Exhibit 10.5

 

SUPPLY AGREEMENT

 

This SUPPLY AGREEMENT (“Supply Agreement”), dated July 31, 2005 (“Effective
Date”), is made by and between AZT International S. de R.L. de C.V., a Mexico
corporation (“AZT”), an affiliate of Commerce Clothing Company, LLC, a
California limited liability company with its principal executive offices at
5804 East Slauson Avenue, Commerce, California 90040 (“Commerce”), and Cygne
Designs, Inc., a Delaware corporation (“Cygne”), having its principal executive
office at 11 West 42nd Street, New York, New York 10036.

 

RECITALS

 

  A. AZT is, among other things, a manufacturer of denim-related products.

 

  B. Cygne is, among other things, a seller of denim-related products.

 

  C. Commerce and Cygne have entered into a separate Asset Purchase Agreement
dated the same date as this Supply Agreement, pursuant to which Cygne has
acquired from Commerce certain assets and properties formerly used by Commerce
in the operation of its business (the “Business”) of selling and distributing
branded and private label denim-related products.

 

  D. The parties now desire to enter into this non-exclusive Supply Agreement
whereby AZT will manufacture and supply certain products for Cygne under the
terms and conditions set forth in this Supply Agreement, and Cygne will market
and sell such products to its customers and the former customers of the
Business.

 

NOW, THEREFORE, and in consideration of the mutual promises, covenants,
representations and good and valuable consideration set forth herein, the
adequacy of which is hereby acknowledged, the parties hereto agree as follows:

 

ARTICLE 1. PRODUCTS, ORDERS AND PRICING

 

1.1 Manufacturing Services. At the request of Cygne, AZT shall supply to Cygne
the denim products described in Exhibit A attached hereto (the “Denim
Products”), during the Term of this Supply Agreement subject to the terms and
conditions hereinafter set forth. Notwithstanding anything herein to the
contrary, Cygne shall not be obligated to utilize AZT’s manufacturing or supply
services with respect to any minimum amount of Denim Products or at all.
Notwithstanding anything herein to the contrary, AZT shall have the right, in
its sole discretion, to outsource to third parties the manufacturing of any
Denim Products to be supplied by AZT to Cygne hereunder.

 

1.2 Purchase Price. AZT agrees that the purchase price (the “AZT Price”) of the
Denim Products purchased from AZT by Cygne or its affiliates shall allow Cygne
(i) for branded Denim Products, an initial Gross Margin (as defined below) on
the initial offering line price per unit to its wholesale customers, net of
discounts granted to customers, which discounts are determined on a customer by
customer basis and are added back to determine the initial offering line price
per unit, but without adjustment for any chargeback deductions and allowances
(the “Cygne Wholesale Price”) of 30% and (ii) for private label Denim Products,
an

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initial Gross Margin on the Cygne Wholesale Price of 15%. For purposes of this
Supply Agreement, “Gross Margin” shall mean the difference between the Cygne
Wholesale Price and the AZT Price divided by the Cygne Wholesale Price. The
parties acknowledge that for the styles currently being offered by Commerce, the
initial offering line price per unit to its wholesale customers before discounts
and allowances (the “Commerce Wholesale Price”) for HIPPIE and DONNA LONGO is
approximately between $23.00 and $28.00 per Denim Product. The parties
acknowledge that for the styles currently being offered by Commerce, the
Commerce Wholesale Price for HINT JEANS and MANHATTAN BLUES is approximately
between $14.10 and $16.10 per Denim Product. The parties acknowledge that for
the styles currently being offered by Commerce, the Commerce Wholesale Price for
private label Denim Products is approximately between $11.00 and $13.00 per
Denim Product. At the beginning of each season or market, the Cygne Wholesale
Prices shall be subject to the prior written consent of AZT, which consent shall
not be unreasonably withheld. The parties acknowledge that in addition to the
foregoing styles currently being offered by Commerce, Cygne may adopt additional
styles after the date hereof to be manufactured or supplied hereunder, in which
case, the Cygne Wholesale Prices with respect to any supply hereunder for each
such additional style shall be subject to the prior written consent of AZT,
which consent shall not be unreasonably withheld or delayed.

 

1.3 Compliance with Law. All of the Denim Products to be manufactured or
supplied hereunder shall be made in accordance with all applicable laws and
regulations.

