Exhibit 10.4


 


EXECUTION VERSION


 


HSBC BANK USA, NATIONAL
ASSOCIATION


(AS AGENT AND AS LENDER)


and


THE OTHER LENDERS
SIGNATORY HERETO


FROM
TIME TO TIME


(AS LENDERS)


with


RAFAELLA APPAREL
GROUP, INC.


and


THE OTHER LOAN PARTIES SIGNATORY HERETO


(AS LOAN PARTIES)


June 20, 2005


 













TABLE OF CONTENTS


 


	
  I.

  	
  DEFINITIONS

  	
  1

  
	
   

  	
  1.1.

  	
  Accounting Terms

  	
  1

  
	
   

  	
  1.2.

  	
  General Terms

  	
  1

  
	
   

  	
  1.3.

  	
  UCC Terms

  	
  21

  
	
   

  	
  1.4.

  	
  Certain Matters
  of Construction

  	
  21

  
	
  II.

  	
  ADVANCES, PAYMENTS

  	
  21

  
	
   

  	
  2.1.

  	
  Maximum Advances

  	
  21

  
	
   

  	
  2.2.

  	
  Procedure for
  Borrowing

  	
  22

  
	
   

  	
  2.3.

  	
  Disbursement of
  Advance Proceeds

  	
  24

  
	
   

  	
  2.4.

  	
  Swingline Loans

  	
  24

  
	
   

  	
  2.5.

  	
  Intentionally
  Omitted

  	
  25

  
	
   

  	
  2.6.

  	
  Repayment of
  Advances

  	
  25

  
	
   

  	
  2.7.

  	
  Repayment of
  Excess Revolving Advances

  	
  26

  
	
   

  	
  2.8.

  	
  Statement of
  Account

  	
  26

  
	
   

  	
  2.9.

  	
  Letters of
  Credit and Air Releases/Steamship Guarantees

  	
  26

  
	
   

  	
  2.10.

  	
  Issuance of
  Letters of Credit and Air Releases/Steamship Guarantees

  	
  27

  
	
   

  	
  2.11.

  	
  Requirements For
  Issuance of Letters of Credit and Air Releases/Steamship Guarantees

  	
  28

  
	
   

  	
  2.12.

  	
  Additional
  Payments

  	
  30

  
	
   

  	
  2.13.

  	
  Manner of
  Borrowing and Payment

  	
  30

  
	
   

  	
  2.14.

  	
  Mandatory
  Prepayments

  	
  31

  
	
   

  	
  2.15.

  	
  Use of Proceeds

  	
  32

  
	
   

  	
  2.16.

  	
  Defaulting
  Lender

  	
  32

  
	
  III.

  	
  INTEREST AND FEES

  	
  33

  
	
   

  	
  3.1.

  	
  Interest

  	
  33

  
	
   

  	
  3.2.

  	
  Letter of Credit
  and Air Release/Steamship Guarantee Fees; Cash Collateral

  	
  33

  
	
   

  	
  3.3.

  	
  Loan Fees

  	
  34

  
	
   

  	
  3.4.

  	
  Computation of
  Interest and Fees

  	
  35

  
	
   

  	
  3.5.

  	
  Maximum Charges

  	
  35

  
	
   

  	
  3.6.

  	
  Increased Costs

  	
  35

  
	
   

  	
  3.7.

  	
  Basis For
  Determining Interest Rate Inadequate or Unfair

  	
  36

  
	
   

  	
  3.8.

  	
  Capital Adequacy

  	
  36

  
	
   

  	
  3.9.

  	
  Gross-Up for
  Taxes

  	
  37

  
	
  IV.

  	
  COLLATERAL: GENERAL
  TERMS

  	
  38

  
	
   

  	
  4.1.

  	
  Security
  Interest in the Collateral

  	
  38

  
	
   

  	
  4.2.

  	
  Perfection of
  Security Interest

  	
  38

  
	
   

  	
  4.3.

  	
  Disposition of
  Collateral

  	
  39

  
	
   

  	
  4.4.

  	
  Preservation of
  Collateral

  	
  39

  
	
   

  	
  4.5.

  	
  Ownership of
  Collateral

  	
  39

  
	
   

  	
  4.6.

  	
  Defense of
  Agent’s and Lenders’ Interests

  	
  40

  
	
   

  	
  4.7.

  	
  Books and
  Records

  	
  40

  



 


i

















 


	
   

  	
  4.8.

  	
  Financial
  Disclosure

  	
  41

  
	
   

  	
  4.9.

  	
  Compliance with
  Laws

  	
  41

  
	
   

  	
  4.10.

  	
  Inspection of
  Premises

  	
  41

  
	
   

  	
  4.11.

  	
  Insurance

  	
  41

  
	
   

  	
  4.12.

  	
  Failure to Pay
  Insurance

  	
  42

  
	
   

  	
  4.13.

  	
  Payment of Taxes

  	
  42

  
	
   

  	
  4.14.

  	
  Payment of
  Leasehold Obligations

  	
  43

  
	
   

  	
  4.15.

  	
  Receivables

  	
  43

  
	
   

  	
  4.16.

  	
  Inventory

  	
  45

  
	
   

  	
  4.17.

  	
  Maintenance of
  Equipment

  	
  45

  
	
   

  	
  4.18.

  	
  Exculpation of
  Liability

  	
  46

  
	
   

  	
  4.19.

  	
  Environmental
  Matters

  	
  46

  
	
   

  	
  4.20.

  	
  Financing
  Statements

  	
  48

  
	
   

  	
  4.21.

  	
  Collateral
  Audits

  	
  48

  
	
  V.

  	
  REPRESENTATIONS AND
  WARRANTIES

  	
  48

  
	
   

  	
  5.1.

  	
  Authority

  	
  48

  
	
   

  	
  5.2.

  	
  Formation and
  Qualification

  	
  49

  
	
   

  	
  5.3.

  	
  Survival of
  Representations and Warranties

  	
  49

  
	
   

  	
  5.4.

  	
  Tax Returns

  	
  49

  
	
   

  	
  5.5.

  	
  Financial
  Statements

  	
  50

  
	
   

  	
  5.6.

  	
  Organization
  Name

  	
  50

  
	
   

  	
  5.7.

  	
  O.S.H.A. and
  Environmental Compliance

  	
  50

  
	
   

  	
  5.8.

  	
  Solvency; No
  Litigation, Violation, Indebtedness or Default

  	
  51

  
	
   

  	
  5.9.

  	
  Patents,
  Trademarks, Copyrights and Licenses

  	
  52

  
	
   

  	
  5.10.

  	
  Licenses and
  Permits

  	
  52

  
	
   

  	
  5.11.

  	
  No Defaults

  	
  53

  
	
   

  	
  5.12.

  	
  No Burdensome
  Restrictions

  	
  53

  
	
   

  	
  5.13.

  	
  No Labor
  Disputes

  	
  53

  
	
   

  	
  5.14.

  	
  Margin
  Regulations

  	
  53

  
	
   

  	
  5.15.

  	
  Investment
  Company Act

  	
  53

  
	
   

  	
  5.16.

  	
  Disclosure

  	
  53

  
	
   

  	
  5.17.

  	
  Delivery of
  Senior Note Documentation and Factoring Agreement

  	
  54

  
	
   

  	
  5.18.

  	
  Swaps

  	
  54

  
	
   

  	
  5.19.

  	
  Conflicts

  	
  54

  
	
   

  	
  5.20.

  	
  Application of
  Certain Laws and Regulations

  	
  54

  
	
   

  	
  5.21.

  	
  Business and
  Property of Loan Parties

  	
  54

  
	
   

  	
  5.22.

  	
  Material
  Contracts

  	
  54

  
	
  VI.

  	
  AFFIRMATIVE COVENANTS

  	
  55

  
	
   

  	
  6.1.

  	
  Payment of Fees

  	
  55

  
	
   

  	
  6.2.

  	
  Conduct of
  Business and Maintenance of Existence and Assets

  	
  55

  
	
   

  	
  6.3.

  	
  Violations

  	
  56

  
	
   

  	
  6.4.

  	
  Government
  Receivables

  	
  56

  
	
   

  	
  6.5.

  	
  Execution of
  Supplemental Instruments

  	
  56

  
	
   

  	
  6.6.

  	
  Payment of
  Indebtedness

  	
  56

  
	
   

  	
  6.7.

  	
  Standards of
  Financial Statements

  	
  56

  



 


ii

















 


	
   

  	
  6.8.

  	
  Financial
  Covenants

  	
  57

  
	
   

  	
  6.9.

  	
  Subsidiaries

  	
  57

  
	
  VII.

  	
  NEGATIVE COVENANTS

  	
  57

  
	
   

  	
  7.1.

  	
  Merger,
  Consolidation, Acquisition and Sale of Assets

  	
  57

  
	
   

  	
  7.2.

