Exhibit 10.1

AMERICAN APPAREL CANADA WHOLESALE INC.

and

AMERICAN APPAREL CANADA RETAIL INC.

as the Borrower

and

BANK OF MONTREAL

as the Bank

 

 

CREDIT AGREEMENT

 

 

December 30, 2009

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TABLE OF CONTENTS

 

ARTICLE 1 INTERPRETATION AND DEFINITIONS    1 Section 1.1    Interpretation    1
Section 1.2    Definitions    1 ARTICLE 2 THE CREDIT    16 Section 2.1   
Revolving Credit    16 Section 2.2    Establishment of Reserves    17
Section 2.3    Revolving Credit Loans    17 Section 2.4    Letters of Credit   
17 Section 2.5    MasterCard Facility    18 Section 2.6    Forward Contracts   
18 Section 2.7    Manner and Disbursement of Loans    19 Section 2.8    U.S.
Dollar Extensions of Credit    19 ARTICLE 3 INTEREST, FEES, CAPITAL ADEQUACY,
TERM AND TERMINATION    20 Section 3.1    Interest Rates, Interest Payment Dates
   20 Section 3.2    Facility Fee    21 Section 3.3    Unused Line Fee    21
Section 3.4    Field Examination Fees    21 Section 3.5    Letter of Credit Fee
   22 Section 3.6    Forward Contract Fees    22 Section 3.7    Monthly
Administration Fee    22 Section 3.8    Cash Management Fee    22 Section 3.9   
Change in Capital Adequacy Requirements    22 Section 3.10    Term and
Termination of the Revolving Credit    23 ARTICLE 4 SCHEDULED PAYMENT OF
MATURITY OF LOANS, APPLICATION OF PAYMENTS AND COLLECTIONS, PREPAYMENTS,
COMPUTATION OF OBLIGATIONS OUTSTANDING AND NOTATIONS    24 Section 4.1   
Maturity of Revolving Credit Loans    24 Section 4.2    Place and Application of
Payments and Collections    24 Section 4.3    Mandatory Prepayments    25
Section 4.4    Computation of Obligations Outstanding    26 Section 4.5   
Evidence of Indebtedness    26 ARTICLE 5 COLLATERAL    26 Section 5.1   
Collateral    26 Section 5.2    Deposits in Blocked Accounts    26 Section 5.3
   Further Assurances    27 ARTICLE 6 REPRESENTATIONS AND WARRANTIES    27
Section 6.1    Qualification    27 Section 6.2    Corporate Authority and
Validity of Obligations    28

 

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Section 6.3    Use of Proceeds    28 Section 6.4    Financial Reports    28
Section 6.5    No Material Adverse Change    29 Section 6.6    Full Disclosure
   29 Section 6.7    Good Title    29 Section 6.8    Litigation and Other
Controversies    29 Section 6.9    Taxes    29 Section 6.10    Approvals    30
Section 6.11    Affiliate Transactions    30 Section 6.12    Pensions    30
Section 6.13    Compliance With Laws    30 Section 6.14    Other Agreements   
30 Section 6.15    No Default    31 Section 6.16    Insurance    31 Section 6.17
   Receivables    31 Section 6.18    Intellectual Property    31 ARTICLE 7
CONDITIONS PRECEDENT    32 Section 7.1    All Advances    32 Section 7.2   
Effective Date    33 Section 7.3    Close Out Date    35 ARTICLE 8 COVENANTS   
35 Section 8.1    Duly Pay and Perform    35 Section 8.2    Maintenance of
Business    35 Section 8.3    Maintenance of Property    35 Section 8.4    Taxes
and Assessments    35 Section 8.5    Insurance    36 Section 8.6    Financial
Reports    38 Section 8.7    Field Examinations; Appraisals; Verifications    40
Section 8.8    Fixed Charge Coverage Ratio    42 Section 8.9    Indebtedness for
Borrowed Money    42 Section 8.10    Liens    43 Section 8.11    Investments,
Acquisitions, Loans, Advances and Guarantees    44 Section 8.12    Material
Contracts    45 Section 8.13    Operating Leases    45 Section 8.14    Mergers,
Consolidations and Sales    45 Section 8.15    Maintenance of Subsidiaries    45
Section 8.16    Repatriation of Funds    45 Section 8.17    Purchase of Goods
for Parent    46 Section 8.18    Remuneration of Employees    46 Section 8.19   
Location of Collateral    46 Section 8.20    Landlord Agreements    47
Section 8.21    Settlements on Receivables    47 Section 8.22    Collection of
Receivables    47 Section 8.23    Inventory and Equipment    49 Section 8.24   
Compliance with Laws    50

 

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Section 8.25    Burdensome Contracts with Affiliates    50 Section 8.26    No
Changes in Fiscal Year    51 Section 8.27    Formation of Subsidiaries    51
Section 8.28    Change in the Nature of Business    51 Section 8.29    Deposit
Accounts    51 Section 8.30    Bank Performance of Covenants    51 Section 8.31
   Books and Records    52 Section 8.32    Insolvency Applications    52
Section 8.33    Minimum Excess Availability    52 Section 8.34    Transfer
Pricing    52 ARTICLE 9 EVENTS OF DEFAULT AND REMEDIES    52 Section 9.1   
Events of Default    52 Section 9.2    Non Bankruptcy Defaults    55 Section 9.3
   Bankruptcy Defaults    56 Section 9.4    Collateral for Undrawn Letters of
Credit    56 Section 9.5    Collateral for Outstanding Forward Contracts    56
ARTICLE 10 MISCELLANEOUS    57 Section 10.1    Non Business Days    57
Section 10.2    No Waiver, Cumulative Remedies    57 Section 10.3    Amendment,
Notices    57 Section 10.4    Costs, Expenses and General Indemnity    57
Section 10.5    Environmental Indemnity    59 Section 10.6    Taxes    59
Section 10.7    Survival of Representations    60 Section 10.8    Notices    61
Section 10.9    Solidary Obligation    62 Section 10.10    Paramountcy    63
Section 10.11    Headings    63 Section 10.12    Severability of Provisions   
63 Section 10.13    Counterparts    63 Section 10.14    Compensation    63
Section 10.15    Binding Nature, Assignment, Governing Law    63 Section 10.16
   Submission to Jurisdiction    64 Section 10.17    Judgment Currency    64
Section 10.18    Most Favoured Lender    64

 

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EXHIBIT “A” BORROWING BASE CERTIFICATE    67 EXHIBIT “B” COMPLIANCE CERTIFICATE
   69 SCHEDULE 5.1 LIST OF COLLATERAL DOCUMENTS    73 SCHEDULE 6.1 LOCATIONS AND
TRADE NAMES OF THE BORROWER    74 SCHEDULE 6.9 TAX DISCLOSURE    84 SCHEDULE
8.10 PERMITTED LIENS    85

 

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CREDIT AGREEMENT

This Credit Agreement is entered into as of the 30th day of December, 2009
between American Apparel Canada Wholesale Inc. and American Apparel Canada
Retail Inc. (individually and collectively, the “Borrower”) and Bank of Montreal
(the “Bank”).

WHEREAS the Borrower has requested credit facilities from the Bank;

WHEREAS the Bank has agreed, subject to the terms and conditions hereof, to
extend such credit facilities to the Borrower;

NOW THEREFORE, in consideration of the mutual agreements contained herein, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE 1

INTERPRETATION AND DEFINITIONS

Section 1.1 Interpretation

The definitions below are equally applicable to both the singular and plural
forms of the terms defined. The words “hereof”, “herein” and “hereunder” and
words of like import when used in this Agreement shall refer to this Agreement
as a whole and not to any particular provision of this Agreement. All references
to time of day herein are references to Montréal, Québec time unless otherwise
specifically provided. All dollar amounts set out herein are in Canadian Dollars
unless otherwise indicated. Where the character or amount of any asset or
liability or item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be made for the
purposes of this Agreement, it shall be done in accordance with GAAP, except
where such principles are inconsistent with the specific provisions of this
Agreement.

Section 1.2 Definitions

In this Agreement, unless something in the subject matter or context is
inconsistent therewith:

 

(1) “Acceleration” is defined in Section 3.10(2) hereof.

 

(2) “Accounts” means the Borrower’s bank accounts described in Section 2.7(3)
hereof and all other accounts established by the Borrower with the Bank from
time to time.

 

(3)

“Affiliate” of any Person means any other Person directly or indirectly
controlling or controlled by, or under direct or indirect common control with,
such first mentioned Person. A Person shall be deemed to control another

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Person for purposes of this definition if such Person possesses, directly or
indirectly, the power to direct, or cause the direction of, the management and
policies of the other Person, whether through the ownership of voting
securities, common directors, trustees or officers, by contract or otherwise;
provided that, in any event for purposes of this definition, any Person that
owns, directly or indirectly, ten percent (10%) or more of the securities having
the ordinary voting power for the election of directors or governing body of a
corporation or ten percent (10%) or more of the partnership or other ownership
interests of any other Person (other than as a limited partner of such other
Person) will be deemed to control such corporation or other Person.

 

(4) “Agreement” means this Credit Agreement, as the same may be amended,
modified or restated from time to time in accordance with the terms hereof.

 

(5) “Allowed Additional Indebtedness” means, without duplication, the following
indebtedness:

 

  (a) any indebtedness that is secured by a Permitted Lien;

 

  (b) Capital Lease Obligations is in the aggregate principal amount not
exceeding Cdn.$250,000;

 

  (c) the non-revolving amortizing term loan in the original principal amount of
Cdn.$427,500 granted by HSBC Bank Canada to Wholesale and secured by a
first-ranking Lien on the Mont-Royal Property, and all renewals, extensions,
replacements thereto, or substitutions therefor, provided none of the foregoing
increases the principal amount thereof; and

 

  (d) the Dov Charney Loan.

 

(6) “Allowed Subordinated Indebtedness” means such indebtedness of the Borrower
as is consented to in writing by the Bank, provided that (i) all such
indebtedness is subordinated and postponed in favour of the Bank by agreements
in form and substance satisfactory to the Bank, and (ii) all security granted in
connection with any such indebtedness has been postponed and subordinated in
favour of the Bank in the manner provided herein by agreements in form and
substance acceptable to the Bank.

 

(7)

“American Apparel U.S. First Lien Credit Agreement” means the Credit Agreement
dated as of July 2, 2007 among American Apparel (USA), LLC (f/k/a AAI
Acquisition LLC (successor by merger to American Apparel, Inc.)), as lead
borrower, the other borrowers and facility guarantors party thereto, Bank of
America, N.A. (successor by merger to LaSalle Business

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Credit, LLC, as agent for LaSalle Bank Midwest National Association, acting
through its division, LaSalle Retail Finance), as agent, and the other lenders
party thereto, and all renewals, extensions, replacements, supplements or
amendments thereto, or substitutions therefore or restatements thereof.

 

(8) “American Apparel U.S. Second Lien Credit Agreement” means the Credit
Agreement dated as of March 13, 2009 among American Apparel, Inc., the facility
guarantors party thereto, Lion Capital LLP, as administrative agent and
collateral agent, and the other lenders party thereto, and all renewals,
extensions, replacements, supplements or amendments thereto, or substitutions
therefore or restatements thereof.

 

(9) “Application” is defined in Section 2.4(4) hereof.

 

(10) “Authorized Representative” means those persons shown on the officer’s
certificate provided by the Borrower pursuant to Section 7.2(a) hereof, or on
any update of such certificate provided by the Borrower to the Bank, or any
further or different officer of the Borrower so named by any Authorized
Representative of the Borrower in a written notice to the Bank.

 

(11) “Bank” is defined in the introductory paragraph hereof.

 

(12) “Borrower” is defined in the introductory paragraph hereof.

 

(13) “Borrowing Base” means, as of any particular date of determination, the sum
of :

(a) 85% of the then outstanding amount of Eligible Accounts (or 90% of the then
outstanding amount of Eligible Accounts to the extent insured under a policy in
form, substance and scope acceptable to the Bank, the proceeds of which have
been duly hypothecated by way of a first ranking (subject to Permitted Liens)
hypothec in favour of the Bank) less any and all returns, rebates, discounts
(which may, at the Bank’s option, be calculated on the shortest terms), credits,
allowances, finance charges and/or Taxes of any nature at any time issued,
owing, available to or claimed by account debtors, granted, outstanding or
payable in connection with such Eligible Accounts at such time; plus

(b) the lesser of (i) for the period from November 1st to April 30th of each
year, 70% of the value of Eligible Inventory and, for the period from May 1st to
October 31st of each year, 75% of the value of Eligible Inventory (computed in
each instance at the lower of net realizable value and cost, determined on a
first in/first out or average cost basis, applied by the Borrower in accordance
with GAAP), and (ii) 85% of the Net Orderly Liquidation Value of Eligible
Inventory at such time;

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provided that: (i) the Borrowing Base shall be adjusted weekly or more
frequently as determined by the Bank and computed only as against and on so much
of such Collateral as is included in the Borrowing Base Certificate or other
reports to be furnished from time to time by the Borrower pursuant to this
Agreement and, if required by the Bank, pursuant to any of the terms hereof or
any Collateral Document, as verified by such other evidence required to be
furnished to the Bank pursuant hereto or pursuant to any such Collateral
Document; and (ii) the amount of the Borrowing Base at any time shall be net of
any reserves applicable at such time pursuant to Section 2.1.

 

(14) “Borrowing Base Certificate” means a certificate of the Borrower certified
by the President, the Vice-President or the Chief Financial Officer of the
Borrower in the form attached hereto as Exhibit “A”.

 

(15) “Business Day” means any day other than a Saturday or Sunday or such other
day on which banks are authorized or required to close in Montréal or Toronto,
Canada.

 

(16) “Canadian Dollar Equivalent” means, on any given date, the amount of
Canadian Dollars which could be purchased with the relevant amount of a currency
at the then applicable Spot Rate at 11:00 a.m. Montréal time on such date (and
if such date is not a Business Day, on the immediately preceding Business Day)
for the purchase of Canadian Dollars with such currency.

 

(17) “Canadian Dollars” and “Cdn. $” means lawful currency of Canada.

 

(18) “Canadian Revolving Credit Loans” is defined in Section 2.3 hereof.

 

(19) “Capital Lease” means any lease of Property that in accordance with GAAP is
required to be capitalized on the balance sheet of the lessee.

 

(20) “Capitalized Lease Obligation” means the amount of the liability shown on
the balance sheet of any Person in respect of a Capital Lease as determined in
accordance with GAAP.

 

(21)

“CDOR Rate” means on any day the annual rate of interest which is the rate
determined as being the arithmetic average of the quotations of all institutions
listed in respect of the “BA 1 Month” Rate for Canadian Dollar denominated
bankers’ acceptances displayed and identified as such on the “Reuters Screen
CDOR Page” (as defined in the International Swap Dealer Association, Inc.
definitions, as modified and amended from time to time) as of 10:00 a.m.
Montréal, Québec local time on such day and, if such day is not a Business Day,
then on the immediately preceding Business Day (as adjusted by the Bank after
10:00 a.m. Montréal, Québec local time to reflect any error in a posted rate of
interest or in the posted average annual rate of interest); and

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if such rates are not available on the Reuters Screen CDOR Page on any
particular day, then the CDOR Rate on that day shall be calculated as the 30 day
rate applicable to Canadian Dollar denominated bankers’ acceptances quoted by
the Bank as of 10:00 a.m. Montréal, Québec local time on such day; or if such
day is not a Business Day, then as quoted by the Bank on the immediately
preceding Business Day.

 

(22) “Collateral” means all property, assets, rights, interests and privileges
from time to time subject to the Liens granted by the Borrower and the Parent to
the Bank under the Collateral Documents.

 

(23) “Collateral Documents” means all charges, mortgages, deeds of trust,
debentures, hypothecs, pledges, security agreements, assignments, guarantees,
subordinations and all other documents and agreements as shall from time to time
directly or indirectly secure or otherwise support the Obligations, including,
without limitation, those listed in Schedule 5.1 hereof.

 

(24) “Contested Taxes” is defined in Section 6.9.

 

(25) “Deemed Forward Contract Amount” in respect of any Forward Contract, means
ten percent (10%) or such other percentage that the Bank shall determine from
time to time, in its discretion, of the maximum amount payable by the Borrower
to the Bank thereunder (for which purpose any amount payable in a currency other
than Canadian Dollars shall be deemed to be the Canadian Dollar Equivalent of
such amount).

 

(26) “Default” means any event or condition the occurrence of which would, with
the passage of time or the giving of notice, or both, constitute an Event of
Default.

 

(27) “Default Rate” means the rate of interest established pursuant to
Section 3.1(3) hereof.

 

(28) “Dov Charney Loan” means the term loan in the initial amount of
Cdn.$2,200,000 granted by Dov Charney to Wholesale pursuant to the promissory
note dated December 11, 2007, the outstanding principal amount thereof as of the
date hereof being Cdn.$968,300.

 

(29) Drawdown Date” means any Business Day on which an Extension of Credit is
made or is deemed to be made.

 

(30) “EBITDA” means, with reference to any period, Net Income for such period
plus all amounts deducted in arriving at such Net Income amount in respect of
(i) Interest Expense for such period, plus (ii) income taxes (including deferred
taxes) for such period, plus (iii) all amounts properly charged for depreciation
and amortization during such period on the books of the Borrower.

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(31) “Effective Date” means the date of this Agreement or such later Business
Day on which all of the conditions precedent described in Section 7.1 and in
Section 7.2 hereof shall have been satisfied in a manner acceptable to, or
waived by, the Bank in its sole discretion.

 

(32) “Eligible Accounts” means all Receivables of the Borrower that the Bank, in
its reasonable judgment, deems to be Eligible Accounts; provided that in no
event shall a Receivable be deemed an Eligible Account unless all
representations and warranties set forth herein and in the Collateral Documents
with respect to such Receivable are true and complete and such Receivable:

 

  (a) arises out of the sale by the Borrower of finished Inventory delivered to
and accepted by, or out of the rendition by the Borrower of services fully
performed by it and accepted by, the account debtor on such Receivable and such
Receivable otherwise represents a final sale;

 

  (b) is owing by an account debtor located within Canada or the U.S. or, if
such right has arisen out of the sale of Inventory shipped to, or out of the
rendition of services to, an account debtor located in any other country, such
right is secured by (i) a valid and irrevocable letter of credit pursuant to
which the Borrower or its transferee may draw on a lender reasonably acceptable
to the Bank for the full amount thereof, or (ii) credit insurance in such form
and content acceptable to the Bank;

 

  (c) is the valid, binding and legally enforceable obligation of the account
debtor obligated thereon and such account debtor is not (i) an Affiliate of the
Borrower, (ii) a shareholder, director, officer or employee of the Borrower,
(iii) the Government of Canada, of the U.S. or any province, state or political
subdivision thereof, or any department, agency or instrumentality of any of the
foregoing, (iv) a debtor under or subject to any proceeding, application, notice
or stay under the Bankruptcy and Insolvency Act (Canada) or the Companies’
Creditors Arrangement Act (Canada), as amended, or any other bankruptcy or
insolvency law, (including, without limitation, the United States Bankruptcy
Code) or (v) a general assignor for the benefit of creditors;

 

  (d) is not evidenced by a note, bill of lading, instrument or chattel paper
unless the same has been endorsed and delivered to the Bank;

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  (e) is an asset of the Borrower to which it has good and marketable title, can
be freely hypothecated and is subject to a perfected, first ranking Lien in
favour of the Bank free and clear of any other Liens, except Permitted Liens;

 

  (f) is not owing from an account debtor who is also a creditor or supplier of
the Borrower, is not subject to any offset, compensation, contra, counterclaim,
holdback (whether a construction holdback or otherwise) or other defence or
deduction with respect thereto and, with respect to said Receivable or the
contract or purchase order out of which the same arose, no surety bond was
required or given in connection therewith;

 

  (g) is not unpaid more than ninety (90) days after the original invoice date
(which must be not more than five (5) days subsequent to the related shipment
date or the date services were fully performed by the Borrower), but in any
event, not more than sixty (60) days past the date that payment is due, provided
that the Bank is satisfied with the documentation submitted to it by the
Borrower evidencing such ninety (90) days credit terms;

 

  (h) is not owing from an account debtor who is obligated on Receivables owed
to the Borrower more than twenty-five percent (25%) of the aggregate unpaid
balance of which have been past due for longer than the relevant period
specified in paragraph (g) above;

 

  (i) would not cause the total Receivables owing from any one account debtor
and its Affiliates to exceed fifteen percent (15%) of all Eligible Accounts
(other than Kitsilano T-Shirt Co Ltd (d/b/a Budget T-Shirt), in respect of which
the said limit shall be twenty percent (20%) of all Eligible Accounts);

 

  (j) would not cause the total uninsured Receivables owing from any one account
debtor and its Affiliates to exceed any credit limit established for purposes of
determining eligibility hereunder by the Bank in its reasonable judgment for
such account debtor;

 

  (k) does not arise from a sale to an account debtor on a bill and hold,
progress billing, pre billing, credits in prior, guaranteed sale, sale or
return, sale on approval, consignment or any other repurchase or return basis
and is not subject to any dispute or uncertainty as to collection.