 

1.4 Placing of Subsequent Orders. During the Term or any Renewal Term of this
Supply Agreement, on a monthly basis, Cygne shall submit written purchase orders
to AZT clearly setting forth the Denim Products to be purchased by Cygne and
requested shipping dates for the ordered Denim Products. All purchase orders
shall be in accordance with the terms and conditions of this Supply Agreement.
In the event of any conflict between the terms of this Supply Agreement and the
terms of any purchase order issued by Cygne, the terms of this Supply Agreement
will govern. In the event that the aggregate amount of all purchase orders
outstanding from Cygne at any given time equals or exceeds $7,500,000, then, at
the written request of AZT, Cygne shall advance AZT an amount equal to fifty
percent (50%) of any amount exceeding $7,500,000. Any such advance paid to AZT
from time to time shall reduce the aggregate amount of the AZT Price due and
owing by Cygne with respect to any outstanding purchase orders.

 

ARTICLE 2. TERM AND TERMINATION

 

2.1 Term. The term of this Supply Agreement shall continue from the Effective
Date until the earlier of (i) two (2) years after the Effective Date and (ii)
the date this Supply Agreement is otherwise terminated in accordance with its
terms (the “Initial Term”).

 

2.2 Termination. This Supply Agreement may be immediately terminated by either
party upon (i) failure of the other party to comply with laws and regulations
which materially affect such party’s contracting rights or reputation and where
such failure is not cured within thirty (30) days of receipt of written notice
thereof; (ii) any material breach of this Supply Agreement by the other party
which is not cured within thirty (30) days of receipt of written notice thereof
or (iii) the mutual agreement of the parties.

 

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2.3 Renewal Term. This Agreement will automatically renew for consecutive one
(1) year terms under the same terms and conditions set forth herein (each a
“Renewal Term”) unless terminated by either party upon delivering written notice
to the other party at least ninety (90) days but not more than one hundred
twenty (120) days prior to the end of the then existing term. The Renewal
Term(s), if any, and the Initial Term are collectively referred to herein as the
“Term.”

 

2.4 Rights on Termination or Expiration. In the event of the termination or
expiration of this Supply Agreement, in addition to all other remedies available
at law or in equity, the parties hereto shall have the following rights and
obligations:

 

  (a) Within ten (10) days after the termination or expiration of this Supply
Agreement, each party shall return to the other any and all proprietary and
Confidential Information of such party then in its possession or under its
control.

 

  (b) Termination or expiration of this Supply Agreement shall not release any
party from the obligation to make payment to the other party of all amounts then
and thereafter due and payable under this Agreement within thirty (30) days of
termination or expiration, as the case may be.

 

  (c) Unless Cygne otherwise instructs AZT in writing, AZT shall fulfill all
outstanding purchase orders submitted by Cygne in accordance with Section 1.4
hereof and approved by AZT under Article 3 as of the last date of the then
current Term.

 

  (d) Any amounts advanced to AZT under Section 1.4 hereof in excess of the
amounts required to pay the AZT Price due for outstanding purchase orders which
are fulfilled by AZT in accordance with the terms hereof, shall be promptly
refunded to Cygne.

 

ARTICLE 3. DELIVERY. CYGNE SHALL PROVIDE AZT WITH REASONABLE LEAD TIME FOR THE
FULFILLMENT AND DELIVERY OF ORDERS FOR PURCHASE AND, SUBJECT TO SECTION 5.1
HEREOF, AZT SHALL TIMELY FULFILL ORDERS FOR PURCHASES RECEIVED FROM CYGNE AND
SHALL DELIVER THE PRODUCTS WHEREVER SO INSTRUCTED BY CYGNE ACCORDING TO A
REASONABLE DELIVERY SCHEDULE. THE PARTIES HERETO SHALL IN GOOD FAITH NEGOTIATE
SUCH DELIVERY TERMS. NOTWITHSTANDING ANY PORTION OF THIS AGREEMENT TO THE
CONTRARY, NO PURCHASE ORDER, OR ANY TERMS THEREIN, SHALL BE DEEMED ACCEPTED
UNTIL AZT PROVIDES WRITTEN NOTICE THEREOF.

 

ARTICLE 4. QUALITY CONTROL. THE QUALITY OF THE PRODUCTS, INCLUDING, AMONG OTHER
THINGS, THE TECHNICAL SPECIFICATIONS IN MANUFACTURING THE PRODUCTS, SHALL MEET
THE QUALITY REQUIREMENTS OF CYGNE’S CUSTOMERS THAT ARE PROVIDED TO AZT OR
OTHERWISE

 

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REASONABLY UNDERSTOOD BY AZT PRIOR TO ACCEPTANCE OF ANY PURCHASE ORDER SOLELY TO
THE EXTENT THE FOREGOING RELATE TO THE DENIM PRODUCTS.

