Exhibit 10.6

 

RESTRICTIVE COVENANT AGREEMENT

 

THIS RESTRICTIVE COVENANT AGREEMENT (this “Agreement”), dated July 31, 2005, by
Hubert Guez (“Stockholder”) in favor and for the benefit of Cygne Designs, Inc.,
a Delaware corporation (“Cygne”), and its subsidiaries (Cygne and such
subsidiaries are collectively referred to herein as the “Cygne Entities”).

 

W I T N E S S E T H:

 

WHEREAS, Cygne is a manufacturer of private label women’s career and casual
apparel, including denim-related clothing products (such business of selling
denim-related clothing products as conducted by Cygne prior to the Closing Date
is herein referred to as the “Cygne Business”);

 

WHEREAS, pursuant to the terms and conditions of that certain Asset Purchase
Agreement, dated July 31, 2005 (the “Purchase Agreement”), by and among Commerce
Clothing Company LLC, a California limited liability company (“Commerce”),
Stockholder, 215 GZ Partners, Guez Living Trust dated December 6, 1996, Griffin
James Aron Guez Irrevocable Trust dated January 1, 1996, Stephan Avner Felix
Guez Irrevocable Trust dated January 1, 1996, and Cygne, Cygne has purchased
certain of the assets of Commerce relating to its business of selling and
distributing branded and private label denim clothing (capitalized terms used
but not defined herein shall have the meanings given to such terms in the
Purchase Agreement);

 

WHEREAS, as a member of Commerce, Stockholder has obtained extensive and
valuable knowledge and confidential information concerning the Acquired
Business; and

 

WHEREAS, as a condition to the obligation of Cygne to consummate the
transactions contemplated by the Purchase Agreement, and to enable the Cygne
Entities to secure more fully the benefits of the acquisition of the Assets and
the Acquired Business, Cygne has required that Stockholder enter into this
Agreement, and Stockholder is entering into this Agreement in order to induce
Cygne to consummate the transactions contemplated by the Purchase Agreement.

 

AGREEMENT

 

In order to induce Cygne to consummate the transactions contemplated by the
Purchase Agreement, in consideration of the amounts to be received by
Stockholder herein, and for other good and valuable consideration, the receipt,
adequacy and sufficiency of which is hereby acknowledged, Stockholder, intending
legally to be bound, agrees as follows:

 

1. Non-Disclosure of Confidential Information. Except for such actions necessary
to ensure the compliance by Stockholder of its obligations under the Purchase
Agreement and the Transaction Documents, from and after the Closing Date,
Stockholder covenants and agrees that, except as may be required by applicable
law, it shall not disclose any Confidential Information (as defined herein).
This limitation upon disclosure does not apply to information (a) readily
available to competitors of the Cygne Business and the Acquired Business (the
Cygne Business and the Acquired Business as conducted on the date of this
Agreement are together referred to herein as the “Competitive Business”) through
means other than as the result of unauthorized disclosure and without assistance
of Stockholder in violation of this Agreement, (b) which is

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publicly known at the time of disclosure to Stockholder, or (c) that becomes
publicly known or available thereafter other than by means in violation of this
Agreement. For the purposes of this Agreement, “Confidential Information” means
confidential information relating to the marketing strategies, pricing policies
or characteristics, customers, suppliers and customer and supplier information,
customer and supplier lists, product or product specifications, Intellectual
Property of any Cygne Entity (including the Purchased Intellectual Property),
designs, manufacturing, testing or assembly processes or costs, costs of
materials, business or business prospects, plans, proposals, codes, marketing
studies, research, reports, investigations, or other information of similar
character which relate to the Competitive Business.