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(33) “Eligible Inventory” means all finished goods Inventory of the Borrower
(other than packaging materials, work in process, crating, supplies, shipping,
storing and other ancillary Inventory) which the Bank, in its reasonable
judgment, deems to be Eligible Inventory; provided that in no event shall
Inventory be deemed Eligible Inventory unless all representations and warranties
set forth herein and in the Collateral Documents with respect to such Inventory
are true and complete and such Inventory:

 

  (a) is an asset of the Borrower to which it has good and marketable title, can
be freely hypothecated and is subject to a perfected, first ranking Lien in
favour of the Bank free and clear of any other Liens, except Permitted Liens;

 

  (b) is located at facilities of the Borrower that have been approved in
writing by the Bank and, in the case of any facilities not owned by the
Borrower, such facilities are at all times subject to a Landlord Agreement,
unless the Bank agrees to waive this requirement in writing in which case the
Eligible Inventory located at such facilities shall be subject to a reserve, as
contemplated by Section 2.3.

 

  (c) is not so identified to a contract to sell that it constitutes, and has
not otherwise given rise to, a Receivable;

 

  (d) is not stored with a bailee, consignee, warehouseman, processor or similar
party unless the Bank has given its prior written approval and such Person has
caused any such bailee, consignee, warehouseman, processor or similar party to
issue and deliver to the Bank, in form and substance acceptable to the Bank, in
its reasonable discretion, such waivers, releases or subordination agreements as
the Bank shall reasonably require;

 

  (e) is not in transit or otherwise not in the possession of the Borrower;

 

  (f) is not destined to be leased to third parties or otherwise rental in
nature;

 

  (g) is not damaged, unsaleable, used, obsolete or slow moving and is otherwise
of good and merchantable quality free from any defects which might adversely
affect the market value thereof;

 

  (h) all such Inventory was produced pursuant to binding and existing purchase
orders therefor to which the Borrower has title.

 

(34)

“Equipment” means and includes all equipment and any other machinery, tools,
fixtures, trade fixtures, furniture, furnishings, office equipment,

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vehicles and all other property now owned or hereafter acquired by the Borrower
and used or usable in connection with the Borrower’s business, together with all
parts, additions, accessories and attachments relating to any of the foregoing.

 

(35) “Event of Default” means any event or condition described in Section 9.1
hereof.

 

(36) “Excess Availability” means as of any date of determination by the Bank,
the excess, if any, of (i) the Borrowing Base over (ii) the Canadian Dollar
Equivalent of the aggregate principal amount of all Extensions of Credit under
the Revolving Credit as of the close of business on such date. For purposes of
calculating Excess Availability and the amount of the Borrowing Base relating
thereto, the Bank may, in the exercise of its reasonable judgment, and without
prejudice to its ability to establish other reserves as set out in this
Agreement, establish a reserve in an aggregate amount based on the Borrower’s
outstanding debt which is not current (in accordance with its terms of payment
as verified by the Bank) or which is past due as of such date of determination.

 

(37) “Excluded Taxes” means with respect to the Bank or any other recipient of
any payment to be made by or on account of any obligation of the Borrower
hereunder:

 

  (a) income or franchise taxes imposed on (or measured by) its net income by
Canada or by the jurisdiction under the laws of which such recipient is
organized or in which its principal office is located; or

 

  (b) any branch profits taxes imposed by Canada or any similar tax imposed by
any other jurisdiction in which the Borrower is located which are imposed on (or
measured by) its net income in Canada or such other jurisdiction, as applicable.

 

(38) “Extension of Credit” means an extension of credit or advance by the Bank
to the Borrower pursuant to this Agreement or the other Loan Documents,
including, for greater certainty, an extension of credit or advance in the form
of a Loan, a Letter of Credit, an advance under the MasterCard Facility or a
Forward Contract.

 

(39) “Forward Contract” means a foreign exchange forward contract in form and
substance satisfactory to the Bank, entered into by the Borrower with the Bank.

 

(40) “GAAP” means generally accepted accounting principles as in effect from
time to time in the United States of America, applied by the Borrower on a basis
consistent with the preparation of the Borrower’s most recent financial
statements furnished to the Bank pursuant to Section 6.4 hereof.

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(41) “Governmental Authority” means any: (i) federal, provincial, state,
municipal, local or other governmental or public department, central bank,
court, commission, board, bureau, agency or instrumentality, domestic or
foreign; (ii) any subdivision or authority of any of the foregoing; or (iii) any
quasi governmental or private body exercising any regulatory, expropriation or
taxing authority under or for the account of any of the above.

 

(42) “Hazardous Materials” means any contaminant, pollutant or substance that is
likely to cause harm or degradation to the surrounding environment or risk to
human health and, without restricting the generality of the foregoing, includes
any pollutant, contaminant, waste, hazardous waste or dangerous goods present in
such quantity or state that it contravenes any Requirements of Environmental
Law.

 

(43) “Indebtedness for Borrowed Money” means for any Person (without
duplication) (i) all indebtedness created, assumed or incurred in any manner by
such Person representing money borrowed (including by the issuance of debt
securities), (ii) all indebtedness for the deferred purchase price of property
or services (other than trade accounts payable arising in the ordinary course of
business owing to the Parent and those which are not more than sixty (60) days
past due or ninety (90) days past the invoice date unless, in the case of any
trade account payable owing for longer than such periods, such trade account
payable is contested in good faith and by appropriate proceedings which prevent
enforcement of the matter under contest and reserves deemed adequate by the Bank
have been established therefor), (iii) all indebtedness representing money
borrowed, secured by any Lien upon Property of such Person, whether or not such
Person has assumed or become liable for the payment of such indebtedness,
(iv) all Capitalized Lease Obligations of such Person, and (v) all obligations
of such Person on or with respect to letters of credit and bankers’ acceptances
and other extensions of credit whether or not representing obligations for
borrowed money.

 

(44) “Indemnified Taxes” means Taxes other than Excluded Taxes.

 

(45) “Indemnitees” means the Bank and its successors and assigns, any agent or
mandatary of them or such successors or assigns (specifically including a
receiver or receiver manager) and the respective officers, directors and
employees of the foregoing.

 

(46) “Intellectual Property” means all licences, franchises, permits, patents,
trademarks, services marks, trade names, copyright, trade secrets, industrial
design and other forms of intellectual property material to the conduct of the
Borrower’s business.

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(47) “Interest Expense” means, with reference to any period, the sum of all
interest charges (including imputed interest charges with respect to Capitalized
Lease Obligations and all amortization of debt discount and expense) of the
Borrower for such period determined in accordance with GAAP.

 

(48) “Interest Payment Date” means, in respect of the credit facilities
hereunder, the last Business Day of each month or such other day of each month
as the Bank and the Borrower may otherwise agree.

 

(49) “Inventory” means all now owned or hereafter acquired inventory and any
other now owned or hereafter acquired property of the Borrower that is new and
held for sale or is to be furnished under contracts of service or consumed in
the Borrower’s business excluding, for greater certainty, property which is raw
materials or work in process and all materials and supplies of every kind and
nature used or usable in connection with the acquisition, manufacture,
processing, supply, servicing, storing, packing, shipping, advertising, selling,
leasing or finishing of the foregoing, and any constituents or ingredients
thereof.

 

(50) “Landlord Agreement” means a landlord agreement entered into between the
Bank and any Person having a right, title or interest in, or Lien on, any
premises not owned by the Borrower where any of the Collateral may be located,
whereby such Person subordinates any right, title or interest in, and Lien on,
the Collateral and allows the removal of such Collateral by the Bank and is
otherwise in form and substance acceptable to the Bank.

 

(51) “Letter Agreements” means collectively (i) the trade-marks agreement dated
December 29, 2009 among the Bank, LLC and the Borrower, and (ii) the sale of
goods agreement dated December 29, 2009 between the Bank, LLC and the Borrower.

 

(52) “Letter of Credit” is defined in Section 2.4 hereof.

 

(53) “Lien” means any mortgage, hypothec, legal hypothec, prior claim, lien,
security interest, pledge, charge or encumbrance of any kind in respect of any
Property, including the reservation of ownership or right of ownership of a
vendor or lessor under any conditional or instalment sale, Capital Lease or
other lease or title retention arrangement.

 

(54) “LLC” means American Apparel (USA), LLC and includes any successor thereto.

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(55) “Loan Documents” means this Agreement, the Applications, the Forward
Contracts, the Collateral Documents, the MasterCard Agreement, the Letter
Agreements and the other agreements required or contemplated by Section 7.2
hereof or otherwise hereunder, to which the Borrower and/or the Parent is party.

 

(56) “Loan” means a Prime Rate Loan, a U.S. Base Rate Loan and any MasterCard
Extension of Credit, and “Loans” means any combination of them.

 

(57) “Management Fees” means the management fees paid by the Borrower to Dov
Charney in 2008 as follows: (a) Cdn.$1,231,700 in November 2008, and
(b) US$3,804,300 in December 2008;

 

(58) “Master Sales Agreement” means collectively (i) the sales and supply
agreement having an effective date of January 1, 2008 between LLC, as seller,
and Wholesale, as purchaser, with respect to the sale of inventory by LLC to
Wholesale, and (ii) the sales and supply agreement having an effective date of
January 1, 2008 between LLC, as seller, and Retail, as purchaser, with respect
to the sale of inventory by LLC to Retail.

 

(59) “MasterCard Agreement” means the corporate MasterCard Account Agreement
dated December 29, 2009 between the Borrower and the Bank, and all renewals,
extensions, replacements, supplements or amendments thereto, or substitutions
therefore or restatements thereof.

 

(60) “MasterCard Extensions of Credit” means Loans made to the Borrower pursuant
to the MasterCard Agreement.

 

(61) “Material Adverse Change” means (a) a material adverse change in the
business, operations, prospects, Property (including any Collateral) or
financial condition of the Borrower, or (b) a material adverse change which
would impair the validity or enforceability of, or the ability of the Borrower
to perform and discharge its obligations under this Agreement or any of the
other Loan Documents.

 

(62) “Material Adverse Effect” means a material adverse effect on (i) the
ability of the Borrower to perform and discharge its obligations under this
Agreement or any of the other Loan Documents, (ii) the Bank’s ability to enforce
its rights under this Agreement or any of the other Loan Documents, or (iii) the
business, operations, prospects, Property (including any Collateral) or
financial or other condition of the Borrower.

 

(63)

“Material Contracts” means (a) the Master Sales Agreement, (b) such other
existing agreements entered into by the Borrower which may in the future become
material to the business, operations, affairs, financial condition, assets

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or property of the Borrower in the commercially reasonable judgment of the Bank,
and (c) such future agreements as are designated by the Bank to be “material” in
the commercially reasonable judgement of the Bank, and, in the case of
paragraphs (b) and (c), following a written notice to the Borrower.

 

(64) “Minimum Excess Availability” is defined in Section 8.33 hereof.

 

(65) “Mont-Royal Property” means the immovable property owned by Wholesale and
located at 1001 Mont-Royal Place, Apartment 807, Montréal, Québec, H3A 1P2.

 

(66) “Net Income” means, with reference to any period, the net income (or net
loss) of the Borrower for such period as computed on a consolidated basis in
accordance with GAAP.

 

(67) “Net Orderly Liquidation Value” means the value of unencumbered (except to
the Bank and for other Permitted Liens) Eligible Inventory based on definitions
and assumptions acceptable to the Bank in its reasonable discretion and
confirmed in an appraisal report by an accredited appraiser satisfactory to the
Bank in its reasonable discretion.

 

(68) “Obligations” means all present and future obligations of the Borrower to
pay principal, interest and fees (including all legal fees, disbursements and
expenses incurred by the Bank) in connection with the Extensions of Credit and
all other obligations of the Borrower arising under, in relation to, or in
respect of, the Loan Documents, or any of them, direct or indirect, absolute or
contingent, joint or solidary, and howsoever evidenced, held or acquired.

 

(69) “Other Taxes” means any and all present or future stamp or documentary
taxes or any other or property taxes, charges or similar levies arising from any
payment made hereunder or form the execution, delivery or enforcement of, or
otherwise with respect to, this Agreement.

 

(70) “Parent” means American Apparel, Inc. and includes any successor thereto.

 

(71) “Parent Distribution” is defined in Section 8.16.

 

(72) “Permitted Collateral Locations” is defined in Section 8.18.

 

(73) “Permitted Distribution” is defined in Section 8.16 hereof.

 

(74) “Permitted Employee Distribution” is defined in Section 8.18.

 

(75) “Permitted Liens” is defined in Section 8.10 hereof.

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(76) “Person” means an individual, partnership, corporation, company,
association, trust, unincorporated organization or any other entity or
organization, including a government or agency or political subdivision thereof.

 

(77) “Prime Rate” means, for any day, the greater of (i) the floating annual
rate of interest established by the Bank from time to time as the reference rate
it will use to determine rates of interest on Canadian dollar loans to customers
in Canada and designated as its prime rate, as in effect on such day; and
(ii) the CDOR Rate applicable on such day plus 100 basis points.

 

(78) “Prime Rate Loans” means a Loan which is denominated in Canadian Dollars
and in respect of which the Borrower has elected to pay interest in accordance
with Section 3.1(1).

 

(79) “Principals” means individually and collectively the following senior
officers of the Borrower: Morris Charney and Dov Charney and includes their
heirs, successors and permitted assigns.

 

(80) “Property” means any property or asset of any kind, immovable or real,
movable or personal or mixed, corporeal or incorporeal.

 

(81) “Receivable” means any account, account receivable, receivable, book debt
and any other form of monetary obligation now or hereafter owing to the
Borrower, including any right of the Borrower to payment for property sold or
for services rendered, whether or not earned by performance.

 

(82) “Receiver” is defined in Section 9.1(p).

 

(83) “Requirements of Environmental Law” means (i) requirements imposed by or
pursuant to statutes, regulations and by laws, (ii) requirements announced by a
Governmental Authority as having immediate effect, provided that at the time of
making such announcement such Governmental Authority also states its intention
of enacting legislation to confirm such requirements retroactively, (iii) all
directives, policies and guidelines issued by any Governmental Authority charged
with the administration thereof which purport to have the force of law, and
(iv) all requirements imposed under any clean up, compliance or other order made
pursuant to any of the foregoing, in each and every case relating to
environmental, health or safety matters including, but not limited to, all such
obligations and requirements which relate to solid, gaseous or liquid waste
generation, handling, treatment, storage, disposal or transportation and
exposure to Hazardous Materials.

 

(84) “Retail” means American Apparel Canada Retail Inc. and includes any
successor thereto.

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(85) “Revolving Credit” is defined in Section 2.1.

 

(86) “Revolving Credit Commitment” means the maximum principal amount of the
Revolving Credit from time to time, being $11,000,000 Canadian Dollars;

 

(87) “Revolving Credit Limit” of each credit facility hereunder at any time
means the lesser of (a) the Revolving Credit Commitment with respect to such
credit facilities, and (b) the Borrowing Base, as determined and computed by the
Bank at such time in its discretion.

 

(88) “Revolving Credit Loan” is defined in Section 2.3 hereof.

 

(89) “Spot Rate” means, in respect of a currency, the rate determined by the
Bank by reference to applicable currency markets to be the spot rate for the
purchase by the Bank of such currency with another currency through its main
Montreal branch at approximately 11:00 a.m. (Montreal time) on the date as of
which the foreign exchange computation is made; provided that if at the time of
any such determination, no such spot rate can be reasonably quoted, the Bank may
use any commercially reasonable method to determine such rate hereunder, and
such determination shall be conclusive absent manifest error.

 

(90) “Subsidiary” means any corporation or other Person more than fifty
percent (50%) of the outstanding ordinary voting shares or other equity
interests of which is at the time directly or indirectly owned by the Borrower.

 

(91) “Taxes” means all taxes, rates, duties, assessments, impositions, levies
and charges of any kind or nature whatsoever, including, without limitation,
income taxes, sales or value added taxes, levies, stamp taxes, municipal,
parliamentary and school taxes, royalties, duties and all fees, deductions,
compulsory loans and withholdings imposed, levied, collected, withheld or
assessed as of the date hereof or at any time in the future, by any Governmental
Authority of or within Canada or any other jurisdiction whatsoever having power
to tax, together with penalties, fines, additions to tax and interest thereon.

 

(92) “Termination Date” means December 30, 2012 or such earlier date on which
the Revolving Credit is terminated in whole pursuant to Section 3.10,
Section 9.2 or Section 9.3 hereof.

 

(93) “U.S.” means the United States of America.

 

(94) “U.S. Base Rate” means, for any day, the floating annual rate of interest
established by the Bank from time to time as the reference rate it will use to
determine the rates of interest on U.S. Dollar loans made to customers in Canada
and designated as its U.S. Base Rate at its principal office in Montreal, Québec
as in effect on such day.

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(95) “U.S. Base Rate Loan” means a Loan which is denominated in U.S. Dollars and
in respect of which the Borrower has elected to pay interest in accordance with
Section 3.1(2).

 

(96) “U.S. Dollars” or “U.S. $” means lawful currency of the United States of
America.

 

(97) “U.S. Revolving Credit Loans” is defined in Section 2.3 hereof.

 

(98) “Wholesale” means American Apparel Canada Wholesale Inc. and includes any
successor thereto.

ARTICLE 2

THE CREDIT

Section 2.1 Revolving Credit

Subject to the terms and conditions hereof, the Bank agrees to extend a
revolving credit (the “Revolving Credit”) to the Borrower which may be availed
of by the Borrower from time to time during the period from and including the
date hereof to but not including the Termination Date, at which time the
commitment of the Bank to extend credit under Revolving Credit shall expire. The
Revolving Credit may be availed of by the Borrower in the form of Revolving
Credit Loans in Canadian Dollars by way of Prime Rate Loans or in U.S. Dollars
by way of U.S. Base Rate Loans, Letters of Credit, MasterCard Extensions of
Credit and Forward Contracts, all as more fully hereinafter set forth, provided
that the Canadian Dollar Equivalent of the aggregate principal amount of all
Extensions of Credit by way of Canadian Revolving Credit Loans, U.S. Revolving
Credit Loans and Letters of Credit and the Deemed Forward Contract Amount of all
Forward Contracts shall not exceed the Revolving Credit Limit. During the period
from and including the date hereof to but not including the Termination Date,
the Borrower may use the Revolving Credit by borrowing, repaying and reborrowing
Revolving Credit Loans in whole or in part, by having the Bank issue Letters of
Credit, having such Letters of Credit expire or otherwise terminate without
having been drawn upon or, if drawn upon, reimbursing the Bank for each such
drawing and having the Bank issue new Letters of Credit, by borrowing, repaying
and reborrowing under the MasterCard Facility in whole or in part, and by
entering into Forward Contracts with the Bank as set forth in Section 2.6
hereof, all in accordance with the terms and conditions of this Agreement.

