Exhibit 10.2

 

 

THE INDEBTEDNESS AND ALL OTHER PAYMENT OBLIGATIONS EVIDENCED BY THIS
SUBORDINATED SECURED PROMISSORY NOTE ARE AND SHALL AT ALL TIMES BE AND REMAIN
SUBORDINATED TO THE PRIOR PAYMENT IN FULL IN CASH OF (I) ALL MILBERG OBLIGATIONS
(AS DEFINED HEREIN) PURSUANT TO, AND TO THE EXTENT AND IN THE MANNER SET FORTH
IN, THE SUBORDINATION AGREEMENT (AS DEFINED HEREIN) AND (II) ALL OTHER
OBLIGATIONS (AS DEFINED HEREIN) PURSUANT TO, AND TO THE EXTENT PROVIDED IN, THIS
SUBORDINATED SECURED PROMISSORY NOTE BY THE MAKER HEREOF AND THE PAYEE NAMED
HEREIN IN FAVOR OF THE SENIOR LENDERS (AS DEFINED HEREIN)

 

SUBORDINATED SECURED PROMISSORY NOTE

 

U.S. $47,500,000

July 31, 2005

 

FOR VALUE RECEIVED, the undersigned, Cygne Designs, Inc., a Delaware corporation
(the “Borrower”), HEREBY UNCONDITIONALLY PROMISES TO PAY to the order of
Commerce Clothing Company LLC, a California limited liability company
(“Noteholder”), the original principal amount of FORTY SEVEN MILLION FIVE
HUNDRED THOUSAND 00/100 DOLLARS ($47,500,000.00), together with interest
thereon, in accordance with the terms and provisions hereof.

 

SECTION 1. DEFINITIONS.

 

1.1 Definitions. As used in this Note, the following terms have the following
meanings:

 

“Agreement” means that certain Asset Purchase Agreement, dated as of July 31,
2005, by and among the Noteholder, Hubert Guez (“Guez”), 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 the Borrower.

 

“Business Day” means a day of the year on which banks are not required or
authorized to close in New York, New York.

 

“Dollars” and “$” mean lawful currency of the United States of America.

 

“Enforcement Action” means any action to enforce any right or remedy available
to the Noteholder under this Note, applicable law, or otherwise, including,
without limitation, (i) accelerating the maturity of the Note, (ii) exercising
any right of setoff or recoupment, (iii) commencing, continuing, or
participating in any judicial, arbitral, or other proceeding or any collection
or enforcement action of any kind against the Borrower or the Borrower’s assets
seeking, directly or indirectly, to enforce any rights or remedies or to enforce
any of the obligations incurred by the Borrower under or in connection with the
Subordinated Debt, or (iv) commencing, or joining with any other person or
entity in commencing, any Proceeding in any jurisdiction.

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“Highest Lawful Rate” means, on any day, the maximum nonusurious rate of
interest permitted for that day by applicable California law, stated as a rate
per annum.

 

“Interest Payment Date” means the last day of each April, July, October and
January to occur while any principal of this Note is outstanding, commencing on
October 31, 2006, and, to the extent that any principal of this Note is then
outstanding, the Maturity Date.

 

“Maturity Date” means April 30, 2012.

 

“Milberg Obligations” means any and all debts, obligations and liabilities of
Borrower to Milberg Factors, Inc., its successors and/or assigns (“Milberg”),
whether absolute or contingent, due or to become due, now existing or hereafter
arising and whether direct or acquired by Milberg by transfer, assignment or
otherwise.

 

“Obligations” means (i) the Milberg Obligations or (ii) any indebtedness of the
Borrower for borrowed money from, or any other liability owing to any
asset-based lender for working capital purposes, and any such indebtedness or
any debentures, notes or other evidence of indebtedness issued in exchange for
such indebtedness, or any indebtedness arising from the satisfaction of such
indebtedness by a guarantor.

 

“Paid in Full” and “Payment in Full” mean, when used in connection with the
Obligations, the full and final, indefeasible payment in cash of all Obligations
and the termination of all commitments of any lender to make loans, issue
letters of credit, or provide or extend other credit that constitutes
Obligations.

 

“Person” means an individual, partnership, corporation (including a business
trust), limited liability company, joint stock company, trust, unincorporated
association, joint venture or other entity, or a government or any political
subdivision or agency thereof.

 

“Proceeding” means any (i) insolvency, bankruptcy, receivership, liquidation,
custodianship, reorganization, readjustment, composition, or other similar
proceeding involving the Borrower or all or substantially all of the Borrower’s
properties, whether under any bankruptcy, reorganization, or insolvency law,
federal or state, or any law, federal or state, relating to relief of debtors,
readjustment of indebtedness, reorganization, composition, or extension, (ii)
proceeding for any liquidation, dissolution, or other winding-up of the
Borrower, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy proceedings, (iii) assignment for the benefit of
creditors of the Borrower or the appointment of a trustee, receiver,
sequestrator, or other custodian for the Borrower or any of its assets or
properties, or (iv) marshaling of assets of the Borrower.