  	
  Creation of
  Liens; Negative Pledges

  	
  58

  
	
   

  	
  7.3.

  	
  Guarantees

  	
  58

  
	
   

  	
  7.4.

  	
  Investments

  	
  58

  
	
   

  	
  7.5.

  	
  Loans

  	
  58

  
	
   

  	
  7.6.

  	
  Intentionally
  Omitted

  	
  58

  
	
   

  	
  7.7.

  	
  Dividends and
  Distributions

  	
  59

  
	
   

  	
  7.8.

  	
  Indebtedness

  	
  60

  
	
   

  	
  7.9.

  	
  Nature of
  Business

  	
  60

  
	
   

  	
  7.10.

  	
  Transactions
  with Affiliates

  	
  60

  
	
   

  	
  7.11.

  	
  Intentionally
  Omitted

  	
  61

  
	
   

  	
  7.12.

  	
  Subsidiaries

  	
  61

  
	
   

  	
  7.13.

  	
  Fiscal Year and
  Accounting Changes

  	
  61

  
	
   

  	
  7.14.

  	
  Pledge of Credit

  	
  61

  
	
   

  	
  7.15.

  	
  Amendment of
  Organizational Documents and Material Agreements

  	
  61

  
	
   

  	
  7.16.

  	
  Compliance with
  ERISA

  	
  61

  
	
   

  	
  7.17.

  	
  Prepayment of
  Indebtedness

  	
  62

  
	
   

  	
  7.18.

  	
  Senior Secured
  Notes

  	
  62

  
	
   

  	
  7.19.

  	
  State of Organization

  	
  62

  
	
   

  	
  7.20.

  	
  Other Agreements

  	
  62

  
	
  VIII.

  	
  CONDITIONS PRECEDENT

  	
  62

  
	
   

  	
  8.1.

  	
  Conditions to
  Initial Advances

  	
  63

  
	
   

  	
  8.2.

  	
  Conditions to
  Each Advance

  	
  66

  
	
  IX.

  	
  INFORMATION AS TO
  BORROWER

  	
  67

  
	
   

  	
  9.1.

  	
  Disclosure of
  Material Matters

  	
  67

  
	
   

  	
  9.2.

  	
  Schedules

  	
  67

  
	
   

  	
  9.3.

  	
  Environmental
  Reports

  	
  68

  
	
   

  	
  9.4.

  	
  Litigation

  	
  68

  
	
   

  	
  9.5.

  	
  Material
  Occurrences

  	
  69

  
	
   

  	
  9.6.

  	
  Government
  Receivables

  	
  69

  
	
   

  	
  9.7.

  	
  Annual Audited
  Financial Statements

  	
  69

  
	
   

  	
  9.8.

  	
  Semi-Annual
  Reviewed Financial Statements

  	
  70

  
	
   

  	
  9.9.

  	
  Quarterly
  Internally Prepared Financial Statements

  	
  70

  
	
   

  	
  9.10.

  	
  Other Reports

  	
  71

  
	
   

  	
  9.11.

  	
  Additional
  Information

  	
  71

  
	
   

  	
  9.12.

  	
  Projected
  Operating Budget

  	
  71

  
	
   

  	
  9.13.

  	
  Variances From
  Operating Budget

  	
  71

  
	
   

  	
  9.14.

  	
  Notice of Suits,
  Adverse Events

  	
  71

  
	
   

  	
  9.15.

  	
  ERISA Notices
  and Requests

  	
  72

  	 

	
   

  	
  9.16.

  	
  Additional
  Documents

  	
  72

  	 




 


iii

















 


	
  X.

  	
  EVENTS OF DEFAULT

  	
  73

  
	
  XI.

  	
  LENDERS’ RIGHTS AND
  REMEDIES AFTER DEFAULT

  	
  75

  
	
   

  	
  11.1.

  	
  Rights and
  Remedies

  	
  75

  
	
   

  	
  11.2.

  	
  Application of
  Proceeds

  	
  75

  
	
   

  	
  11.3.

  	
  Agent’s
  Discretion

  	
  76

  
	
   

  	
  11.4.

  	
  Setoff

  	
  76

  
	
   

  	
  11.5.

  	
  Rights and
  Remedies not Exclusive

  	
  76

  
	
  XII.

  	
  WAIVERS AND JUDICIAL
  PROCEEDINGS

  	
  76

  
	
   

  	
  12.1.

  	
  Waiver of Notice

  	
  76

  
	
   

  	
  12.2.

  	
  Delay

  	
  76

  
	
   

  	
  12.3.

  	
  Jury Waiver

  	
  77

  
	
  XIII.

  	
  EFFECTIVE DATE AND
  TERMINATION

  	
  77

  
	
   

  	
  13.1.

  	
  Term

  	
  77

  
	
   

  	
  13.2.

  	
  Termination

  	
  77

  
	
  XIV.

  	
  REGARDING AGENT

  	
  78

  
	
   

  	
  14.1.

  	
  Appointment

  	
  78

  
	
   

  	
  14.2.

  	
  Nature of Duties

  	
  79

  
	
   

  	
  14.3.

  	
  Lack of Reliance
  on Agent and Resignation

  	
  79

  
	
   

  	
  14.4.

  	
  Certain Rights
  of Agent

  	
  80

  
	
   

  	
  14.5.

  	
  Reliance

  	
  80

  
	
   

  	
  14.6.

  	
  Notice of
  Default

  	
  80

  
	
   

  	
  14.7.

  	
  Indemnification

  	
  80

  
	
   

  	
  14.8.

  	
  Agent in its
  Individual Capacity

  	
  81

  
	
   

  	
  14.9.

  	
  Delivery of
  Documents

  	
  81

  
	
   

  	
  14.10.

  	
  Intentionally
  Deleted

  	
  81

  
	
   

  	
  14.11.

  	
  Agent under
  Collateral Documents and Guaranty

  	
  81

  
	
  XV.

  	
  GUARANTEE

  	
  82

  
	
   

  	
  15.1.

  	
  Guaranty

  	
  82

  
	
   

  	
  15.2.

  	
  Waivers

  	
  82

  
	
   

  	
  15.3.

  	
  No Defense

  	
  82

  
	
   

  	
  15.4.

  	
  Guaranty of
  Payment

  	
  82

  
	
   

  	
  15.5.

  	
  Liabilities
  Absolute

  	
  83

  
	
   

  	
  15.6.

  	
  Waiver of Notice

  	
  84

  
	
   

  	
  15.7.

  	
  Agent’s
  Discretion

  	
  84

  
	
   

  	
  15.8.

  	
  Reinstatement

  	
  84

  
	
   

  	
  15.9.

  	
  Action Upon
  Event of Default

  	
  85

  
	
   

  	
  15.10.

  	
  Statute of
  Limitations

  	
  86

  
	
   

  	
  15.11.

  	
  Interest

  	
  86

  
	
   

  	
  15.12.

  	
  Guarantor‘s
  Investigation

  	
  86

  
	
   

  	
  15.13.

  	
  Termination

  	
  87

  
	
   

  	
  15.14.

  	
  Discharge of
  Guaranty Upon Sale of Guarantor

  	
  87

  



 


iv

















 


	
  XVI.

  	
  MISCELLANEOUS

  	
  87

  
	
   

  	
  16.1.

  	
  Governing Law

  	
  87

  
	
   

  	
  16.2.

  	
  Entire
  Understanding; Amendments

  	
  87

  
	
   

  	
  16.3.

  	
  Successors and
  Assigns; Participations; New Lenders

  	
  90

  
	
   

  	
  16.4.

  	
  Application of
  Payments

  	
  92

  
	
   

  	
  16.5.

  	
  Indemnity

  	
  92

  
	
   

  	
  16.6.

  	
  Notice

  	
  93

  
	
   

  	
  16.7.

  	
  Survival

  	
  94

  
	
   

  	
  16.8.

  	
  Severability

  	
  94

  
	
   

  	
  16.9.

  	
  Expenses

  	
  94

  
	
   

  	
  16.10.

  	
  Injunctive
  Relief

  	
  95

  
	
   

  	
  16.11.

  	
  Consequential
  Damages

  	
  95

  
	
   

  	
  16.12.

  	
  Captions

  	
  95

  
	
   

  	
  16.13.

  	
  Counterparts ;
  Telecopied Signatures

  	
  95

  
	
   

  	
  16.14.

  	
  Construction

  	
  96

  
	
   

  	
  16.15.

  	
  Confidentiality;
  Sharing Information

  	
  96

  
	
   

  	
  16.16.