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Section 2.2 Establishment of Reserves

Notwithstanding any other provision of this Agreement to the contrary, the Bank
shall have the right at any time and from time to time to establish reserves,
and to adjust the amount of any existing reserve, against the amount of the
Revolving Credit which the Borrower may otherwise request hereunder in such
amounts and with respect to such matters as the Bank shall deem necessary or
appropriate in its reasonable judgment, including, without limitation,
(i) reserves in respect of dilution, (ii) reserves in respect of amounts owing
by the Borrower to holders of Liens that may have priority over the Liens of the
Bank (regardless of whether such third party Liens are Permitted Liens), and
(iii) reserves with respect to Inventory located in leased premises that are not
subject to a Landlord Agreement. The amount of all such reserves established by
the Bank shall be subtracted from the Borrowing Base when calculating the amount
of availability under the Revolving Credit.

Section 2.3 Revolving Credit Loans

Subject to the terms and conditions hereof, the Revolving Credit may be availed
by the Borrower in the form of loans (individually, a “Revolving Credit Loan”
and collectively, the “Revolving Credit Loans”). The Revolving Credit Loans may
be obtained by the Borrower in Canadian Dollars (“Canadian Revolving Credit
Loans”) and in U.S. Dollars (“U.S. Revolving Credit Loans”).

Section 2.4 Letters of Credit

 

(1) General Terms. Subject to the terms and conditions hereof, the Revolving
Credit may be availed of by the Borrower in the form of standby and commercial
letters of credit issued by the Bank for the account of the Borrower
(individually, a “Letter of Credit” and collectively, the “Letters of Credit”),
provided that the Canadian Dollar Equivalent of the aggregate amount of all
Letters of Credit issued and outstanding under the Revolving Credit shall not at
any time exceed five hundred thousand Canadian Dollars (Cdn.$500,000) thereof.
For purposes of calculating the amount of all outstanding Extensions of Credit
under the Revolving Credit, and for other purposes of this Agreement, a Letter
of Credit shall be deemed outstanding as of any time in an amount equal to the
maximum amount which could be drawn thereunder under any circumstances and over
any period of time plus any unreimbursed drawings then outstanding with respect
thereto. If and to the extent any Letter of Credit expires or otherwise
terminates without having been drawn upon, the availability under the Revolving
Credit Commitment shall to such extent be reinstated.

 

(2) Term. Each Letter of Credit issued hereunder shall expire not later than the
earlier of (i) twelve (12) months after the date of issuance or the most recent
renewal thereof, as applicable, or (ii) the Termination Date.

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(3) General Characteristics. Each Letter of Credit issued hereunder shall be
payable in Canadian Dollars, in U.S. Dollars or in any other major currency then
offered by the Bank, conform to the general requirements of the Bank for the
issuance of standby or commercial letters of credit, as the case may be, as to
form and substance, and be a letter of credit which the Bank may lawfully issue.

 

(4) Applications. At the time the Borrower requests a Letter of Credit to be
issued (or prior to the first issuance of a Letter of Credit in the case of a
continuing application), the Borrower shall execute and deliver to the Bank an
application for such Letter of Credit in the form then customarily prescribed by
the Bank (individually, an “Application” and collectively, the “Applications”).
Subject to the other provisions of this Section 2.4(4) and Section 10.9 hereof,
the obligation of the Borrower to reimburse the Bank for drawings under a Letter
of Credit shall be governed by the Application for such Letter of Credit.
Anything contained in the Applications to the contrary notwithstanding, (i) in
the event the Bank is not reimbursed by the Borrower for the amount the Bank
pays on or in respect of any draft drawn or demand made under a Letter of Credit
issued hereunder by the close of the Bank’s business hours at its main Montreal
branch on the date when such amount is paid, the obligation of the Borrower to
reimburse the Bank for the amount so paid shall bear interest (which the
Borrower hereby promises to pay in accordance with Section 3.1(4)) from and
after the date the amount is paid until payment in full thereof at the rate per
annum determined in accordance with Section 3.1(1) (in the case of Canadian
Dollar amounts) or with Section 3.1(2) (in the case of U.S. Dollar amounts), and
(ii) the Borrower shall pay fees in connection with each Letter of Credit as set
forth in Article 3 hereof.

Section 2.5 MasterCard Facility

Subject to the terms and conditions hereof, the Revolving Credit may be availed
by the Borrower by way of Extensions of Credit pursuant to the MasterCard
Agreement, provided that the maximum amount outstanding under the MasterCard
Agreement shall not at any time exceed two hundred thousand Canadian Dollars
(Cdn.$200,000).

Section 2.6 Forward Contracts

Subject to the terms and conditions hereof, the Revolving Credit may be availed
by the Borrower in the form of Forward Contracts. The maximum aggregate amount
payable under such Forward Contracts shall not at any time exceed three million
Canadian Dollars (Cdn.$3,000,000). For the purpose of calculating such maximum
aggregate amount at any particular time, the amount of any Forward Contract
shall be deemed to be the Deemed Forward Contract Amount of such

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Forward Contract at such time. The term of each Forward Contract shall expire
not later than the earlier of (i) twelve (12) months from the date the Forward
Contract is entered into, and (ii) the Termination Date. The Borrower agrees to
complete such Forward Contracts and other documents as the Bank may require each
time the Borrower wishes to avail itself of the Revolving Credit by way of a
Forward Contract.

Section 2.7 Manner and Disbursement of Loans

 

(1) The Borrower shall give written or telephonic notice to the Bank (which
notice shall be irrevocable once given) for requests of Extensions of Credit by
way of Prime Rate Loans or U.S. Base Rate Loans, before 11:00 a.m. on the
Drawdown Date. Each notice given in respect of a Prime Rate Loan and a U.S. Base
Rate Loan shall indicate the amount of the required Loan and the date funds are
required. Each notice given in respect of a Letter of Credit shall indicate the
amount of the Letter of Credit to be issued, the applicable contract period, the
beneficiary, the terms of draw under the requested Letter of Credit and all
other relevant information. Each notice given in respect of a Forward Contract
shall indicate the amount of the Forward Contract, the counterparty and all
other relevant information.

 

(2) The Borrower hereby irrevocably authorizes the Bank to make Revolving Credit
Loans from time to time hereunder for payment of any Obligation then due and
payable (whether such Obligation is for interest then due on a Loan,
reimbursement under an Application, payment under a Forward Contract or
otherwise), and such Revolving Credit Loan may be made without regard to the
provisions of Article 7 hereof. The Borrower acknowledges and agrees, however,
that the Bank shall not be under any obligation to make a Revolving Credit Loan
under this Section 2.7(2), and the Bank shall incur no liability to the Borrower
or any other Person for refusing to make a Revolving Credit Loan under this
Section 2.7(2).

 

(3) Subject to the provisions of Article 7 hereof, the proceeds of each Loan
made hereunder shall be made available to the Borrower at the principal office
of the Bank in Montréal, Québec, in immediately available funds, by deposit to
the following accounts: (a) Account Number 0002-6526-190 for Loans made in
Canadian Dollars and (b) Account Number 0002-4827-562 for Loans made in U.S.
Dollars. The proceeds of each Revolving Credit Loan made under Section 2.7(2)
hereof shall be disbursed by the Bank by way of direct payment of the relevant
Obligation.

Section 2.8 U.S. Dollar Extensions of Credit

The Borrower acknowledges that the ability of the Bank to provide Extensions of
Credit in U.S. Dollars is subject to any statute, law, regulation, rule or

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direction by any Governmental Authority having jurisdiction to prohibit or
restrict the supply of U.S. Dollars to or by the Bank, and the Borrower agrees
that the Bank shall incur no liability hereunder if it does not provide any
Extension of Credit in U.S. Dollars as a result of any such prohibition or
restriction.

ARTICLE 3

INTEREST, FEES, CAPITAL ADEQUACY, TERM AND TERMINATION

Section 3.1 Interest Rates, Interest Payment Dates

 

(1) Prime Rate Loans. The outstanding principal balance of Prime Rate Loans
shall bear interest at the Prime Rate plus 2% per annum, as in effect from time
to time, and the Borrower hereby promises to pay such interest at the rate and
at the times set forth herein.

 

(2) U.S. Base Rate Loans. The outstanding principal balance of U.S. Base Rate
Loans shall bear interest at the U.S. Base Rate plus 2% per annum, as in effect
from time to time, and the Borrower hereby promises to pay such interest at the
rate and at the times set forth herein.

 

(3) Default Rate. Notwithstanding the foregoing, upon the occurrence and during
the continuation of any Event of Default hereunder, the Borrower hereby promises
to pay interest on the outstanding principal balance of the Loans at a rate per
annum of two percent (2%) greater than the rates of interest specified in
Section 3.1(1) and Section 3.1(2) above.

 

(4) Due Dates. Interest on the Loans shall be payable both before and after
maturity, default and judgment. Interest on the Loans shall be calculated,
compounded and payable monthly in arrears on the last Business Day of each month
during the term of this Agreement and on the Termination Date. Interest on any
overdue principal or interest on the Loans (whether by lapse of time,
acceleration, or otherwise) shall be due and payable on demand.

 

(5) Interest Act (Canada). For the purpose of the Interest Act (Canada) only,
the yearly rate of interest to which any rate for a period less than a year is
equivalent is such rate, divided by the number of days in such period, and
multiplied by the actual number of days in the year.

 

(6)

Calculation. Interest on Prime Rate Loans and U.S. Base Rate Loans shall be
payable monthly in arrears on every Interest Payment Date and on the Termination
Date, as applicable, for the period from and including, as the case may be, the
Drawdown Date or the immediately preceding Interest Payment Date to but
excluding the first-mentioned Interest Payment Date or the Termination Date, as
applicable, and shall be calculated daily on the principal amount of each Prime
Rate Loan or U.S. Base Rate Loans remaining

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unpaid on the basis of the actual number of days elapsed in a year of 365 or 366
days, as applicable. All other Extensions of Credit and for reimbursement and
other obligations with respect to all Applications, Letters of Credit and
Forward Contracts and all fees due hereunder shall be calculated on the basis of
a year of 365 or 366 days, for the actual number of days elapsed.

 

(7) Payment of Interest. Interest on Loans shall be paid on every Interest
Payment Date and on the Termination Date, as applicable, by debit to the
relevant Account by the Bank, in respect of Loans hereunder, interest on all
Loans and Extensions of Credit shall be payable both before and after maturity,
default and judgment. Interest on any overdue principal or interest on the
Extensions of Credit (whether by lapse of time, acceleration, or otherwise)
shall be due and payable on demand.

Section 3.2 Facility Fee

The Borrower shall pay to the Bank a non-refundable facility fee equal to 1.50%
of the Revolving Credit Commitment fully earned on the date hereof. The Bank
confirms having received a partial payment of the said fee in the amount of
$82,500 and the Borrower agrees to pay the balance thereof on the date of the
first Extension of Credit hereunder and no later than January 8, 2010.

Section 3.3 Unused Line Fee

For the period from and including the date hereof to but not including the
Termination Date, the Borrower shall pay to the Bank a fee at the rate of one
half of one percent (0.50%) per annum calculated daily on the amount by which
the Revolving Credit Commitment exceeds the Canadian Dollar Equivalent of the
daily closing balance of outstanding Extensions of Credit under Revolving Credit
during the applicable period, and taking into account the number of days in the
applicable period. Such fee shall be payable monthly in arrears on the first day
of each month during the term of this Agreement and on the Termination Date.

Section 3.4 Field Examination Fees

The Borrower shall pay to the Bank charges for field examinations of the
Collateral performed by the Bank or its agents or representatives in such
amounts as the Bank may from time to time reasonably request, but subject to the
maximum number of such field examinations set forth in Section 8.7. The Bank
acknowledges and agrees that such charges shall be computed in the same manner
as it customarily uses at the applicable time for the assessment of charges for
similar collateral audits, and the Borrower acknowledges and agrees that, as of
the date hereof, such charges are calculated at a rate of $1,200 per man per
day, plus reasonable out-of-pocket expenses.

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Section 3.5 Letter of Credit Fee

On the date of issuance, renewal or increase in the amount of any Letter of
Credit, and at the end of each three (3) month period following such date, the
Borrower shall pay to the Bank a fee equal to 2% per annum (based on the number
of days in the next three month period) of the face amount of (or of the
increase or decrease in the face amount of) such Letter of Credit. In addition,
the Borrower shall pay to the Bank the Bank’s standard drawing, negotiation,
amendment and other processing, transaction and administrative fees in effect
from time to time for each Letter of Credit issued.

Section 3.6 Forward Contract Fees

The Borrower shall pay to the Bank any and all fees customarily charged by the
Bank in connection with the issuance of Forward Contracts.

Section 3.7 Monthly Administration Fee

The Borrower shall pay to the Bank the amount of one thousand five hundred
Canadian Dollars (Cdn. $1,500) on the first Business Day of each calendar month
as administration fees, and such fees shall be paid by the Borrower so long as
any Obligations remain owing to the Bank by, or the Bank has any obligation to
make Extensions of Credit to, the Borrower.

Section 3.8 Cash Management Fee

The Borrower shall pay to the Bank such cash management fees as are established
by the Bank from time to time, and such fees shall be paid by the Borrower so
long as the Bank performs cash management services for the benefit of the
Borrower.

Section 3.9 Change in Capital Adequacy Requirements

If the Bank, acting reasonably, shall determine that the adoption after the date
hereof of any applicable law, rule or regulation regarding capital adequacy, or
any change in any existing law, rule or regulation, or any change in the
interpretation or administration thereof by any Governmental Authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by the Bank (or any of its branches) with any request or
directive regarding capital adequacy (whether or not having the force of law) of
any such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on the Bank’s capital as a consequence of
its obligations hereunder or for the credit which is the subject matter hereof
to a level below that which the Bank could have achieved but for such adoption,
change or compliance (taking into consideration the Bank’s policies with respect
to liquidity and capital adequacy) by an amount deemed by the Bank to be
material, then from time to time, within fifteen (15) days after written demand
by the Bank accompanied by a copy or extract of the applicable law, rule,
regulation or directive and a certificate of a duly authorized

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officer of the Bank setting forth the additional amount and the basis of
calculation therefor, the Borrower shall pay to the Bank such additional amount
or amounts reasonably determined by the Bank as will compensate the Bank for
such reduction.

Section 3.10 Term and Termination of the Revolving Credit

 

(1) The term of the Revolving Credit shall be for a period of three (3) years
from the date hereof to but excluding the Termination Date. The Borrower may
terminate the Revolving Credit in whole (but not in part) at any time upon at
least sixty (60) days prior written notice to the Bank and upon (i) the payment
in full of all outstanding Obligations, together with all accrued and unpaid
interest thereon, (ii) the payment of any accrued and unpaid unused line fees
and other fees due under the Loan Documents (including any prepayment fee
payable pursuant to Section 3.10(2) hereof) to the date of termination, and
(iii) the expiration or termination of all Letters of Credit and Forward
Contracts and, to the extent any such Letter of Credit or Forward Contract has
not expired in accordance with its terms or otherwise been terminated to the
satisfaction of the Bank, accompanied by collateral security in form and in such
amounts as shall be satisfactory to the Bank.

 

(2) At the effective date of any termination of the Revolving Credit by the
Borrower which occurs prior to the end of the term indicated in Section 3.10(1)
hereof, or upon the Obligations or any of them being declared or becoming due
and payable pursuant to Section 9.2 or Section 9.3 (an “Acceleration”), if
termination or Acceleration occurs during the first twelve (12) month period of
the term of this Agreement, the Borrower shall pay a prepayment fee to the Bank,
as liquidated damages for the loss of bargain and not as a penalty, in an amount
equal to three percent (3%) of the Revolving Credit Commitment, if termination
or Acceleration occurs during the second twelve (12) month period of the term of
this Agreement, an amount equal to two percent (2%) of the Revolving Credit
Commitment and an amount equal to one percent (1%) of the Revolving Credit
Commitment at any time thereafter, whether during the initial term of the
Revolving Credit or during any extension or renewal thereof. Notwithstanding the
foregoing, no prepayment fee shall be payable by the Borrower if the Revolving
Credit is terminated as a result of the transfer of the Revolving Credit to the
commercial banking or corporate finance divisions of the Bank.

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ARTICLE 4

SCHEDULED PAYMENT OF MATURITY OF LOANS, APPLICATION OF

PAYMENTS AND COLLECTIONS, PREPAYMENTS, COMPUTATION OF

OBLIGATIONS OUTSTANDING AND NOTATIONS

Section 4.1 Maturity of Revolving Credit Loans

The outstanding Revolving Credit Loans, both for principal and interest, shall
mature and become due and payable in full by the Borrower on the Termination
Date.

Section 4.2 Place and Application of Payments and Collections

 

(1) All payments of principal, interest, fees and all other Obligations payable
hereunder and under the other Loan Documents shall be made to the Bank at its
office at the address set out in Section 10.8 hereof (or at such other place as
the Bank may specify). All such payments shall be made in the currency in which
such Obligations are denominated, in immediately available funds at the place of
payment, without set off, compensation or counterclaim and without reduction
for, and free from, any and all present or future Taxes, levies, imposts,
duties, fees, charges, deductions, withholdings, restrictions or conditions of
any nature imposed by any Governmental Authority (but excluding any Taxes
imposed on or measured by the net income of the Bank).

 

(2) All payments made by the Borrower and all proceeds of Collateral shall, upon
receipt by the Bank, be applied by the Bank to the Obligations then due and
payable, with any balance of such proceeds not applied to the Obligations to be
held by the Bank as collateral security for the Obligations, which amounts shall
bear interest at the Bank’s prevailing rate for deposit accounts. Prior to the
occurrence of a Default or an Event of Default which is continuing, except as
otherwise specifically provided for herein or directed by the Borrower, all
payments made by the Borrower and all proceeds of Collateral shall be applied by
the Bank against the outstanding Obligations as follows:

 

  (a) first, to any outstanding fees, charges and expenses then due to the Bank
or its legal counsel;

 

  (b) second, to outstanding interest charges then due in respect of the
Obligations;

 

  (c) third, to the outstanding principal balance of the Revolving Credit Loans,
reimbursement obligations in respect of claims under Letters of Credit and
satisfaction of all Obligations under the MasterCard Agreement and Forward
Contracts, all in such proportions as the Bank may determine; and

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  (d) finally, to be applied to, or held as collateral security for, any
remaining unpaid or unsatisfied Obligations.

Except as otherwise specifically provided for herein, the Borrower hereby
irrevocably waives the right to direct the application of payments and
collections at any time received by the Bank from or on behalf of the Borrower,
and the Borrower hereby irrevocably agrees that the Bank shall have the
continuing exclusive right to apply and reapply any and all such payments and
collections received at any time by the Bank against the Obligations in such
manner as the Bank may deem advisable.

 

(3) The Borrower hereby irrevocably authorizes the Bank to charge any of the
Accounts for the amounts from time to time necessary to pay any then due
Obligations; provided that the Borrower acknowledges and agrees that the Bank
shall be under no obligation to do so and the Bank shall incur no liability to
the Borrower or any other Person for the Bank’s failure to do so, except in the
case of the gross or intentional fault of the Bank.

Section 4.3 Mandatory Prepayments

 

(1) The Borrower covenants and agrees that if, at any time, the Canadian Dollar
Equivalent of the aggregate principal amount of all outstanding Extensions of
Credit under the Revolving Credit exceeds the Revolving Credit Limit, or any
other limit set out in Article 2 hereof is exceeded at any time (whether or not
as a result of any change in the exchange rate between Canadian Dollars and U.S.
Dollars), the Borrower shall immediately pay, without notice or demand, the
amount of the excess to the Bank, with each such prepayment to be applied, as
determined by the Bank, until payment in full thereof.