 

ARTICLE 5. INVOICING AND FORM OF PAYMENT

 

5.1 Invoices:

 

  (a) AZT shall invoice Cygne upon each shipment of goods made against a Cygne
purchase order. Payments by Cygne shall be made directly to AZT on or before the
date which is five days after the date of receipt of such invoice.

 

  (b) If Cygne fails to pay any fees or charges when due, AZT may charge Cygne a
late payment charge of one-half percent (1/2%) per month on the past due balance
and/or (ii) suspend shipment of all or any portion of any outstanding orders
from Cygne that have been approved by AZT and demand payment of all amounts due
and owing to AZT for fulfilled purchase orders within thirty (30) days of the
date payment was due under Section 5.1(a) hereof, in addition to all other
rights and remedies available at law or in equity.

 

5.2 Form of Payments. Cygne shall remit payments directly to AZT in the form of
cash via a wire transfer.

 

ARTICLE 6. RISK OF LOSS. CYGNE SHALL BEAR THE RISK OF LOSS OF, OR DAMAGE TO, ANY
OF THE DENIM PRODUCTS AFTER THE DENIM PRODUCTS HAVE BEEN PLACED ON TRUCKS AT THE
LOADING DOCK AT AZT’S PLANT LOCATED AT REFORMA SUR NO. 27, PANZACOLA, TLAXCALA,
MEXICO 90796 (THE “PLANT”) FOR TRANSPORT TO CYGNE’S CUSTOMERS OR OTHER PLACE
DESIGNATED BY CYGNE. AZT SHALL BEAR THE RISK OF LOSS FOR THE DENIM PRODUCTS
PRIOR TO SUCH TIME (FOB AZT’S PLANT).

 

ARTICLE 7. INSPECTION OF THE PRODUCTS. CYGNE AND ITS REPRESENTATIVES MAY, UPON
REASONABLE NOTICE AND DURING REGULAR BUSINESS HOURS, INSPECT THE MANUFACTURE OF
DENIM PRODUCTS AND CONDUCT RELATED QUALITY CONTROL; PROVIDED, THAT SUCH RIGHT OF
INSPECTION SHALL BE LIMITED TO ONE INSPECTION PER QUARTER OF EACH YEAR. IN
CONNECTION THEREWITH, AZT SHALL PROVIDE REASONABLE ASSISTANCE AND ACCESS TO
AZT’S FACILITIES, PERSONNEL AND MATERIALS. AZT SHALL COMPLY WITH CYGNE’S
REASONABLE QUALITY AND INSPECTION PROCEDURES.

 

ARTICLE 8. MUTUAL REPRESENTATIONS AND WARRANTIES

 

8.1 Each party represents and warrants to the other that it has the right and
authority to enter into this Supply Agreement and to perform all of its
respective obligations and

 

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undertakings herein. Each party further represents and warrants to the other
that (i) the rights and privileges granted or to be granted hereunder are and
will at all times be free and clear of any liens, claims, charges or
encumbrances; and (ii) neither party has done or omitted to do, nor will do or
omit to do, any act or thing that would or might impair, encumber, or diminish
the other party’s full enjoyment of the rights and privileges granted and to be
granted under this Supply Agreement.

 

8.2 Each party represents and warrants that it is duly organized and existing in
good standing under the laws of the jurisdiction in which it is organized, is
duly qualified and in good standing as a foreign corporation in every state in
which the character of its business requires such qualifications, and has the
power to own its property and to carry on its business as now being conducted.

 

ARTICLE 9. COVENANT. Cygne recognizes that AZT is currently manufacturing and/or
supplying and may manufacture and/or supply Denim Products for third parties
during the Term. AZT agrees that it will not enter into any agreement for the
manufacture of products that would impair its ability to perform its obligations
hereunder on a timely basis.

