficiency under Section 412 of the IRC, no
Lien has been imposed upon the Borrower or any ERISA Affiliate under Section
412(n) of the IRC, no Benefit Plan has been amended in such a way that the
security requirements of Section 401(a)(29) of the IRC apply, no notice of
intent to terminate a Benefit Plan has been distributed to affected parties or
filed with the PBGC under Section 4041 of ERISA, no Benefit Plan has been
terminated under Section 4041(e) of ERISA, the PBGC has not instituted
proceedings to terminate, or appoint a trustee to administer, a Benefit Plan and
no event has occurred or condition exists which might reasonably constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Benefit Plan, neither Borrower nor any ERISA
Affiliate would be liable for any amount in the aggregate pursuant to Section
4062, 4063 or 4064 of ERISA if all Benefit Plans terminated as of the most
recent valuation dates of such Benefit Plans; neither Borrower nor any ERISA
Affiliate of Borrower maintains any employee welfare benefit plan, as defined in
Section 3(1) of ERISA, which provides any benefits to an employee or the
employee's dependents with respect to claims incurred after the employee
separates from service other than is required by applicable law; and neither
Borrower nor any ERISA Affiliate of Borrower has incurred or expects to incur
any withdrawal liability to any Multiemployer Plan and after the Closing Date,
none of the above-described events shall occur which are reasonably likely to
result in Material Adverse Effect;



           (z)   On the Closing Date, Borrower has no material liabilities
(accrued, absolute, contingent, unliquidated or otherwise, including, without
limitation, any tax, warranty or product liabilities) which are, or indebtedness
which is, not fully reflected or provided for in accordance with GAAP on the Pro
Forma Balance Sheet as of the Closing Date and the Borrower does not know of any
basis for the assertion against Borrower of any material liabilities of Borrower
which are not adequately reflected or reserved against on the Pro Forma Balance
Sheet;

           (aa)  Except as set forth on SCHEDULE 14(aa) attached hereto,

                 (i)     Borrower is in compliance with, and its facilities,
                         business, assets, property, leaseholds and Equipment
                         are in compliance in all material respects with, the
                         applicable provisions of the Federal Occupational
                         Safety and Health Act, the Environmental Protection
                         Act, RCRA and all other applicable Environmental Laws;
                         there are no outstanding citations, notices or orders
                         of non-compliance issued to Borrower or relating to its
                         business, assets, property, leaseholds or Equipment
                         under any such laws, rules or regulations;

                 (ii)    Borrower holds all required federal, state and local
                         licenses, certificates or permits required under
                         applicable Environmental Laws to operate its business;

                 (iii)   (1) There are no visible signs of releases, spills,
                         discharges, leaks or disposal (collectively referred to
                         as "Releases") of Hazardous Substances at, upon, under
                         or within any Real Property; (2) there are no
                         underground storage tanks or polychlorinated biphenyls
                         on the Real Property; (3) the Real Property has never
                         been used as a treatment, storage or disposal facility
                         of Hazardous Waste; and (4) no Hazardous Substances are
                         present on the Real Property or any premises leased by
                         Borrower, excepting such quantities as are handled in
                         accordance with all applicable manufacturer's
                         instructions and Environmental Laws and in proper
                         storage containers and as are necessary for the
                         operation of the commercial business of Borrower or of
                         its tenants; and

           (bb)  Borrower is not involved in any labor dispute, there are no
strikes or walkouts or union organization of Borrower's employees threatened or
in existence and no labor contract is scheduled to expire during the Term other
than as set forth on SCHEDULE 14(bb) attached hereto.

           Borrower represents, warrants and covenants to Lender that all
representations, warranties and covenants of Borrower contained in this
Agreement (whether appearing in paragraphs 14 or 15 hereof or elsewhere) shall
be true at the time of Borrower's execution of this Agreement, shall survive the
execution, delivery and acceptance hereof by the parties hereto and the closing
of the transactions described herein or related hereto, shall remain true until
the repayment in full of all of the Liabilities and termination of this
Agreement, and shall (other than the representation set forth in clause (z)
above) be remade by Borrower at the time each Revolving Loan is made and each
Letter of Credit is issued pursuant to this Agreement.

     15.   COVENANTS. Until payment or satisfaction in full of all Liabilities
and termination of this Agreement, unless Borrower obtain Lender's prior written
consent waiving or modifying any of Borrower's covenants hereunder in any
specific instance, Borrower agrees as follows:

           (a)   Borrower shall at all times keep accurate and complete books,
records and accounts with respect to all of Borrower's business activities, in
accordance with sound accounting practices and generally accepted accounting
principles consistently applied, and shall keep such



books, records and accounts, and any copies thereof, only at the addresses
indicated for such purpose on EXHIBIT A;

           (b)   Lender, or any Persons designated by it, shall have the right,
at any time (but, prior to the occurrence of an Event of Default, upon not less
than three (3) Business Days notice), in the exercise of its commercially
reasonable credit judgment, to call at Borrower's places of business at any
reasonable times during Borrower's normal business hours, and, without hindrance
or delay, to inspect the Collateral and to inspect, audit, check and make
extracts from Borrower's books, records, journals, orders, receipts and any
correspondence and other data relating to Borrower's business, the Collateral or
any transactions between the parties hereto, and shall have the right to make
such verification concerning Borrower's business as Lender may consider
reasonable under the circumstances. Borrower shall furnish to Lender such
information relevant to Lender's rights under this Agreement as Lender shall at
any time and from time to time reasonably request. Borrower authorizes Lender to
discuss the affairs, finances and business of Borrower with any officers or
directors of Borrower or any Affiliate, or with those employees of Borrower with
whom Lender has determined in its commercially reasonable judgment to be
necessary or desirable to converse, and to discuss the financial condition of
Borrower with Borrower's independent public accountants. Any such discussions
shall be without liability to Lender or to such accountants. Borrower shall pay
to or reimburse Lender for all reasonable fees, costs, and out-of-pocket
expenses incurred by Lender in the exercise of its rights hereunder (in addition
to the fees payable by Borrower pursuant to paragraph 6(g) hereof in connection
with Lender's examination of Borrower's books and records and Collateral) and
all of such costs, fees and expenses shall constitute Revolving Loans hereunder,
shall be payable on demand and, until paid, shall bear interest at the highest
rate then applicable to Loans hereunder;

           (c)   (i)     Borrower shall: keep the Collateral properly stored and
                         shall keep the Collateral insured against such risks
                         and in such amounts as are customarily insured against
                         by Persons engaged in businesses similar to that of
                         Borrower with such companies, in such amounts and under
                         policies in such form as shall be reasonably
                         satisfactory to Lender. Originals or certified copies
                         of such policies of insurance have been or shall be
                         delivered to Lender on the Closing Date, together with
                         evidence of payment of all premiums therefor, and shall
                         contain an endorsement, in form and substance
                         acceptable to Lender, showing loss under such insurance
                         policies payable to Lender. Such endorsement, or an
                         independent instrument furnished to Lender, shall
                         provide that the insurance company shall give Lender at
                         least thirty (30) days written notice before any such
                         policy of insurance is altered or cancelled and that no
                         act, whether willful or negligent, or default of
                         Borrower or any other Person shall affect the right of
                         Lender to recover under such policy of insurance in
                         case of loss or damage. Borrower hereby directs all
                         insurers under such policies of insurance to pay all
                         proceeds payable thereunder directly to Lender for its
                         benefit as their respective interests may appear.
                         Borrower irrevocably, makes, constitutes and appoints
                         Lender (and all officers, employees or agents
                         designated by Lender) as Borrower's true and lawful
                         attorney (and agent-in-fact) for the purpose of making,
                         settling



                         and adjusting claims under such policies of insurance,
                         endorsing the name of Borrower on any check, draft,
                         instrument or other item of payment for the proceeds of
                         such policies of insurance and making all
                         determinations and decisions with respect to such
                         policies of insurance, PROVIDED, HOWEVER, that Lender
                         shall exercise such rights only upon the occurrence of
                         an Event of Default;