 

(2) The Borrower covenants and agrees that all proceeds derived from (i) the
sale or disposition (whether voluntary or involuntary) of its Property outside
of the ordinary course of business, or (ii) on account of loss, damage or
destruction of Collateral, in each instance in excess of $100,000, shall be paid
over to the Bank and shall be applied to, or held by the Bank as collateral
security for, such Obligations as the Bank may determine appropriate, in the
manner set forth in Section 4.2(2), provided that (i) the foregoing provision
shall be inapplicable to proceeds received by the Bank if and so long as the
Borrower has requested, and the Bank has agreed, that the same be held by the
Bank and disbursed for the restoration, repair or replacement of the property in
respect of which such proceeds were received, and (ii) no prepayment shall be
required with respect to up to $100,000 of net proceeds (i.e., gross proceeds
net of out of pocket expenses incurred in effecting the sale or other
disposition) received in any calendar year from the sale or other disposition of
Collateral in the form of movable property which is worn out, obsolete, damaged
or, in the good faith judgment of the Borrower, no longer necessary to the
efficient conduct of its business as then conducted.

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Section 4.4 Computation of Obligations Outstanding

For the purpose of calculating the aggregate principal balance of Obligations
outstanding hereunder, Obligations shall be deemed to be paid on the date
payments or collections, as the case may be, are applied by the Bank to such
Obligations. Notwithstanding the foregoing, if any item presented for collection
by the Bank is not honoured, the Bank may reverse any provisional credit that
has been given for such item, and make appropriate adjustments to the amount of
interest and principal otherwise due hereunder.

Section 4.5 Evidence of Indebtedness

The amount and date of each Extension of Credit and the amount and date of each
payment of principal and interest thereon shall be recorded by the Bank on its
books and records and the amount of principal and interest shown on such books
and records as owing on such Extension of Credit from time to time shall, in the
absence of manifest error, be prima facie evidence of the principal amount
remaining unpaid thereon and the interest applicable thereto in any court or
other proceeding brought to collect such Extension of Credit; provided that the
failure of the Bank to record any of the foregoing shall not limit or otherwise
affect the obligation of the Borrower to repay the principal amount owing on
such Extension of Credit together with accrued interest thereon.

ARTICLE 5

COLLATERAL

Section 5.1 Collateral

The payment and performance of the Obligations shall at all times be secured by,
among other things, Liens charging the universality of all personal and movable
property and real and immovable property, present and future, corporeal and
incorporeal, of the Borrower, including, without limitation, on all of its
Receivables, Inventory and Equipment, Intellectual Property and by Liens
charging all of the shares held by the Parent in the capital stock of the
Borrower pursuant to Collateral Documents listed on Schedule 5.1 hereof.

Section 5.2 Deposits in Blocked Accounts

The Borrower shall cause each of the other financial institutions where it
deposits proceeds of Collateral from time to time to enter into a blocked
account agreement or similar agreement with the Bank in form and substance
satisfactory to the Bank to assure (through the use of blocked accounts under
the sole control of the Bank) that all proceeds of the Collateral are deposited
(in the same form as received) in blocked accounts maintained with and under the
sole control of the Bank. Any

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proceeds of Collateral received by the Borrower shall be held as mandatary for
the Bank in the same form in which received, shall not be commingled with any
other assets of the Borrower and shall be delivered immediately to the Bank
(together with any necessary endorsements thereto) for deposit into the accounts
described in Section 2.7(3) hereof. The Borrower acknowledges that all funds in
such accounts are held as mandatary for the Bank, and that, to the extent of any
interest of the Borrower therein, the Bank holds a Lien on such accounts and all
funds contained therein to secure the Obligations. No amounts deposited in such
accounts shall be released to the Borrower, but shall instead be applied to, or
otherwise held for application to, or as collateral security for, the
outstanding Obligations as set forth in Article 4 hereof.

Section 5.3 Further Assurances

The Borrower covenants and agrees that it shall comply with all terms and
conditions of each of the Loan Documents and that it shall, at any time and from
time to time, as requested by the Bank, execute and deliver or cause to be
executed and delivered such further instruments and documents and do or cause to
be done such other acts and things as the Bank may deem necessary or desirable
to ensure that all such terms and conditions are complied with and to provide
for or protect or perfect the first-ranking Lien of the Bank (subject only to
Permitted Liens) in the Collateral.

ARTICLE 6

REPRESENTATIONS AND WARRANTIES

The Borrower represents and warrants to the Bank as follows:

Section 6.1 Qualification

The Borrower is duly organized, validly existing and in good standing as a
corporation under the laws of Canada, has full and adequate corporate power to
own its Property and conduct its business as now conducted, and is duly licensed
or qualified and in good standing in each jurisdiction in which the nature of
the business conducted by it or the nature of the Property owned or leased by it
requires such licensing or qualifying. The domicile and chief executive office
of the Borrower is at the location set out in paragraph 1 of Schedule 6.1 hereto
and the Borrower has no other places of business except those listed in
paragraph 1 of Schedule 6.1. The Collateral is situated at the locations listed
in paragraph 2 of Schedule 6.1 and the Borrower does not store Collateral in any
other location. The Borrower does not use or transact business using any trade
name other than those trade names listed in paragraph 3 of Schedule 6.1 hereto
and other than its proper legal name.

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Section 6.2 Corporate Authority and Validity of Obligations

The Borrower has full right and authority to enter into this Agreement and the
other Loan Documents to which it is a party, to make the borrowings herein
provided for, to grant to the Bank the Liens described in the Collateral
Documents to which it is a party and to exercise all of its rights and perform
all of its obligations hereunder and under the other Loan Documents to which it
is a party. The Loan Documents have been duly authorized, executed and delivered
by the Borrower and constitute legal, valid and binding obligations of the
Borrower, enforceable against it in accordance with their respective terms,
except as enforceability may be limited by bankruptcy, insolvency, fraudulent
conveyance or similar laws affecting creditors’ rights generally; and this
Agreement and the other Loan Documents do not, nor does the performance or
observance by the Borrower of any of the matters and things herein or therein
provided for, contravene or constitute a default under (i) any provision of law
or any judgment, injunction, order or decree binding upon the Borrower or any
provision of the charter, articles of incorporation or by-laws of the Borrower,
or (ii) any covenant, indenture or agreement of or affecting the Borrower or any
of its Property, which contravention or breach could reasonably be expected to
have a Material Adverse Effect, or result in the creation or imposition of any
Lien (other than in favour of the Bank) on any Property of the Borrower.

Section 6.3 Use of Proceeds

The Borrower shall use the proceeds of Revolving Credit solely to (i) finance
the ongoing operations and for the general working capital purposes of the
Borrower, (ii) repay its existing credit facilities with The Toronto-Dominion
Bank; and (iii) make a Parent Distribution to the Parent on the Effective Date.

Section 6.4 Financial Reports

The balance sheet of the Borrower as at December 31, 2008 and the related
statement of income, retained earnings and cash flows of the Borrower for the
fiscal year then ended, and accompanying notes thereto, which financial
statements are accompanied by the audit report of a nationally recognized firm
of independent chartered accountants, and the unaudited interim balance sheet of
the Borrower as at November 30, 2009 and the related statement of income,
retained earnings and cash flows of the Borrower for the one-month period and
year to date then ended, as previously furnished to the Bank, fairly present the
financial condition of the Borrower as at the said dates and the results of its
operations and cash flows for the periods then ended in conformity with GAAP
applied on a consistent basis. The Borrower has no contingent liabilities that
are material to it other than as indicated on such financial statements or, with
respect to future periods, on the financial statements furnished pursuant to
Section 8.6 hereof.

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Section 6.5 No Material Adverse Change

Since December 31, 2008, there has been no adverse change in the condition
(financial or otherwise) or business prospects of the Borrower except those
occurring in the ordinary course of business, which individually or in the
aggregate constitute a Material Adverse Change.

Section 6.6 Full Disclosure

The statements and information furnished to the Bank by or on behalf of the
Borrower in connection with the negotiation of this Agreement and the other Loan
Documents and the commitment by the Bank to provide all or part of the financing
contemplated hereby do not contain any untrue statements of a material fact or
omit a material fact which would make the material statements contained herein
or therein misleading.

Section 6.7 Good Title

The Borrower has good and valid title to all of the Collateral that it owns as
reflected on the most recent balance sheets of the Borrower furnished to the
Bank, free and clear of all Liens other than Permitted Liens.

Section 6.8 Litigation and Other Controversies

There is no litigation or governmental proceeding or labour controversy pending,
nor to the knowledge of the Borrower threatened, against the Borrower that, if
adversely determined, would result in a Material Adverse Change.

Section 6.9 Taxes

All tax returns required to be filed by the Borrower in any jurisdiction have,
in fact, been filed, and all Taxes, assessments, fees and other governmental
charges upon the Borrower or upon any of its Property, income or franchises,
which are shown to be due and payable in such returns, have been paid, except
for those which are being contested in good faith by appropriate proceedings and
for which adequate reserves have been established to the satisfaction of the
Bank (“Contested Taxes”). The Borrower does not know of any proposed additional
tax assessment against it for which adequate provision in accordance with GAAP
has not been made on its accounts. Adequate provisions in accordance with GAAP
for Taxes on the books of the Borrower have been made for all open years, and
for their current fiscal periods. As of the Effective Date, except as disclosed
in Schedule 6.9, all Tax returns required to be filed by the Borrower in any
jurisdiction have, in fact, been filed, all Taxes, assessments, fees and other
governmental charges upon the Borrower or upon any of its Property, income or
franchises, which are shown to be due and payable in such returns, have been
paid, and there are no Contested Taxes, except as disclosed in Schedule 6.9.

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Section 6.10 Approvals

No authorization, consent, license or exemption from, or filing or registration
with, any court or Governmental Authority, nor any approval or consent of the
sole shareholder of the Borrower or any other Person, is or will be necessary to
the valid execution, delivery or performance of this Agreement or any other Loan
Document except (i) consents which have been obtained, and (ii) the registration
of the Collateral Documents in the appropriate public registers.

Section 6.11 Affiliate Transactions

The Borrower is not a party to any contracts or agreements with any of its
Affiliates other than those not prohibited by Section 8.25.

Section 6.12 Pensions

All employee pension benefit plans are registered under, and in compliance with,
all requirements of law, all payments, reports, returns and filings required to
be made thereunder have been made and there is no obligation on the part of the
Borrower under any such plan that is in arrears. All such plans have been
administered in accordance with their terms and the provisions of applicable
law. There are no unfunded liabilities under any such plans and, without
limiting the generality of the foregoing, there is no going concern unfunded
actuarial liability, past service unfunded actuarial liability or solvency
deficiency.

Section 6.13 Compliance With Laws

The Borrower is in compliance with the requirements of all federal, provincial
and municipal laws, rules and regulations applicable to or pertaining to its
Property or business operations (including, without limitation, laws, rules and
regulations pertaining to Taxes, employee contributions, withholdings and
remittances, employee pensions, retirement benefits and other benefits, and
employee health and safety, and laws and regulations establishing quality
criteria and standards for air, water, land and toxic or hazardous wastes and
substances), non compliance with which could reasonably be expected to have a
Material Adverse Effect. The Borrower has not receive notice to the effect that
its operations are not in compliance with any of the requirements of applicable
federal, provincial or municipal environmental or health and safety statutes and
regulations or are the subject of any governmental investigation evaluating
whether any remedial action is needed to respond to a release of any toxic or
hazardous waste or substance into the environment, which non compliance or
remedial action (if not taken) could reasonably be expected to have a Material
Adverse Effect.

Section 6.14 Other Agreements

The Borrower is not in default under the terms of any covenant, indenture or
agreement of or affecting it or any of its Property, which default, if uncured,
would have a Material Adverse Effect.

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Section 6.15 No Default

No Default or Event of Default has occurred and is continuing.

Section 6.16 Insurance

A policy of insurance or policies of insurance in compliance with the
requirements of Section 8.5 is or are in effect in respect of the Borrower.

Section 6.17 Receivables

As of the time any Receivable becomes subject to any Lien in favour of the Bank,
and at all times thereafter, the Borrower shall be deemed to have represented
and warranted as to each and all of such Receivables:

 

  (a) that each Receivable is valid and subsisting and, if such Receivable is an
account, arises out a bona fide sale of property sold and delivered by the
Borrower to, or in the process of being delivered to, or out of and for services
theretofore actually rendered by the Borrower to, the account debtor named
therein;

 

  (b) that no surety bond was required or given in connection with such
Receivable or the contracts or purchase orders out of which the same arose;

 

  (c) that the amount of the Receivable represented as owing is the correct
amount actually and unconditionally owing to the Borrower; and

 

  (d) that the amount of such Receivable represented as owing is not disputed
and is not subject to any setoffs, compensation, credits, deductions or counter
charges other than those arising in the ordinary course of the Borrower’s
business which are disclosed to the Bank in writing promptly upon the Borrower
becoming aware thereof.

Section 6.18 Intellectual Property

 

(1) The Borrower owns or possesses all of the Intellectual Property necessary
for the conduct of its business as now conducted and presently proposed to be
conducted, except those the failure to own or possess could not reasonably be
expected to have a Material Adverse Effect and, to the best of the knowledge of
the Borrower, it is not infringing or alleged to be infringing on the rights of
any Person with respect to any Intellectual Property, which infringement could
have a Material Adverse Effect;

 

(2)

All applications, registrations and grants for Intellectual Property that the
Borrower owns are subsisting and in good standing, and all required filings with
any relevant governmental intellectual property office have been made

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and all required filing, registration, maintenance and other fees have been paid
and, to the knowledge of the Borrower, all applications and registrations and
grants of its Intellectual Property are valid.

ARTICLE 7

CONDITIONS PRECEDENT

The obligation of the Bank to make any Extension of Credit under this Agreement
is subject to the realization of the following conditions precedent to the
satisfaction of the Bank and its legal counsel:

Section 7.1 All Advances

As of the time of the making of any Extension of Credit hereunder:

 

  (a) each of the representations and warranties set forth in Article 6 hereof
and in the other Loan Documents shall be true and complete in all material
respects as of such time, except to the extent the same expressly relate to an
earlier date;

 

  (b) no event has occurred and is continuing, or would result from such
Extension of Credit, which constitutes a Default or an Event of Default;

 

  (c) the Borrower shall be in full compliance with all of the terms and
conditions of the Loan Documents to which it is a party;

 

  (d) the Canadian Dollar Equivalent of the aggregate principal amount of all
Extensions of Credit shall not exceed the relevant Revolving Credit Limit;

 

  (e) the Bank shall have received payment of any and all fees (including the
fees of its legal counsel) and the Borrower and the Parent shall have properly
completed the Loan Documents in connection with such Extension of Credit;

 

  (f) such Extension of Credit shall not violate any order, judgment or decree
of any court or other authority or any provision of law or regulation applicable
to the Bank as then in effect; and

 

  (g) no request of the Customs and Revenue Agency or any similar authority for
payment pursuant to Section 224(1.1), or any successor section, of the Income
Tax Act (Canada) shall have been received by the Bank in respect of the
Borrower.

The Borrower’s request for any Extension of Credit shall constitute its warranty
as to the accuracy of the facts set forth in Section 7.1(a) through
Section 7.1(g) above.

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Section 7.2 Effective Date

On or prior to the Effective Date, the following conditions precedent shall have
been realized to the satisfaction of the Bank and its legal counsel, in addition
to the conditions precedent set forth in Section 7.1:

 

  (a) the Bank shall have received the following, each properly executed and
completed:

 

  (i) all Loan Documents, including all blocked account agreements required
pursuant to Section 5.2 hereof;

 

  (ii) copies (executed or certified, as may be appropriate) of all legal
documents or proceedings (corporate or otherwise) taken by the Borrower and the
Parent in connection with the execution and delivery of this Agreement and the
other Loan Documents;

 

  (iii) an officer’s certificate containing the names, titles and genuine
signatures of each of the Authorized Representatives of the Borrower and the
Parent;

 

  (iv) evidence of insurance required by Section 8.5 hereof;

 

  (v) except to the extent waived in writing by the Bank, Landlord Agreements in
connection with the Property of the Borrower located in leased premises;

 

  (vi) such valuations and certifications as are provided for herein in order
for the Bank to satisfy itself as to the value of the Collateral, the financial
condition of the Borrower and the absence of material contingent liabilities of
the Borrower;

 

  (vii) a favourable written opinion of legal counsel to the Borrower, the
Parent and LLC;

 

  (viii) a Borrowing Base Certificate showing the computation of the Borrowing
Base in reasonable detail as of the close of business not more than five (5)
Business Days prior to the Effective Date;

 

  (ix) a recent certificate of attestation, certificate of compliance or other
similar good standing certificate (as applicable) for the Borrower and the
Parent from the applicable Governmental Authority in the jurisdiction of the
applicable party’s incorporation or constitution and in each other Canadian
jurisdiction in which the Borrower is qualified to do business;

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  (x) financial statements for the three (3) most recently completed fiscal
years of the Borrower;

 

  (xi) original or certified copies of all Material Contracts entered into by
the Borrower;

 

  (xii) the Borrower’s financial forecasts for the period ending December 31,
2010;

 

  (xiii) certified copies of any and all necessary governmental, regulatory and
other third party authorizations and approvals (including any exchange control
approvals or environmental approvals) required with respect to this Agreement
and the other Loan Documents;

 

  (xiv) a favourable title opinion from Solomon & Malus addressed to the Bank
and a certificate of location addressed to the Bank with respect to the
Mont-Royal Property;

 

  (xv) such other information, agreements, instruments, documents, certificates
and opinions as the Bank may reasonably request;

 

  (b) the Bank shall be satisfied with the results of the pre-closing field
examination of the Borrower and of the Collateral and such other items as may
reasonably be required;

 

  (c) all legal matters incident to the execution and delivery of this Agreement
and the other Loan Documents and to the transactions contemplated hereby shall
be satisfactory to the Bank and its legal counsel;

 

  (d) the Liens granted to the Bank under the Collateral Documents shall have
been, and shall continue to be after the Effective Date, good and valid first
ranking Liens against the Property of the Borrower or the Parent, as applicable,
fully perfected against third parties, subject only to Permitted Liens;

 

  (e) the Bank shall be satisfied with its review of the audited financial
statements of the Borrower for the fiscal year ended December 31, 2008;

 

  (f) the Bank shall be satisfied that the Excess Availability after payment of
transaction costs and initial proceeds application immediately prior to the
first Extension of Credit hereunder is not less than twenty percent (20%) of the
drawn amount at closing; and

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  (g) no Material Adverse Change or Material Adverse Effect shall have occurred.

Section 7.3 Close Out Date

If the first Extension of Credit is not made by no later than January 8, 2010,
all of the Bank’s obligations hereunder, including the Bank’s obligation to make
any Extension of Credit, shall terminate and be cancelled and the Bank shall
retain all fees paid by the Borrower to the Bank, including the facility fee
provided in Section 3.2.

ARTICLE 8

COVENANTS

The Borrower agrees that so long as any credit is available to or in use by the
Borrower hereunder, except to the extent compliance in any case or cases is
waived in writing by the Bank:

Section 8.1 Duly Pay and Perform

The Borrower shall duly and punctually pay all sums of money due by it under the
terms of this Agreement or the other Loan Documents at the times and places and
in the manner provided for by this Agreement and the other Loan Documents and
shall duly and punctually perform and observe all other obligations or covenants
on its part to be performed or observed hereunder or thereunder at the times and
in the manner provided for herein or therein.

Section 8.2 Maintenance of Business

The Borrower shall preserve and maintain its existence. The Borrower shall
preserve and keep in full force and effect all licenses, permits and franchises
necessary to the proper conduct of its business, except for those that could not
reasonably be expected to have a Material Adverse Effect. The Borrower shall not
change its name or transact business under any trade name without first giving
not less than thirty (30) days’ prior written notice of its intent to do so to
the Bank.