 

ARTICLE 10. CONFIDENTIAL INFORMATION

 

10.1 Each party acknowledges and agrees that it may have access to information,
including, but not limited to, intellectual property, trade secrets, business
information, ideas and expressions, which are proprietary to and/or embody the
substantial creative efforts of the other party (“Confidential Information”).
The parties agree that Confidential Information will remain the sole and
exclusive property of the disclosing party (“Disclosing Party”), and the
receiving party (“Receiving Party”) agrees to maintain and preserve the
confidentiality of such information, including, but without limitation, taking
such steps to protect and preserve the confidentiality of the Confidential
Information as it takes to preserve and protect the confidentiality of its own
confidential information. All materials and information disclosed by either
party to the other will be presumed to be Confidential Information and will be
so regarded by the Receiving Party unless, the Receiving Party can prove that
the materials or information are not Confidential Information. For the purposes
of this section:

 

10.2 The parties agree that the Confidential Information will be disclosed for
use by the Receiving Party only for the limited and sole purpose of carrying out
the terms of this Supply Agreement.

 

10.3 The Receiving Party agrees not to disclose or permit any other person or
entity access to the Confidential Information, except that such disclosure will
be permitted to an employee, agent, representative or independent contractor of
the Receiving Party requiring access to the same.

 

10.4 The Receiving Party agrees: (i) not to alter or remove any identification
of any copyright, trademark or other proprietary rights notice which indicates
the ownership of any part of the Confidential Information, and (ii) to notify
the Disclosing Party of the circumstances surrounding any possession, use or
knowledge of the Confidential Information by any person or entity other than
those authorized by this Supply Agreement.

 

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10.5 Confidential Information will exclude any information that (i) has been or
is obtained by the Receiving Party from a source independent of the Disclosing
Party and not receiving such information from the Disclosing Party, (ii) is or
becomes generally available to the public other than as a result of an
unauthorized disclosure by the Disclosing Party or its personnel, or (iii) is
independently developed by the Receiving Party without reliance in any way on
the Confidential Information provided by the Disclosing Party; or (iv) the
Receiving Party is required to disclose under judicial order, regulatory
requirement, or statutory requirement, provided that the Receiving Party
provides written notice and an opportunity for the Disclosing Party to take any
available protective action prior to such disclosure.

 

ARTICLE 11. INDEMNIFICATION; LIMITATION ON DAMAGES

 

11.1 AZT’s Indemnification. AZT hereby agrees to indemnify, defend, and hold
Cygne harmless from any and all third party claims, losses, liabilities, causes
of action and costs (including reasonable attorneys’ fees) arising from, or on
account of, or related to any breach by AZT of its obligations, representations
and warranties hereunder.

 

11.2 Cygne’s Indemnification. Cygne hereby agrees to indemnify, defend, and hold
AZT harmless from any and all third party claims, losses, liabilities, causes of
action and costs (including reasonable attorneys’ fees) arising from, or on
account of, or related to any breach by Cygne of its obligations,
representations and warranties hereunder.

 

11.3 Limitation on Damages. NEITHER PARTY NOR ANY OF ITS RESPECTIVE AFFILIATES,
SHALL BE LIABLE TO THE OTHER PARTY OR TO ANY OTHER INDIVIDUAL OR ENTITY FOR ANY
INDIRECT, SPECIAL, PUNITIVE, EXEMPLARY, CONSEQUENTIAL, OR INCIDENTAL LOSS OR
DAMAGE OF ANY KIND OR NATURE, RELATING TO OR ARISING OUT OF THIS AGREEMENT
INCLUDING BUT NOT LIMITED TO ANY LOSS OF REVENUES, ANTICIPATED PROFITS OR
SAVINGS, OR LOSS BY REASON OF SHUTDOWN IN OPERATION OR FOR INCREASED EXPENSES OF
OPERATION.

 

ARTICLE 12. GENERAL

 

12.1 Governing Law. This Supply Agreement shall be interpreted in accordance
with the laws of the State of California, without regard to the conflicts of
laws principles thereof. The parties agree that jurisdiction over and venue in
any legal proceeding arising out of or relating to this Supply Agreement will
exclusively be in the state or federal courts located in Los Angeles County,
California.

 

12.2 Entire Agreement. This Supply Agreement, including the Exhibit(s) attached
hereto, constitutes the entire agreement and understanding between the parties
and integrates all prior discussions between them related to its subject matter.
No modification of any of the terms of the agreement will be valid unless in
writing and signed by an authorized representative of each party.