  	
  Publicity

  	
  96

  



 


v

















List of Exhibits and Schedules


Exhibits


 


	
  Exhibit A

  	
  Borrowing Base
  Certificate

  
	
  Exhibit 2.1(a)

  	
  Revolving Credit Note

  
	
  Exhibit 2.4

  	
  Swingline Note

  
	
  Exhibit 5.5

  	
  Financial Projections

  
	
  Exhibit 6.9

  	
  Form of Joinder
  Agreement

  
	
  Exhibit 8.1(i)

  	
  Financial Condition
  Certificate

  
	
  Exhibit 16.3

  	
  Commitment Transfer
  Supplement

  



Schedules


 


	
  Schedule 2.10(g)

  	
  Existing Letters of
  Credit and Existing Air Release/Steamship Guarantees

  
	
  Schedule 4.5

  	
  Equipment and Inventory
  Locations

  
	
  Schedule 4.15(c)

  	
  Location of Executive
  Offices

  
	
  Schedule 5.2(a)

  	
  States of Qualification
  and Good Standing

  
	
  Schedule 5.2(b)

  	
  Subsidiaries and
  Equityholders

  
	
  Schedule 5.4

  	
  Federal Tax
  Identification Number

  
	
  Schedule 5.6

  	
  Prior Names

  
	
  Schedule 5.7

  	
  Environmental

  
	
  Schedule 5.8(b)

  	
  Litigation

  
	
  Schedule 5.8(d)

  	
  Plans

  
	
  Schedule 5.9

  	
  Intellectual Property,
  Source Code Escrow Agreements

  
	
  Schedule 5.10

  	
  Licenses and Permits

  
	
  Schedule 5.13

  	
  Labor Disputes

  
	
  Schedule 5.22

  	
  Material Contracts

  
	
  Schedule 7.2

  	
  Existing Liens

  
	
  Schedule 7.8

  	
  Existing Indebtedness

  



 


vi

















EXECUTION
VERSION


FINANCING AGREEMENT


Financing Agreement dated June 20, 2005 among RAFAELLA
APPAREL GROUP, INC., a Delaware corporation (the “Borrower”), Verrazano,
Inc., a New York corporation (“Verrazano”), each other subsidiary of the
Borrower which becomes a guarantor of the obligations hereunder from time to
time (collectively with Verrazano, the “Guarantors”; each a “Guarantor”),
HSBC BANK USA, NATIONAL ASSOCIATION (“HSBC”) and the other financial
institutions which are now or which hereafter become a party hereto (each a “Lender”
and collectively, the “Lenders”) and HSBC, as agent for the Lenders (in
such capacity, the “Agent”).


IN CONSIDERATION of the mutual covenants and
undertakings herein contained, Borrower, Guarantors, Lenders and Agent hereby
agree as follows:


I.                            DEFINITIONS.


1.1. Accounting Terms.


As used in this Agreement, the Notes, any Other
Document, or any certificate, report or other document made or delivered
pursuant to this Agreement, accounting terms not defined in Section 1.2 or
elsewhere in this Agreement and accounting terms partly defined in Section 1.2 to
the extent not defined, shall have the respective meanings given to them under
GAAP; provided, however, whenever such accounting terms are used
for the purposes of determining compliance with financial covenants in this
Agreement, such accounting terms shall be defined in accordance with GAAP as
applied in preparation of the audited financial statements of Rafaella Inc. for
the fiscal year ended June 30, 2004.


1.2. General Terms.


For purposes of this Agreement the following terms
shall have the following meanings:


“Accountants” shall have the meaning set forth
in Section 9.7.


“ACH Transactions” shall mean any cash
management, disbursement, or related services, including overdrafts and the
automated clearinghouse transfer of funds by HSBC or any affiliate of HSBC for
the account of any Loan Party.


“Adjusted LIBO Rate” shall mean, with respect
to any Eurodollar Rate Loan for any Interest Period a rate of interest equal
to:


(a) the offered rate for deposits in U.S. dollars in
the London interbank market for the relevant Interest Period which is shown on
the Dow Jones & Company Telerate screen as of 11:00 a.m. (London time) on
the day which is two (2) Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period; provided, however,
that if such a rate ceases to be available on that or any other source from Dow
Jones & Company, Adjusted LIBO Rate shall be a rate per annum equal to the
offered rate for deposits in U.S. dollars in the London interbank market for
the relevant Interest Period that appears on Reuters

















Screen LIBO Page (or any successor page) as of 11:00
a.m. (London time) on the day which is two (2) Business Days prior to the first
day of such Interest Period for a term comparable to such Interest Period,
provided that if more than one rate is specified on Reuters Screen LIBO Page,
Adjusted LIBO Rate shall be a rate per annum equal to the arithmetic mean of all
such rates (rounded upwards, if necessary, to the nearest 1/100 of 1%); provided,
however, that if, for any reason, such a rate is not published by the
British Bankers’ Association or available on the Reuters Screen LIBO Page,
Adjusted LIBO Rate shall be equal to a rate per annum equal to the average rate
(rounded upwards, if necessary, to the nearest 1/100 of 1%) at which Agent
determines that U.S. dollars in an amount comparable to the amount of the
applicable Advances are being offered to prime banks at approximately 11:00
a.m. (London time) on the day which is two (2) Business Days prior to the first
day of such Interest Period for a term comparable to such Interest Period for
settlement in immediately available funds by leading banks in the London interbank
market selected by Agent; divided by


(b) a number equal to 1.0 minus the aggregate (but
without duplication) of the rates (expressed as a decimal fraction) of reserve
requirements in effect on the day which is two (2) Business Days prior to the
beginning of such Interest Period (including, without limitation, basic,
supplemental, marginal and emergency reserves under any regulations of the
Board of Governors of the Federal Reserve System or other governmental
authority having jurisdiction with respect thereto, as now and from time to
time in effect) for Eurocurrency funding (currently referred to as
“Eurocurrency Liabilities” in Regulation D of such Board) which are required to
be maintained by a member bank of the Federal Reserve System; such rate (if
greater than zero) to be rounded upward to the next whole multiple of
one-sixteenth of one percent (.0625%).


“Advance Rates” shall mean the Receivables
Advance Rate and the Inventory Advance Rate.


“Advances” shall mean and include the Revolving
Advances, Swingline Loans, Letters of Credit, and Air Release/Steamship
Guarantees.


“Affiliate” of any Person shall mean (a) any
Person (other than a Subsidiary) which, directly or indirectly, is in control
of, is controlled by, or is under common control with such Person, or (b) any
Person who is a director or executive officer (i) of such Person, (ii) of any
Subsidiary of such Person or (iii) of any Person described in clause (a) above.
For purposes of this definition, control of a Person shall mean the power, direct
or indirect, (x) to vote 10% or more of the securities having ordinary voting
power for the election of directors of such Person, or (y) to direct or cause
the direction of the management and policies of such Person whether by contract
or otherwise.


“Agent” shall have the meaning set forth in the
preamble to this Agreement and shall include its successors and assigns.


“Agreement” shall mean this Financing
Agreement, as amended, restated, modified or supplemented from time to time.


“Air Release/Steamship Guarantee” shall mean a
guarantee issued by Agent, a Lender or any Affiliate of Agent or a Lender to a
steamship line or airway carrier for the benefit


 


2

















of Borrower
covering the absence for any reason of a steamship or airway bill of lading
applicable to goods shipped to Borrower to expedite delivery of such goods and
to facilitate Customs entry.


“Assignment of
Factoring Proceeds” shall mean the Assignment of Factoring Proceeds among
Agent, Factor and Borrower dated as of the Closing Date.


“Authority”
shall have the meaning set forth in Section 4.19(d).


“Availability
Reserve” shall mean (a) $5,000,000 from April 1, 2006 through May 31, 2008,
(b) $10,000,000 from June 1, 2008 through May 31, 2009, and (c) $15,000,000 on
and after June 1, 2009.


“Bank Products”
shall mean each and any of the following types of services or facilities
extended to the Loan Parties by HSBC or any Affiliate of HSBC: (a) commercial
credit cards; (b) cash management services (including controlled disbursement
services, ACH Transactions, and interstate depository network services); (c)
return items; (d) Hedge Agreements, and (e) foreign exchange.


“Base Rate”
shall mean a variable rate of interest per annum equal to the rate of interest
from time to time published by the Board of Governors of the Federal Reserve
System in Federal Reserve statistical release H.15 (519) entitled “Selected
Interest Rates” as the Bank Prime Loan Rate, such rate to be adjusted
automatically, without notice, on the effective date of any change in such
rate. Base Rate also includes rates published in any successor publications of
the Federal Reserve System reporting the Bank Prime Loan Rate or its
equivalent. The statistical release generally sets forth a Bank Prime Loan Rate
for each Business Day. The applicable Bank Prime Loan Rate for any date not set
forth in such statistical release or equivalent document shall be the rate set
forth for the last preceding date. In the event the Board of Governors of the Federal
Reserve System ceases to publish a Bank Prime Loan Rate or equivalent, the term
“Base Rate” shall mean a variable rate of interest per annum equal to the
highest of the “prime rate,” “reference rate,” “base rate” or other similar
rate as determined by Agent announced from time to time by HSBC (or any
successor to HSBC) (with the understanding that any such rate may merely be a
reference rate and may not necessarily represent the lowest or best rate
actually charged to any customer by such bank).