Section 8.3 Maintenance of Property

The Borrower shall maintain, preserve and keep its Property in good repair,
working order and condition (ordinary wear and tear excepted) for the necessary
or useful conduct of its business and shall from time to time make all needed
repairs, renewals, replacements, additions and improvements thereto so that at
all times the efficiency thereof shall be materially preserved and maintained.

Section 8.4 Taxes and Assessments

The Borrower shall duly pay and discharge all Taxes, rates, assessments, fees
and governmental charges upon or against it or its Property, in each case before
the

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same become delinquent and before penalties accrue thereon, unless and to the
extent that the same are contested in good faith and by appropriate proceedings
which prevent enforcement of the matter under contest and reserves deemed
adequate by the Bank are provided therefor.

Section 8.5 Insurance

 

(1) The Borrower shall insure and keep insured with reputable insurance
companies, all insurable Property owned by it which is of a character usually
insured by Persons similarly situated and operating like Property against loss
or damage from such hazards and risks, and in such amounts, as are insured by
Persons similarly situated and operating like Property; and the Borrower shall
insure such other hazards and risks (including employers’ and public liability
risks) with reputable insurance companies as and to the extent usually insured
by Persons similarly situated and conducting similar businesses. The Borrower
shall, upon request, furnish to the Bank a certificate setting forth in summary
form the nature and extent of the insurance maintained pursuant to this Section.

 

(2)

The Borrower shall at all times insure or cause to be insured the Collateral
consisting of corporeal movable or personal property against such risks and
hazards as other Persons engaged in the same or similar business insure against,
and including in any event loss or damage by fire, theft, burglary, pilferage,
loss in transit and such other hazards as are customary for such Persons and as
the Bank may reasonably specify. All insurance required hereby shall be
maintained in amounts and under policies and with insurers acceptable to the
Bank, and all such policies shall contain a standard mortgage clause and loss
payable clauses naming the Bank as loss payee and first hypothecary creditor and
all in form and content, naming the Bank as an additional insured therein,
acceptable to the Bank. The Borrower shall pay or caused to be paid all premiums
on such insurance. Certificates of insurance evidencing compliance with the
foregoing and, at the Bank’s request, the policies of such insurance shall be
delivered by the Borrower to the Bank. All insurance required hereby shall
provide that no cancellation thereof shall be effective until at least
thirty (30) days after receipt by the Borrower and the Bank of written notice
thereof, and shall be satisfactory to the Bank and its insurance consultant in
all other respects. In case of any material loss, damage to or destruction of
the Collateral or any part thereof, the Borrower shall promptly give written
notice thereof to the Bank generally describing the nature and extent of such
damage or destruction. In case of any loss, damage to or destruction of the
Collateral or any part thereof, the Borrower, whether or not the insurance
proceeds, if any, received on account of such damage or destruction shall be
sufficient for that purpose, at the Borrower’s cost and expense, shall promptly
cause to be repaired or replaced the

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Collateral so lost, damaged or destroyed. In the event the Borrower shall
receive any proceeds of such insurance in excess of $100,000, the Borrower shall
immediately pay over or caused to be paid over such proceeds to the Bank. The
Borrower hereby authorizes the Bank, at the Bank’s option, to adjust, compromise
and settle any losses in excess of $100,000 under any insurance afforded, and
does hereby irrevocably constitute the Bank, and each of its nominees, officers,
mandataries, attorneys and any other Person whom the Bank may designate, as
their attorney in fact, with full power and authority to effect such adjustment,
compromise and/or settlement and to endorse any drafts drawn by an insurer of
the Collateral or any part thereof and to do everything necessary to carry out
such purposes and to receive and receipt for any unearned premiums due under
policies of such insurance. Unless the Bank elects to adjust, compromise or
settle such losses as aforesaid, the Borrower shall ensure that any such
adjustment, compromise and/or settlement of any such losses under any such
insurance shall be made by the Borrower subject to final approval of the Bank,
acting reasonably (regardless of whether or not a Default or an Event of Default
shall have occurred hereunder) in the case of losses exceeding $100,000. Net
insurance proceeds in excess of $100,000 received by the Bank under the
provisions hereof or under any policy of insurance covering the Collateral or
any part thereof shall be applied to the reduction of the Obligations (whether
or not then due); provided, however, that the Bank may, in its sole discretion,
release any or all such insurance proceeds to the Borrower. All such insurance
proceeds shall be subject to the Lien of the Bank under the Collateral
Documents.

 

(3) Unless the Borrower provides the Bank with evidence of the insurance
coverage required by this Agreement, the Bank may purchase insurance at the
Borrower’s expense to protect the Bank’s interests in the Collateral. This
insurance may, but need not, protect the Borrower’s interests in the Collateral.
The coverage purchased by the Bank may not pay any claims that the Borrower
makes or any claim that is made against the Borrower in connection with the
Collateral. The Borrower may later cancel any such insurance purchased by the
Bank, but only after providing the Bank with evidence that the Borrower has
obtained insurance as required by this Agreement. If the Bank purchases
insurance for the Collateral, the Borrower will be responsible for the costs of
that insurance, including interest and any other charges that the Bank may
impose in connection with the placement of the insurance, until the effective
date of the cancellation or expiration of the insurance. The costs of the
insurance may be added to the Obligations. The costs of the insurance may be
more than the cost of insurance the Borrower may be able to obtain on its own.

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Section 8.6 Financial Reports

The Borrower shall maintain a standard system of accounting in accordance with
GAAP and shall promptly furnish to the Bank and its duly authorized
representatives such information respecting the business and financial condition
of the Borrower as the Bank may reasonably request and, without any request, the
Borrower shall furnish to the Bank:

 

  (a) as soon as available, and in any event not more than three (3) Business
Days after the last Business Day of each week, a Borrowing Base Certificate
signed by an Authorized Representative of the Borrower showing the computation
of the Borrowing Base in reasonable detail (including any Permitted Distribution
and Permitted Employee Distribution effected in the past twelve (12) months and
any purchase of goods for the Parent or others contemplated in Section 8.17
effected during the current month) as of the close of business on the last
Business Day of such calendar week, together with such other information as is
therein required;

 

  (b) as soon as available, and in any event within twenty-five (25) days after
the close of each monthly accounting period of the Borrower (or more frequently
if requested by the Bank), (i) an accounts payable and accounts receivable aging
report on an invoice date basis (including reconciliation of cash and accounts
receivable), together with an Inventory report for the Borrower, determined on
the lower of market or cost basis, and (ii) a priority claims and statutory
deductions report; in each case prepared by the Borrower in such format and
detail as is required by the Bank, and certified by the President or the Chief
Financial Officer of the Borrower;

 

  (c) as soon as available, and in any event within twenty-five (25) days after
the close of each monthly accounting period of the Borrower (other than a
monthly accounting period ending as of the fiscal year end of the Borrower):

 

  (i)

a copy of the unaudited balance sheet of the Borrower as of the last day of such
monthly accounting period and the unaudited statement of income, retained
earnings and cash flows of the Borrower for such monthly accounting period and
for the fiscal year to date period then ended, each in reasonable detail showing
in comparative form the figures for the corresponding date and period in the
previous fiscal year, as well as showing in comparative form the month and year
to date comparisons to the Borrower’s current business plan, prepared by the
Borrower

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in accordance with GAAP and including a brief management commentary and
certified by the President or the Chief Financial Officer of the Borrower;

 

  (ii) a report reconciling accounts receivable, accounts payable and inventory
amounts set forth in the report delivered pursuant to Section 8.6(b) for such
monthly accounting period to the corresponding figures for such items in the
financial statements for such monthly accounting period;

 

  (d) as soon as available, and in any event within seven (7) days after the end
of each month, a certificate executed by the President or the Vice-President,
Finance of the Borrower listing all store openings and closings to be effected
in the next thirty (30) day period and confirming that all monthly rent owing by
the Borrower with respect to leased premises has been paid and is current;

 

  (e) as soon as available, and in any event within one hundred and twenty
(120) days after the last day of each fiscal year of the Borrower:

 

  (i) a copy of the audited balance sheet of the Borrower as of the close of
such period and the audited statement of income, retained earnings and cash
flows of the Borrower for the period then ended, and accompanying notes thereto,
each in reasonable detail showing in comparative form the figures for the
previous fiscal year, accompanied by an unqualified opinion thereon issued by a
firm of independent chartered accountants of recognized national standing
selected by the Borrower and satisfactory to the Bank, to the effect that such
financial statements have been prepared in accordance with GAAP and present
fairly in accordance with GAAP the financial condition of the Borrower as of the
close of such fiscal year and the results of its operations and cash flows for
the fiscal year then ended and that an examination of such accounts in
connection with such financial statements has been made in accordance with
generally accepted auditing standards and, accordingly, such examination
included such tests of the accounting records and such other auditing procedures
as were considered necessary in the circumstances; and

 

  (ii) a report reconciling accounts receivable, accounts payable and inventory
amounts set forth in the report delivered pursuant to Section 8.6(b) for such
period to the corresponding amounts for such items on the financial statements
delivered to the Bank in respect of such period;

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  (f) promptly after receipt thereof, any additional written reports, management
letters or other detailed information contained in writing concerning
significant aspects of the operations and financial affairs of the Borrower
given to it by its independent chartered accountants;

 

  (g) as soon as available, and in any event not less than thirty (30) days
prior to the end of each fiscal year of the Borrower, a copy of the Borrower’s
business plan for the next fiscal year, such business plan to show the
Borrower’s projected revenues, expenses, balance sheet, cash flows and borrowing
base calculations, on a month by month basis in reasonable detail, prepared by
the Borrower and in form satisfactory to the Bank;

 

  (h) promptly after knowledge thereof shall have come to the attention of any
responsible officer of the Borrower, written notice of any threatened or pending
litigation or governmental proceeding or labour controversy against the Borrower
which, if adversely determined, would have a Material Adverse Effect or would
result in the occurrence of any Default or Event of Default hereunder;

 

  (i) as soon as possible and in any event within two (2) days after becoming
aware of the occurrence of each Event of Default or becoming aware of each event
which constitutes a Default, a statement of an Authorized Representative of the
Borrower setting forth details of such Event of Default or Default and the
action which the Borrower proposes to take with respect thereto.

Each of the financial statements furnished to the Bank pursuant to
Section 8.6(c) and Section 8.6(e) shall be accompanied by a written certificate
in the form attached hereto as Exhibit “B” signed by the President or the Chief
Financial Officer of the Borrower to the effect that to the best of such
officer’s knowledge and belief, no Default or Event of Default has occurred
during the period covered by such statements or, if any Default or Event of
Default has occurred during such period, setting forth a description of such
Default or Event of Default and specifying the action, if any, taken by the
Borrower to remedy the same. Such certificate shall also set forth the
calculations supporting such statements in respect of Section 8.8 of this
Agreement.

Section 8.7 Field Examinations; Appraisals; Verifications

 

(1)

Upon reasonable notice and at reasonable times, the Borrower shall permit (and
arrange for all access required to permit) the Bank and its duly

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authorized representatives and agents to conduct inspections of the Property and
the corporate books and financial records of the Borrower, to examine and make
copies of the books of accounts and other financial records of the Borrower and
to discuss the affairs, finances and accounts of the Borrower with, and to be
advised as to the same by, its officers, employees and independent chartered
accountants (and by this provision the Borrower authorizes such accountants to
discuss with the Bank the finances and affairs of the Borrower) and to conduct
field examinations not more frequently than three (3) times per calendar year or
two (2) times per calendar year if the Fixed Charge Coverage Ratio (in this
Section, the Parent Distribution shall at all times be included in the
denominator of the Fixed Charge Coverage Ratio) is more than 3.0 : 1.0 for a
12-month period if no Default or Event of Default has occurred and is
continuing, and otherwise at such times and such intervals as the Bank
determines appropriate. The Bank may obtain (or direct the Borrower to obtain
and provide to the Bank) updated appraisals of the Borrower’s Inventory or any
portion thereof, not more frequently than two (2) times per calendar year or one
(1) time per calendar year if the Fixed Charge Coverage Ratio is more than
3.0 : 1.0 for a rolling 12-month period and if no Default or Event of Default
has occurred and is continuing, and otherwise at such times and such intervals
as the Bank determines appropriate, which appraisal reports shall in each case
be prepared by an appraiser acceptable to the Bank and be in such format and
contain such detail as the Bank may reasonably request. The costs and expenses
incurred in obtaining any such appraisal shall in each case be borne by the
Borrower (whether obtained by the Bank or by the Borrower). The Borrower shall,
from time to time, at the Bank’s request, provide, at the Borrower’s expense, an
environmental questionnaire or checklist concerning activities and conditions
affecting any immovable or real property owned, leased or operated by the
Borrower and/or environmental reports prepared for the Bank by an environmental
consultant or an environmental engineering firm acceptable to the Bank
concerning any immovable or real property owned, leased or operated by the
Borrower.

 

(2)

The Borrower agrees from time to time to deliver to the Bank such evidence of
the existence, identity and location of the Collateral and of its availability
as collateral security pursuant hereto including, without limitation, schedules
describing all Receivables created or acquired by the Borrower, copies of
customer invoices or the equivalent and original shipping or delivery receipts
for all merchandise and other property sold, leased or services rendered,
together with the Borrower’s warranty of the genuineness thereof, and reports
stating the book value of Inventory and Equipment by major category and
location, in each case as the Bank may request. Subject to the terms and
conditions of this Agreement, the Bank shall have the right to verify all or any

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part of the Collateral in any manner, and through any medium, which the Bank
considers appropriate including, without limitation, the verification of
Collateral by use of a fictitious name or through a mandatary of the Bank, and
the Borrower agrees to furnish all assistance and information, and perform any
acts, which the Bank may require in connection therewith. The Borrower shall
promptly notify the Bank of any Collateral that the Borrower has determined is
obsolete, stating the prior book value of such Collateral, a description thereof
and its location.

Section 8.8 Fixed Charge Coverage Ratio

The Borrower shall at all times during the period described below maintain a
ratio during each rolling 12-month period of (i) EBITDA less cash income taxes
paid, dividends paid and unfinanced capital expenditures, to (ii) Interest
Expense plus scheduled principal repayments of long term debt (including,
without limitation, senior debt, subordinated debt (unless formally subordinated
in favour of the Bank), debt under Capital Leases, dividends (other than stock
dividends) paid or payable in respect of preferred shares) and shareholder loans
and advances, that is not less than 1.25:1.0, calculated as of the last day of
each month, commencing on November 30, 2009 for the trailing twelve month period
then ending. Notwithstanding the foregoing, the Parent Distribution and the
Management Fees shall be excluded from the denominator of the Fixed Charge
Coverage Ratio but only during the rolling twelve (12) month period following
the Parent Distribution and the payment of the Management Fees.

Section 8.9 Indebtedness for Borrowed Money

The Borrower shall not issue, incur, assume, create or have outstanding any
Indebtedness for Borrowed Money; provided, however, that the foregoing shall not
restrict nor operate to prevent:

 

  (a) the Obligations of the Borrower owing to the Bank and other indebtedness
and obligations of the Borrower from time to time owing to the Bank;

 

  (b) the Allowed Subordinated Indebtedness; and

 

  (c) the Allowed Additional Indebtedness, provided that the current principal
amount outstanding under the Dov Charney Loan may not be reimbursed prior to its
stated maturity date of December 11, 2012 without the prior written consent of
the Bank.

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Section 8.10 Liens

The Borrower shall not create, incur or permit to exist any Lien of any kind on
any Collateral owned by the Borrower; provided, however that the foregoing shall
not apply to nor operate to prevent the following permitted Liens (“Permitted
Liens”):

 

  (a) Liens arising by statute in connection with worker’s compensation,
unemployment insurance, old age benefits, social security obligations, Taxes,
assessments, statutory obligations or other similar charges, good faith cash
deposits in connection with tenders, contracts or leases to which the Borrower
is a party or other cash deposits required to be made in the ordinary course of
business, provided in each case that the obligation is not for borrowed money
and that the obligation secured is not overdue or, if overdue, is being
contested in good faith by appropriate proceedings which prevent enforcement of
the matter under contest and reserves deemed adequate by the Bank have been
established therefor;

 

  (b) mechanics’, workmen’s, materialmen’s, landlords’, carriers’,
warehousemen’s or other similar Liens arising in the ordinary course of business
with respect to obligations which are not due or which are being contested in
good faith by appropriate proceedings which prevent enforcement of the matter
under contest and reserves deemed adequate by the Bank have been established
therefor;

 

  (c) judgment Liens for which an appeal has been made or in respect of which
revision has been sought and a suspension of execution has been obtained pending
the appeal or the revision, but only to the extent that failure to pay such
judgments does not otherwise constitute an Event of Default;

 

  (d) the pledge of Property for the purpose of securing an appeal, stay or
discharge in the course of any legal proceeding, provided that the aggregate
amount of liabilities of the Borrower secured by a pledge of Property permitted
under this Section 8.10(d), including interest and penalties thereon, if any,
shall not be in excess of Cdn. $100,000 at any one time outstanding;

 

  (e) the Liens granted in favour of the Bank by the Collateral Documents;

 

  (f) Liens on property of the Borrower created solely for the purpose of
securing indebtedness permitted by Section 8.9 hereof, representing or incurred
to finance, refinance or refund the purchase price of Property purchased in the
ordinary course of business, provided that no such Lien shall extend to or cover
other Property of the Borrower other than the Property so acquired, and the
principal amount of indebtedness secured by any such Lien shall at no time
exceed the original purchase price of such Property;

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  (g) the Liens granted in respect of the Allowed Subordinated Indebtedness,
provided that all such Liens are subordinated in favour of the Bank by agreement
in form and substance satisfactory to the Bank; and

 

  (h) Liens described on Schedule 8.10.

Section 8.11 Investments, Acquisitions, Loans, Advances and Guarantees

The Borrower shall not directly or indirectly, make, retain or have outstanding
any investments (whether through purchase of stock or obligations or otherwise)
in, or loans or advances to, any other Person, or acquire all or any substantial
part of the assets or business of any other Person or division thereof, or be or
become liable as endorser, guarantor, surety or otherwise for any debt,
obligation or undertaking of any other Person (except to or in favour of the
Bank), or otherwise agree to provide funds for payment of the obligations of
another, or supply funds thereto or invest therein or otherwise assure a
creditor of another against loss, or apply for or become liable to the issuer of
a letter of credit which supports an obligation of another, or subordinate any
claim or demand it may have to the claim or demand of any other Person (except
to or in favour of the Bank) without the prior written notice of the Bank;
provided, however, that the foregoing shall not apply to nor operate to prevent:

 

  (a) investments in direct obligations of the government of Canada or of any
agency or instrumentality thereof whose obligations constitute full faith and
credit obligations of the government of Canada, provided that any such
obligations shall mature within one year of the date of issuance thereof;

 

  (b) investments in commercial paper rated at least P 1 by Moody’s Investors
Services, Inc. or at least A 1 by Standard & Poor’s Corporation maturing within
two hundred and seventy (270) days of the date of issuance thereof;

 

  (c) investments in certificates of deposit issued by any Canadian chartered
bank having capital and surplus of not less than $100,000,000 which have a
maturity of one (1) year or less; and

 

  (d) endorsement of items for deposit or collection of commercial paper
received in the ordinary course of business.

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In determining the amount of investments, acquisitions, loans, advances and
guarantees permitted under this Section 8.11, investments and acquisitions shall
always be taken at the original cost thereof (regardless of any subsequent
appreciation or depreciation therein), loans and advances shall be taken at the
principal amount thereof then remaining unpaid, and guarantees shall be taken at
the amount of obligations guaranteed thereby.