 

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12.3 Assignment. This Supply Agreement may not be assigned by any party hereto
to any other person, firm, or entity without the express written approval of the
other party hereto and any attempt at assignment in violation of this section
will be null and void; provided, that, notwithstanding the foregoing, Cygne may
assign this Agreement, and grant a security interest in this Agreement, to any
senior lender to Cygne without being required to obtain the consent of AZT, and
AZT shall have the right to assign this Supply Agreement to an affiliate of AZT
upon written notice to Cygne, without being required to obtain the consent or
approval of Cygne. Without limiting the foregoing, AZT shall not, voluntarily or
by operation of law (including, without limitation, by transfer of the stock of
AZT or Azteca), assign or transfer, this Supply Agreement or any interest
herein, or any right or obligation hereunder, without first obtaining the
written consent of Cygne, which consent shall not be unreasonably withheld.

 

12.4 Notices. All legal notices required or permitted hereunder will be given in
writing addressed to the respective parties as set forth below and will either
be (i) personally delivered, (ii) transmitted by postage prepaid certified mail,
return receipt requested, or (iii) transmitted by nationally recognized private
express courier, and will be deemed to have been given on the date of receipt if
delivered personally, or three (3) days after deposit in mail or express
courier. Either party may change its address for purposes hereof by written
notice to the other in accordance with the provisions of this Subsection. The
addresses for the parties are as follows:

 

AZT

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Cygne

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AZT International

5804 E. Slauson Ave.

Commerce, CA 90040

Attn: Hubert Guez

 

Cygne Designs, Inc.

11 West 42nd Street

New York, New York 10036

Attn: Bernard Manuel

 

12.5 Rights to Injunctive Relief. Both parties acknowledge that remedies at law
may be inadequate to provide full compensation in the event of a material breach
relating to either party’s obligations, representations, and warranties
hereunder, and the non-breaching party will therefore be entitled to seek
injunctive relief in the event of any such material breach.

 

12.6 Force Majeure. No party will be liable for, or will be considered to be in
breach of or default under this Supply Agreement on account of, any delay or
failure to perform as required by this Supply Agreement as a result of any
causes or conditions that are beyond such party’s reasonable control (such as
war, riot, attack of terror, insurrection, rebellion, strike, lockout,
unavoidable casualty, or damage to personnel, material or equipment, fire,
flood, storm, earthquake, tornado, or any act of God) and that such party is
unable to overcome through the exercise of commercially reasonable diligence. If
any force majeure event occurs, the affected party will give prompt written
notice to the other party and will use commercially reasonable efforts to
minimize the impact of the event. However, if a force majeure event prevents a
party’s performance of a material covenant set forth herein, the other party can
immediately terminate this Supply Agreement.

 

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12.7 Waiver. The waiver, express or implied, by any party of any breach of or
right under this Supply Agreement by another party will not waive any subsequent
breach or right by such party of the same or a different kind.

 

12.8 Headings. The headings to the Sections and Exhibits of this Supply
Agreement are included merely for convenience of reference and will not affect
the meaning of the language included therein.

 

12.9 Independent Contractors. The parties acknowledge and agree that they are
dealing with each other hereunder as independent contractors. Nothing contained
in this Supply Agreement will be interpreted as constituting either party the
joint venturer, employee or partner of the other party or as conferring upon
either party the power of authority to bind the other party in any transaction
with third parties.

 

12.10 Severability. In the event any provision of this Supply Agreement is held
by a court or other tribunal of competent jurisdiction to be unenforceable, such
provision will be reformed only to the extent necessary to make it enforceable,
and the other provisions of this Supply Agreement will remain in full force and
effect.

 

12.11 Counterparts. This Supply Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument. For purposes hereof, a
facsimile copy of this Supply Agreement, including the signature pages hereto,
will be deemed to be an original. Notwithstanding the foregoing, the parties
will deliver original execution copies of this Supply Agreement to one another
as soon as practicable following execution thereof.

 

12.12 Cooperation in Drafting. All parties have cooperated in the drafting and
preparation of this Supply Agreement, and it will not be construed more
favorably for or against any party.

 

12.13 Attorney’s Fees. Should any party hereto initiate a legal or
administrative action or arbitration proceeding (an “Action”) to enforce any of
the terms or conditions of this Supply Agreement, the prevailing party (as
determined by the court, arbitrator or other fact-finder) will be entitled to
recover from the losing party all reasonable costs of the Action, including
without limitation, reasonable attorneys’ fees and costs.

 

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IN WITNESS WHEREOF, the parties have executed this Supply Agreement as of the
Effective Date.

 

AZT INTERNATIONAL, SA DE CV By:  

/s/ Hubert Guez

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Name:   Hubert Guez Title:   President CYGNE DESIGNS, INC. By:  

/s/ Bernard Manuel

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Name:   Bernard Manuel Title:   President

 

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