“Blocked
Accounts” shall have the meaning set forth in Section 4.15(h).


“Borrower’s
Account” shall have the meaning set forth in Section 2.8.


“Borrowing Base
Certificate” shall mean a certificate duly executed by an officer of
Borrower appropriately completed and in substantially the form of Exhibit A.


“Business Day”
shall mean, with respect to Eurodollar Rate Loans, any day on which commercial
banks are open for domestic and international business, including dealings in
Dollar deposits, in London, England and New York, New York, and with respect to
all other matters, any day other than a day on which commercial banks in New
York are authorized or required by law to close.


 


3

















“Capital Lease” means any lease of any property (whether
real, personal or mixed) that, in conformity with GAAP, should be accounted for
as a capital lease.


“Cash
Equivalents” shall mean: (a) marketable direct obligations issued or
unconditionally guaranteed by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within 1 year from the date of acquisition thereof; (b)
commercial paper maturing no more than 1 year from the date issued and, at the
time of acquisition, having one of the two highest ratings obtainable from
Standard & Poor’s Corporation or Moody’s Investment Service when acquired;
(c) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or public
instrumentality thereof, in each case, maturing within one year after such date
and having, at the time of the acquisition thereof, one of two highest ratings
from Standard & Poor’s Corporation or Moody’s Investors Service, (d) certificates
of deposit or bankers’ acceptances maturing within 1 year from the date of
issuance thereof issued by, or overnight reverse repurchase agreements from,
any commercial bank organized under the laws of the United States of America or
any state thereof or the District of Columbia having combined capital and
surplus of not less than $250,000,000 and whose debt obligations, or those of a
holding company of which it is a Subsidiary, are rated not less than A (or the
equivalent rating) by a nationally recognized investment rating agency when
acquired and not subject to setoff rights in favor of such bank and (e) shares
of any money market mutual fund that (i) has substantially all of its assets
invested continuously in the types of investments referred to in clauses (a)
through (d) above, (ii) has net assets of not less than $250,000,000, and (iii)
has one of the two highest ratings obtainable from Standard & Poor’s
Corporation or Moody’s Investors Service when acquired.


“Cerberus”
shall mean Cerberus Capital Management L.P., a Delaware limited partnership.


“CERCLA”
shall mean the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, 42 U.S.C. §§9601 et seq.


“Change of
Control” shall mean (a) the occurrence of any event (whether in one or more
transactions) which results in a transfer of control of any Loan Party to a
Person who is not a Permitted Holder; (b) more than 50% of the equity interests
in any Loan Party (including for the purposes of the calculation of percentage
ownership, any equity interests into which any equity interests in any Loan Party
held by any of the Permitted Holders is convertible or for which any such
equity interests in any Loan Party or of any other Person may be exchanged and
any equity interests issuable to such Permitted Holders upon exercise of any
warrants, options or similar rights which may at the time of calculation be
held by such Permitted Holders) (with full power to elect directors) is no
longer owned or controlled by a Person who is a Permitted Holder or (c) any
merger or consolidation of or with any Loan Party or sale of all or
substantially all of the property or assets of any Loan Party. For purposes of
this definition, “control” of a Person shall mean the power, direct or indirect,
(x) more than 50% of the securities having ordinary voting power for the
election of directors or managers of such Person or (y) to direct or cause the
direction of the management and policies of such Person by contract or
otherwise.


 


4

















“Charges” shall mean all taxes, charges, fees, imposts,
levies or other assessments, including, without limitation, all net income,
gross income, gross receipts, sales, use, ad valorem, value added, transfer,
franchise, profits, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp, occupation
and property taxes, custom duties, fees, assessments, liens, claims and charges
of any kind whatsoever, together with any interest and any penalties, additions
to tax or additional amounts, imposed by any taxing or other authority,
domestic or foreign (including, without limitation, the PBGC or any
environmental agency or superfund), upon the Collateral, Loan Parties or any of
their Affiliates.


“Closing Date”
shall mean June 20, 2005.


“Code”
shall mean the Internal Revenue Code of 1986, as amended from time to time and
the regulations promulgated thereunder.


“Collateral”
shall mean and include:


(a) all
Receivables;


(b) all Equipment;


(c) all General
Intangibles;


(d) all Inventory;


(e) all Investment
Property;


(f) all Real
Property;


(g) all of each
Loan Party’s right, title and interest in and to (i) its goods and other
property including, but not limited to, all merchandise returned or rejected by
Customers, relating to or securing any of the Receivables; (ii) all of each
Loan Party’s rights as a consignor, a consignee, an unpaid vendor, mechanic,
artisan, or other lienor, including stoppage in-transit, setoff, detinue, replevin,
reclamation and repurchase; (iii) all supporting obligations and all additional
amounts due to any Loan Party from any Customer relating to the Receivables;
(iv) other property, including warranty claims, relating to any goods securing
this Agreement; (v) all of each Loan Party’s contract rights, rights of payment
which have been earned under a contract right, letter of credit rights (whether
or not the letter of credit is evidenced by a writing), instruments (including
promissory notes), documents, chattel paper (whether tangible or electronic),
warehouse receipts, deposit accounts, money and securities; (vi) if and when
obtained by any Loan Party, all real and personal property of third parties in
which such Loan Party has been granted a lien or security interest as security
for the payment or enforcement of Receivables; and (vii) any other goods,
personal property or real property now owned or hereafter acquired in which any
Loan Party has expressly granted a security interest or may in the future grant
a security interest to Agent hereunder, or in any amendment or supplement
hereto or thereto, or under any other agreement between Agent and any Loan
Party;


 


5

















(h) all of each Loan Party’s ledger sheets, ledger cards, files,
correspondence, records, books of account, business papers, computers, computer
software (owned by any Loan Party or in which it has an interest), computer
programs, tapes, disks and documents relating to clauses (a), (b), (c), (d), (e),
(f) or (g) of this definition; and


(i) all proceeds
and products of clauses (a), (b), (c), (d), (e), (f), (g) and (h) of this
definition in whatever form, including, but not limited to: cash, deposit
accounts (whether or not comprised solely of proceeds), certificates of
deposit, insurance proceeds (including hazard, flood and credit insurance),
negotiable instruments and other instruments for the payment of money, chattel
paper, security agreements, documents, eminent domain proceeds, condemnation proceeds
and tort claim proceeds; provided, however, that the Collateral shall not in
any event include (1) any interest of any Loan Party in the funds held in the
“First Escrow Account” or the “Second Escrow Account” under and as defined in
the Escrow Agreement, (2) any interest of any Loan Party in any premises leased
by any Loan Party at any time or (3) any interest in the capital stock of any
Subsidiary organized in a jurisdiction other than a State of the United States
or the District of Columbia in excess of 65% of the voting power of all
classes, series or designations of equity interests of such Subsidiaries
entitled to vote.


“Commitment
Percentage” of any Lender shall mean the percentage set forth below such
Lender’s name on the signature page hereof as same may be adjusted upon any
assignment by a Lender pursuant to Section 16.3.


“Commitment
Transfer Supplement” shall mean a document in the form of Exhibit 16.3,
properly completed and otherwise in form and substance satisfactory to Agent by
which the Purchasing Lender purchases and assumes a portion of the obligation
of Lenders to make Advances under this Agreement.


“Commitments”
shall mean, as to any Lender, its obligation to make Advances (including
participating in Letters of Credit) in an aggregate amount not to exceed at any
one time outstanding the amount set forth below such Lender’s name on the
signature page hereof under the heading “Commitment”, as same may be adjusted
in accordance with this Agreement.


“Consents”
shall mean all filings and all licenses, permits, consents, approvals,
authorizations, qualifications and orders of governmental authorities and other
third parties, domestic or foreign, necessary to carry on any Loan Party’s
business, including, without limitation, any Consents required under all
applicable federal, state or other applicable law.


“Contribution
Agreement” shall mean the Contribution Agreement by and among Rafaella
Inc., Borrower, Verrazano and Purchaser. 


“Controlled
Group” shall mean all members of a controlled group of corporations and all
trades or businesses (whether or not incorporated) under common control which,
together with any Loan Party, are treated as a single employer under Section
414 of the Code.


“Currency
Agreement” means any foreign exchange contract, currency swap agreement,
futures contract, option contract, synthetic cap or other similar agreement or
arrangement, each of which is for the purpose of hedging the foreign currency
risk associated with Borrower’s and its Subsidiaries’ operations and not for
speculative purposes. 


 


6

















“Current Assets” at a particular date, shall mean all (a)
cash and cash equivalents, (b) Receivables, and (c) Inventory, in each case of
Loan Parties on a Consolidated Basis; provided, however, that
such amounts shall not include amounts owing by contractors to Borrower with
respect to Inventory of Borrower which is located at such contractors.