Section 8.12 Material Contracts

The Borrower shall comply with any Material Contracts for which non-compliance
could reasonably be expected to have a Material Adverse Change. The Borrower
shall notify the Bank at least thirty (30) days prior to any amendment to any
Material Contract and shall advise the Bank promptly in writing upon becoming
aware of any default or event of default or any contravention or non-compliance
or any notice of default, termination prior to the expiry of the stipulated term
thereof, suspension or modification in respect of any Material Contracts.

Section 8.13 Operating Leases

The Borrower shall not acquire the use or possession of any Property under an
operating lease, whether or not the Borrower has the express or implied right to
acquire title to or purchase such Property, at any time if, after giving effect
thereto, the aggregate amount of fixed rentals and other consideration payable
by the Borrower under all such operating leases would exceed Cdn.$8,500,000
during any fiscal year of the Borrower.

Section 8.14 Mergers, Consolidations and Sales

The Borrower shall not be a party to any amalgamation, merger or consolidation,
or sell, transfer, lease or otherwise dispose of all or any substantial part of
its Property, including any disposition of Property as part of a sale and
leaseback transaction, or in any event sell, factor or discount (with or without
recourse) any of its Receivables; provided, however, that this Section shall not
apply to nor operate to prevent the Borrower from selling its inventory in the
ordinary course of its business or selling assets which are obsolete, damaged or
worn-out or, in the good faith judgment of the Borrower, no longer necessary to
the efficient conduct of its business as then conducted.

Section 8.15 Maintenance of Subsidiaries

The Parent and any other shareholder of the Borrower shall not assign, sell or
transfer any shares held by them in the capital stock of the Borrower.

Section 8.16 Repatriation of Funds

The Borrower shall not, without the Bank’s prior written consent, repatriate
funds or otherwise make a distribution or payment to the Parent, any other
shareholder of the Borrower, the Principals or any Affiliate of the Parent, of
the

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Borrower or of any other shareholder of the Borrower (collectively, the
“Restricted Parties”) in any manner including, without limitation, by way of
cash distributions of any kind, payment of management fees, payment of any
remuneration to the Restricted Parties, payments under expense sharing or cost
allocation arrangements, expense reimbursements in excess of Cdn.$500,000 on a
rolling twelve (12) months basis (a “Permitted Distribution”); provided that any
such repatriation of funds shall not be permitted if the Bank is not satisfied,
at its sole discretion, based on the financial projections and current financial
results and trends of the Borrower, that following such repatriation of funds
and at all times during the twelve month period thereafter, the Borrower shall
continue to comply with the minimum Fixed Charge Coverage Ratio set forth in
Section 8.8 and the Minimum Excess Availability requirement. Notwithstanding the
foregoing, the Bank agrees with the payment of the Management Fees and shall
allow a one-time payment to the Parent not exceeding U.S.$5,338,000 on the first
Drawdown Date (the “Parent Distribution”).

Section 8.17 Purchase of Goods for Parent

The Borrower shall not purchase goods destined to be used by the Parent, any
other shareholder of the Borrower or any Affiliate of the Parent in excess of
Cdn.$250,000 per month, and the purchase price of any such goods shall be
reimbursed to the Borrower no later than the 15th day of the month next
following such purchase.

Section 8.18 Remuneration of Employees

The Borrower shall not make payment of salaries, bonuses or any other form of
remuneration to any employee of the Borrower (excluding the Principals) or any
other Person related to the Principals in excess of the aggregate amount of
Cdn.$350,000 per Person per year (a “Permitted Employee Distribution”) without
the prior written consent of the Bank.

Section 8.19 Location of Collateral

The Collateral is and shall remain in the possession or control of the Borrower
at the locations listed in paragraph 2 of Schedule 6.1 (collectively, the
“Permitted Collateral Locations”). If for any reason any Collateral is at any
time kept or located at a location other than a Permitted Collateral Location,
the Bank shall nevertheless have and retain a Lien thereon. The Borrower shall
at all times own or lease all Permitted Collateral Locations, except to the
extent otherwise disclosed in paragraph 2 of Schedule 6.1. The Borrower shall
not move its domicile or chief executive office or maintain a place of business
at a location other than those specified in paragraph 1 of Schedule 6.1 or
permit the Collateral to be located at a location other than those specified in
paragraph 2 of Schedule 6.1, in each case without first providing the Bank
thirty (30) days’ prior written notice of its intent to do so; provided that the
Borrower shall at all times maintain its domicile and chief executive office
and, unless otherwise specifically agreed to in writing by the Bank,

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Permitted Collateral Locations, in Canada and, with respect to any new domicile
or chief executive office or place of business or location of Collateral, the
Borrower shall have taken all action requested by the Bank to maintain the Lien
of the Bank in the Collateral at all times as a first ranking fully perfected
Lien opposable to third parties and in full force and effect, subject only to
Permitted Liens.

Section 8.20 Landlord Agreements

As to any premises not owned by the Borrower wherein any of the Collateral is
located, the Borrower shall, unless the Bank waives this requirement in writing,
use commercially reasonable efforts to cause each party having any right, title
or interest in, or Lien on, any of such premises to enter into a Landlord
Agreement with the Bank.

Section 8.21 Settlements on Receivables

Unless and until an Event of Default occurs and is continuing, any merchandise
or other Property which is returned by a customer or account debtor or otherwise
recovered may be resold by the Borrower in the ordinary course of its business
as presently conducted; and, during the existence of any Event of Default which
is continuing, such merchandise and other Property shall be set aside at the
request of the Bank and held by the Borrower as mandatary for the Bank and shall
remain part of the Collateral. Unless and until an Event of Default occurs and
is continuing, the Borrower may settle and adjust disputes and claims with its
customers and account debtors, handle returns and recoveries and grant
discounts, credits and allowances in the ordinary course of its business as
presently conducted for amounts and on terms which it in good faith considers
advisable; and, during the existence of any Event of Default which is
continuing, unless the Bank requests otherwise, the Borrower shall notify the
Bank promptly of all returns and recoveries outside the ordinary course of
business and, on the Bank’s request, deliver any such merchandise or other
Property to the Bank. During the existence of any Event of Default which is
continuing, unless the Bank requests otherwise, the Borrower shall also notify
the Bank promptly of all disputes and claims outside the ordinary course of
business and settle or adjust them at no expense to the Bank, but no discount,
credit or allowance other than on normal trade terms in the ordinary course of
business as presently conducted shall be granted to any customer or account
debtor and no returns of merchandise or other Property outside the ordinary
course of business shall be accepted by the Borrower without the Bank’s consent.
The Bank may, at all times during the existence of any Event of Default which is
continuing, settle or adjust disputes and claims directly with customers or
account debtors for amounts and upon terms which the Bank considers advisable.

Section 8.22 Collection of Receivables

 

  (a)

Whether or not any Event of Default has occurred and is continuing, and whether
or not the Bank has exercised any or all of its rights under

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other provisions of this Section 8.22, and without prejudice to any other right
or remedy available to the Bank, if the Bank requests the Borrower to do so, all
bills, notes, documents of title, instruments and chattel paper at any time
constituting part of the Receivables or any other Collateral (including any post
dated cheques) shall, upon receipt by the Borrower, be immediately endorsed to
and deposited with the Bank.

 

  (b) Until the occurrence of an Event of Default which is continuing, the
Borrower shall be authorized to collect the Receivables and other Collateral and
shall deposit the proceeds of the Receivables and other Collateral in the
blocked accounts contemplated by Section 5.2. At any time after an Event of
Default has occurred, and whether or not the Bank has exercised any or all of
its rights under other provisions of this Section 8.22, and without prejudice to
any other right or remedy available to the Bank, the Bank or its designee may
withdraw such authorization and notify the Borrower’s customers and account
debtors that Receivables or any other Collateral have been hypothecated or
otherwise charged in favour of the Bank and, in its own name, demand, collect,
receive, sue for, compound and give acquittance for any or all amounts due or to
become due on Receivables or any other Collateral and, in the Bank’s discretion,
file any claim or take any other action or proceeding which the Bank may deem
necessary or appropriate to protect or realize upon the Lien of the Bank in the
Receivables or any other Collateral.

 

  (c)

Any proceeds of Receivables or other Collateral transmitted to or otherwise
received by the Bank pursuant to any of the foregoing provisions hereof may be
handled and administered by the Bank in and through one or more remittance
accounts at the Bank (such remittance accounts to constitute special restricted
accounts for purposes of and subject to the provisions of Section 5.2 of this
Agreement), and the Borrower acknowledges that the maintenance of such
remittance account by the Bank is solely for the Bank’s convenience and that the
Borrower does not have any right, title or interest in such remittance account
or any amounts at any time standing to the credit thereof. The Bank shall apply
proceeds of Receivables and other Collateral received by it from any source to
the payment of the Obligations (whether or not then due and payable) in the
manner provided in Section 4.2 of this Agreement. Except for purposes of
computing interest on the Obligations in accordance with this Agreement, the
Bank need not apply or give credit for any item included in proceeds of
Receivables or other Collateral until the Bank

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has received final payment therefor at its office in cash or final solvent
credits current in Montreal, Québec, acceptable to the Bank as such. However, if
the Bank does give credit for any item prior to receiving final payment therefor
and the Bank fails to receive such final payment or an item is charged back to
the Bank for any reason, the Bank may, at its election in either instance,
charge the amount of such item back against the remittance account or any
depository account of the Borrower maintained with the Bank, together with
interest thereon at the rate referred to in Section 3.1 hereof which applies to
Revolving Credit Loans in the currency of the amount involved. Concurrently with
each transmission of any proceeds of Receivables or other Collateral to the
remittance account, the Borrower shall furnish the Bank with a report in such
form as the Bank shall require identifying the particular Receivable or other
Collateral from which the same arises or relates.

 

  (d) The Borrower hereby indemnifies the Indemnitees from and against all
liabilities, damages, losses, actions, claims, judgments, costs, expenses,
charges and legal fees (on a solicitor client basis) suffered or incurred by any
or all of them because of the maintenance of the foregoing arrangements;
provided, however, that the Borrower shall not be required to indemnify any of
the Indemnitees for any of the foregoing to the extent they arise solely from
the gross or intentional fault of such Indemnitee. The Bank shall have no
liability or responsibility for accepting any cheque, draft or other order for
payment of money bearing the legend “payment in full” or words of similar import
or any other restrictive legend or endorsement whatsoever or be responsible for
determining the correctness of any remittance.

Section 8.23 Inventory and Equipment

 

(1) The Borrower shall at its own cost and expense maintain, keep and preserve
its Inventory in good and merchantable condition except for damaged, defective
or obsolete Inventory arising in the ordinary course of business.

 

(2) The Borrower may, until otherwise notified by the Bank after the occurrence
of an Event of Default which is continuing, use, consume and sell its Inventory
in the ordinary course of business, but a sale in the ordinary course of
business shall not under any circumstance include any transfer or sale in
satisfaction, partial or complete, of a debt owing by the Borrower.

 

(3) The Borrower may, until otherwise notified by the Bank after the occurrence
of a Default or an Event of Default which is continuing, sell obsolete, worn out
or unusable Equipment which is concurrently replaced with similar Equipment at
least equal in quality and condition to that sold and owned by the Borrower free
of any Lien other than Permitted Liens.

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(4) As of the time any Inventory or Equipment becomes subject to the Liens
provided pursuant to the Collateral Documents and at all times thereafter, the
Borrower shall be deemed to have warranted as to any and all of such Inventory
and Equipment that all warranties of the Borrower set forth in this Agreement
are true and complete with respect to such Inventory and Equipment, that all of
such Inventory and Equipment is located at a location set forth pursuant to
Section 8.18 hereof and that, in the case of Inventory, such Inventory is new
and unused and in good and merchantable condition except for damaged, defective
or obsolete Inventory or Equipment arising in the ordinary course of business.
The Borrower warrants and agrees that no Inventory is or will be consigned to
any other person without the Bank’s prior written consent.

 

(5) Except for Equipment from time to time located at the Permitted Collateral
Locations or as otherwise agreed to by the Bank in writing, none of the
Equipment is or will be incorporated or attached to an immovable in such a
manner as to lose its individuality and ensure the utility of the immovable to
which it becomes incorporated or attached.

 

(6) If any Inventory is at any time evidenced by a document of title, such
document shall be promptly delivered by the Borrower to the Bank, except to the
extent the Bank specifically requests the Borrower not to do so with respect to
any such document.

Section 8.24 Compliance with Laws

The Borrower shall comply in all respects with the requirements of all federal,
provincial and municipal laws, rules, regulations, ordinances and orders
applicable to or pertaining to its Property or business operations, the non
compliance with which could reasonably be expected to have a Material Adverse
Effect or could reasonably be expected to result in a Lien other than a
Permitted Lien.

Section 8.25 Burdensome Contracts with Affiliates

The Borrower shall not enter into any contract, agreement or business
arrangement with any of its Affiliates (but excluding any contract, agreement or
business arrangement between the two legal entities comprising the Borrower) on
terms and conditions which are less favourable to the Borrower than would be
usual and customary in similar contracts, agreements or business arrangements
between Persons not affiliated with each other.

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Section 8.26 No Changes in Fiscal Year

The Borrower shall not change its fiscal year end without the prior written
consent of the Bank.

Section 8.27 Formation of Subsidiaries

The Borrower shall not form or acquire any Subsidiary without the prior written
consent of the Bank.

Section 8.28 Change in the Nature of Business

The Borrower shall not engage in any business or activity if as a result the
general nature of the business of the Borrower would be changed in any material
respect from the general nature of the business engaged in by the Borrower on
the date of this Agreement.

Section 8.29 Deposit Accounts

The Borrower shall not open or maintain any bank, deposit or similar account
except with the Bank or with any other financial institution acceptable to the
Bank and with whom the Bank shall have entered into a blocked account agreement
in form and substance acceptable to the Bank.

Section 8.30 Bank Performance of Covenants

The Borrower shall observe and comply with all covenants provided in this
Agreement and in the other Loan Documents. If the Borrower fails to perform any
of such covenants and agreements, the Bank may, at its option, perform the same
and in so doing may expend such reasonable sums as the Bank may deem advisable
in the performance thereof, including, without limitation, the payment of any
insurance premiums, Taxes, Liens, expenditures made in defending against any
adverse claims and all other expenditures which the Bank may be compelled to
make by operation of law or which the Bank may make by agreement or otherwise
for the protection of its security. All such reasonable sums and amounts so
expended shall be repayable by the Borrower immediately, without notice or
demand, shall constitute additional Obligations secured pursuant to the
Collateral Documents and shall bear interest from the date said amounts are
expended at the rate per annum referred to in Section 3.1 hereof which applies
to Revolving Credit Loans in the currency of the sum or amount involved. No such
performance of any covenant or agreement by the Bank and no such advancement or
expenditure therefor shall relieve the Borrower of any default under the terms
of this Agreement or in any way obligate the Bank to take any further or future
action with respect thereto. The Bank, in making any payment hereby authorized,
may do so according to any bill, statement or estimate procured from the
appropriate public office or holder of the Lien to be discharged without inquiry
into the accuracy of such bill, statement or estimate or into the validity of
any tax assessment, sale, forfeiture, tax lien or title or claim. The Bank, in
performing any act hereunder, shall act

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reasonably and be the sole judge of whether the Borrower is required to perform
same under the terms of this Agreement or any other Loan Document. The Bank is
hereby authorized to charge any depository or other account of the Borrower
maintained with the Bank for the amount of such sums and amounts so expended.

Section 8.31 Books and Records

The Borrower shall at all times keep true and complete books and records and
accounts in accordance with GAAP.

Section 8.32 Insolvency Applications

The Borrower acknowledges that its business and financial relationships with the
Bank are unique and that the Bank does not have a common interest with any other
of the Borrower’s creditors. The Borrower agrees that if it files any plan of
arrangement under the Companies’ Creditors Arrangement Act (Canada) or makes any
proposal under the Bankruptcy and Insolvency Act (Canada), the Bank will be
placed in its own class for voting and distribution purposes, and the Borrower
further agrees that it will not permit, directly or indirectly, the Bank to be
classified with any other creditor for any purpose of such plan or proposal or
otherwise.

Section 8.33 Minimum Excess Availability

The Borrower shall maintain at all times a minimum Excess Availability of five
percent (5%) of the Revolving Credit Commitment, calculated on a weekly basis
and disclosed in the Borrowing Base Certificate delivered to the Bank in
accordance with Section 8.6(a) of this Agreement (the “Minimum Excess
Availability”).

Section 8.34 Transfer Pricing

The Borrower and LLC shall not make any changes to the transfer price provisions
set forth in the Master Sales Agreement without the prior written consent of the
Bank.

ARTICLE 9

EVENTS OF DEFAULT AND REMEDIES

Section 9.1 Events of Default

Each of the following shall constitute an Event of Default hereunder:

 

  (a) default in the payment when due of any principal or interest payable by
the Borrower hereunder, whether at the stated maturity thereof or at any other
time provided for in this Agreement; or

 

  (b)

default in the payment when due of all or any part of any Obligation payable by
the Borrower hereunder (other than the Obligations referred to in paragraph
(a) above), whether at the stated maturity

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thereof or at any other time provided for in this Agreement or any other Loan
Document, or default shall occur in the payment when due of any other
indebtedness or obligation, whether direct, contingent or otherwise, of the
Borrower owing to the Bank, and such default is not remedied within two
(2) Business Days after the date on which written notice thereof is given to the
Borrower by the Bank; or

 

  (c) default in the observance or performance of any covenant set forth in
Article 5 or Article 8 hereof or of any provision of any other Loan Document
requiring the maintenance of insurance on the Collateral or dealing with the use
or remittance of proceeds of Collateral, and such default is not remedied within
five (5) Business Days after the date on which written notice thereof is given
to the Borrower by the Bank; or

 

  (d) default in the observance or performance of any other provision hereof or
of any other Loan Document which is not remedied within five (5) Business Days
after the date on which written notice thereof is given to the Borrower by the
Bank; or

 

  (e) any representation or warranty made by the Borrower herein or in any other
Loan Document or in any statement or certificate furnished by it pursuant hereto
or thereto, or in connection with any Extension of Credit made hereunder, proves
untrue in any material respect as of the date of the issuance or making thereof;
or

 

  (f) any of the Loan Documents shall for any reason not be or shall cease to be
in full force and effect, or any of the Loan Documents is declared to be null
and void, or any of the Collateral Documents shall for any reason fail to create
a valid and enforceable first ranking Lien in favour of the Bank in all of the
Collateral except for Permitted Liens; or

 

  (g) default shall occur under any Indebtedness for Borrowed Money in excess of
Cdn.$100,000 issued, assumed or guaranteed by the Borrower or under any
indenture, agreement or other instrument under which the same may be issued, and
such default shall result in the acceleration of the maturity of any such
Indebtedness for Borrowed Money; or

 

  (h) any judgment or judgments, writ or writs, or warrant or warrants of
attachment, distress or any similar process or processes in an aggregate amount
in excess of Cdn.$100,000 shall be entered or filed against the Borrower or
against any of its Property and which remains unvacated, unbonded, unstayed or
unsatisfied for a period of thirty (30) days or if, within such period, any
seizure or taking of possession of such Property of the Borrower occurs by or on
behalf of the related creditor; or

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  (i) the dissolution, winding up or termination of existence of the Borrower;
or

 

  (j) a Material Adverse Change or a Material Adverse Effect occurs; or

 

  (k) one hundred percent (100%) of the issued and outstanding shares in the
capital stock of the Borrower ceases at any time and for any reason to be
directly owned by the Parent; or

 

  (l) the determination of the Borrower, whether by vote of its board of
directors or otherwise, to suspend the operation of the Borrower’s business in
the ordinary course, liquidate all or substantially all of its assets or store
locations, or employ an agent or other third party to conduct any so-called
store closing, store liquidation or “going-out-of-business” operation with
respect to all or substantially all of the Borrower’s assets or store locations;

 

  (m) a breach by the Borrower, the Parent, LLC or any other party under any of
the Material Contracts which could reasonably be expected to have a Material
Adverse Effect;

 

  (n) (i) any Event of Default (as defined in the American Apparel U.S. First
Lien Credit Agreement) shall occur under the American Apparel U.S. First Lien
Credit Agreement, except any such Event of Default that has been cured or duly
waived in accordance with the terms of the American Apparel U.S. First Lien
Credit Agreement, or (ii) any Event of Default (as defined in the American
Apparel U.S. Second Lien Credit Agreement) shall occur under the American
Apparel U.S. Second Lien Credit Agreement, except any such Event of Default that
has been cured or duly waived in accordance with the terms of the American
Apparel U.S. Second Lien Credit Agreement;

 

  (o)

the Borrower, the Parent or LLC shall (i) have entered involuntarily against it
a receiving order or other order for relief under the Bankruptcy and Insolvency
Act (Canada), the Companies’ Creditors Arrangement Act (Canada) or any other
legislation in respect of bankruptcy, insolvency or relief of debtors
(including, without limitation, the United States Bankruptcy Code), (ii) not
pay, or admit in writing its inability to pay, its debts generally as they
become due, or commit any other act of bankruptcy, (iii) make an assignment for
the benefit of its creditors, (iv) apply for, seek, consent to or acquiesce in

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the appointment of a receiver, interim receiver, custodian, monitor, trustee,
examiner, liquidator or similar official for it or any substantial part of its
Property, (v) institute any proceeding seeking relief (including, without
limitation, any assignment, proposal or the giving of any notice of intention to
make a proposal) under the Bankruptcy and Insolvency Act (Canada), the
Companies’ Creditors Arrangement Act (Canada) or any other legislation in
respect of bankruptcy, insolvency or relief of debtors (including, without
limitation, the United States Bankruptcy Code), or to adjudicate it insolvent,
or seeking dissolution, winding up, liquidation, reorganization, arrangement,
adjustment or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or fail to file
promptly and in good faith an answer or other pleading denying (or shall admit)
the material allegations of any such proceeding filed against it or shall
consent to, acquiesce in or indicate approval of, any such proceeding, (vi) take
any corporate action in furtherance of any matter described in Section 9.1(o)(i)
through Section 9.1(o)(v) above, or (vii) fail to contest in good faith any
appointment or proceeding described in Section 9.1(p) hereof;

 

  (p) a custodian, monitor, receiver, receiver and manager, interim receiver,
trustee, examiner, liquidator or similar official (a “Receiver”) shall be
appointed for the Borrower or any substantial part of any of its Property, or a
proceeding described in Section 9.1(o)(v) shall be instituted against the
Borrower and such appointment continues undischarged or such proceeding
continues undismissed or unstayed for a period of fifteen (15) days, or if,
within such period, a Receiver or creditor shall take possession of any Property
of the Borrower.