 

“Securities” means any common or preferred stock of the Borrower.

 

“Senior Lenders” means the holders of the Obligations, including, without
limitation, Milberg.

 

“Subordination Agreement” means the Client Subordination Agreement dated July
31, 2005 delivered by Commerce Clothing Company LLC in favor of Milberg and
acknowledged by Cygne Designs, Inc.

 

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“Subordinated Debt” means the indebtedness of the Borrower represented by this
Note.

 

SECTION 2. TERMS OF PAYMENT.

 

2.1 Principal. The Borrower unconditionally promises to pay, to the extent not
prepaid prior thereto in accordance with the terms hereof, the aggregate
outstanding principal of this Note on or before the Maturity Date. The principal
amount of this Note shall be repaid by paying to the Noteholder (i) $1,500,000
on the last day of each of April, July, October and January commencing on
October 31, 2006, through and including January 31, 2009 and (ii) $2,500,000 on
the last day of each of April, July, October and January, commencing on April
30, 2009, through and including the Maturity Date.

 

2.2 Interest. The outstanding principal of this Note shall bear interest at a
rate per annum equal to 4.70%, compounded annually. Interest shall begin to
accrue hereunder as of the date hereof. Interest on the principal then
outstanding shall be paid on each Interest Payment Date.

 

2.3 Payments and Computations. (a) The Borrower shall make each payment
hereunder not later than 12:00 noon, New York time, on the day when due in U.S.
dollars to Noteholder at its address referred to in Section 6.4, in same day
funds without setoff, counterclaim or other defense.

 

(a) All computations of interest shall be made by Noteholder on the basis of a
year of 365 days (or if applicable, 366 days) for the actual number of days
(including the first day but excluding the last day) occurring in the period for
which such interest is payable.

 

(b) Whenever any payment hereunder shall be stated to be due on a day other than
a Business Day, such payment shall be made on the next succeeding Business Day,
and such extension of time shall in such case be included in the computation of
payment of interest; provided, however, if such extension would cause such
payment to be made in the next following calendar month, such payment shall be
made on the immediately preceding Business Day.

 

(c) The principal amount of this Note can be prepaid at any time or from time to
time without premium or penalty. Any prepayment hereunder shall be applied first
to outstanding and accrued interest and then to each remaining principal payment
pro rata.

 

(d) Principal of this Note that is repaid may not be reborrowed by the Borrower.

 

(e) Until the Maturity Date or the entire principal amount of this Note has been
repaid, subject to the provisions of the Subordination Agreement and any other
agreement with Milberg, borrower immediately shall use fifty percent (50%) of
the proceeds of any sale of its debt securities in a public offering or a
private placement (but not including any bank debt, debt to any Senior Lender in
connection with the Obligations or any other ordinary course short term
obligations) or any sale of its equity securities (other than pursuant to the
exercise of options to purchase securities) (any such sale, a “Prepayment
Event”) to prepay this Note. To the extent that the Borrower is prevented under
the terms of the Subordination Agreement or any other agreement with Milberg
from making a prepayment as contemplated by this paragraph, the Borrower may use
the proceeds for any purpose permitted by such agreements, including general

 

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corporate purposes without default under this Note. To the extent that the
amount of the prepayment is applied to principal, the amount of principal owing
under this Note shall be reduced by the amount of the prepayment so applied to
principal plus another one percent (1%) of the amount of such prepayment, which
shall be applied to principal. The proceeds from a Prepayment Event shall be
applied against the last of the principal payments due as set forth in Section
2.1 above, and shall not otherwise affect the principal payment schedule set
forth in Section 2.1 above. No proceeds from a Prepayment Event may be applied
to payment of interest hereunder. The Borrower shall provide the Noteholder with
written notice of any Prepayment Event promptly upon consummation of such
Prepayment Event

 

2.4 Milberg Consent. Notwithstanding anything to the contrary in this Note or in
the Agreement, each of the Noteholder and the Borrower acknowledges and agrees
that no payment in respect of the indebtedness evidenced by this Note,
including, without limitation, any scheduled payment of principal and/or
interest or any prepayment, may be made by the Borrower, or accepted by the
Noteholder, except as expressly permitted pursuant to that certain factoring
agreement between Milberg and the Borrower bearing the effective date of July
31, 2005 (the “Factoring Agreement”). Each of the Borrower and the Noteholder
has reviewed, understands and agrees to the conditions set forth in the
Factoring Agreement to the Borrower making any payment in respect of the
indebtedness evidenced by this Note.

 

SECTION 3. SUBORDINATION.

 

3.1 Rank. To the extent there is any conflict between any provision of this
Note, including, without limitation this Section 3, and any provision of the
Subordination Agreement, the provisions of the Subordination Agreement shall
control. To the extent there is any conflict between the provisions of this
Section 3 and the other provisions of this Note, the provisions of Section 3
shall control. By its acceptance of the Note, the Noteholder and any subsequent
holder hereof agrees to the terms and conditions of this Section 3.