“Current
Liabilities” at a particular date, shall mean, without duplication, all
amounts which would, in conformity with GAAP, be included under current
liabilities on a balance sheet of Loan Parties on a Consolidated Basis, as at
such date, but in any event including, without limitation, the amounts of (a)
all Indebtedness of Loan Parties on a Consolidated Basis payable on demand, or,
at the option of the Person to whom such Indebtedness is owed, not more than
twelve (12) months after such date, (b) any payments in respect of any
Indebtedness of any Loan Party (whether installment, serial maturity, sinking
fund payment or otherwise) required to be made not more than twelve (12) months
after such date, (c) all reserves in respect of liabilities or Indebtedness
payable on demand or, at the option of the Person to whom such Indebtedness is
owed, not more than twelve (12) months after such date, the validity of which
is not contested at such date, and (d) all accruals for federal or other taxes
measured by income payable within a twelve (12) month period.


“Customer” shall mean and include the account debtor with
respect to any Receivable and/or the prospective purchaser of goods, services
or both with respect to any contract or contract right, and/or any party who
enters into or proposes to enter into any contract or other arrangement with
any Loan Party, pursuant to which any Loan Party is to deliver any personal
property or perform any services.


“Customs”
shall mean the U.S. Customs Service and any successor thereto.


“Default”
shall mean an event which, with the giving of notice or passage of time or
both, would constitute an Event of Default.


“Default Rate” shall have the meaning set forth in Section 3.1.


“Defaulting
Lender” shall have the meaning set forth in Section 2.16(a).


“Depository
Accounts” shall have the meaning set forth in Section 4.15(h).


“Documentary
Letters of Credit” shall mean all Letters of Credit issued in connection
with this Agreement to pay the purchase price for Inventory purchased by
Borrower.


“Documents”
shall have the meaning set forth in Section 8.1(c).


“Dollar”
and the sign “$” shall mean lawful money of the United States of America.


“Domestic Rate
Loan” shall mean any Advance that bears interest based upon the Base Rate.


“Early
Termination Date” shall have the meaning set forth in Section 13.1. 


 


7

















“Eligible Factored Receivables” shall mean Receivables that
have been credit approved by the Factor pursuant to the Factoring Agreement and
the proceeds of which will constitute part of the credit balance in favor of
the Borrower thereunder and which have been assigned to Agent pursuant to an
Assignment of Factoring Proceeds.


“Eligible
Inventory” shall mean and include Inventory consisting of finished goods,
owned by and in the possession of Borrower and located at premises of Borrower
listed on Schedule 4.5,
valued at the lower of cost or market value, determined on a first-in-first-out
basis, which is not, in Agent’s opinion, obsolete, slow moving or
unmerchantable and which Agent, in its reasonable discretion, shall deem to be
eligible Inventory, based on such considerations as Agent may from time to time
deem appropriate in its reasonable discretion including, without limitation,
whether such Inventory is subject to a perfected, first priority security
interest in favor of Agent and no other Lien (other than Permitted
Encumbrances) and whether such Inventory conforms to all standards imposed by
any governmental agency, division or department thereof which has regulatory
authority over such goods or the use or sale thereof. Eligible Inventory shall
not include licensed or private-label Inventory, unless (i) Borrower is the
owner of such license or private-label, or (ii) a consent, in form and
substance satisfactory to Agent, has been obtained from the owner of such
license or private-label with respect to Agent’s security interest in such
Inventory. Eligible Inventory shall include all Inventory in-transit for which
title has passed to Borrower, which is insured to the full value thereof, and
for which Agent has in its possession (a) all negotiable bills of lading,
properly endorsed, and (b) all non-negotiable bills of lading issued in Agent’s
name.


“Eligible
Receivables” shall mean and include each Receivable of Borrower arising in
the ordinary course of Borrower’s business which is not an Eligible Factored
Receivable and which Agent, in its reasonable credit judgment, shall deem to be
an Eligible Receivable, based on such considerations as Agent may from time to
time deem appropriate in its reasonable discretion. A Receivable shall not be
deemed eligible unless such Receivable is subject to Agent’s first priority
perfected security interest and no other Lien (other than Permitted
Encumbrances described in clauses (a), (b), (c) and (f) of the definition
thereof), and is evidenced by an invoice or other documentary evidence
satisfactory to Agent. In addition, no Receivable shall be an Eligible
Receivable if:


(a) it arises out
of a sale made by Borrower to an Affiliate of Borrower or to a Person
controlled by an Affiliate of Borrower; provided that Portfolio Company
Receivables shall be Eligible Receivables to the extent they otherwise meet the
eligibility criteria;


(b) it is due or
unpaid more than ninety (90) days after the original due date;


(c) more than 50%
of the Receivables from such Customer are not deemed Eligible Receivables
hereunder;


(d) any covenant,
representation or warranty contained in this Agreement with respect to such
Receivable has been breached;


(e) the Customer
shall (i) apply for, suffer, or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself or of all
or a


 


8

















substantial part of its property or call a meeting of
its creditors, (ii) admit in writing its inability, or be generally unable, to
pay its debts as they become due or cease operations of its present business, (iii) make a general assignment for the
benefit of creditors, (iv) commence a voluntary case under any state or
federal bankruptcy laws (as now or hereafter in effect), (v) be adjudicated a
bankrupt or insolvent, (vi) file a petition seeking to take advantage of any
other law providing for the relief of debtors, (vii) acquiesce to, or fail to
have dismissed, any petition which is filed against it in any involuntary case
under such bankruptcy laws, or (viii) take any action for the purpose of effecting any of the foregoing;


(f) the sale is to a Customer
outside the United States of America or Canada, unless the sale is on
letter of credit, guaranty or acceptance terms, in each case acceptable to
Agent in its sole discretion;


(g) the sale to the Customer is
on a bill-and-hold, guaranteed sale, sale-and-return, sale on approval,
consignment or any other repurchase or return basis or is evidenced by chattel
paper;


(h) Agent believes, in its reasonable credit judgment,
that collection of such Receivable is insecure or that such Receivable may not
be paid by reason of the Customer’s financial
inability to pay;


(i) the Customer is the United States of America, any
state or any department, agency or instrumentality of any of them, unless
Borrower assigns its right to payment of such Receivable to Agent pursuant to
the Assignment of Claims Act of 1940, as amended (31 U.S.C. Sub-Section 3727 et
seq. and 41 U.S.C. Sub-Section 15 et  seq.) or has otherwise
complied with other applicable statutes or ordinances;


(j) the goods giving rise to such
Receivable have not been shipped and delivered to and accepted by the
Customer or the services giving rise to such Receivable have not been performed by Borrower and accepted by
the Customer or the Receivable otherwise does not represent a final
sale, except for customary rights of return in accordance with practices
disclosed in writing to Agent;


(k) the Receivables of the Customer exceed a credit
limit determined by Agent, in its
reasonable credit judgment, to the extent such Receivable exceeds such limit;


(1) the Receivable is subject to any offset,
deduction, defense, dispute, or counterclaim, (except that the amount of the
Receivable in excess of such offset, deduction, defense, dispute or counterclaim shall not be ineligible due to the
operation this clause (1)) or the Receivable is contingent in any
respect or for any reason;


(m) the Borrower has made any
agreement with any Customer for any deduction
therefrom, except for discounts or allowances made in the ordinary course of
business for prompt payment, all of which discounts or allowances are
reflected in the calculation of the face value of each respective invoice related
thereto;


(n) any return, rejection or
repossession of the merchandise has occurred;


 


9

















(o) such Receivable is
not payable to Borrower;


(p) Receivables with respect to which the Customer is
located in New Jersey, Minnesota, or any
other state denying creditors access to its courts in the absence of a Notice
of Business Activities Report or other similar filing, unless Borrower
is incorporated under the laws of such state
or has either qualified as a foreign corporation authorized to transact
business in such state or has filed a Notice of Business Activities
Report or similar filing with the applicable state agency for the then current
year; or


(q) such Receivable is not otherwise satisfactory to
Agent as determined in good faith by Agent in the exercise of its discretion in
a reasonable manner.


“Environmental Complaint” shall have the
meaning set forth in Section 4.19(d).


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


“Equipment” shall mean and
include as to each Loan Party, all of such Loan Party’s goods (other than
Inventory) whether now owned or hereafter acquired and wherever located
including, without limitation, all equipment, machinery, apparatus, motor
vehicles, fittings, furniture, furnishings, fixtures, parts, accessories and
all replacements and substitutions therefor or accessions thereto.


“ERISA” shall mean the Employee Retirement
Income Security Act of 1974, as amended from time to time and the rules and
regulations promulgated thereunder.