Section 9.2 Non Bankruptcy Defaults

When any Event of Default described in Section 9.1(a) through Section 9.1(k) has
occurred and is continuing, the Bank may, by notice to the Borrower, take one or
more of the following actions:

 

  (a) terminate the obligation of the Bank to extend any further credit on the
date (which may be the date thereof) stated in such notice, whether or not
further credit would otherwise be available;

 

  (b) declare the principal of and the accrued interest on any Loans and all
other Obligations then outstanding to be forthwith due and payable, and
thereupon all Loans and all such other Obligations, including principal,
interest and all fees, charges and other Obligations payable hereunder and under
the other Loan Documents, shall be and become immediately due and payable
without further demand, presentment, protest or notice of any kind; and

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  (c) enforce any and all rights and remedies available to it under the Loan
Documents or applicable law.

Section 9.3 Bankruptcy Defaults

When any Event of Default described in Section 9.1(o) or Section 9.1(p) has
occurred and is continuing, then all Loans and all other Obligations then
outstanding, including principal, interest and all fees, charges and other
Obligations payable hereunder and under the other Loan Documents, shall be and
become immediately due and payable without presentment, demand, protest or
notice of any kind, and the obligation of the Bank to extend further credit
pursuant to this Agreement or any other Loan Document shall immediately
terminate. In addition, the Bank may exercise any and all remedies available to
it under the Loan Documents or applicable law.

Section 9.4 Collateral for Undrawn Letters of Credit

When any Event of Default, other than an Event of Default described in
Section 9.1(o) or Section 9.1(p), has occurred and is continuing, the Borrower
shall, upon demand of the Bank, and when any Event of Default described in
Section 9.1(o) or Section 9.1(p) has occurred the Borrower shall, without notice
or demand from the Bank, immediately pay to the Bank the full amount of each
Letter of Credit then outstanding, the Borrower agreeing to immediately make
such payment and acknowledging and agreeing that the Bank would not have an
adequate remedy at law for failure of the Borrower to honour any such demand and
that the Bank shall have the right to require the Borrower to specifically
perform such undertaking, whether or not any such Letters of Credit have been
presented for payment.

Section 9.5 Collateral for Outstanding Forward Contracts

When any Event or Default other than an Event of Default described in
Section 9.1(o) or Section 9.1(p) has occurred and is continuing, the Borrower
shall, upon demand of the Bank, and when any Event of Default described in
Section 9.1(o) or Section 9.1(p) has occurred the Borrower shall, without notice
or demand from the Bank, immediately pay to the Bank the Deemed Forward Contract
Amounts of all Forward Contracts in respect of which the Bank has not already
been fully reimbursed and pay all other amounts owing to the Bank under the
terms of such Forward Contracts, the Borrower agreeing to immediately make such
payment and acknowledging and agreeing that the Bank would not have an adequate
remedy at law for failure of the Borrower to honour any such demand and that the
Bank shall have the right to require the Borrower to specifically perform such
undertaking without regard to the date upon which the Bank is required under any
outstanding

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Forward Contract to purchase any currency on behalf of the Borrower, the date
upon which the Borrower is obligated to reimburse the Bank for currency
purchased by the Bank on its behalf or the date upon which the Borrower is
obligated to pay to the Bank any other amounts owing to the Bank under the terms
of such Forward Contract.

ARTICLE 10

MISCELLANEOUS

Section 10.1 Non Business Days

If any payment hereunder becomes due and payable on a day that is not a Business
Day, the due date of such payment shall be extended to the next succeeding
Business Day on which date such payment shall be due and payable. In the case of
any payment of principal falling due on a day which is not a Business Day,
interest on such principal amount shall continue to accrue during such extension
at the rate per annum then in effect, which accrued amount shall be due and
payable on the next scheduled date for the payment of interest.

Section 10.2 No Waiver, Cumulative Remedies

No delay or failure on the part of the Bank in the exercise of any power or
right shall operate as a waiver thereof or as an acquiescence in any default,
nor shall any single or partial exercise of any power or right preclude any
other or further exercise thereof or the exercise of any other power or right.
No provision of any Loan Document as to any commercially reasonable manner or
process of or in respect of the exercising of any right or remedy shall be
construed as meaning no other manner or process is commercially reasonable. The
rights and remedies of the Bank hereunder are cumulative to, and not exclusive
of, any rights or remedies that it would otherwise have.

Section 10.3 Amendment, Notices

No amendment, modification, termination or waiver of any provision of this
Agreement or of any other Loan Document, nor consent to any departure by the
Borrower therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Bank. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.

Section 10.4 Costs, Expenses and General Indemnity

 

  (a)

The Borrower agrees to pay on demand the reasonable costs and expenses of the
Bank in connection with the negotiation, preparation, execution and delivery of
this Agreement and the other Loan Documents and the other instruments and
documents to be delivered thereunder, and in connection with the recording and
filing of any of

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the foregoing as well as in connection with legal work (on a solicitor and his
own client basis) and advice, field examinations, lien searches and filings and
independent appraisals from time to time undertaken and obtained by the Bank in
its administration of the credit facility provided for herein, and in connection
with the transactions contemplated hereby or thereby, and in connection with any
consents hereunder and any waivers or amendments hereto or thereto, including
the reasonable fees and expenses of Borden Ladner Gervais LLP, counsel for the
Bank, with respect to all of the foregoing (whether or not the transactions
contemplated hereby are consummated). The Borrower further agrees to pay on
demand to the Bank or any other holder of the Obligations all costs and expenses
(including court costs and legal fees and disbursements on a solicitor client
basis), if any, incurred or paid by the Bank or any other holder of the
Obligations in connection with any Default or Event of Default or in connection
with the enforcement or attempted enforcement of this Agreement or any other
Loan Document or any other instrument or document delivered thereunder or in
order for the Bank to preserve, protect or render opposable to third parties its
interests under this Agreement or any other Loan Document or any other
instrument or document delivered hereunder or thereunder.

 

  (b) The Borrower further agrees to indemnify the Bank and any trustee, and
their respective successors, assigns, agents, directors, officers and employees,
against all losses, claims, damages, penalties, judgments, liabilities and
expenses (including, without limitation, all expenses of litigation or
preparation therefor, whether or not the indemnified person is a party thereto)
which any of them may pay or incur arising out of or relating to this Agreement
or any other Loan Document or any of the transactions contemplated thereby or
the direct or indirect application or proposed application of the proceeds of
any Extension of Credit made available hereunder, other than those which arise
from the gross or intentional fault of the party claiming indemnification. The
Borrower, upon demand by the indemnified party at any time, shall reimburse such
indemnified party for any legal or other expenses incurred in connection with
investigating or defending against any of the foregoing, except if the same is
directly due to the gross or intentional fault of the party to be indemnified.
The obligations of the Borrower under this Section 10.4 shall survive the
termination of this Agreement.

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Section 10.5 Environmental Indemnity

In addition to any other liability of the Borrower hereunder or under any other
Loan Document, the Borrower agrees to indemnify and save harmless the
Indemnitees from and against:

 

  (a) any losses suffered by the Indemnitees for, in connection with, or as a
direct or indirect result of, the failure of the Borrower to comply with all
Requirements of Environmental Law;

 

  (b) any losses suffered by the Indemnitees for, in connection with, or as a
direct or indirect result of, the presence of any Hazardous Material situated
in, on or under any Property owned by the Borrower or upon which it carries on
business; and

 

  (c) any and all liabilities, losses, damages, penalties, expenses (including
reasonable legal fees on a solicitor and his own client basis) and claims which
may be paid, incurred or asserted against the Indemnitees for, in connection
with, or as a direct or indirect result of, any legal or administrative
proceedings with respect to the presence of any Hazardous Material on or under
any Property owned by the Borrower or upon which it carries on business, or the
discharge, emission, spill, radiation or disposal by the Borrower of any
Hazardous Material into or upon any Property, the atmosphere or any watercourse
or body of water including, without limitation, the costs of defending and/or
counterclaiming or claiming over against third parties in respect of any action
or matter and any cost, liability or damage arising out of a settlement entered
into by the Indemnitees of any such action or matter;

except, as it relates to any Indemnitee, to the extent that any of the foregoing
liabilities, losses, damages, penalties and expenses were caused by the gross or
intentional fault of such Indemnitee. The obligations of the Borrower under this
Section shall survive the termination of this Agreement.

Section 10.6 Taxes

 

(1)

Any and all payments by or on account of any obligation of the Borrower
hereunder shall be made free and clear of and without deduction for any
Indemnified Taxes or Other Taxes; provided that if the Borrower shall be
required to deduct any Indemnified Taxes or Other Taxes from such payments, then
(i) the sum payable shall be increased as necessary so that, after making all
required deductions (including deductions applicable to additional sums payable
under this Section), the Bank receives an amount equal to the sum it would have
received had no such deductions been made,

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(ii) the Borrower shall make such deductions, and (iii) the Borrower shall pay
the full amount deducted to the relevant Governmental Authority in accordance
with applicable law. In addition, the Borrower shall pay all Other Taxes due and
payable to the relevant Governmental Authority in accordance with applicable
law.

 

(2) The Borrower shall indemnify the Bank within ten (10) Business Days after
written demand therefor, accompanied by reasonable supporting documentation and
a certificate of a duly authorized officer of the Bank setting forth the amount
in question, for the full amount of any Indemnified Taxes or Other Taxes
(including Indemnified Taxes or Other Taxes imposed or asserted on or
attributable to amounts payable under this Section) paid by the Bank and any
penalties, interest and reasonable expenses arising therefrom or with respect
thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or
legally imposed or asserted by the relevant Governmental Authority. A
certificate as to the amount of such payment or liability delivered to the
Borrower by the Bank shall be conclusive absent manifest error.

 

(3) As soon as practicable after any payment of Indemnified Taxes or Other Taxes
by the Borrower to a Governmental Authority, the Borrower shall deliver to the
Bank the original or a certified copy of a receipt issued by such Governmental
Authority evidencing such payment, a copy of the return reporting such payment
or other evidence of such payment reasonably satisfactory to the Bank.

Section 10.7 Survival of Representations

All representations and warranties made herein or in any other Loan Document or
in any certificate given pursuant hereto or thereto shall survive the execution
and delivery of this Agreement and the other Loan Documents, and shall continue
in full force and effect with respect to the date as of which they were made as
long as any credit is in use or available hereunder.

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Section 10.8 Notices

Except as otherwise specified herein, all notices hereunder or under any other
Loan Document shall be in writing (including telecopy and e-mail) and shall be
given to the relevant party at its address, telecopier or e-mail number set
forth below, or such other address, telecopier number or e-mail as such party
may hereafter specify by notice to the other given by registered mail, by
telecopy or by e-mail. Notices hereunder shall be addressed as follows:

 

if to the Borrower:   

American Apparel Canada Wholesale Inc.

and

American Apparel Canada Retail Inc.

  

5430 Ferrier Street

Mont-Royal, Québec H4P 1M2

  

Attention: Lorne Gold

   Chief Financial Officer

   Telephone: (514) 939-0245    Telecopy: (514) 939-7421    E-mail:
lorne@americanapparel.net with a copy to:   

Davies Ward Phillips & Vineberg

1501 McGill College Avenue, 26th Floor

Montréal, Québec H3A 3N9

   Attention: Hillel W. Rosen    Telephone: (514) 841-6443    Telecopy: (514)
841-6499    E-mail : hrosen@dwpv.com if to the Parent:    American Apparel, Inc.
  

747 Warehouse Street

Los Angeles, California 90021

United States of America

  

Attention: Glenn A. Weinman SVP,

   General Counsel and Secretary

   Telephone: (213) 488-0226    Telecopy: (213) 201-3048    E-mail :
glenn@americanapparel.net

--------------------------------------------------------------------------------

- 62 -

 

if to the Bank:   

Bank of Montreal

Corporate Finance Division

1 First Canadian Place

100 King St. West, 11th Floor

Toronto, Ontario

M5X 1A1

  

Attention: Grace Lam

   Senior Portfolio Manager

   Asset Based Lending

   Telephone: (416) 643-4351    Telecopy: (416) 643-4249    E-mail:
grace2.lam@bmo.com with a copy to:   

Borden Ladner Gervais LLP

1000 de La Gauchetière Street West

Suite 900

Montréal, Québec H3B 5H4

   Attention: Pierre B. Côté    Telephone: (514) 954-3111    Telecopy: (514)
954-1905    E-mail: pcote@blgcanada.com

Each such notice, request or other communication shall be effective (i) if given
by telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section 10.8 and a confirmation of such telecopy has been
received by the sender, (ii) if given by mail, five (5) days after such
communication is deposited in the mail, registered with return receipt
requested, addressed as aforesaid, or (iii) if given by any other means, when
delivered at the addresses specified in this Section 10.8.

Section 10.9 Solidary Obligation

Each Borrower shall at all times be solidarily liable with the other Borrower
towards the Bank for all payment, indemnity and other obligations of the
Borrower hereunder and under the other Loan Documents including, without
limitation, all payment, indemnity and other obligations under the Applications
and the Forward Contracts, whether or not expressed as joint and several or
solidary therein or executed by the Borrower. Without limiting the generality of
the foregoing, each Borrower guarantees the payment of all payment, indemnity
and other obligations

--------------------------------------------------------------------------------

- 63 -

 

referred to above, and this guarantee shall be absolute and permanent and will
remain in effect until payment in full of all such payment, indemnity and other
obligations. Each Borrower renounces to the benefits of division and discussion.

Section 10.10 Paramountcy

To the extent of any conflict or inconsistency between any provision in this
Agreement and any provision in any other Loan Document, the provision in this
Agreement shall govern.

Section 10.11 Headings

Section headings used in this Agreement are for convenience of reference only
and are not a part of this Agreement for any other purpose.

Section 10.12 Severability of Provisions

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

Section 10.13 Counterparts

This Agreement may be executed in any number of counterparts and by different
parties hereto on separate counterpart signature pages, whether by telecopy or
otherwise, and all such counterparts taken together shall be deemed to
constitute one and the same instrument.

Section 10.14 Compensation

The Borrower hereby authorizes the Bank at any time and from time to time to
compensate or set off and apply any and all deposits (general or special, time
or demand, provisional or final, due or not due) at any time held by the Bank in
the Borrower’s name and any and all debts and obligations at any time owing by
the Bank to or for the credit or account of the Borrower, against any or all of
the Obligations or the indebtedness or obligations of the Borrower to the Bank.
The rights of the Bank under this Section 10.14 are in addition to all other
rights and remedies (including, without limitation, other rights of compensation
and combination) that the Bank may have.

Section 10.15 Binding Nature, Assignment, Governing Law

This Agreement shall be binding upon the Borrower and its successors and
permitted assigns, and shall inure to the benefit of the Bank and its successors
and assigns, including any subsequent holder of the Obligations. The Borrower
hereby consents to the Bank’s sale, assignment, transfer or other disposition,
at any time and from time to time hereafter, of this Agreement, the other Loan
Documents and

--------------------------------------------------------------------------------

- 64 -

 

the Obligations, or any portion thereof (including, without limitation, the
Bank’s rights, title, interests, remedies, powers and/or duties thereunder), and
any grant of participations made by the Bank from time to time therein. The
Borrower shall not assign its rights hereunder without the prior written consent
of the Bank. This Agreement constitutes the entire understanding of the parties
with respect to the subject matter hereof and any prior agreements, whether
written or oral, with respect thereto are superseded hereby. This Agreement and
the other Loan Documents and the rights and obligations of the parties hereto
and thereto shall, except as otherwise specified therein, be governed by and
construed in accordance with the laws of the Province of Québec and the federal
laws of Canada applicable therein, without regard to principles of conflict of
laws.

Section 10.16 Submission to Jurisdiction

The Borrower hereby submits to the non-exclusive jurisdiction of the courts of
competent jurisdiction located in the Province of Québec for purposes of all
legal proceedings arising out of or relating to this Agreement, the other Loan
Documents or the transactions contemplated hereby or thereby. The Borrower
irrevocably waives, to the fullest extent permitted by law, any objection which
it may now or hereafter have to the commencement and prosecution of any such
proceeding brought in such a court and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum.

Section 10.17 Judgment Currency

If in the recovery by the Bank of any amount owing by the Borrower hereunder or
under any other Loan Document in any currency, judgment can only be obtained in
another currency, and because of changes in the exchange rate of such currencies
between the date of such judgement and payment in full of the amount of such
judgment, the recovery under the judgment is less than the full amount owed by
the Borrower, the Borrower shall pay any such shortfall to the Bank and such
shortfall can be claimed by the Bank against the Borrower as an alternative or
additional cause of action and shall form part of the Obligations.

Section 10.18 Most Favoured Lender

In the event the Borrower enters into any agreement with any lender or lessor
creating obligations for the Borrower in excess of Cdn.$500,000 during the term
of any such agreement containing one or more covenants which are more
restrictive on the Borrower than the covenants set forth in this Agreement, such
more restrictive covenants shall ipso facto be deemed to form part of this
Agreement and be binding on the Borrower.

--------------------------------------------------------------------------------

- 65 -

 

IN WITNESS WHEREOF this Agreement has been executed and delivered as of the date
first mentioned above by the parties hereto under the hands of their proper
officers duly authorized for such purpose.