                 (ii)    Borrower shall maintain, at its expense, such public
                         liability and third party property damage insurance as
                         is customary for Persons engaged in businesses similar
                         to that of Borrower with such companies and in such
                         amounts, with such deductibles and under policies in
                         such form as shall be reasonably satisfactory to Lender
                         and originals or certified copies of such policies have
                         been or shall be delivered to Lender on the Closing
                         Date, together with evidence of payment of all premiums
                         therefor; each such policy shall contain an endorsement
                         showing Lender as additional insured thereunder and
                         providing that the insurance company shall give Lender
                         at least thirty (30) days written notice before any
                         such policy shall be altered or cancelled;

                 (iii)   Borrower shall maintain at its expense, key person life
                         insurance on the life of Gay Burke in the amount of at
                         least $1,000,000.00; such policy shall be assigned to
                         Lender for its benefit as collateral security for the
                         payment of the Liabilities pursuant to a collateral
                         assignment of life insurance policy in form and
                         substance acceptable to Lender, and such assignment
                         shall be duly recorded with the applicable life
                         insurance company; and

                 (iv)    If Borrower at any time or times hereafter shall fail
                         to obtain or maintain any of the policies of insurance
                         required above or to pay any premium in whole or in
                         part relating thereto, then Lender, without waiving or
                         releasing any obligation or default by Borrower
                         hereunder, may (but shall be under no obligation to)
                         obtain and maintain such policies of insurance and pay
                         such premiums and take such other actions with respect
                         thereto as Lender reasonably deems advisable. All sums
                         disbursed by Lender in connection with any such
                         actions, including, without limitation, court costs,
                         expenses, other charges relating thereto and reasonable
                         attorneys' fees, shall constitute Revolving Loans
                         hereunder and, until paid, shall bear interest at the
                         highest rate then applicable to Revolving Loans
                         hereunder;

           (d)   Borrower shall not use the Collateral, or any part thereof, in
any unlawful business or for any unlawful purpose or use or maintain any of the
Collateral in any manner that does or could reasonably be expected to result in
material damage to the environment or a violation of any applicable
environmental laws, rules or regulations; Borrower shall keep the Collateral in
good condition, repair and order, ordinary wear and tear excepted; Borrower
shall not permit the



Collateral, or any part thereof, to be levied upon under execution, attachment,
distraint or other legal process; Borrower shall not sell, lease, grant a
security interest in or otherwise dispose of any of the Collateral except as
expressly permitted by this Agreement; and Borrower shall not secrete or abandon
any of the Collateral, or remove or permit removal of any of the Collateral from
any of the locations listed on EXHIBIT A or in any written notice to Lender
pursuant to paragraph 14 hereof, except for the removal of Inventory sold in the
ordinary course of Borrower's business as permitted herein and sales or other
dispositions of Collateral contemplated by Paragraph 5(a);

           (e)   all monies and other property obtained by Borrower from Lender
pursuant to this Agreement will be used solely for the purposes set forth
herein;

           (f)   Borrower shall, at the request of Lender, indicate on its
records concerning the Collateral a notation, in form satisfactory to Lender, of
the security interest of Lender hereunder, and Borrower shall not maintain
duplicates or copies of such records at any address other than Borrower's
principal place of business set forth on the first page of this Agreement;
PROVIDED, HOWEVER, that Borrower, in the ordinary course of its business, may
furnish copies of such records to its accountants, attorneys and other agents or
advisors as it may determine to be necessary or desirable, in the exercise of
its commercially reasonable judgment;

           (g)   Borrower shall file all required tax returns and pay all of its
taxes when due, including, without limitation, taxes imposed by federal, state
or municipal agencies, and shall cause any liens for taxes to be promptly
released; PROVIDED, that Borrower shall have the right to contest the payment of
such taxes in good faith by appropriate proceedings so long as (i) the amount so
contested is shown on Borrower's financial statements, (ii) the contesting of
any such payment does not give rise to a lien for taxes, (iii) upon the
occurrence of an Event of Default, Borrower keeps on deposit with Lender (such
deposit to be held without interest) an amount of money which, in the sole
judgment of Lender, is sufficient to pay such taxes and any interest or
penalties that may accrue thereon, and (iv) if Borrower fails to prosecute such
contest with reasonable diligence, Lender may apply the money so deposited in
payment of such taxes. If Borrower fails to pay any such taxes and in the
absence of any such contest by Borrower, Lender may (but shall be under no
obligation to) advance and pay any sums required to pay any such taxes and/or to
secure the release of any lien therefor, and any sums so advanced by Lender
shall constitute Revolving Loans hereunder, shall be payable by Borrower to
Lender on demand, and, until paid, shall bear interest at the highest rate then
applicable to Revolving Loans hereunder;

           (h)   Borrower shall not (i) incur, create, assume or suffer to exist
any indebtedness other than (A) indebtedness arising under this Agreement, (B)
unsecured indebtedness owing in the ordinary course of business to trade
suppliers arising on or after the Closing Date, and (C) any other indebtedness
described in paragraphs 14(q)(ii), (iii), and (iv) hereof; or (ii) assume,
guarantee or endorse, or otherwise become liable in connection with, the
obligations of any Person, except by endorsement of instruments for deposit or
collection or similar transactions in the ordinary course of business;

           (i)   Borrower shall not enter into any merger or consolidation, or
sell, lease or otherwise dispose of all or substantially all of its assets;
Borrower shall not create or acquire any new Subsidiary or Affiliate or issue
any shares of, or warrants or other rights to receive or purchase



any shares of, any class of its stock; Borrower shall not enter into any
transaction outside the ordinary course of Borrower's business;

           (j)   Except as otherwise permitted by paragraph 5(b)(ii) above,
Borrower shall not (i) except as otherwise permitted below declare or pay any
dividend or other distribution (whether in cash or in kind) on, purchase, redeem
or retire any shares of any class of its stock, or make any payment on account
of, or set apart assets for the repurchase, redemption, defeasance or retirement
of, any class of its stock; (ii) make any optional payment or prepayment on or
redemption (including without limitation by making payments to a sinking fund or
analogous fund) or repurchase of any indebtedness for borrowed money other than
indebtedness pursuant to this Agreement; (iii) pay any management or similar
fees to any Person, except for management fees to Security Capital Corporation
pursuant to that certain Management Advisory Services Agreement dated as of June
27, 1997 between Borrower and Security Capital Corporation; (iv) make any loan
in excess of $1,000.00 to any Person at any time except travel, entertainment
and relocation advances to Borrower's employees in the ordinary course of
business consistent with past practices; or (v) make any payment to PCG, Inc. or
any other party pursuant to the Asset Purchase Agreement dated June 27, 1997
among Pumpkin Ltd. d/b/a Pumpkin Masters, Inc., Pumpkin Masters Holdings, Inc.
and Security Capital Corporation or the transactions contemplated thereby except
for Additional Payments pursuant to and as defined in such Asset Purchase
Agreement not to exceed $160,000 per year on an accrual basis. Notwithstanding
the foregoing, Borrower shall be permitted to make distributions to its
shareholders in lieu of taxes pursuant to, and in accordance with the terms of
the Consolidated Income Tax Sharing Agreement, dated as of May 17, 1996, by and
between Possible Dreams, Ltd. and Security Capital Corporation and the Joinder
Agreement dated as of June 27, 1997 among Security Capital Corporation, Pumpkin
Masters Holdings, Inc. and Borrower provided that (1) such distributions in lieu
of taxes shall be made in accordance with the following schedule: not more than
$100,000.00 at the end of Borrower's first fiscal quarter (provided that a
reserve against availability shall be established for such payment); not more
than an additional $100,000.00 at the end of Borrower's second fiscal quarter
(provided that a reserve against availability shall be established for such
payment) and the balance payable (and the above described reserves against
availability eliminated) at such time as Borrower has completed its seasonal
selling period and has realized (on a cash basis) the profits giving rise to
such distributions in lieu of taxes; (2) at the time of payment no Event of
Default shall have occurred hereunder at any time, and (3) the making of such
distribution in lieu of taxes shall not cause the aggregate outstanding balance
of the Revolving Loans to exceed the limits set forth in Section 2(b) above or
cause the Borrower to be out of compliance with any covenant or other
requirement or obligation contained herein. Notwithstanding the foregoing,
Borrower shall also be permitted to make payments to John Bardeen and Kea
Bardeen under employment and consulting agreements and in reimbursement of
reasonable business expenses incurred on behalf of Borrower in the ordinary
course of business, PROVIDED THAT such payments do not exceed $200,000.00 per
year in the aggregate;