 

3.2 Effect of Subordination. Notwithstanding any other provision set forth in
this Note, except as provided in Section 3.4 hereof, all Subordinated Debt
(including, without limitation, all interest) is and shall be subordinate and
junior in right of payment to the prior Payment in Full of the Obligations.
Notwithstanding the foregoing, subject to the rights, if any, of the Senior
Lenders under this Section 3.2 to receive cash or other property otherwise
payable or deliverable to the Noteholder, nothing contained in this Section 3.2
shall impair, as between the Borrower and the Noteholder, the obligation of the
Borrower, subject to the terms and conditions hereof, to pay to the Noteholder
the principal hereof and interest hereon as and when the same become due and
payable.

 

3.3 Distributions in Liquidation and Bankruptcy. In the event of any
distribution, division, or application, partial or complete, voluntary or
involuntary, by operation of law or otherwise, of all or any part of the assets
of the Borrower or the proceeds thereof to creditors of the Borrower or upon any
indebtedness of the Borrower, as a result of the liquidation, dissolution, or
other winding up, partial or complete, of the Borrower, or as a result of any
Proceeding by or against the Borrower for any relief under any bankruptcy or
insolvency law or laws relating to the relief of debtors, readjustment of
indebtedness, arrangements, reorganizations or compositions, or as a result of
the sale of all or substantially all of the assets of the Borrower, then and in
any such event:

 

(a) The Senior Lenders shall be entitled to receive Payment in Full of all
Obligations before the Noteholder shall be entitled to receive any payment or
other distributions on, or with respect to, the Subordinated Debt;

 

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(b) Any payment or distribution of any kind or character, whether in cash,
securities, or other property, which but for these provisions would be payable
or deliverable upon or with respect to the Subordinated Debt shall instead be
paid or delivered directly to the Senior Lenders, whether then due or not due,
until the Obligations shall have first been Paid in Full;

 

(c) If any direct or indirect payment is made by Borrower to the Noteholder upon
or with respect to the Subordinated Debt prior to the Payment in Full of the
Obligations as provided herein, the Noteholder will forthwith deliver the same
to the Senior Lenders in precisely the form received (except for the endorsement
or assignment by the Noteholder where necessary) for application on the
Obligations, whether then due or not due; provided, however, that nothing in
this subsection (c) shall in anyway prohibit the non-cash accrual or
capitalization of interest payments that results in an increase in the
outstanding principal amount of the Subordinated Debt, nor shall any such
accrual or capitalization require that any payment or delivery be made to the
Senior Lenders, provided further, that in the event the Noteholder is required
to surrender any amounts received from the Borrower pursuant to this Section
3.3, then the outstanding principal amount due under this Note shall be
increased by such amount delivered by the Noteholder to the Senior Lenders.
Until delivered to the Senior Lenders, any payment or distribution required to
be delivered to the Senior Lenders pursuant to this subsection shall be held in
trust by the Noteholder as property of the Senior Lenders; and

 

(d) Upon Payment in Full of the Obligations under this Section 3.3, all
remaining amounts held by the Noteholder shall be applied to the Note and no
payments or distributions to the Seniors Lenders made hereunder shall, as
between the Borrower and its creditors, other than the Senior Lenders and the
Borrower, be deemed to be a payment by the Borrower to or on account of this
Note.

 

3.4 Permitted Payments. Subject to the provisions of the Subordination
Agreement, so long as no event of default (as such may be defined in the
documentation relating to the Obligations) with respect to any Obligations shall
have been declared in writing by the Senior Lenders and be continuing or would
result after giving effect to any payments of interest or principal on the
Subordinated Debt, then Borrower may make, and the Noteholder may accept or
receive from the Borrower, payments of interest and principal on the
Subordinated Debt in accordance with the terms of this Note; provided, however,
that in the event there shall have been declared in writing by the Senior
Lenders and be continuing any event of default under the Obligations, then all
payments on account of the Subordinated Debt shall be suspended until such event
of default shall have been cured (in the case where a cure period applies),
ceased to exist or waived. Notwithstanding the foregoing, in the event there
shall have been declared in writing by the Senior Lenders and be continuing any
event of default under the Obligations, then the Noteholder, at its option, may
cure the event of default under the Obligations on behalf of the Borrower, in
which case, such amounts paid by the Noteholder to the Senior Lenders shall be
added to the outstanding principal amount due hereunder.

 

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3.5 Acceleration or Exercise of Remedies. Subject to the provisions of the
Subordination Agreement, the rights of Milberg thereunder and the rights of the
Senior Lenders under this Note, the Noteholder may take any Enforcement Action
at any time, including while any Obligation (other than a Milberg Obligation) is
outstanding.

 

3.6 Additional Documents. To the extent necessary for the holders of Obligations
to realize or preserve the full benefits of this Section 3, the Noteholder and
the Borrower, at their own expense and at any time from time to time, shall
execute and deliver such instruments or documents and take such further action
as may be reasonably requested by any Senior Lender.

 

SECTION 4. EVENTS OF DEFAULT; REMEDIES.