[Remainder of page left in blank. Signature pages to follow]

--------------------------------------------------------------------------------

S - 1

 

Borrower: AMERICAN APPAREL CANADA WHOLESALE INC. Per:  

/s/ Lorne Gold

  Name:   Lorne Gold   Title:   Chief Financial Officer AMERICAN APPAREL CANADA
RETAIL INC. Per:  

/s/ Lorne Gold

  Name:   Lorne Gold   Title:   Chief Financial Officer Lender: BANK OF MONTREAL
Per:  

/s/ Grace Lam

  Name:   Grace Lam   Title:   Senior Portfolio Manager Per:  

/s/ Gary Karges

  Name:   Gary Karges   Title:   Director   Corporate Finance   BMO Bank of
Montreal

Credit Agreement - Signature page

--------------------------------------------------------------------------------

S - 2

 

TO: BANK OF MONTREAL

The undersigned hereby acknowledges and consents to the provisions of this
Agreement and covenants and agrees to comply with Section 8.16 and Section 8.34
of this Agreement.

 

AMERICAN APPAREL, INC. By:  

/s/ Adrian Kowalewski

  Name: Adrian Kowalewski   Title: Chief Financial Officer

Credit Agreement - Signature page

--------------------------------------------------------------------------------

- 67 -

 

EXHIBIT “A”

BORROWING BASE CERTIFICATE

 

Report    Date:                       Number:                               
Total Approved    Maximum Revolving                       Revolving Credit
:        $                         Credit Commitment $:                      

 

ACCOUNTS RECEIVABLE UPDATE          COLLATERAL STATUS   

ADDITIONS:

                  ACCOUNTS
RECEIVABLE   
     INVENTORY                   As of Date    MM/DD/YY      MM/DD/YY   

(A) New Sales (See Attached)

   ____     (1)   Previous Collateral Balance             

(B) Miscellaneous (+)

   ____     (2)+   Additions             

Total Gross Additions (2)

   ____     (3)-   Collections/Deductions                         (4)=   New
Collateral Balance             

DEDUCTIONS:

         (5)   Less total Ineligibles as of
                                                                 (6)=   Eligible
Collateral    %      %   

(A) Collections (See Attached)

   ____     (7)x   Rate of Advance    %      %   

(B) Discounts Allowed

   ____     (8)=   Loan value    (A )    (B ) 

(C) Credit Memos

   ____     (9)   Other Loan Value (if Applicable)    (C )       

(D) Miscellaneous (-)

   ____     (10)   Total Loan Value =   

Total Gross deductions(3)

   ____        

A/R+Inv+Other:

A+B+C

  

  

                          (11)  

Maximum Revolving Credit =

Less of Total Loan Value

OR Total Approved Revolving Credit

                    (12)  

Maximum Borrowing Limit =

Lesser of Total Loan Value

OR Total Approved Revolving Line

             LOAN BALANCE UPDATE     (13)  

NEW AVAILABILITY

(Line 11 minus 12)

             Loan Outstanding as of              :          From Previous Report
   ____     Permitted Distributions in Current Year: $                        
Less Collections    ____    

Additional Advance

Requested

    Permitted Employee Distributions in Current Year: $                     

 

  

 

New Loan Balance This Report     Purchase of Goods for Parent in Current Month

(maximum of $250,000 per month):    $                     

  

  

              Plus L/C or Other Reserves    ____            Total Loans and
Other Liabilities    ____            From Previous Report    ____           
Carry to Line 12    ____           

--------------------------------------------------------------------------------

- 68 -

 

Pursuant to the terms of the Credit Agreement dated as of December 30, 2009
between us, we submit this Borrowing Base Certificate to you and certify that
the information set forth above and on any attachments to this Certificate is
true, correct and complete as of the date of this Certificate.

 

AMERICAN APPAREL CANADA WHOLESALE INC. By:  

 

  Name:   Title: AMERICAN APPAREL CANADA RETAIL INC. By:  

 

  Name:   Title:

--------------------------------------------------------------------------------

- 69 -

 

EXHIBIT “B”

COMPLIANCE CERTIFICATE

This Compliance Certificate is furnished to Bank of Montreal (the “Bank”)
pursuant to the Credit Agreement dated as of December 30, 2009, between American
Apparel Canada Wholesale Inc. and American Apparel Canada Retail Inc.
(individually and collectively, the “Borrower”) and the Bank (such credit
agreement, as amended, supplemented, restated or replaced from time to time, the
“Credit Agreement”). Unless otherwise defined herein, the terms used in this
Compliance Certificate have the meanings ascribed thereto in the Credit
Agreement.

The undersigned hereby certifies that:

 

(1) I am the duly appointed                                         of the
Borrower.

 

(2) I have reviewed the terms of the Credit Agreement and I have made, or have
caused to be made under my supervision, a detailed review of the transactions
and conditions of the Borrower during the accounting period covered by the
attached financial statements.

 

(3) The examinations described in paragraph 2 above did not disclose, and I have
no knowledge of, the existence of any condition or the occurrence of any event
which constitutes a Default or an Event of Default during or at the end of the
accounting period covered by the attached financial statements or as of the date
of this Certificate, except as set forth in paragraph (6) below.

 

(4) The financial statements required by Section 8.6 of the Credit Agreement and
furnished to you concurrently with this Certificate are, to the best of my
knowledge, true and complete as of the dates and for the periods covered
thereby.

 

(5) Schedule A attached hereto sets forth financial data and computations
evidencing the Borrower’s compliance with certain covenants of the Credit
Agreement, all of which data and computations are, to the best of my knowledge,
true, complete and correct and have been made in accordance with the relevant
Sections of the Credit Agreement.

 

(6) Described below are the exceptions, if any, to paragraph 3 above, which
list, in detail, the nature of the condition or event, the period during which
it has existed and the action which the Borrower has taken, is taking, or
proposes to take with respect to each such condition or event:

 

(7) The foregoing certifications, together with the computations set forth in
Schedule A attached hereto and the financial statements delivered to you with
this Certificate in support hereof, are made and delivered this
                     day of                     , 200    .

--------------------------------------------------------------------------------

- 70 -

 

AMERICAN APPAREL CANADA WHOLESALE INC. By:  

 

  Name:   Title: AMERICAN APPAREL CANADA RETAIL INC. By:  

 

  Name:   Title:

--------------------------------------------------------------------------------

- 71 -

 

Schedule A

to the Compliance Certificate delivered to Bank of Montreal (the “Bank”)
pursuant to the Credit Agreement dated as of December 30, 2009, between American
Apparel Canada Wholesale Inc. and American Apparel Canada Retail Inc.
(individually and collectively, the “Borrower”) and the Bank (such credit
agreement, as amended, supplemented, restated or replaced from time to time, the
“Credit Agreement”).

Dated as of                     , 200    .

Calculations as of                     , 200    .

 

A. Fixed Charge Coverage Ratio

 

1.   EBITDA for past twelve (12) months:    $                B1 2.   Income
taxes paid during the past twelve (12) months:    $                B2 3.  
Dividends paid during the past twelve (12) months:    $                B3 4.  
Unfinanced capital expenditures for the past twelve (12) months:   
$                B4 5.   Add lines B2, B3 and B4:    $                B5 6.  
Subtract Line B5 from Line B1:    $                B6

--------------------------------------------------------------------------------

- 72 -

 

7.   Interest Expense for past twelve (12) months:    $                B7 8.  
Scheduled principal repayments of long term debt for past twelve (12) months:   
$                B8 9.   Debt under Capital Lease:    $                B9 10.  
Subordinated Debt:    $                B10 11.   Shareholder loans and advances:
   $                B11 12.   Add lines B7, B8, B9, B10 and B11    $            
   B12 13.   Ratio of Line B6 to B12:                  :    B13      1.0   

Line B13 ratio must not be less than 1.25:1.0

--------------------------------------------------------------------------------

- 73 -

 

SCHEDULE 5.1

LIST OF COLLATERAL DOCUMENTS

 

A. By the Borrower

 

1. Notice of Intention to Give Security under Section 427 of the Bank Act.

 

2. Application for Credit and Promise to Give Security under Section 427 of the
Bank Act.

 

3. Security under Section 427(1) of the Bank Act.

 

4. Agreement as to Loans and Advances and Security Therefor.

 

5. Movable Hypothec on all present and future movable property

 

6. General Security Agreement on all present and future personal property

 

7. Deed of Collateral Hypothec on the Mont-Royal Property

 

B. By the Parent

 

8. Movable Hypothec and Pledge of all shares of the Borrower

 

C. By LLC

 

9. Trade-Marks Agreement among the Bank, LLC and the Borrower concerning the use
of trademarks

 

10. Sale of Goods Agreement among the Bank, LLC and the Borrower concerning the
sale of goods by LLC to the Borrower

--------------------------------------------------------------------------------

- 74 -

 

SCHEDULE 6.1

LOCATIONS AND TRADE NAMES OF THE BORROWER

1. Places of Business of the Borrower

 

Name of the Borrower

  

Address of Domicile

and Chief Executive

Office

  

Addresses of Other Places of

Business

American Apparel Canada Wholesale Inc.   

5430 Ferrier Street

Mont-Royal QC

H4P 1M2

  

1001 Mont Royal

P1 #807

Montréal QC H3A 1P2

American Apparel Canada Retail Inc.   

5430 Ferrier Street

Mont-Royal QC

H4P 1M2

  

967 Mount Royal

Avenue East

Montréal QC H2J 1X4

     

1455 Rue Peel #127

Montréal QC H3H 1L9

     

5184-5190 Côte des Neiges

Montréal QC H3T 1X8

     

1651 Rue St Catherine W.

Montréal QC H3H 1L9

     

4001 Rue St Denis

Montréal QC H2W 2M4

     

1205 Ste-Catherine East

Montréal QC H2L 2H1

     

Second floor, room no. 16

and 17

4001 Rue St Denis

Montréal QC H2W 2M4

     

Storage Space No. 319

1455 Rue Peel #127

Montréal QC H3H 1L9

     

4502 rue Boyer

(second floor)

Montréal QC H2J 3E2

--------------------------------------------------------------------------------

- 75 -

 

     

1392-1394 Sainte-Catherine

Street West, Montreal QC

H3G 1P8

     

1551 Metcalfe Street, suite

1500, Montreal QC H3A 1X6

     

Unit B003B

3035 boul. Le Carrefour

Laval QC H7T 1C7

     

Storage space S100E

Fairview Shopping Center

Pointe Claire Store

     

Fairview Shopping Center

Pointe Claire Store No. C-

003B

     

1183 rue Saint- Jean

Québec QC G1R 1S3

     

Premises #0055, Place Laurier

2700 boul Laurier

Ste-Foy QC G1V 2L8

     

4945 Sherbrooke St West

Westmount QC H3Z 1H2

     

499 Queen Street West

Toronto ON MSV 284

     

533-535 College St. West

Toronto ON M6G 1A8

     

Unit C28/ C29

50 Bloor Street West

Toronto ON M4W 3L8

     

2466-2468 Yonge Street

Toronto ON M4P 2H5

     

338 Yonge Street

Toronto ON M5B 1R8

     

No. 1893 – Sherway Gardens

25 The West Mall, Box 101

Toronto ON M9C 1B8

 

--------------------------------------------------------------------------------

- 76 -

 

    

Unit 234A

Yorkdale Shopping Center

1 Yorkdale Road

Toronto ON M6A 3A1

    

S 1894 – Sherway Gardens

25 The West Mall, Box 101

Toronto ON M9C 1B8

    

B239A – The Promenade

Shopping Centre

1 Promenade Circle

Thornhill ON L4J 4P8

    

SC11B – The Promenade

Shopping Centre

1 Promenade Circle

Thornhill ON L4J 4P8

    

Rideau Center Mall

Unit No. 226

Ottawa ON K1N 9J7

    

400 Richmond Road

Ottawa ON K2A 0E8

    

No. S042, Rideau Center

Mall, Unit No. 226

Ottawa ON KIN 9J7

    

No. S046, Rideau Center

Mall, Unit No. 226

Ottawa ON KIN 9J7

    

274 Princess St.

Kingston ON K7L 1B5

    

551 Richmond Street

London ON N6A 3E9

    

Unit 273 – Vaughan Mills

Shopping Centre 1 Bass Pro Mills Drive Vaughan ON L4K 5W4

--------------------------------------------------------------------------------

- 77 -

 

     

10750-82nd Avenue

Edmonton AB T6E 2A8

     

Unit S-233 – Store no.: 2305

West Edmonton Mall 8882

170 Street

Edmonton AB T5T 4M2

     

Unit ZR017 West Edmonton

Mall 8882 – 170 Street

Edmonton AB T5T 4M2

     

1429 – 17th Ave SW

Calgary AB T2T 0C6

     

130 - 10th Street N.W.

Calgary AB T2N 1V3

     

Unit SF04, 3625 Shaganappi

Trail NW, Calgary AB T3A

0E2

     

Unit D011B

3625 Shaganappi Trail NW

Calgary AB T3A 0E2

     

872 Granville St

Vancouver BC V6Z 1K3

     

3050-3098 Granville St.

Vancouver BC

     

2242 West 4th Avenue

Vancouver BC V6J 1J4

     

Unit #1003, Park Royal

Shopping Center

2002 Park Royal South, West

Vancouver BC V7T 2W4

     

1053 Robson

Vancouver BC V6E 1A9

     

1071 Robson

Vancouver BC V6E 1A9

     

1156-1160 Robson

Vancouver BC V6E 1B2

 

--------------------------------------------------------------------------------

- 78 -

 

     

Premises #218, Metrotown

Centre, 4800 Kingsway

Burnaby BC V5H 4J2

     

441 Bernard Avenue

Kelowna BC V1Y 6N8

     

566 Johnson Street, Victoria

BC V8W 1M3

     

108 Osborne Street

Winnipeg MB R3L 1Y5

     

130 – 21st Street East

Saskatoon SK S7K OB6

     

5466 Spring

Garden Road

Halifax NS

2. Permitted Collateral Locations       Name of the Borrower       Addresses of
Other Collateral Locations

 

     

 

American Apparel Canada Wholesale Inc.      

1001 Mont Royal

P1 #807

Montréal QC H3A 1P2

American Apparel Canada Retail Inc.      

967 Mount Royal

Avenue East

Montréal QC H2J 1X4

     

1455 Rue Peel #127

Montréal QC H3H 1L9

     

5184-5190 Côte des Neiges

Montréal QC H3T 1X8

--------------------------------------------------------------------------------

- 79 -

 

     

1651 Rue St Catherine W.

Montréal QC H3H 1L9

     

4001 Rue St Denis

Montréal QC H2W 2M4

     

1205 Ste-Catherine East

Montréal QC H2L 2H1

     

Second floor, room no. 16

and 17

4001 Rue St Denis

Montréal QC H2W 2M4

     

Storage Space No. 319

1455 Rue Peel #127

Montréal QC H3H 1L9

     

4502 rue Boyer

(second floor)

Montréal QC H2J 3E2

     

1392-1394 Sainte-Catherine

Street West, Montreal QC

H3G 1P8

     

1551 Metcalfe Street, suite

1500, Montreal QC H3A 1X6

     

Unit B003B

3035 boul. Le Carrefour

Laval QC H7T 1C7

     

Storage space S100E

Fairview Shopping Center

Pointe Claire Store

     

Fairview Shopping Center

Pointe Claire Store No. C-

003B

     

1183 rue Saint- Jean

Québec QC G1R 1S3

--------------------------------------------------------------------------------

- 80 -

 

     

Premises #0055, Place Laurier

2700 boul Laurier

Ste-Foy QC G1V 2L8

     

4945 Sherbrooke St West

Westmount QC H3Z 1H2

     

499 Queen Street West

Toronto ON MSV 284

     

533-535 College St. West

Toronto ON M6G 1A8

     

Unit C28/ C29

50 Bloor Street West

Toronto ON M4W 3L8

     

2466-2468 Yonge Street

Toronto ON M4P 2H5

     

338 Yonge Street

Toronto ON M5B 1R8

     

No. 1893 – Sherway Gardens

25 The West Mall, Box 101

Toronto ON M9C 1B8

     

Unit 234A

Yorkdale Shopping Center

1 Yorkdale Road

Toronto ON M6A 3A1

     

S 1894 – Sherway Gardens

25 The West Mall, Box 101

Toronto ON M9C 1B8

     

B239A – The Promenade

Shopping Centre

1 Promenade Circle

Thornhill ON L4J 4P8

     

SC11B – The Promenade

Shopping Centre

1 Promenade Circle

Thornhill ON L4J 4P8

--------------------------------------------------------------------------------

- 81 -

 

     

Rideau Center Mall

Unit No. 226

Ottawa ON K1N 9J7

     

400 Richmond Road

Ottawa ON K2A 0E8

     

No. S042, Rideau Center

Mall, Unit No. 226

Ottawa ON KIN 9J7

     

No. S046, Rideau Center

Mall, Unit No. 226

Ottawa ON KIN 9J7

     

274 Princess St.

Kingston ON K7L 1B5

     

551 Richmond Street

London ON N6A 3E9

     

Unit 273 – Vaughan Mills

Shopping Centre

1 Bass Pro Mills Drive

Vaughan ON L4K 5W4

     

10750-82nd Avenue

Edmonton AB T6E 2A8

     

Unit S-233 – Store no.: 2305

West Edmonton Mall 8882

170 Street

Edmonton AB T5T 4M2

     

Unit ZR017 West Edmonton

Mall 8882 – 170 Street

Edmonton AB T5T 4M2

     

1429 – 17th Ave SW

Calgary AB T2T 0C6

     

130 – 10th Street N.W.

Calgary AB T2N 1V3

--------------------------------------------------------------------------------

- 82 -

 

     

Unit SF04, 3625 Shaganappi

Trail NW, Calgary AB T3A

0E2

     

Unit D011B

3625 Shaganappi Trail NW

Calgary AB T3A 0E2

     

872 Granville St

Vancouver BC V6Z 1K3

     

3050-3098 Granville St.

Vancouver BC

     

2242 West 4th Avenue

Vancouver BC V6J 1J4

     

Unit #1003, Park Royal

Shopping Center

2002 Park Royal South, West

Vancouver BC V7T 2W4

     

1053 Robson

Vancouver BC V6E 1A9

     

1071 Robson

Vancouver BC V6E 1A9

     

1156-1160 Robson

Vancouver BC V6E 1B2

     

Premises #218, Metrotown

Centre, 4800 Kingsway

Burnaby BC V5H 4J2

     

441 Bernard Avenue

Kelowna BC V1Y 6N8

     

566 Johnson Street, Victoria

BC V8W 1M3

     

108 Osborne Street

Winnipeg MB R3L 1Y5

     

130 - 21st Street East

Saskatoon SK S7K OB6

--------------------------------------------------------------------------------

- 83 -

 

     

5466 Spring

Garden Road

Halifax NS

3. Trade Names       Name of the Borrower       Trade Names

 

     

 

American Apparel Canada Wholesale Inc.       American Apparel American Apparel
Canada Retail Inc.       American Apparel

 

--------------------------------------------------------------------------------

- 84 -

 

SCHEDULE 6.9

TAX DISCLOSURE

None.

--------------------------------------------------------------------------------

- 85 -

 

SCHEDULE 8.10

PERMITTED LIENS

 

•  

A movable hypothec in the amount of $1,000,000 granted by Wholesale in favour of
Warren Baer and registered at the Register of Personal and Movable Real Rights
on January 24, 2005 under number 05-0034038-0001.

 

•  

An immovable hypothec in the amount of $427,500 granted to HSBC Bank Canada by
American Apparel Holdings Inc. (now American Apparel Canada Wholesale Inc.)
pursuant to the Conventional Mortgage/Fixed Rate (Quebec) executed before Mtre
Norman Malus Notary, and registered at the Land Register for the Registration
Division of Montreal under number 11846089.