“Escrow Agreement” means the Escrow Agreement
dated as of June 20, 2005 among the Purchaser, the Borrower, Rafaella
Sportswear, Inc., Ronald Frankel and JPMorgan Chase Bank, N.A., as escrow agent
and securities intermediary thereunder.


“Eurodollar Rate” shall mean for any Eurodollar
Rate Loan for the then current Interest
Period relating thereto the rate per annum (such Eurodollar Rate to be adjusted
to the next higher 1/100 of one percent (1%)) equal to the Adjusted LIBO
Rate.


“Eurodollar Rate Loan” shall mean an Advance at
any time that bears interest based on the
Adjusted LIBO Rate.


“Event of Default” shall mean the occurrence of
any of the events set forth in Article X.


“Existing Air Release/Steamship Guarantee”
shall have the meaning provided in Section
2.10(g).


“Existing Letter of Credit”
shall have the meaning provided in Section 2.10(g).


 


10

















“Factor”
shall mean GMAC Commercial Finance LLC and any other factor that is acceptable
to Agent in its sole judgment.


“Factoring Agreement” shall mean the Factoring
Agreement dated as of the Closing Date between Factor and Borrower, as such
agreement is supplemented, modified, amended,
amended and restated, or replaced with the consent of Agent, together in each
case with an Assignment of Factoring Proceeds related thereto.


“Federal Funds Rate” shall mean, for any day,
the weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or if such day is
not a Business Day, for the next preceding Business Day) by the Federal Reserve
Bank of New York, or if such rate is not so published for any day which
is a Business Day, the average of quotations for such day on such transactions received by Agent from three Federal
funds brokers of recognized standing selected by Agent.


“Fee Letter” shall mean the fee letter dated
June 20, 2005, between Borrower and HSBC.


“Formula Amount” shall have the meaning set
forth in Section 2.1(b).


“GAAP” shall mean
generally accepted accounting principles in the United States of America
in effect from time to time.


“General Intangibles” shall mean and include as
to each Loan Party, all of such Loan Party’s
general intangibles, whether now owned or hereafter acquired including, without
limitation, all payment intangibles, closes in action, commercial tort
claims, causes of action, corporate or other business records, inventions,
designs, patents, patent applications, equipment formulations, manufacturing procedures, quality control procedures,
trademarks, service marks, trade secrets, goodwill, copyrights, design
rights, registrations, licenses, franchises, customer lists, tax refunds, tax refund claims, computer programs and computer
software, all claims under guaranties, security interests or other
security held by or granted to such Loan Party to secure payment of any of the
Receivables by a Customer, all rights of indemnification and all other
intangible property of every kind and nature (other than Receivables).


“Governmental Body” shall mean any nation or
government, any state or other political subdivision thereof or any entity
exercising the legislative, judicial, regulatory or administrative functions of
or pertaining to a government.


“Guarantor” or “Guarantors” shall have
the meaning set forth in the preamble to this Agreement and shall extend to all
permitted successors and assigns of such Persons.


“Guaranty” shall mean the guaranty set forth in
Article XV of this Agreement and any other
guaranty of the obligations of Borrower executed by a Guarantor in favor of
Agent for its benefit and for the ratable benefit of Lenders.


“Hazardous Discharge”
shall have the meaning set forth in Section 4.19(d). 


 


11

















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


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


“Hedge
Agreement” shall mean an Interest Rate Agreement or a Currency Agreement.


“HSBC”
shall have the meaning set forth in the preamble to this Agreement and shall
include its successors and assigns.


“HSBC L/C
Program” shall mean the HSBC Supply Chain Solutions program, as in effect
from time to time.


“Indebtedness”
of a Person at a particular date shall mean all obligations of such Person
which in accordance with GAAP would be classified upon a balance sheet as
liabilities (except capital stock and surplus earned or otherwise) and in any
event, without limitation by reason of enumeration, shall include (a) all
indebtedness, debt and similar monetary obligations of such Person whether direct
or guaranteed; (b) all indebtedness for borrowed money; (c) that portion of
obligations with respect to capital leases that is properly classified as a
liability on a balance sheet in conformity with GAAP; (d) notes payable and
drafts accepted representing extensions of credit whether or not representing
obligations for borrowed money; (e) any obligation owed for all or any part of
the deferred purchase price of property or services if the purchase price is
due more than six (6) months from the date the obligation is incurred or is
evidenced by a note or similar written instrument; and (f) all indebtedness
secured by any Lien on any property or asset owned or held by that Person
regardless of whether the indebtedness secured thereby shall have been assumed
by that Person or is nonrecourse to the credit of that Person.


“Intercreditor
Agreement” shall mean the Intercreditor Agreement dated as of the date
hereof among Agent, Borrower and Senior Note Agent, as amended, restated,
supplemented or otherwise modified from time to time.


“Interest
Period” shall mean the period provided for any Eurodollar Rate Loan
pursuant to Section 2.2(b).


“Interest Rate
Agreement” means any interest rate swap agreement (whether from fixed to
floating or from floating to fixed), interest rate cap agreement, interest rate
collar agreement, interest rate hedging agreement or other similar agreement or
arrangement, each of which is for the purpose of hedging the interest rate
exposure associated with Borrower’s and its Subsidiaries’ operations and not
for speculative purposes.


 


12

















“Inventory” shall mean and include, as to each Loan Party,
all of such Loan Party’s now owned or hereafter acquired goods, merchandise and
other personal property, wherever located, to be furnished under any contract
of service or held for sale or lease, all raw materials, work in process,
finished goods and materials and supplies of any kind, nature or description
which are or might be used or consumed in such Loan Party’s business or used in
selling or furnishing such goods, merchandise and other personal property, all
other inventory of such Loan Party, and all documents of title or other
documents representing them.


“Inventory
Advance Cap” shall mean $45,000,000.00.


“Inventory
Advance Rate” shall have the meaning set forth in Section 2.1(b)(y)(ii).


“Investment
Property” shall mean and include as to each Loan Party, all of such Loan
Party’s now owned or hereafter acquired securities (whether certificated or uncertificated),
securities entitlements, securities accounts, commodities contracts,
commodities accounts, stocks, mutual fund shares, money market shares and U.S.
Government securities.


“Issuer”
shall mean any Person who issues a Letter of Credit and/or accepts a draft
pursuant to the terms thereof, it being agreed that so long as HSBC shall be
Agent or a Lender, and IBD shall be a Lender, then the Issuer shall be HSBC (or
any corporation that directly or indirectly controls or is controlled by or it
under common control with HSBC) or, at the request of HSBC, IDB; provided,
however, that in the event that HSBC is neither Agent nor a Lender, the
“Issuer” with respect to all subsequently issued Letters of Credit shall be
either IDB or any other Lender selected by Loan Parties.


“Lender”
and “Lenders” shall have the meaning ascribed to such term in the
preamble to this Agreement and shall include each Person which becomes a
transferee, successor or assign of any Lender.


“Lender Default”
shall have the meaning set forth in Section 2.16(a).


“Letter of
Credit Application” shall have the meaning set forth in Section 2.10.


“Letter of
Credit and Guarantee Fees” shall have the meaning set forth in Section 3.2.


“Letters of
Credit” shall have the meaning set forth in Section 2.9.


“Lien”
shall mean any mortgage, deed of trust, pledge, hypothecation, assignment,
security interest, lien (whether statutory or otherwise), claim or encumbrance,
or preference, priority or other security agreement or preferential arrangement
held or asserted in respect of any asset of any kind or nature whatsoever
including, without limitation, any conditional sale or other title retention
agreement, any lease having substantially the same economic effect as any of
the foregoing, and the filing of, or agreement to give, any financing statement
under the UCC or comparable law of any jurisdiction.


 


13

















“Loan Party” shall mean, individually, the Borrower and
each Guarantor, and “Loan Parties” shall mean, collectively, the
Borrower and the Guarantors.


“Loan Parties
on a Consolidated Basis” shall mean the consolidation in accordance with
GAAP of the accounts or other items of Loan Parties and their respective
Subsidiaries.


“Material
Adverse Effect” shall mean a material adverse effect on (a) the business,
operations, assets or financial condition of the Loan Parties, taken as a
whole, (b) any Loan Party’s ability to pay the Obligations in accordance with
the terms thereof, (c) the value of the Collateral, taken as a whole, or
Agent’s Liens on any material amount of the Collateral or the priority of any
such Lien or (d) the practical realization of the benefits of Agent’s and each
Lender’s rights and remedies under this Agreement and the Other Documents.


“Maximum Direct
Debt Sublimit” shall mean $45,000,000.


“Maximum Loan
Amount” shall mean $62,500,000.


“Maximum
Swingline Loan Amount” shall mean $5,000,000. 


“Multiemployer
Plan” shall mean a “multiemployer plan” as defined in Sections 3(37) and
4001(a)(3) of ERISA.