 

4.1 Events of Default. Unless waived by the Noteholder in writing, each of the
following events (each an “Event of Default”) shall constitute an Event of
Default; provided that, the Borrower fails to cure the applicable breach,
violation or failure within the applicable time period, if any, set forth in the
applicable Subsection below or in Section 4.2(a) after receipt of written notice
thereof from the Noteholder and; provided, further, that it shall not be an
Event of Default hereunder if the Borrower is prohibited from making any payment
or prepayment hereunder under the terms of the Subordination Agreement or any
other agreement with Milberg. For purposes of clarity, no Event of Default shall
be deemed to have occurred hereunder, and the Borrower shall not be in default
under this Note, unless and until such notice has been duly given, and, in each
case for which a cure period applies, such time period shall have passed and
such breach, violation or failure shall not have been cured. No such notice may
be given by the Noteholder until the passage of any period of time specified in
the applicable Subsection below or Section 4.2(a), if applicable;

 

(a) any failure by the Borrower to pay the principal of or interest or premium
on any of the obligations under this Note or any fee or other amount owing
thereunder when due, whether upon demand or otherwise; provided that, the
Borrower fails to cure such failure within 45 days after receipt of written
notice thereof from the Noteholder;

 

(b) subject to Section 4.2(a) below, any representation or warranty made by the
Borrower in the Agreement or other agreements contemplated by the Agreement
(other than this Note and the Security Agreement (as defined below), which are
expressly excluded from this Section 4.1(b)), any financial statement, or any
certificate furnished by the Borrower at any time to the Noteholder shall prove
to be untrue in any material respect as of the date on which made or furnished;

 

(c) any representation or warranty made by the Borrower in this Note or the
Security Agreement (as defined below) at any time shall prove to be untrue in
any material respect as of the date on which made or furnished;

 

(d) subject to Section 4.2(a) below, any material default shall occur in the
observance or performance of any of the covenants and agreements contained in
the Agreement or other agreements contemplated by the Agreement (other than this
Note and the Security Agreement (as defined below), which are expressly excluded
from this Section 4.1(d));

 

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(e) any material default shall occur in the observance or performance of any of
the covenants and agreements contained in this Note (other than any payment
covenant, which shall be governed by Section 4.1(a) hereof) or the Security
Agreement (as defined below); provided that, the Borrower fails to cure such
failure within 45 days after receipt of written notice thereof from Noteholder;

 

(f) any default shall occur with respect to any debt (other than with respect to
the Milberg Obligations or any replacement lender’s Obligations, if the default,
with respect to such Milberg Obligations or such replacement lender’s
Obligations, is caused by Guez or the existence of, or compliance with, this
Note) of the Borrower, in an outstanding principal amount which individually, or
in the aggregate, exceeds $500,000, or under any agreement or instrument under
or pursuant to which any such debt may have been issued, created, assumed, or
guaranteed by the Borrower, and such default shall continue for more than the
period of grace, if any, therein specified, and such debt shall be declared due
and payable or be required to be prepaid (other than by a regularly scheduled
required prepayment) prior to the stated maturity thereof;

 

(g) the Borrower shall (i) file a voluntary petition in bankruptcy or file a
voluntary petition or an answer or otherwise commence any action or proceeding
seeking reorganization, arrangement or readjustment of its debts or for any
other relief under the federal Bankruptcy Code, as amended, or under any other
bankruptcy or insolvency act or law, state or federal, now or hereafter
existing, or consent to, approve of, or acquiesce in, any such petition, action
or proceeding; (ii) apply for or acquiesce in the appointment of a receiver,
assignee, liquidator, sequestrator, custodian, monitor, trustee or similar
officer for it or for all or any part of its property; (iii) make an assignment
for the benefit of creditors; or (iv) be unable generally to pay its debts as
they become due;

 

(h) an involuntary petition shall be filed or an action or proceeding otherwise
commenced seeking reorganization, arrangement, consolidation or readjustment of
the debts of the Borrower or for any other relief under the federal Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency act or law, state
or federal, now or hereafter existing and such petition or proceeding shall not
be dismissed within sixty (60) days after the filing or commencement thereof or
an order of relief shall be entered with respect thereto;

 

(i) a receiver, assignee, liquidator, sequestrator, custodian, monitor, trustee
or similar officer for the Borrower or for all or any part of its property shall
be appointed or a warrant of attachment, execution or similar process shall be
issued against any part of the property of the Borrower;

 

(j) the Borrower shall file a certificate of dissolution under applicable state
law or shall be liquidated, dissolved or wound-up or shall commence or have
commenced against it any action or proceeding for dissolution, winding-up or
liquidation, or shall take any corporate action in furtherance thereof if, in
the case of any action by the Borrower;

 

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(k) all or any material part of the property of the Borrower shall be
nationalized, expropriated or condemned, seized or otherwise appropriated, or
custody or control of such property or of the Borrower shall be assumed by any
governmental authority or any court of competent jurisdiction at the instance of
any governmental authority, except where contested in good faith by proper
proceedings diligently pursued where a stay of enforcement is in effect;