           (k)   Borrower shall not make any investment in any Person, whether
in cash, securities or other property of any kind, other than investments in
Cash Equivalents;

           (l)   Borrower shall not amend its charter, by-laws or any
shareholder's agreement or change its Fiscal Year;



           (m)   Borrower shall not enter into or maintain any transaction or
agreement with its Affiliates, except in the ordinary course of business in a
manner and to an extent consistent with past practices of Borrower and necessary
or desirable for the prudent operation of its business and upon fair and
reasonable terms no less favorable to Borrower than would be obtained by
Borrower in a comparable arms-length transaction with a Person who is not an
Affiliate of Borrower;

           (n)   Borrower shall not (i) (x) maintain, or permit any ERISA
Affiliate to maintain, or (y) become obligated to contribute, or permit any
ERISA Affiliate to become obligated to contribute, to any Benefit Plan, (ii)
engage, or permit any ERISA Affiliate to engage, in any non-exempt "prohibited
transaction", (iii) incur, or permit any ERISA Affiliate to incur, any
"accumulated funding deficiency", as that term is defined in Section 302 of
ERISA or Section 412 of the IRC, (iv) terminate, or permit any ERISA Affiliate
to terminate, any Benefit Plan in a manner which could result in any material
liability of Borrower or any ERISA Affiliate or the imposition of a lien on the
property of Borrower or any ERISA Affiliate pursuant to Section 4068 of ERISA,
(v) assume, or permit any ERISA Affiliate to assume, any obligation to
contribute to any Multiemployer Plan, (vi) incur, or permit any ERISA Affiliate
to incur, any withdrawal liability to any Multiemployer Plan; (vii) fail
promptly to notify Lender of the occurrence of any Termination Event, (viii)
fail to comply, in all material respects, or permit a ERISA Affiliate to fail to
comply, in all material respects, with the requirements of ERISA or IRC or other
applicable laws in respect of any Benefit Plan, (ix) fail to meet, or permit any
ERISA Affiliate to fail to meet, all minimum funding requirements under ERISA or
IRC or postpone or delay or allow any ERISA Affiliate to postpone or delay any
funding requirement with respect of any Benefit Plan except as permitted by
applicable laws, in each event set forth in clauses (i) through (ix) which would
be reasonably likely to result in a Material Adverse Effect;

           (o)   Borrower shall maintain and keep in full force and effect each
of the financial covenants set forth below. The calculation and determination of
each such financial covenant, and all accounting terms contained therein, shall
be so calculated and construed in accordance with GAAP, applied on a basis
consistent with the financial statements of Borrower delivered on or before the
Closing Date:

                 (i)     Net Worth. Borrower shall maintain as of the end of (A)
                         the fiscal quarter ending June 30, 2001 (the "base
                         quarter") a Net Worth of not less than Four Million
                         Eight Hundred Fifty Thousand dollars ($4,850,000.00)
                         and (B) each fiscal quarter thereafter (each a "current
                         quarter"), a Net Worth of not less than the sum of (1)
                         Four Million Eight Hundred Fifty Thousand dollars
                         ($4,850,000.00) and (2) an aggregate amount equal to
                         fifty percent (50%) of the net income after taxes of
                         Borrower for each fiscal quarter commencing with the
                         base quarter through and including the then current
                         quarter, provided, however, that such aggregate amount
                         shall not be reduced by the amount of any net loss
                         before taxes of Borrower for any preceding fiscal
                         quarter.

                 (ii)    DEBT SERVICE COVERAGE RATIO. Borrower shall maintain as
                         of September 30, 2001 with respect to the three (3)
                         fiscal quarters then ended and, thereafter, as of the
                         end of each fiscal quarter with respect to the four (4)
                         fiscal quarters then ended a Debt Service Coverage
                         Ratio of not less than 1.0 to 1.0.

                 (iii)   Capital Expenditures. Borrower shall not make Capital
                         Expenditures of an aggregate amount of more than Three
                         Hundred Thousand dollars ($300,000.00) during any
                         Fiscal Year.



                 (iv)    Minimum EBITDA. Borrower shall maintain EBITDA of not
                         less than the amounts shown opposite such fiscal
                         quarter calculated on a rolling twelve-month basis
                         (except as otherwise noted below), for each
                         twelve-month period (except as otherwise noted below)
                         ending on the last day of each such fiscal quarter:



                         Fiscal Quarter Ended                    Minimum EBITDA
                                                              
                         September 30, 2001 (9 month period)     $ 3,500,000.00
                         December 31, 2001                       $ 2,600,000.00
                         March 31, 2002                          $ 2,600,000.00
                         June 30, 2002                           $ 2,650,000.00
                         September 30, 2002                      $ 2,865,000.00
                         December 31, 2002 and thereafter        $ 2,865,000.00


           (p)   Borrower shall reimburse Lender for all reasonable costs and
expenses including, without limitation, legal expenses and reasonable attorneys'
fees (both in-house and outside counsel), incurred by Lender in connection with
the documentation and consummation of this transaction and any other
transactions between Borrower and Lender, including, without limitation, UCC and
other public record searches, lien filings, Federal Express or similar express
or messenger delivery, appraisal costs, surveys, title insurance and
environmental audit or review costs, and in seeking to collect, protect or
enforce any rights in or to the Collateral or incurred by Lender in seeking to
collect any Liabilities and to administer and enforce any of Lender's rights
under this Agreement. Borrower shall also pay all normal and customary service
charges with respect to accounts maintained by Lender for the benefit of
Borrower. All such costs, expenses and charges shall constitute Revolving Loans
hereunder, shall be payable by Borrower to Lender on demand, and, until paid,
shall bear interest at the highest rate then applicable to Revolving Loans
hereunder;

           (q)   Borrower shall promptly notify Lender in writing of the
occurrence of a (i) Default or an Event of Default; (ii) any event, development
or circumstance whereby any financial statements furnished to Lender fail in any
material respect to present fairly, in accordance with GAAP consistently
applied, the financial condition or operating results of Borrower as of the date
of such statements or whereby any reports furnished to Lender fail in any
material respect to present fairly the financial condition or operating results
of Borrower as of the date of such reports; (iii) any "accumulated funding
deficiency," as that term is defined in Section 302 of ERISA and Section 412 of
the IRC which, if such deficiency continued for two plan years and was not
corrected as provided in Section 4971 of the IRC, could subject Borrower to a
tax imposed by Section 4971 of the IRC; (iv) each and every default by Borrower
which could reasonably be expected to result in the acceleration of the maturity
of any indebtedness of Borrower, including the names and addresses of the
holders of such indebtedness with respect to which there is a default existing
or with respect to which the maturity has been or could be accelerated, and the
amount of such indebtedness; and (v) any other development in the business or
affairs of Borrower which could reasonably be expected to have a Material
Adverse Effect; in each case describing the nature thereof and the action
Borrower proposes to take with respect thereto;

           (r)   (i)     Borrower shall ensure that the Real Property remains in
                         compliance with all Environmental Laws and shall not
                         place or permit to be placed any Hazardous