“Net Income”
shall mean, for any period, the aggregate income (or loss) of Loan Parties on a
Consolidated Basis for such period, all computed and calculated in accordance
with GAAP.


“Non-Defaulting
Lenders” shall have the meaning set forth in Section 2.16(b).


“Notes”
shall mean, collectively, the Revolving Credit Note and the Swingline Note.


“Obligations”
shall mean and include any and all of each Loan Party’s Indebtedness and/or
liabilities to Agent, Lenders or any Issuer, or any corporation that directly
or indirectly controls or is controlled by or is under common control with
Agent, any Lender or any Issuer, under this Agreement and the Other Documents,
of every kind, nature and description, direct or indirect, secured or
unsecured, joint, several, joint and several, absolute or contingent, due or to
become due, now existing or hereafter arising, contractual or tortious,
liquidated or unliquidated, regardless of how such indebtedness or liabilities
arise or by what agreement or instrument they may be evidenced or whether
evidenced by any agreement or instrument (including all interest accruing after
the commencement of any bankruptcy or similar proceeding whether or not
enforceable in such proceeding) including, without limitation, Bank Products
and all obligations of any Loan Party to Agent, Lenders or any Issuer to
perform acts or refrain from taking any action.


“Original Term”
shall have the meaning set forth in Section 13.1.


 


14

















“Other Documents”
shall mean the Notes, the Questionnaire, the Assignment of Factoring Proceeds
and any and all other agreements, instruments and documents, including, without
limitation, guaranties, pledges, powers of attorney, consents, and all other
writings heretofore, now or hereafter executed by any Person and/or delivered
to Agent or any Lender in respect of the transactions contemplated by this
Agreement.


“Parent” of any Person shall mean a corporation
or other entity owning, directly or indirectly, more than 50% of the shares of
stock or other ownership interests having ordinary voting power to elect a
majority of the directors of the Person, or other Persons performing similar
functions for any such Person.


“Participant” shall mean each Person who shall
be granted the right by any Lender to participate in any of the Advances and
who shall have entered into a participation agreement in form and substance
satisfactory to such Lender.


“Payment Office” shall mean initially 452 Fifth
Avenue, New York, New York 10018; thereafter, such other office of Agent, if
any, which it may designate by notice to the Borrower and to each Lender to be
the Payment Office.


“PBGC” shall mean the Pension Benefit Guaranty
Corporation.


“Permitted Disposition” means (a) sales or
other dispositions of equipment that is substantially worn, damaged, or
obsolete in the ordinary course of business, (b) sales and leases of inventory
to buyers in the ordinary course of business, (c) the use or transfer of money
or Cash Equivalents in a manner that is not prohibited by the terms of the
Agreement or the Other Documents, (d) the licensing, on a non-exclusive basis,
of patents, trademarks, copyrights, and other intellectual property rights in
the ordinary course of business, including without limitation, non-exclusive
licenses of such Person’s company name to resellers pursuant to reseller
agreements, and (e) dispositions permitted by Section 4.3.


“Permitted Encumbrances” shall mean (a) Liens
in favor of Agent for the benefit of Agent, Lenders and/or any Issuer, which,
in each case, secure Obligations; (b) Liens for taxes, assessments or other
governmental charges not delinquent or being contested in good faith and by
appropriate proceedings and with respect to which proper reserves have been
taken by Loan Parties; provided, that, a stay of enforcement of
any such Lien shall be in effect; (c) Liens disclosed in the financial
statements referred to in Section 5.5, the existence of which Agent has
consented to in writing; (d) deposits or pledges to secure obligations under
worker’s compensation, social security or similar laws, or under unemployment
insurance; (e) deposits or pledges to secure bids, tenders, contracts (other
than contracts for the payment of money), leases, statutory obligations, surety
and appeal bonds and other obligations of like nature arising in the ordinary
course of any Loan Party’s business; (f) judgment Liens that have been stayed
or bonded and mechanics’, landlords’, carriers’, warehousemens’, workers’,
materialmen’s or other like Liens arising in the ordinary course of any Loan
Party’s business with respect to obligations which are not due or which are
being contested in good faith by the applicable Loan Party; (g) Liens placed
upon fixed assets hereafter acquired to secure a portion of the purchase price
thereof, provided that (x) any such lien shall not encumber any other property
of Loan Parties and (y) the aggregate amount of Indebtedness secured by such
Liens incurred as a result of such


 


15

















purchases during any fiscal year shall not exceed the amount provided
for in Section 7.8(v); (h) Liens disclosed on Schedule
7.2, or on a title report delivered with respect to any real
estate subject to a mortgage in favor of the Agent; (i) easements, rights-of-way,
restrictions, encroachments, and other minor defects or irregularities in
title, in each case which do not and will not interfere in any material respect
with the ordinary conduct of the business of Borrower or any of its
Subsidiaries; (j) any interest or title of a lessor or sublessor under any
lease of real or personal property which is not a Capital Lease; (k) purported
Liens evidenced by the filing of precautionary UCC financing statements
relating solely to operating leases of personal property entered into in the
ordinary course of business; (1) Liens in favor of Customs and revenue
authorities or freight handlers, or forwarders to secure payment of Customs
duties in connection with the importation of goods; (m) any zoning or similar
law or right reserved to or vested in any Governmental Body; (n) Liens securing
Indebtedness permitted pursuant to Section 7.8(v); provided, any such
Lien shall encumber only the asset acquired, constructed or improved with the
proceeds of such Indebtedness and substitutions and replacements thereof and
accessions and attachments thereto, and extensions, renewals and replacements
of such Liens; provided, that any extension, renewal or replacement is
no more restrictive in any material respect than the Liens so extended, renewed
or replaced and does not extend to any additional property or assets; (o)
customary security deposits under operating leases in the ordinary course of
business; (p) customary rights of set off, bankers’ lien, refund or charge back
under deposit agreements, the Uniform Commercial Code or common law of banks or
other financial institutions where Borrower or any of its Subsidiaries
maintains deposits (other than deposits intended as cash collateral) in the
ordinary course of business; (q) Liens in connection with permitted repurchase
obligations; and (r) Liens in favor of any Loan Party; (5) (i) Liens on
property, plant and equipment of a Person existing at the time such Person is
merged with or into or consolidated with, or the assets of such Person are
acquired by, Borrower or a Subsidiary thereof; provided, that such Liens
were in existence prior to and were not incurred in connection with or in
contemplation of such merger or consolidation or acquisition and do not extend
to any assets other than those of the Person merged into or consolidated with
or acquired by Borrower or such Subsidiary and (ii) extensions, renewals and
replacements of any Liens set forth in clause (i) of this subsection (r) provided,
that any such extension, renewal or replacement is no more restrictive in any
material respect than the Lien so extended, renewed or replaced and does not
extend to any additional property or assets; (s) other Liens on assets other
than the Collateral securing Indebtedness in an aggregate amount not to exceed
$1,000,000 at any time outstanding pursuant to the Escrow Agreement, and (t)
any Liens on any interest of any Loan Party in the funds held in the “First
Escrow Account” or the “Second Escrow Account” under and as defined in the
Escrow Agreement.


“Permitted Holders” means (a) Cerberus and (b)
any investment funds and managed accounts which are managed or advised by
Cerberus or an Affiliate of Cerberus.


“Permitted Investments” means:


(a) Investments in cash and Cash Equivalents;


(b) obligations, stock or other ownership interests
owned as of the Closing Date in any Subsidiary;


 


16

















(c) Investments
(i) received in satisfaction or partial satisfaction of delinquent accounts and
disputes with
customers or suppliers of such Person in the ordinary course of business; or
(ii) acquired as a result of foreclosure of a Lien securing an investment or
the transfer of the assets subject to such Lien in lieu of foreclosure;


(d) loans to the
extent permitted under Section 7.5;


(e) Investments
described in Schedule 7.4;


(f) extensions of
credit to customers or advances, deposits and payment to or with suppliers,
lessors or utilities or for workers’ compensation, in each case, in the
ordinary course of business that are recorded as accounts receivable, prepaid
expenses or deposits on the balance sheet of the Borrower and its Subsidiaries
prepared in accordance with GAAP;


(g) Investments
constituting non-cash consideration received by Borrower or any of its
Subsidiaries in connection with Permitted Dispositions and other sales and
dispositions permitted under Section 7.1.(b); and


(h) Investments
under Hedge Agreements to the extent permitted under Section 7.8;


(i) Investments in
joint ventures with any buying agent of Borrower to facilitate the purchase of
Inventory so long as Borrower shall not become liable in respect of any
Indebtedness of such joint ventures in excess of $5,000,000 at any time
outstanding;


(j) Investments in
connection with the purchase or redemption of Senior Secured Notes made in
accordance with Section 7.18; and


(k) Investments of
any funds held in the “First Escrow Account” or the “Second Escrow Account”
under and as defined in the Escrow Agreement.