 

(l) this Note shall be terminated, revoked or declared void or invalid or
unenforceable or challenged by the Borrower or any other obligor;

 

(m) one or more judgments, orders, decrees or arbitration awards is entered
against the Borrower by persons other than the Noteholder or its Affiliates (as
defined in the Agreement) involving in the aggregate liability (to the extent
not covered by independent third-party insurance) as to any single or related or
unrelated series of transactions, incidents or conditions, of $250,000 or more
in excess of applicable deductibles, and the same shall remain unsatisfied,
unvacated and unstayed pending appeal for a period of sixty (60) days after the
entry thereof;

 

(n) there occurs a Change of Control of the Borrower (other than as a result of
actions taken by the Noteholder, Guez or any of their respective Affiliates (as
defined in the Agreement)) (for purposes hereof, “Change of Control” means (i)
any transaction or series of transactions that, individually or cumulatively,
together with one or more prior transactions, other than the transactions
contemplated by the Agreement, result in a transfer of over 50% of Borrower’s
assets, (ii) a merger, consolidation, sale of stock or other transaction, series
of transactions or cumulative transfers as a result of which, together with one
or more prior transactions other than the transactions contemplated by the
Agreement, there is a cumulative change in ownership of over 50% of the equity
owners of Borrower, excluding any transfer to current owners of Borrower or the
surviving entity or successor-in-interest to Borrower immediately upon
completion of any such future transaction, as measured from the date of this
Note, or (iii) the stockholders of Borrower approve a plan of complete
liquidation of Borrower);

 

(o) the Borrower incurs any indebtedness or issues any bonds, notes or other
obligations above $250,000 in the aggregate in any fiscal year other than (i)
for purposes of obtaining working capital through Milberg or any replacement
lender or for trade credit purposes, (ii) any Obligations and (iii) in
connection with any Prepayment Event;

 

(p) the Borrower directly or indirectly pays or declares any dividend or makes
any distribution upon, or redeems or repurchases, any shares of capital stock
other than in connection with a Prepayment Event and other than pursuant to
arrangements with employees upon termination of employment at prices no greater
than the original purchase price of such shares;

 

(q) the Borrower enters into a binding agreement with respect to a transaction
which, if consummated, would result in a Change of Control of the Borrower;

 

(r) the Borrower purchases any capital stock or other interest in, or any
material portion of the assets of, any other entity;

 

(s) the Borrower makes any capital expenditure in excess of $250,000 in the
aggregate in any fiscal year; or

 

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(t) the Borrower grants a security interest in, or otherwise pledges as security
for indebtedness or other obligation, any trademark owned by the Borrower to any
third party other than Milberg or any replacement lender or to the Senior
Lenders in connection with the Obligations.

 

4.2 Limitations on Events of Default. Notwithstanding anything in Section 4.1 to
the contrary and, in addition to any notices required thereunder:

 

(a) no breach of any representation, warranty or covenant set forth in the
Agreement or other agreements contemplated by the Agreement (other than this
Note or the Security Agreement, which are expressly excluded from this Section
4.2(a)), any financial statement, or any certificate furnished by the Borrower
at any time to the Noteholder shall constitute an Event of Default unless and
until (i) the existence of such breach has been determined by a final,
non-appealable judgment of a court of competent jurisdiction and (ii) written
notice has been furnished and 45 days have elapsed and such breach has not been
cured;

 

(b) non-payment of the Deferred Purchase Price (as defined in the Agreement), if
such non-payment is in accordance with the non-payment provisions set forth in
Section 2.4 of the Agreement, shall not constitute an Event of Default under
Section 4.1; and

 

(c) no action by the Borrower under Subsections 4.1(l), (m), (n), (o), (p), (q),
(r), shall be an Event of Default hereunder if the Borrower gives the Noteholder
written notice of its intent to take such action at least 30 days prior to
taking such action and, the Noteholder does not object in writing to the taking
of such action within such 30 day period.

 

4.3 Remedies. If any Event of Default shall have occurred and be continuing,
then, and in any such event, in addition to all other rights, remedies and
powers of Noteholder under this Note or otherwise available at law or in equity,
unless such event has been cured, after the applicable notice periods set forth
in this Note, if any, the Noteholder may, upon five (5) Business Days notice to
the Borrower, declare all outstanding principal of this Note (and all accrued
and unpaid interest thereon) and all other amounts owing under this Note to be
forthwith due and payable, whereupon all outstanding principal of this Note, all
such accrued and unpaid interest and all such other amounts shall become and be
forthwith due and payable, without presentment, demand, protest, or further
notice of any kind, all of which are hereby expressly waived by the Borrower;
provided, however, that in the event of an actual or deemed entry of an order
for relief with respect to the Borrower or any of its Subsidiaries under the
United States Bankruptcy Code, all outstanding principal of this Note, all
accrued and unpaid interest thereon and all other amounts owing under this Note
shall automatically become and be due and payable, without presentment, demand,
protest, notice of acceleration, notice of intent to accelerate, or any notice
of any kind, all of which are hereby expressly waived by the Borrower. In the
event the Noteholder is required to surrender or return any amounts received
from Borrower under this Note due to fraudulent activities or bankruptcy of the
Borrower, then such amounts repaid by Borrower shall be added to the outstanding
principal amount due under this Note, provided, that the Noteholder shall be
entitled to retain any and all interest payments paid by the Borrower hereunder.