 

2. Non-Competition. Except for such actions necessary to ensure the compliance
by Stockholder of its obligations under the Purchase Agreement and the
Transaction Documents, and except as otherwise set forth herein, Stockholder
agrees that during the period commencing on the Closing Date and terminating on
the fifth anniversary of the Closing Date (the “Noncompetition Period”),
Stockholder shall not directly or through any Affiliate (as defined below),
whether for compensation or without compensation, directly or indirectly, as an
owner, principal, partner, member, shareholder, independent contractor,
consultant, joint venturer, investor, licensor, lender or in any other capacity
whatsoever, alone, or in association with any other Person, carry on, be engaged
or take part in, or render services (other than services which are generally
offered to third parties and do not compete with the Competitive Business) or
advice to, own, share in the earnings of, invest in the stocks, bonds or other
securities of, or otherwise become financially interested in, any Person engaged
in the Competitive Business anywhere in the United States (including Puerto
Rico), Canada, Latin America, Brazil, Mexico, the Caribbean, the United Kingdom,
Japan or China. For purposes of this Agreement, an “Affiliate” means an entity
in which the Stockholder or his spouse or children owns or controls, directly or
indirectly, individually or collectively, a majority of the outstanding voting
securities of or other ownership interests in such entity or otherwise has the
right to appoint a majority of the board of directors, managers or other like
governing body; provided that, notwithstanding the foregoing, the term
“Affiliate” shall not include Innovo Group, Inc., or any entity controlled by or
affiliated with Stockholder’s brothers. Notwithstanding the foregoing, nothing
herein shall prevent (i) AZT International S.A. de C.V., Apparel Distribution
Services, Azteca or any affiliate thereof or other entity in which Stockholder
has an ownership interest from continuing to manufacture denim-related clothing
products for and on behalf of any party, subject to its ability to fulfill its
obligations under the Supply Agreement, (ii) Stockholder from acting as a third
party investment banker or advisor with respect to finding, buying, selling or
otherwise packaging and marketing companies, including, without limitation,
denim clothing product companies for purchase or sale; and (ii) Stockholder from
owning (A) less than or equal to five percent (5%) of the outstanding capital
stock of a corporation whose stock is traded on an established stock exchange or
quoted on NASDAQ or any other over the counter market, or (B) less than or equal
to twenty percent (20%) of the outstanding capital stock, partnership interest
or membership interest in a privately-held corporation, limited liability
company, partnership or other privately-held entity. Any activities by
Stockholder undertaken in connection with clause (ii) of this Section 2 shall
not be deemed to be a violation or breach of Section 2, 3 or 4 of this
Agreement.

 

3. Non-Diversion. Stockholder covenants and agrees that during the
Noncompetition Period, he and his Affiliates shall not, directly or indirectly
through any representative or agent: (a) solicit, or contact for the purpose of
soliciting, any customer of the

 

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Competitive Business which has actively done business with any of the Cygne
Entities during the Noncompetition Period or with Commerce (with respect to the
Acquired Business) in the last two years prior to the Closing Date (a
“Customer”), for the purpose of the sale to or servicing of any Customer where
such sale or servicing is in respect of products and services which are the same
as or substantially similar to the Competitive Business; (b) make use of any
list of clients of the Competitive Business for the purpose of competing or
attempting to persuade any Customer to discontinue or alter its relationship
with any of the Cygne Entities; or (c) attempt to persuade any supplier or
distributor to the Competitive Business to discontinue or alter its relationship
with any of the Cygne Entities.

 

4. Non-Recruitment. Stockholder agrees that during the Noncompetition Period,
Stockholder shall not, directly or indirectly, hire or initiate contact for the
purpose of hiring away any executive employee of any Cygne Entity, provided,
that this restriction shall not apply to any employee of a Cygne Entity who
responds to solicitations made by means of general advertisement (e.g. newspaper
advertisements).