                         Substances on any Real Property except as not
                         prohibited by applicable law (including Environmental
                         Laws) or appropriate governmental authorities;

                 (ii)    Borrower shall establish and maintain a system to
                         assure and monitor continued compliance with all
                         applicable Environmental Laws which system shall
                         include periodic reviews of such compliance;

                 (iii)   Borrower shall (i) employ in connection with the use of
                         the Real Property appropriate technology necessary to
                         maintain compliance with any applicable Environmental
                         Laws and (ii) dispose of any and all Hazardous Waste
                         generated at the Real Property only at facilities and
                         with carriers that maintain valid permits under RCRA
                         and any other applicable Environmental Laws. Borrower
                         shall use its best efforts to obtain certificates of
                         disposal, such as hazardous waste manifest receipts,
                         from all treatment, transport, storage or disposal
                         facilities or operators employed by Borrower in
                         connection with the transport or disposal of any
                         Hazardous Waste generated at the Real Property;

                 (iv)    In the event Borrower obtains, gives or receives notice
                         of any Release or threat of Release of a reportable
                         quantity of any Hazardous Substances at the Real
                         Property (any such event being hereinafter referred to
                         as a "Hazardous Discharge") or receives any notice of
                         violation, request for information or notification that
                         it is potentially responsible for investigation or
                         cleanup of environmental conditions at the Real
                         Property, demand letter or complaint, order, citation,
                         or other written notice with regard to any Hazardous
                         Discharge or violation of Environmental Laws affecting
                         the Real Property or Borrower's interest therein (any
                         of the foregoing is referred to herein as an
                         "Environmental Complaint") from any Person, including
                         any state agency responsible in whole or in part for
                         environmental matters in the state in which the Real
                         Property is located or the United States Environmental
                         Protection Agency (any such person or entity
                         hereinafter the "Authority"), then Borrower shall,
                         within five (5) Business Days, give written notice of
                         same to Lender detailing facts and circumstances of
                         which Borrower is aware giving rise to the Hazardous
                         Discharge or Environmental Complaint. Such information
                         is to be provided to allow Lender to protect its
                         security interest in the Real Property and is not
                         intended to create nor shall it create any obligation
                         upon Lender with respect thereto;

                 (v)     Borrower shall promptly forward to Lender copies of any
                         request for information, notification of potential
                         liability, demand letter relating to potential
                         responsibility with respect to the investigation or
                         cleanup of Hazardous Substances at any other site
                         owned, operated or used by Borrower to dispose of
                         Hazardous Substances and shall continue to forward
                         copies of correspondence between Borrower and the
                         Authority regarding such claims to Lender until the
                         claim is settled. Borrower shall promptly forward to
                         Lender copies of all documents and reports concerning a
                         Hazardous Discharge at the Real Property that Borrower
                         is required to file under any Environmental Laws. Such
                         information is to be provided solely to allow Lender to
                         protect Lender's security interest in the Real Property
                         and the Collateral;

                 (vi)    Borrower shall respond promptly to any Hazardous
                         Discharge or Environmental Complaint and take all
                         necessary action in order to safeguard the health of
                         any Person and to avoid subjecting the Collateral or
                         Real Property to any lien. If Borrower shall fail to
                         respond promptly to any Hazardous Discharge or
                         Environmental Complaint or Borrower shall fail to
                         comply with any of the requirements of any
                         Environmental Laws, Lender may, but without the
                         obligation to do so, for the sole purpose of protecting
                         Lender's interest in Collateral: (A) give such notices
                         or (B) enter onto the Real Property (or authorize third
                         parties to enter onto the Real Property) and take such
                         actions as Lender (or such third parties as



                         directed by Lender) deem reasonably necessary or
                         advisable, to clean up, remove, mitigate or otherwise
                         deal with any such Hazardous Discharge or Environmental
                         Complaint. All reasonable costs and expenses incurred
                         by Lender (or such third parties) in the exercise of
                         any such rights, including any sums paid in connection
                         with any judicial or administrative investigation or
                         proceedings, fines and penalties, together with
                         interest thereon from the date expended at the Default
                         Rate for Prime Rate Revolving Loans shall be paid upon
                         demand by Borrower, and until paid shall be added to
                         and become a part of the Liabilities secured by the
                         liens created by the terms of this Agreement or any
                         other agreement between Lender and Borrower;

                 (vii)   Promptly upon the written request of Lender from time
                         to time (but prior to the occurrence of an Event of
                         Default not more frequently than annually), Borrower
                         shall provide Lender, at Borrower's expense, with an
                         environmental site assessment or environmental audit
                         report prepared by an environmental engineering firm
                         acceptable in the reasonable opinion of Lender, to
                         assess with a reasonable degree of certainty the
                         existence of a Hazardous Discharge and the potential
                         costs in connection with abatement, cleanup and removal
                         of any Hazardous Substances found on, under, at or
                         within the Real Property. Any report or investigation
                         of such Hazardous Discharge proposed and acceptable to
                         an appropriate Authority that is charged to oversee the
                         clean-up of such Hazardous Discharge shall be
                         acceptable to Lender. If such estimates, individually
                         or in the aggregate, exceed $100,000, Lender shall have
                         the right to require Borrower to post a bond, letter of
                         credit or other security reasonably satisfactory to
                         Lender to secure payment of these costs and expenses;

                 (viii)  Borrower shall defend and indemnify Lender and
                         hold Lender and its employees, agents, directors and
                         officers harmless from and against all loss, liability,
                         damage and expense, claims, costs, fines and penalties,
                         including reasonable attorney's fees, suffered or
                         incurred by Lender under or on account of any
                         Environmental Laws, including, without limitation, the
                         assertion of any lien thereunder, with respect to any
                         Hazardous Discharge, or the presence of any Hazardous
                         Substances affecting the Real Property, whether or not
                         the same originates or emerges from the Real Property
                         or any contiguous real estate, except to the extent
                         such loss, liability, damage and expense is
                         attributable to any Hazardous Discharge resulting from
                         actions on the part of Lender or its employees, agents,
                         officers or directors. Borrower's obligations under
                         this paragraph 15(viii) shall arise upon the discovery
                         of the presence of any Hazardous Substances at the Real
                         Property, whether or not any federal, state, or local
                         environmental agency has taken or threatened any action
                         in connection with the presence of any Hazardous
                         Substances. Borrower's obligation and the
                         indemnifications hereunder shall survive the
                         termination of this Agreement; and

                 (ix)    For purposes of paragraphs 14(aa) and 15(r), all
                         references to Real Property shall be deemed to include
                         all of Borrower's right, title and interest in and to
                         its owned and leased premises.

     16.   CONDITIONS PRECEDENT.

           (a)   The obligation of Lender to fund the Term Loan, to fund the
initial Revolving Loan on the Closing Date, and to co-sign as applicant for the
initial Letter of Credit, if any, on the Closing Date is subject to the
satisfaction or waiver on or before the Closing Date of the following conditions
precedent:



                 (i)     Lender shall have received each of the agreements,
                         opinions, reports, approvals, consents, certificates
                         and other documents set forth on the closing document
                         list attached hereto as Schedule A (the "Closing
                         Document List").

                 (ii)    Since March 31, 2001, no event shall have occurred
                         which has had or could reasonably be expected to have a
                         Material Adverse Effect, as determined by Lender in its
                         reasonable business judgment.

                 (iii)   Lender shall have received payment in full of all fees
                         and expenses set forth herein payable to it by Borrower
                         on or before the Closing Date.

                 (iv)    Lender shall have determined that immediately after
                         giving effect to (A) the making of the initial Loans
                         requested to be made on the Closing Date and (B) the
                         issuance of the initial Letters of Credit, if any,
                         requested to be made on the Closing Date and (C) the
                         payment or reimbursement by Borrower of Lender for all
                         closing costs and expenses incurred in connection with
                         the transactions contemplated hereby, on a pro forma
                         basis the Excess Availability of Borrower shall not be
                         less than Five Hundred Thousand Dollars ($500,000.00).