 

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SECTION 5. SECURITY AGREEMENT.

 

This Note is secured by a certain Security Agreement (the “Security Agreement”)
of even date herewith between the Borrower and the Noteholder granting the
Noteholder a security interest in the Collateral (as defined therein) and is
subject to and governed by the terms and conditions of the Security Agreement.

 

SECTION 6. MISCELLANEOUS.

 

6.1 Limitation on Senior Secured Indebtedness. Except for the Obligations to the
Senior Lenders, the Borrower shall not incur indebtedness senior to the
Subordinated Debt which is secured, in the aggregate, by a pledge of more than
60% of its Inventory and/or 90% of its Accounts in existence at any time and
from time to time (each as defined in the Uniform Commercial Code in effect from
time to time in the State of California and as determined in accordance with
generally acceptable accounting principles, consistently applied).

 

6.2 List of Shareholders. On or before the first day of each month prior to the
Maturity Date, the Borrower agrees to cause its transfer agent to deliver to the
Noteholder a list of record holders of the common stock of the Borrower.

 

6.3 Amendments. No amendment or waiver of any provision of this Note, nor
consent to any departure by the Borrower herefrom, shall in any event be
effective unless the same shall be in writing and signed by Noteholder and, to
the extent all or any portion of the Milberg Obligations remain outstanding,
Milberg, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.

 

6.4 Notices. All notices and other communications provided for hereunder shall
be in writing (including telecopier, telegraphic, telex or cable communication)
and mailed, telecopied, telegraphed, telexed, cabled or delivered, if to the
Borrower, to it care of Cygne Designs, Inc., 11 West 42nd Street, 9th Floor, New
York, New York, 10018, attention: President, and if to Noteholder, to it care of
Commerce Clothing Company LLC, 5804 E. Slauson Avene, Commerce, California,
90040, attention: Hubert Guez; or, as to each party, at such other address as
shall be designated by such party in a written notice to the other party. All
such notices and communications shall, when mailed, telecopied, telegraphed,
telexed or cabled, be effective when deposited in the mails, telecopied,
delivered to the telegraph company, confirmed by telex answerback or delivered
to the cable company, respectively, except that notices to Noteholder pursuant
to this Note shall not be effective until received by Noteholder.

 

6.5 No Waiver; Remedies. No failure on the part of Noteholder to exercise, and
no delay in exercising, any right hereunder shall operate as a waiver thereof;
nor shall any single or partial exercise of any right hereunder preclude any
other or further exercise thereof or the exercise of any other right. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law. No failure on the part of any Senior Lender to exercise and no
delay in exercising, and no course of dealing with respect to, any right, power
or privilege under this Note or any other instrument, agreement or other
document relating to the Obligations shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or privilege under this
Note or any other instrument, agreement or other document relating to the
Obligations preclude any other or further exercise thereof or the exercise of
any other right, power or privilege.

 

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6.6 Absolute and Unconditional Obligation; Relationship of Parties. (a) Subject
to the provisions of the Subordination Agreement, the Borrower acknowledges that
the Borrower’s obligation to pay the Subordinated Debt in accordance with the
Agreement and the provisions of this Note is and shall at all times continue to
be absolute and unconditional in all respects, and shall at all times be valid
and enforceable irrespective of any other agreements or circumstances of any
nature whatsoever (other than the absence of an Event of Default) which might
otherwise constitute a defense to this Note or the obligation of the Borrower
hereunder to pay the Subordinated Debt and the Borrower absolutely,
unconditionally and irrevocably waives any and all right to assert any defense,
setoff, counterclaim or cross-claim of any nature whatsoever (other than the
absence of an Event of Default) with respect to the obligation of the Borrower
to pay the Subordinated Debt in accordance with the provisions of this Note in
any action or proceeding brought by Noteholder to collect the Subordinated Debt,
or any portion thereof, or to enforce, foreclose and realize upon the lien and
security interest created by the Security Agreement and any other document or
instrument securing repayment of the Subordinated Debt, in whole or in part.

 

(b) The relationship of Noteholder to the Borrower hereunder is strictly and
solely that of lender and borrower and nothing contained in the Agreement or any
other document, agreement or instrument now or hereafter executed and delivered
in connection therewith or otherwise in connection with the Agreement or this
Note is intended to create, or shall in any event or under any circumstance be
construed as creating, a partnership, joint venture, tenancy-in-common, joint
tenancy or other relationship of any nature whatsoever between Noteholder and
the Borrower other than as lender and borrower.