 

5. Percentage Payments. In return for Stockholder’s covenants hereunder, during
the Noncompetition Period, including any renewal thereof, Cygne will pay to
Stockholder one percent (1%) of the net sales of the Cygne Entities, not
including non-denim sales to New York and Co. (Lerner) and not including sales
of denim-related clothing products resulting from subsequent business
acquisitions. For purposes of this Agreement, net sales shall mean net sales as
reported in accordance with GAAP on Cygne’s periodic reports filed from time to
time with the Securities and Exchange Commission. Such payments shall be made to
Stockholder quarterly, within sixty (60) days of the end of each applicable
fiscal quarter.

 

6. Remedies.

 

(a) Stockholder acknowledges that should it violate any of the covenants
contained in Sections 1 through 4 of this Agreement (collectively, the
“Restrictive Covenants”), it will be difficult to determine the resulting
damages to the Cygne Entities and, in addition to any other remedies the Cygne
Entities may have, the Cygne Entities shall be entitled to temporary injunctive
relief without being required to post a bond and permanent injunctive relief
without the necessity of proving actual damages. Stockholder shall be liable to
pay all costs, including reasonable attorneys’ fees and expenses, that the Cygne
Entities may incur in enforcing or defending any of the Restrictive Covenants
against Stockholder where the Cygne Entities succeed in enforcing any of the
Restrictive Covenants. The Cygne Entities may elect to seek one or more of these
remedies at their sole discretion on a case by case basis. Failure to seek any
or all remedies in one case shall not restrict the Cygne Entities from seeking
any remedies in another situation. Such action by the Cygne Entities shall not
constitute a waiver of any of their rights.

 

(b) In the event that the Cygne Entities, or any of them, shall at any time fail
to make timely and proper payment of the percentage payments to Stockholder
pursuant to Section 5 of this Agreement, including under the Promissory Note or
in the event any Event of Default occurs (as defined in such Promissory Note),
other than by reason of that Subordination Agreement, dated as of July 31, 2005,
between Cygne and Guez made in favor of Milberg Factors, or breaches the Supply
Agreement or the Transfer Restriction Agreement, and the

 

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Cygne Entities fail to cure the applicable breach, violation or failure, if
curable, within 45 days after receipt of written notice from Stockholder or, if
such breach is not curable within 45 days, have not begun the process to cure
such breach, then in addition to all other rights and remedies Stockholder may
have at law or in equity, Stockholder shall have the right, at its option, to
(i) terminate this Agreement effective immediately without further notice; or
(ii) toll and suspend the running of the period of restriction contained in this
Agreement for the duration of such breach, which shall automatically recommence
when such breach is remedied. In no event shall Stockholder be under any
obligation to refund any portion of the percentage payments previously received
from the Cygne Entities pursuant to Section 5 of this Agreement.

 

7. Severability and Modification of Any Unenforceable Covenant. It is the intent
of Stockholder that each of the Restrictive Covenants be read and interpreted
with every reasonable inference given to its enforceability. However, it is also
Stockholder’s intent that if any term, provision or condition of the Restrictive
Covenants is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the provisions thereof shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
Finally, it is also Stockholder’s intent that if a court should determine any of
the Restrictive Covenants are unenforceable because of over-breadth, then the
court shall modify said covenant so as to make it reasonable and enforceable
under the prevailing circumstances.

 

8. Agreement Not to Challenge. Stockholder acknowledges that Cygne, in executing
the Purchase Agreement and the Transaction Documents, placed significant
reliance on Stockholder’s compliance with the Restrictive Covenants.
Accordingly, Stockholder (a) will not make any claim that any of the Restrictive
Covenants is unenforceable, and (b) will not challenge or commence or institute
any claim, lawsuit or action (or assert any counterclaim or cross claim) seeking
to invalidate or reduce the scope of any of the Restrictive Covenants.

 

9. Tolling; Renewal. In the event of any breach by Stockholder of any
Restrictive Covenant, the running of the period of restriction shall be
automatically tolled and suspended for the duration of such breach, and shall
automatically recommence when such breach is remedied in order that the Cygne
Entities shall receive the full benefit of the compliance by Stockholder with
each of the Restrictive Covenants. This Agreement may be renewed by Stockholder
(and the Noncompetition Period extended) for one additional five year period
upon at least 90 days prior written notice to Cygne; provided that such notice
is given prior to the 90th day prior to the expiration of the initial
Noncompetition Period.