                 (v)     Lender shall have received a certificate from
                         Borrower's chief executive officer or chief financial
                         officer, pursuant to which such officer shall certify
                         that in calculating the Excess Availability described
                         in clause (iv) above, the outstanding trade payables of
                         Borrower were and are current and not past due in any
                         material respect.

                 (vi)    Borrower shall have executed and delivered to Lender
                         all documents which Lender determines are reasonably
                         necessary to consummate the transactions contemplated
                         hereby.

                 (vii)   Lender shall have received duly executed agreements
                         establishing the Lock Box and Blocked Accounts with
                         Lender for the collection or servicing of the Accounts
                         and proceeds of the Collateral.


                 (viii)  Lender shall have completed Collateral examinations,
                         the results of which shall be satisfactory in form and
                         substance to the Lender, of the Accounts, Inventory,
                         General Intangibles, Investment Property and Equipment
                         of Borrower and all books and records in connection
                         therewith.

                 (ix)    Lender shall have received and be satisfied with the
                         audited financial statements of Borrower for the Fiscal
                         Year ended December 31, 2000.



                 (x)     There shall exist no default in any obligations or in
                         compliance with any applicable legal requirement of
                         Borrower (other than those disclosed to Lender in
                         writing on or prior to the date hereof).

                 (xi)    Lender shall be satisfied with its due diligence review
                         of the business and financial affairs of Borrower and
                         its management and its pre-closing audit of Borrower.

                 (xii)   Lender shall have received the executed legal opinion
                         of Morgan, Lewis & Bockius LLP in form and substance
                         satisfactory to Lender which shall cover such matters
                         incident to the transactions contemplated by this
                         Agreement, the Notes, and related agreements as Lender
                         may reasonably require (including, without limitation,
                         enforceability and perfection issues with respect to
                         the Collateral and the Real Property) and Borrower
                         hereby authorizes and directs such counsel to deliver
                         such opinions to Lender.

                 (xiii)  Lender shall have received landlord, warehouseman and
                         supplier agreements satisfactory to Lender with respect
                         to all premises leased by Borrower or any of its
                         customers or suppliers at which books and records,
                         Inventory and Equipment are located. Notwithstanding
                         the foregoing, Borrower shall only be required to use
                         its best efforts to deliver the landlord agreement
                         pertaining to the Borrower's facility located at 1905
                         Sherman Street, Denver, Colorado to Lender within
                         forty-five (45) days after the date hereof. Lender may
                         establish a reserve against the Revolving Loan of
                         $30,000.00 (which amount may be increased or decreased
                         by Lender from time to time in its reasonable business
                         judgment) until such agreement is received.

                 (xiv)   Lender shall have received in form and substance
                         satisfactory to Lender, certified copies of Borrower's
                         casualty insurance policies, together with (on or
                         before June 20, 2001, TIME BEING OF THE ESSENCE) loss
                         payable endorsements on Lender's standard form of loss
                         payee endorsement naming Lender as lender loss payee,
                         certified copies of Borrower's liability insurance
                         policies, together with endorsements naming Lender as a
                         co-insured, and, within sixty (60) days after the date
                         hereof TIME BEING OF THE ESSENCE, certified copies of
                         Borrower's key person life insurance policies on the
                         life of Gay Burke, together with collateral assignments
                         of such policies and each such insurance policy shall
                         be in accordance with the requirements of Paragraph
                         15(c) of this Agreement. Without limiting the
                         generality of paragraph 17(b) below, failure by
                         Borrower to deliver any item required under this
                         paragraph within the time required hereunder shall
                         constitute an Event of Default. Borrower agrees that
                         any payment or proceeds received with respect to
                         Borrower's casualty insurance shall immediately be
                         delivered to



                         Lender in the form received, together with any
                         necessary endorsements.

                 (xv)    Each document (including, without limitation, any
                         Uniform Commercial Code financing statement and filings
                         with the United State Patent and Trademark Office or
                         any similar state authority) required by this
                         Agreement, any Other Agreement or under law or
                         reasonably requested by the Lender to be filed,
                         registered or recorded in order to create, in favor of
                         Lender, a perfected security interest in or lien upon
                         the Collateral shall have been properly filed,
                         registered or recorded in each jurisdiction in which
                         the filing, registration or recordation thereof is so
                         required or requested, and Lender shall have received
                         an acknowledgment copy, or other evidence satisfactory
                         to it, of each such filing, registration or recordation
                         and satisfactory evidence of the payment of any
                         necessary fee, tax or expense relating thereto.

                 (xvi)   No litigation, investigation or proceeding before or
                         by any arbitrator or governmental body shall be
                         continuing or threatened against Borrower or against
                         the officers or directors of Borrower (A) in connection
                         with this Agreement or the Other Agreements or any of
                         the Transactions and which, in the reasonable opinion
                         of Lender, is deemed material or (B) which if adversely
                         determined, could, in the reasonable opinion of Lender,
                         have a Material Adverse Effect on Borrower; and (ii) no
                         injunction, writ, restraining order or other order of
                         any nature materially adverse to Borrower or the
                         conduct of its business or inconsistent with the due
                         consummation of the transactions contemplated by this
                         Agreement or the Other Agreements shall have been
                         issued by any governmental body.

                 (xvii)  Lender shall have received all environmental studies
                         and reports requested by Lender and prepared by
                         independent environmental engineering firms regarding
                         the Real Property, the results of which shall be
                         satisfactory to Lender in all respects.

                 (xviii) Lender shall have reviewed all material contracts of
                         Borrower including, without limitation, leases, union
                         contracts, labor contracts, vendor supply contracts,
                         license agreements and distributorship agreements and
                         such contracts and agreements shall be satisfactory in
                         all respects to Lender.

                 (xix)   Borrower shall be in compliance with all applicable
                         laws and regulations.

                 (xx)    No Default or Event of Default shall exist.

                 (xxi)   All corporate and other proceedings, and all documents,
                         instruments and other legal matters in connection with
                         the transactions contemplated by this Agreement shall
                         be satisfactory in form and substance to Lender and its
                         counsel.

                 (xxii)  Lender shall have received and reviewed the Pro Forma
                         Balance Sheet and monthly projections of the Borrower
                         for the first Contract Year, together with financial
                         projections for the second and third Contract Year,
                         calculated on an annual basis, and such balance sheet
                         and projections shall be in form and substance
                         satisfactory to the Lender.

                 (xxiii) All existing insurance on Borrower's Accounts shall be
                         assigned to Lender within thirty (30) days after the
                         date hereof pursuant to documentation satisfactory to
                         Lender.



           (b)   The obligation of Lender to make any requested Loan, or to
issue or cause the issuance of any requested Letter of Credit whether on or at
any time after the Closing Date, is subject to the satisfaction of the
conditions precedent set forth below. Each such request shall constitute a
representation and warranty that such conditions are satisfied:

                 (i)     All representations and warranties contained in this
                         Agreement and the Other Agreements shall be true and
                         correct on and as of the date of such request, as if
                         then made, other than representations and warranties
                         that relate solely to an earlier date;

                 (ii)    No Default or Event of Default shall have occurred, or
                         would result from the making of the requested Loan or
                         the issuance of the requested Letter of Credit, which
                         has not been waived in writing by Lender; and

                 (iii)   Since March 31, 2001, no event has occurred which has
                         had or could reasonably be expected to have a Material
                         Adverse Effect.