 

6.7 Costs and Expenses. (a) The Borrower agrees to pay on demand all costs and
expenses in connection with the administration, modification and amendment of
this Note and any other instruments and documents to be delivered in connection
herewith, including, without limitation, the reasonable fees and expenses of
counsel for Noteholder with respect thereto and with respect to advising
Noteholder as to its rights and responsibilities under this Note. The costs and
expenses of the preparation, execution and delivery of this note shall be borne
by the parties in accordance with the terms of the Agreement. The Borrower
further agrees to pay on demand all losses, costs and expenses, if any
(including reasonable counsel fees and expenses), in connection with the
enforcement (whether through negotiations, legal proceedings or otherwise) of
this Note and any other instruments and documents delivered in connection
herewith, including, without limitation, reasonable counsel fees and expenses in
connection with the enforcement of rights under this Section 6.7. In addition,
the Borrower shall pay any and all stamp and other taxes payable or determined
to be payable in connection with the execution and delivery of this Note and any
other instruments and documents delivered in connection herewith, and agrees to
save Noteholder harmless from and against any and all liabilities with respect
to or resulting from any delay in paying or omission to pay such taxes.

 

(b) All amounts that become due and payable from time to time under Section
6.7(a) shall be capitalized and added to the outstanding principal amount of
this Note on the date when due to the fullest extent permitted under applicable
laws.

 

6.8 Usury Savings Clause. (a) It is the intention of the parties hereto to
comply with applicable state and federal usury laws (now or hereafter enacted).
Accordingly, notwithstanding

 

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any provision to the contrary in this Note or any other document related hereto,
in no event (including, but not limited to, prepayment or acceleration of the
maturity of any obligation) shall this Note or any such other document require
the payment or permit the collection of interest in excess of the Highest Lawful
Rate. If under any circumstance whatsoever, any provision of this Note or of any
other document pertaining hereto, shall provide for the payment or collection of
interest in excess of the Highest Lawful Rate, then, ipso facto, the obligation
to be fulfilled shall be reduced to the limit of such validity, and if from any
such circumstances Noteholder shall ever receive anything of value as interest
or deemed interest by applicable law under this Note or any other document
pertaining hereto or otherwise an amount that would exceed the Highest Lawful
Rate, such amount that would be excessive interest shall be applied to the
reduction of the principal amount owing under this Note or on account of any
other indebtedness of the Borrower to Noteholder, and not to the payment of
interest, or if such excessive interest exceeds the unpaid balance of principal
of this Note and such other indebtedness, such excess shall be refunded to the
Borrower. In determining whether or not the interest paid or payable with
respect to any indebtedness of the Borrower to Noteholder, under any specified
contingency, exceeds the Highest Lawful Rate, the Borrower and Noteholder shall,
to the maximum extent permitted by applicable law, (i) characterize any
non-principal payment as an expense, fee or premium rather than as interest,
(ii) exclude voluntary prepayments and the effects thereof, (iii) amortize,
prorate, allocate and spread the total amount of interest throughout the full
term of such indebtedness so that interest thereon does not exceed the maximum
amount permitted by applicable law, and/or (iv) allocate interest between
portions of such indebtedness, to the end that no such portion shall bear
interest at a rate greater than that permitted by applicable law.

 

(b) If at any time the interest rate hereunder (the “Stated Rate”) exceeds the
Highest Lawful Rate, then the rate at which interest shall accrue hereunder
shall automatically be limited to the Highest Lawful Rate, and shall remain at
the Highest Lawful Rate until the total amount of interest accrued hereunder
equals the total amount of interest that would have accrued but for the
operation of this sentence. Thereafter, interest shall accrue at the Stated Rate
unless and until the Stated Rate again exceeds the Highest Lawful Rate, in which
case the immediately preceding sentence shall apply.

 

6.9 Waiver. The Borrower and each surety, guarantor, endorser and other party
ever liable for payment of this Note or any part hereof jointly and severally
waive notice, presentment, demand for payment, protest, notice of protest and
non-payment or dishonor, notice of acceleration, notice of intent to accelerate,
notice of intent to demand, diligence in collecting, grace, and all other
formalities of any kind, and consent to all extensions without notice for any
period or periods of time and partial payments, before or after maturity, all
without prejudice to Noteholder. Noteholder shall similarly have the right to
deal in any way, at any time, with one or more of the foregoing parties without
notice to any other party, and to grant any such party any extensions of time
for payment of any of said indebtedness, or to grant any other indulgences or
forbearances whatsoever, without notice to any other party and without in any
way affecting the personal liability of any party hereunder.

 

6.10 Conflict. Each of the Noteholder and the Borrower expressly acknowledges
and agrees that to the extent there is any conflict between any provision of
this Note and any provision of the Subordination Agreement, the provisions of
the Subordination Agreement shall control.

 

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6.11 Binding Effect. This Note shall be binding upon and inure to the benefit of
the Borrower and Noteholder and their respective successors and assigns, except
that the Borrower shall not have the right to assign or delegate any of its
rights or obligations hereunder or any interest herein without the prior written
consent of Noteholder, which may be granted or withheld in its sole and absolute
discretion.

 

6.12 Governing Law. This Note shall be governed by, and construed in accordance
with, the laws of the State of California, without giving effect to conflicts of
laws principles thereunder.