 

10. No Other Defenses. Stockholder agrees that the Restrictive Covenants shall
be enforced independently of any other obligations between Cygne and
Stockholder, and that the existence of any other claim or defense shall not
affect the enforceability of the Restrictive Covenants or the remedies provided
herein. The Restrictive Covenants shall be in addition to and shall not replace
any other agreement relating to the subject matter hereof that Stockholder may
have at any time with any Cygne Entity.

 

11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAWS.

 

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12. Waiver of Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF
STOCKHOLDER AND CYGNE HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.

 

13. Forum Selection and Consent to Jurisdiction. EACH OF STOCKHOLDER AND CYGNE
AGREES THAT ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN
CONNECTION WITH THIS AGREEMENT SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN
STATE OR FEDERAL COURTS OF LOS ANGELES COUNTY, CALIFORNIA. EACH OF STOCKHOLDER,
CYGNE AND EACH OF CYGNE’S AFFILIATES HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO
THE JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, CALIFORNIA. EACH OF
STOCKHOLDER AND CYGNE HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO
ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM.

 

14. Waiver. No failure on the part of any Cygne Entity to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part of any
Cygne Entity in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy. No Cygne Entity shall be deemed to have waived any
claim arising out of this Agreement, or any power, right, privilege or remedy
under this Agreement, unless the waiver of such claim, power, right, privilege
or remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of the Person from whom such waiver is sought; and any such
waiver shall not be applicable or have any effect except in the specific
instance in which it is given.

 

15. Successors and Assigns. Each Cygne Entity may freely assign any or all of
its rights under this Agreement, at any time, in whole or in part, to any Person
without obtaining the consent or approval of Stockholder or of any other Person.
This Agreement shall be binding upon Stockholder and his heirs, executors,
estate, personal representatives, successors and assigns, and shall inure to the
benefit of each Cygne Entity.

 

16. Further Assurances. Stockholder shall execute and/or cause to be delivered
to each Cygne Entity such instruments and other documents, and shall take such
other actions, as Cygne or any such affiliate of Cygne may reasonably request at
any time for the purpose of carrying out or evidencing any of the provisions of
this Agreement.

 

17. Interpretation. The headings preceding the text of Sections included in this
Agreement and the headings to this Agreement are for convenience only and shall
not be deemed part of this Agreement or be given any effect in interpreting this
Agreement. The use of the masculine, feminine or neuter gender herein shall not
limit any provision of this Agreement. The

 

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use of the terms “including” or “include” shall in all cases herein mean
“including, without limitation” or “include, without limitation,” respectively.
Unless otherwise indicated, references to Sections shall refer to those portions
of this Agreement.

 

18. No Presumption Against Drafter. Both Cygne and Stockholder have jointly
participated in the negotiation and drafting of this Agreement. In the event of
any ambiguity or a question of intent or interpretation arises, this Agreement
shall be construed as if drafted jointly by Cygne and Stockholder and no
presumptions or burdens of proof shall arise favoring any party hereto by virtue
of the authorship of any of the provisions of this Agreement.

 

19. Amendment. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of Stockholder and Cygne.

 

IN WITNESS WHEREOF, Stockholder has duly executed and delivered this Agreement
as of the date first above written.

 

STOCKHOLDER:

/s/ Hubert Guez

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Hubert Guez

5804 E. Slauson Avenue

Commerce, California 90040

Telephone No.: (    )

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Facsimile: (    )

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CYGNE DESIGNS, INC. By:  

/s/ Bernard Manuel

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Name:   Bernard Manuel Title:   CEO Telephone No.:  

 

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Facsimile:  

 

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