     17.   DEFAULT. The occurrence of any one or more of the following events
shall constitute an "EVENT OF DEFAULT" hereunder:

           (a)   the failure of Borrower to pay when due, declared due, or
demanded by Lender in accordance with the terms hereof, any of the Liabilities;

           (b)   the failure of Borrower to perform, keep or observe any of the
covenants, conditions, promises, agreements or obligations of such Obligor under
this Agreement or any of the Other Agreements;

           (c)   (i) the making or furnishing by Borrower to Lender of any
representation, warranty, certificate, schedule, report or other communication
within or in connection with this Agreement or the Other Agreements or in
connection with any other agreement between Borrower and Lender, which is untrue
or misleading in any material respect, or (ii) the failure of any Borrower to
perform, keep or observe any of the covenants, conditions, promises, agreements
of such Borrower under any other agreement with any Person if such failure has
or is reasonably likely to have a Material Adverse Effect;

           (d)   the creation (whether voluntary or involuntary) of, or any
attempt to create, any lien or other encumbrance upon any of the Collateral,
other than the Permitted Liens, or the making or any attempt to make any levy,
seizure or attachment thereof;

           (e)   the commencement of any proceedings (i) in bankruptcy by or
against Borrower, (ii) for the liquidation or reorganization of Borrower, (iii)
alleging that Borrower is insolvent or unable to pay its debts as they mature,
or (iv) for the readjustment or arrangement of any Borrower's debts, whether
under the United States Bankruptcy Code or under any other law, whether state or
federal, now or hereafter existing for the relief of debtors, or the
commencement of any analogous statutory or non-statutory proceedings involving
Borrower; PROVIDED, HOWEVER, that if such commencement of proceedings against
Borrower is involuntary, such action shall not



constitute an Event of Default unless such proceedings are not dismissed within
forty-five (45) days after the commencement of such proceedings;

           (f)   the appointment of a receiver or trustee for Borrower, for any
of the Collateral or for any substantial part of Borrower's assets or the
institution of any proceedings for the dissolution, or the full or partial
liquidation, or the merger or consolidation, of Borrower which is a corporation
or a partnership; PROVIDED, HOWEVER, that if such appointment or commencement of
proceedings against Borrower is involuntary, such action shall notconstitute an
Event of Default unless such appointment is not revoked or such proceedings are
not dismissed within forty-five (45) days after the commencement of such
proceedings;

           (g)   the entry of any judgment or order in excess of $250,000
against Borrower which is not covered in full by insurance and which remains
unsatisfied or undischarged and in effect for forty-five (45) days after such
entry without a stay of enforcement or execution;

           (h)   the occurrence of a default or event of default under, or the
revocation or termination of, any agreement, instrument or document executed and
delivered by any Person to Lender pursuant to which such Person has guaranteed
to Lender for its benefit the payment of all or any of the Liabilities or has
granted Lender for its benefit a security interest in or lien upon some or all
of such Person's real and/or personal property to secure the payment of all or
any of the Liabilities;

           (i)   the occurrence of a default or event of default under any other
agreement or instrument evidencing indebtedness for borrowed money in excess of
$250,000.00 executed or delivered by Borrower or pursuant to which agreement or
instrument Borrower or its properties is or may be bound;

           (j)   the occurrence of any event or condition which has or is
reasonably likely to have a Material Adverse Effect;

           (k)   the occurrence of a Change of Control;

           (l)   if any Reportable Event shall have occurred or any Benefit Plan
shall be terminated within the meaning of Title IV of ERISA, a trustee shall be
appointed by the appropriate United States District Court to administer any
Benefit Plan, the PBGC shall institute proceedings to terminate any Benefit
Plan, or there shall be a withdrawal from any Multiemployer Plan, and there
shall be a Material Adverse Effect in the case of any event described in this
paragraph 17(l);

           (m)   the occurrence of any event specified in Borrower's certificate
of incorporation or by-laws that could reasonably be expected to result in
Borrower's dissolution or liquidation or Borrower shall file a certificate of
dissolution or shall be liquidated, dissolved or wound-up or shall commence or
have commenced against it any action or proceeding for dissolution, winding up
or liquidation; or

           (n)   the operations of any facility manufacturing or processing
goods for sale by Borrower are interrupted (x) for more than ten (10)
consecutive Business Days during the period from April 1 through August 31, both
inclusive, of any year, or (y) at any other time and such interruption is
reasonably to likely have a Material Adverse Effect.



                 Notwithstanding anything contained in this paragraph 17 or
contained in any other provision of ths Agreement or the Other Agreements to the
contrary, in the event of the institution of any proceeding or appointment
described in paragraph 17(e) or paragraph 17(f) hereof against Borrower, Lender
shall not be obligated to make advances to Borrower during the forty-five (45)
day grace period provided in paragraph 17(e) or paragraph 17(f).

         18.     REMEDIES UPON AN EVENT OF DEFAULT.

                 (a) Upon the occurrence of an Event of Default described in
paragraph 17(e) hereof, all of the Liabilities shall immediately and
automatically become due and payable, without notice of any kind. Upon the
occurrence of any other Event of Default, all of the Liabilities may, at the
option of Lender, and without demand, notice or legal process of any kind, be
declared, and immediately shall become, due and payable.

                 (b) Upon the occurrence of an Event of Default, Lender may
exercise from time to time any rights and remedies available to it under UCC or
any other applicable law in addition to, and not in lieu of, any rights and
remedies expressly granted in this Agreement or in any of the Other Agreements
and all of Lender's rights and remedies shall be cumulative and non-exclusive to
the extent permitted by law. In particular, but not by way of limitation of the
foregoing, Lender may, without notice, demand or legal process of any kind, take
possession of any or all of the Collateral (in addition to Collateral of which
it already has possession), wherever it may be found, and for that purpose may
pursue the same wherever it may be found, and may enter into any of Borrower's
premises where any of the Collateral may be, and search for, take possession of,
remove, keep and store any of the Collateral until the same shall be sold or
otherwise disposed of, and Lender shall have the right to store the same at any
of Borrower's premises without cost to Lender. At Lender's request, Borrower
shall, at Borrower's expense, assemble the Collateral and make it available to
Lender at one or more places to be designated by Lender and reasonably
convenient to Borrower. Borrower recognizes that if Borrower fails to perform,
observe or discharge any of its Liabilities under this Agreement or the Other
Agreements, no remedy at law will provide adequate relief to Lender, and
Borrower agrees that Lender shall be entitled to temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages. Any notification of intended disposition of any of the Collateral
required by law will be deemed reasonably and properly given if given at least
ten (10) calendar days before such disposition. Any proceeds of any disposition
by Lender of any of the Collateral may be applied by Lender to the payment of
expenses in connection with the Collateral including, without limitation, legal
expenses and reasonable attorneys' fees (both in-house and outside counsel) and
any balance of such proceeds may be applied by Lender toward the payment of such
of the Liabilities, and in such order of application, as Lender may from time to
time elect.

         19.     INDEMNIFICATION. Borrower agrees to defend (with counsel
reasonably satisfactory to Lender), protect, indemnify and hold harmless Lender,
each Affiliate or subsidiary Lender, and each of their respective officers,
directors, employees, attorneys and agents (each an "Indemnified Party") from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any kind
or nature (including, without limitation, the disbursements and the reasonable
fees of counsel for each Indemnified Party in connection with any investigative,
administrative or judicial proceeding, whether or not the Indemnified Party
shall be designated a party thereto), which may be imposed



on, incurred by, or asserted against, any Indemnified Party (whether direct,
indirect or consequential and whether based on any federal, state or local laws
or regulations including, without limitation, securities, environmental and
commercial laws and regulations, under common law or in equity, or based on
contract or otherwise) in any manner relating to or arising out of this
Agreement or any Other Agreement, or any act, event or transaction related or
attendant thereto, the making and the management of the Loans or any Letters of
Credit or the use or intended use of the proceeds of the Loans or any Letters of
Credit; PROVIDED, HOWEVER, that Borrower shall not have any obligation hereunder
to any Indemnified Party with respect to matters caused by or resulting from the
willful misconduct or gross negligence of such Indemnified Party. To the extent
that the undertaking to indemnify set forth in the preceding sentence may be
unenforceable because it is violative of any law or public policy, Borrower
shall satisfy such undertaking to the maximum extent permitted by applicable
law. Any liability, obligation, loss, damage, penalty, cost or expense covered
by this indemnity shall be paid to each Indemnified Party on demand, and,
failing prompt payment, shall, together with interest thereon at the highest
rate then applicable to Revolving Loans hereunder from the date incurred by each
Indemnified Party until paid by Borrower, be added to the Liabilities of
Borrower and be secured by the Collateral. The provisions of this paragraph 19
shall survive the satisfaction and payment of the other Liabilities and the
termination of this Agreement.