 

6.13 Jurisdiction. (a) The Borrower hereby irrevocably and unconditionally
submits, for itself and its property, to the nonexclusive jurisdiction of any
California state court or federal court of the United States of America sitting
in the County of Los Angeles, and any appellate court from any thereof, in any
action or proceeding arising out of or relating to this Note, or for recognition
or enforcement of any judgment, and the Borrower hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in any such California state court, or to
the extent permitted by law, in such federal court. The Borrower agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Note shall affect any right that Noteholder may
otherwise have to bring any action or proceeding relating to this Note in the
courts of any jurisdiction.

 

(b) The Borrower irrevocably and unconditionally waives, to the fullest extent
it may legally and effectively do so, any objection that it may now or hereafter
have to the laying of venue of any suit, action or proceeding arising out of or
relating to this Note in any California state or federal court. The Borrower
hereby irrevocably waives, to the fullest extent permitted by law, the defense
of an inconvenient forum to the maintenance of such action or proceeding in any
such court.

 

(c) The Borrower agrees to not assert any claim against Noteholder, any of its
affiliates, or any of their respective directors, officers, attorneys, agents
and advisers, for special, indirect, consequential or punitive damages arising
out of or otherwise relating to this Note, any of the transactions contemplated
herein or the actual or proposed use of the loan evidenced by this Note.

 

6.14 Waiver of Jury Trial. THE BORROWER IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY
JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT
OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS NOTE OR THE ACTIONS OF
NOTEHOLDER IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT
THEREOF.

 

6.15 ENTIRE AGREEMENT. THIS NOTE, THE AGREEMENT, THE SECURITY AGREEMENT, THE
SUBORDINATION AGREEMENT AND THE OTHER DOCUMENTS CONTEMPLATED HEREBY AND THEREBY
REPRESENT THE FINAL, FULL AND ENTIRE UNDERSTANDING AND AGREEMENT BETWEEN THE
PARTIES REGARDING THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY
EVIDENCE

 

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OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS BEEN AFFORDED A FULL AND FAIR OPPORTUNITY TO UNDERTAKE
WHATEVER INVESTIGATION(S) IT DEEMED NECESSARY OR APPROPRIATE IN ORDER FOR IT TO
ENTER INTO OR ACCEPT THIS NOTE. EACH PARTY ACKNOWLEDGES THAT NO OTHER PARTY (AND
NO PERSON PURPORTING TO ACT ON BEHALF OF ANY OTHER PARTY) HAS MADE ANY PROMISE,
REPRESENTATION OR WARRANTY NOT CONTAINED HEREIN, OR IN THE AGREEMENT, THE
SECURITY AGREEMENT OR ANY OTHER DOCUMENT CONTEMPLATED HEREBY AND THEREBY TO
INDUCE EXECUTION OR ACCEPTANCE OF THIS NOTE AND EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS NOT EXECUTED OR ACCEPTED THIS NOTE IN RELIANCE UPON (A) ANY
PROMISE, REPRESENTATION OR WARRANTY NOT CONTAINED HEREIN, OR IN THE AGREEMENT,
THE SECURITY AGREEMENT OR ANY OTHER DOCUMENT CONTEMPLATED HEREBY AND THEREBY OR
(B) ANY FACT OR STATE OF FACTS NOT EXPRESSLY RECITED HEREIN OR IN THE AGREEMENT,
THE SECURITY AGREEMENT OR ANY OTHER DOCUMENT CONTEMPLATED HEREBY AND THEREBY.
EACH PARTY HAS CONDUCTED SUCH INVESTIGATION AS IT HAS DEEMED NECESSARY PRIOR TO
EXECUTING OR ACCEPTING THIS NOTE, WAIVES AND DEEMS UNNECESSARY ANY FURTHER
INVESTIGATION, INQUIRY OR KNOWLEDGE, AND EXPRESSLY ASSUMES THE RISK OF ANY
MISTAKE OF FACT WITH REGARD TO THE MAKING OF OR ACCEPTING THIS NOTE. EACH PARTY
HEREBY IRREVOCABLY WAIVES ANY RIGHT TO ASSERT ANY CLAIM OF FRAUD IN THE
INDUCEMENT OF THIS NOTE, WHETHER ARISING BY MISREPRESENTATION OR OMISSION, AND
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT TO SEEK, REQUEST OR OBTAIN
RECISSION OF THIS NOTE.

 

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IN WITNESS WHEREOF, the Borrower has caused this Note to be executed by its
officer thereunto duly authorized, as of the date first above written.

 

CYGNE DESIGNS, INC., a Delaware corporation By:  

/s/ Bernard Manuel

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Name:   Bernard Manuel Title:   President By:  

/s/ Roy Green

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Name:   Roy Green Title:   Secretary

 

 

ACKNOWLEDGED AND AGREED:

 

COMMERCE CLOTHING COMPANY LLC By:  

/s/ Hubert Guez

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Name:   Hubert Guez Title:   Manager

 

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