         20.     NOTICES. All written notices and other written communications
with respect to this Agreement shall be sent by ordinary, certified or overnight
mail, by telecopy or delivered in person, and in the case of Lender shall be
sent to it at LaSalle Business Credit, Inc., 565 Fifth Avenue, New York, New
York 10017, Attention: District Credit Manager, (facsimile no. (212) 982-4205)
with a copy to Shipman & Goodwin LLP, One Landmark Square, Suite 1700, Stamford,
Connecticut 06901, attention Robert M. Wonneberger (facsimile (203) 324-8199)
and in the case of Borrower shall be sent to Borrower at its principal place of
business as set forth on the first page of this Agreement, Attention: Ms. Gay
Burke (facsimile no. (303) 860-9826), with copies to Capital Partners, One
Pickwick Plaza, Suite 310, Greenwich, Connecticut 06830, Attention: Brian D.
Fitzgerald/William Schlueter (facsimile no. (203) 625-0423) and to Morgan, Lewis
& Bockius LLP, 101 Park Avenue, New York, New York 10178-0060, Attention: Samuel
B. Fortenbaugh III (facsimile no. (212) 309-6273). Any notice, if mailed and
properly addressed with postage prepaid, shall be deemed given when received;
any notice, if transmitted by telecopy, shall be deemed given when transmitted,
provided receipt is confirmed.

         21.     CHOICE OF GOVERNING LAW AND CONSTRUCTION. This Agreement and
the Other Agreements are submitted by Borrower to Lender for Lender's acceptance
or rejection at Lender's principal place of business as an offer by Borrower to
borrow monies from Lender now and from time to time hereafter, and shall not be
binding upon Lender or become effective until accepted by Lender, in writing, at
said place of business. If so accepted by Lender, this Agreement and the Other
Agreements shall be deemed to have been made at said place of business. THIS
AGREEMENT AND THE OTHER AGREEMENTS SHALL BE GOVERNED AND CONTROLLED BY THE
INTERNAL LAWS OF THE STATE OF NEW YORK AS TO INTERPRETATION, ENFORCEMENT,
VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING, WITHOUT
LIMITATION, THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, BUT EXCLUDING
PERFECTION OF THE SECURITY INTERESTS IN THE COLLATERAL, WHICH SHALL BE GOVERNED
AND CONTROLLED BY THE LAWS



OF THE RELEVANT JURISDICTION. If any provision of this Agreement shall be held
to be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or remaining provisions of this
Agreement.

         22.     FORUM SELECTION AND SERVICE OF PROCESS. To induce Lender to
accept this Agreement, Borrower irrevocably agrees that, subject to Lender's
sole and absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR
RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER
AGREEMENTS OR THE COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN
THE CITY OF NEW YORK, STATE OF NEW YORK. BORROWER HEREBY CONSENTS AND SUBMITS TO
THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN SAID CITY
AND STATE. Borrower hereby irrevocably appoints and designates the Secretary of
State of Colorado (or any other person having and maintaining a place of
business in such state whom Borrower may from time to time hereafter designate
upon ten (10) days written notice to Lender and who Lender has agreed in writing
in its sole discretion is satisfactory and who has executed an agreement in form
and substance satisfactory to Lender agreeing to act as such attorney and
agent), as Borrower's true and lawful attorney and duly authorized agent for
acceptance of service of legal process. Borrower agrees that service of such
process upon such person shall constitute personal service of such process upon
Borrower. BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE
VENUE OF ANY LITIGATION BROUGHT AGAINST BORROWER BY LENDER IN ACCORDANCE WITH
THIS PARAGRAPH.

         23.     MODIFICATION AND BENEFIT OF AGREEMENT.

                  (a) This Agreement and the Other Agreements may not be
modified, altered or amended except by an agreement in writing signed by
Borrower and Lender as provided in paragraph (b) below. Borrower may not sell,
assign or transfer this Agreement, or the Other Agreements or any portion
thereof including, without limitation, Borrower's rights, titles, interest,
remedies, powers or duties thereunder.

                  (b) Lender, with the consent in writing of the Borrower may,
subject to the provisions of this paragraph 23(b), from time to time enter into
written supplemental agreements to this Agreement, the Notes or the Other
Agreements executed by Borrower, for the purpose of adding or deleting any
provisions or otherwise changing, varying or waiving in any manner the rights of
Lender or Borrower thereunder or the conditions, provisions or terms thereof of
waiving any Event of Default thereunder, but only to the extent specified in
such written agreements.

       Any such supplemental agreement shall be binding upon Borrower, Lender
and all future holders of the Liabilities. In the case of any waiver, Borrower
and Lender shall be restored to their former positions and rights, and any Event
of Default waived shall be deemed to be cured and not continuing, but no waiver
of a specific Event of Default shall extend to any subsequent Event of Default
(whether or not the subsequent Event of Default is the same as the Event of
Default which was waived), or impair any right consequent thereon.

         24.      PARTICIPATIONS AND ASSIGNMENT.



              (a)  Borrower acknowledges that in the regular course of
commercial banking business Lender may at any time and from time to time sell
participating interests in the Loans to other financial institutions (each such
transferee or purchaser of a participating interest, a "Transferee"). Each
Transferee may exercise all rights of payment (including without limitation
rights of set-off) with respect to the portion of such Loans held by it or other
Liabilities payable hereunder as fully as if such Transferee were the direct
holder thereof provided that Borrower shall not be required to pay to any
Transferee more than the amount which it would have been required to pay to the
Lender which granted an interest in its Loans or other Liabilities payable
hereunder to such Transferee had Lender retained such interest in the Loans
hereunder or other Liabilities payable hereunder and in no event shall Borrower
be required to pay any such amount arising from the same circumstances and with
respect to the same Loans or other Liabilities payable hereunder to both Lender
and such Transferee. Borrower hereby grants to any Transferee a continuing
security interest in any deposits, moneys or other property actually or
constructively held by such Transferee as security for the Transferee's interest
in the Loans.

              (b)  Lender may (with Borrower's prior written consent, which
consent shall not be unreasonably withheld or delayed) sell, assign or transfer
all or any part of its rights under this Agreement and the Other Agreements to
one or more additional banks or financial institutions and one or more
additional banks or financial institutions may commit to make Loans hereunder
(each a "Purchasing Lender"), in minimum amounts of not less than $1,000,000,
pursuant to a Commitment Transfer Supplement in the form of EXHIBIT 24(b)
attached hereto, executed by the Purchasing Lender and the transferor Lender.
Upon such execution, delivery, acceptance and recording, from and after the
transfer effective date determined pursuant to such Commitment Transfer
Supplement, (i) a Purchasing Lender thereunder shall be a party hereto and, to
the extent provided in such Commitment Transfer Supplement, have the rights and
obligations of a Lender hereunder with a Commitment Percentage as set forth
therein, and (ii) the transferor Lender thereunder shall, to the extent provided
in such Commitment Transfer Supplement, be released from its obligations under
this Agreement, the Commitment Transfer Supplement creating a novation for that
purpose. Such Commitment Transfer Supplement shall be deemed to amend this
Agreement to the extent, and only to the extent, necessary to reflect the
addition of such Purchasing Lender and the resulting adjustment of the
Commitment Percentages arising from the purchase by such Purchasing Lender of
all or a portion of the rights and obligations of such transferor Lender under
this Agreement and the Other Agreements. Borrower hereby consents to the
addition of such Purchasing Lender and the resulting adjustment of the
Commitment Percentages arising from the purchase by such Purchasing Lender of
all or a portion of the rights and obligations of such transferor Lender under
this Agreement and the Other Agreements. Borrower shall execute and deliver such
further documents and do such further acts and things in order to effectuate the
foregoing.

              (c)  Borrower authorizes Lender to disclose to any Transferee or
Purchasing Lender and any prospective Transferee or Purchasing Lender any and
all financial information in Lender's possession concerning Borrower which has
been delivered to Lender by or on behalf of Borrower pursuant to this Agreement
or in connection with Lender's credit evaluation of Borrower; PROVIDED such
Transferee or Purchasing Lender agrees in writing to keep all such information
confidential in accordance with the terms of Paragraph 27(e) hereof.



         25.      HEADINGS OF SUBDIVISIONS. The headings of subdivisions in
this Agreement are for convenience of reference only, and shall not govern the
interpretation of any of the provisions of this Agreement.

         26.      POWER OF ATTORNEY. Borrower acknowledges and agrees that
its appointment of Lender as its attorney-in-fact for the purposes specified in
this Agreement is an appointment coupled with an interest and shall be
irrevocable until all of the Liabilities are paid in full and this Agreement is
terminated.

         27.      WAIVER OF JURY TRIAL; OTHER WAIVERS; CONFIDENTIALITY.

                  (a) LENDER AND BORROWER HEREBY WAIVE ALL RIGHTS TO TRIAL BY
JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS
AGREEMENT, ANY OF THE OTHER AGREEMENTS, THE LIABILITIES, THE COLLATERAL, ANY
ALLEGED TORTIOUS CONDUCT OF BORROWER OR LENDER OR WHICH, IN ANY WAY, DIRECTLY OR
INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP AMONG BORROWER AND
LENDER. IN NO EVENT SHALL LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR
CONSEQUENTIAL DAMAGES.

                  (b) BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF
ANY KIND PRIOR TO THE EXERCISE BY LENDER OF ITS RIGHTS TO REPOSSESS THE
COLLATERAL OF BORROWER WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY
UPON SUCH COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.

                  (c) Borrower hereby waives demand, presentment, protest and
notice of nonpayment, and further waives the benefit of all valuation, appraisal
and exemption laws.

                  (d) Lender's failure, at any time or times hereafter, to
require strict performance by Borrower of any provision of this Agreement or any
of the Other Agreements shall not waive, affect or diminish any right of Lender,
thereafter to demand strict compliance and performance therewith. Any suspension
or waiver by Lender, of an Event of Default under this Agreement or any default
under any of the Other Agreements shall not suspend, waive or affect any other
Event of Default under this Agreement or any other default under any of the
Other Agreements, whether the same is prior or subsequent thereto and whether of
the same or of a different kind or character. No delay on the part of Lender in
the exercise of any right or remedy under this Agreement or any Other Agreement
shall preclude other or further exercise thereof or the exercise of any right or
remedy. None of the undertakings, agreements, warranties, covenants and
representations of Borrower contained in this Agreement or any of the Other
Agreements and no Event of Default under this Agreement or default under any of
the Other Agreements shall be deemed to have been suspended or waived by Lender
unless such suspension or waiver is in writing in compliance with Paragraph
23(b) hereof.

                  (e) Borrower has furnished and will furnish to Lender certain
information concerning Borrower which Borrower has advised is non-public,
proprietary or confidential in nature ("CONFIDENTIAL INFORMATION"). Lender
confirms to the Borrower that it is Lender's policy and practice to maintain in
confidence all Confidential Information which is provided to it under agreements
providing for the extension of credit and which is identified to it as such, and



that it will protect the confidentiality of Confidential Information submitted
to it with respect to Borrower under this Agreement, commensurate with its
efforts to maintain the confidentiality of its own Confidential Information,
PROVIDED, HOWEVER, that (i) nothing contained herein shall prevent Lender from
disclosing Confidential Information (A) to its Affiliates and their respective
directors, officers, and employees and to any legal counsel, auditors,
appraisers, consultants or other persons retained by it or its Affiliates as
professional advisors, on the condition that such information not be further
disclosed except in compliance with this paragraph 27(e); (B) under color of
legal authority, including, without limitation, to any regulatory authority
having jurisdiction over it or its operations or to, or under the authority of,
any court deemed by it to be of competent jurisdiction; (C) to any actual or
potential Transferee or Purchasing Lender in Lender's rights and obligations
under this Agreement to the extent such actual or potential Transferee or
Purchasing Lender has agreed to maintain such information in confidence on the
basis set forth in this paragraph 27(e); and (D) as necessary in connection with
the exercise of its remedies under this Agreement or any of the Other
Agreements; (ii) the terms of this paragraph 27(e) shall be inapplicable to any
information furnished to it which is in possession prior to the delivery to it
of such information by Borrower or any other authorized Person, or otherwise has
been obtained by it on a non-confidential basis, or which was or becomes
available to the public or otherwise part of the public domain (other than as a
result of Lender's failure or any prospective participant's or assignee's
failure to abide hereby), or which was not non-public, proprietary or
confidential when Borrower or any other authorized Person delivered it to
Lender; and (iii) the determination by Lender as to the application of any of
the circumstances described in the foregoing clauses (i) and (ii) will be
conclusive and binding if made in good faith.

                  (f) Notwithstanding subparagraph (e) above, Borrower consents
to Lender publishing a tombstone or similar advertising material relating to the
financing transaction contemplated by this Agreement.



                  IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the 13th day of June, 2001.


                                      LASALLE BUSINESS CREDIT, INC.


                                      By: /s/ Anthony J. Veith
                                          Name: Anthony J. Veith
                                          Title:  Senior Vice President


                                      PUMPKIN LTD.


                                      By: /s/ William R. Schlueter
                                          Name: William R. Schlueter
                                          Title:  Vice President

EX-21

EXHIBIT 21

                  SUBSIDIARIES OF SECURITY CAPITAL CORPORATION



                                                                 JURISDICTION OF
                      NAME                                        INCORPORATION
                      ----                                       ---------------
                                                                  
  Security Capital Insurance Group, Inc.                             Delaware

  Possible Dreams, Ltd.                                              Delaware

  P.D. Holdings, Inc.                                                Delaware

  Pumpkin Masters Holdings, Inc.                                     Delaware

  Pumpkin, Ltd.                                                      Delaware

  Primrose Holdings, Inc.                                            Delaware

  Primrose School Franchising Company                                Georgia

  The Jewel I, Inc.                                                  Georgia

  WC Holdings, Inc.                                                  Delaware

  Health Power, Inc.                                                 Delaware

  CompManagement, Inc.                                                 Ohio

  CompManagement Disability Services Company                         Virginia

  CompManagement Health Systems, Inc.                                  Ohio

  CompManagement of Virginia, Inc.                                   Virginia

  M & N Risk Management, Inc.                                          Ohio

  M & N Enterprises, Inc.                                              Ohio

EX-23.1

EXHIBIT 23.1


CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement Form
S-8 (No. 333-55234) pertaining to the 2000 Long-Term Incentive Plan of our
report dated March with respect to the consolidated financial statements of
Security Capital Corporation and subsidiaries included in this Annual Report
(Form 10-K) for the year ended December 31, 2001.


                                                 /s/ Ernst & Young LLP


Stamford, Connecticut
April 5, 2002

EX-23.2

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in Registration Statement No.
333-55234 of Security Capital Corporation on Form S-8 of our report dated
March 27, 2000 appearing in this Annual Report on Form 10-K of Security Capital
Corporation and subsidiaries for the year ended December 31, 2001, and to the
reference to us under the heading "Experts" in the Prospectus, which is part of
such Registration Statement.

                                              /s/ Deloitte & Touche LLP


Stamford, Connecticut
April 5, 2002