“Person”
shall mean any individual, sole proprietorship, partnership, corporation,
business trust, joint stock company, trust, unincorporated organization,
association, limited liability company, institution, public benefit
corporation, joint venture, entity or government (whether Federal, state, county,
city, municipal or otherwise, including any instrumentality, division, agency,
body or department thereof).


“Plan”
shall mean any employee benefit plan within the meaning of Section 3(3) of
ERISA, maintained for employees of any Loan Party or any member of the
Controlled Group or any such Plan to which any Loan Party or any member of the
Controlled Group is required to contribute on behalf of any of its employees.


“Portfolio
Company Receivable” means a Receivable of Borrower owing by an Affiliate of
Borrower (i) that contains arms-length terms and arises in the ordinary course
of business of Borrower and such Affiliate and (ii) the Customer with respect
thereto is an Affiliate of Borrower solely as a result of common ownership by
Permitted Holders or the existence of common directors with Borrower and such
Customer.


 


17

















“Pro Forma
Balance Sheet” shall have the meaning set forth in Section 5.5(a).


“Pro Forma
Financial Statements” shall have the meaning set forth in Section 5.5(b).


“Purchaser”
shall mean RA Cerberus Acquisition, LLC, a Delaware limited liability company.


“Purchasing
Lender” shall have the meaning set forth in Section 16.3(c).


“ Questionnaire”
shall mean the Documentation Information Questionnaire and the responses
thereto provided by Loan Parties and delivered to Agent.


“Rafaella Inc.”
shall mean Rafaella Sportswear, Inc., a Delaware corporation.


“RCRA”
shall mean the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901 et
seq., as same may be amended from time to time.


“Real Property”
shall have the meaning set forth in Section 4.19(i).


“Recapitalization” shall mean, collectively, (i) the
contribution of the assets of Rafaella Inc. to Borrower and the assumption of
the liabilities of Rafaella Inc. by Borrower pursuant to the Contribution
Agreement, (ii) the issuance of the Senior Secured Notes, (iii) the acquisition
of 100% of the preferred capital stock (which is convertible into 75% of the
common capital stock) in Borrower by Cerberus pursuant to the Securities
Purchase Agreement, and (iv) the redemption of the 75% of the common in
Borrower owned by Rafaella Sportswear, Inc.


“Receivables” Shall mean and include as to each Loan Party,
all of such Loan Party’s accounts (including, without limitation, all
health-care insurance receivables), contract rights, instruments (including
promissory notes and other instruments evidencing Indebtedness owed to such
Loan Party by their Affiliates), chattel paper (whether tangible or
electronic), General Intangibles relating to accounts, drafts and acceptances,
and all other forms of obligations owing to such Loan Party arising out of or
in connection with the sale, lease or other disposition of Inventory or the
rendition of services, all guarantees and other security therefor, whether
secured or unsecured, now existing or hereafter created, and whether or not
specifically sold or assigned to Agent hereunder.


“Receivables Advance Rate” shall have the meaning set forth
in Section 2.1(b)(y)(i).


“Release” shall have the meaning set forth in Section
5.7(c).


“Reportable Event” shall mean a reportable event described
in Section 4043(b) of ERISA or the regulations promulgated thereunder.


“Required Lenders” shall mean Lenders holding at least
sixty six and two-thirds percent (66 2/3%) of the Advances and, if no Advances
are outstanding, shall mean Lenders holding sixty six and two-thirds percent
(66 2/3%) of the Commitment Percentages.


 


18

















“Reserves” shall mean such reserves as Agent may reasonably
deem proper and necessary from time to time, (a) to reflect events, conditions,
contingencies or risks which, as determined by Agent in good faith, adversely
affect, or would have a reasonable likelihood of adversely affecting, either
(i) the Collateral or any other property which is security for the Obligations,
its value or the amount that might be received by Agent from the sale or other
disposition or realization upon such Collateral, or (ii) the security interests
and other rights of Agent or any Lender in the Collateral (including the
enforceability, perfection and priority thereof) or (b) to reflect Agent’s good
faith belief that any collateral report or financial information furnished by
or on behalf of any Borrower to Agent is or may have been incomplete,
inaccurate or misleading in any material respect, or (c) to reflect outstanding
Letters of Credit, or (d) in respect of any state of facts which Agent
determines in good faith constitutes a Default or an Event of Default; and also
including the Availability Reserve.


“Revolving Advances” shall mean Advances made other than
Swingline Loans, Letters of Credit, and Air Release/Steamship Guarantees.


“Revolving Credit Note” shall mean, collectively, the
promissory notes referred to in Section 2.1(a).


“Revolving Interest Rate” shall mean an interest rate per
annum equal to (a) the sum of Base Rate minus one-half of one percent
(0.50%) per annum with respect to Domestic Rate Loans and (b) the sum of the
Eurodollar Rate plus two and one-quarter percent (2.25%) per annum with
respect to Eurodollar Rate Loans.


“Securities Purchase Agreement” shall mean the Securities
Purchase Agreement, dated as of April 15, 2004, by and among Purchaser,
Borrower, Rafaella Inc., Verrazano, and Ronald Frankel.


“Senior Note Agent” shall mean The Bank of New York, as
Trustee, arid its successors and assigns.


“Senior Note Debt” shall mean all Indebtedness of Borrower
under or in connection with the Senior Note Documentation.


“Senior Note Documentation” shall mean the Senior Note
Indenture, the Senior Secured Notes and any agreements, documents and
instruments relating thereto.


“Senior Note Indenture” shall mean that certain Indenture
dated as of June 20, 2005 among Borrower, the Guarantors and The Bank of New
York, as Trustee and Collateral Agent.


“Senior Secured Notes” shall mean the 11.25% Senior Secured
Notes due 2011 issued by Borrower.


“Settlement Date” shall mean the Closing Date and
thereafter Monday of each week, unless such day is not a Business Day in which
case it shall be the next succeeding Business Day, and every other Business Day
designated by Agent as a “Settlement Date” by notice from Agent to each Lender.


 


19

















“Standby Letters of Credit” shall mean all Letters of
Credit issued in connection with this Agreement as a credit enhancement for
certain Indebtedness of Loan Parties.


“Subsidiary” shall mean, with respect to any Person, a
corporation or other entity of whose shares of stock or other ownership
interests having ordinary voting power (other than stock or other ownership
interests having such power only by reason of the happening of a contingency)
to elect a majority of the directors of such corporation, or other Persons
performing similar functions for such entity, are owned, directly or
indirectly, by such Person.


“Swingline Lender” means HSBC, or if HSBC shall resign as
Swingline Lender, another Lender selected by Agent and reasonably acceptable to
Borrower.


“Swingline Loan” means each Advance made by Swingline
Lender pursuant to Section 2.4.


“Swingline Note” shall mean the promissory note referred to
in Section 2.4.


“Term” shall mean the period commencing on the Closing Date
and ending on the Termination Date.


“Termination Date” shall have the meaning set forth in
Section 13.1.


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


“Toxic Substance” shall mean and include any material
present on the Real Property or the Leasehold Interests which has been shown to
have significant adverse effect on human health or which is subject to
regulation under the Toxic Substances Control Act (TSCA), 15 U.S.C. §§ 2601 et
seq., applicable state law, or any other applicable Federal or state laws
now in force or hereafter enacted relating to toxic substances. “Toxic
Substance” includes but is not limited to asbestos, polychlorinated biphenyls
(PCBs) and lead-based paints.


“Transactions” shall have the meaning set forth in Section
5.5.


“Transferee” shall have the meaning set forth in Section
16.3.


“UCC” shall mean the Uniform Commercial Code as in effect
in the State of New York from time to time.


 


20

















“Week” shall mean the time period commencing with the
opening of business on a Monday and ending on the end of business the following
Sunday.


“Working Capital” shall mean as of any date of
determination, the excess, if any, of Current Assets over Current Liabilities
at such date.


1.3. UCC Terms.


All terms used herein and defined in the UCC shall have the
meaning given therein unless otherwise defined herein.


1.4. Certain Matters of Construction.


The terms “herein”, “hereof” and “hereunder” and other words of
similar import refer to this Agreement as a whole and not to any particular
section, paragraph or subdivision. Each reference to a Section, an Exhibit or a
Schedule shall be deemed to refer to a Section, an Exhibit or a Schedule, as
applicable, of this Agreement, as modified or supplemented with the consent of
Agent unless otherwise specified. Any pronoun used shall be deemed to cover all
genders. Wherever appropriate in the context, terms used herein in the singular
also include the plural and vice versa. All references to
statutes (including the UCC) and related regulations shall include any
amendments of sam e and any successor statutes and regulations. Unless
otherwise provided, all references to any instruments or agreements to which
Agent is a party, including, without limitation, references to any of the Other
Documents, shall include any and all modifications, restatements, supplements
or amendments thereto and any and all extensions or renewals thereof. For
purposes of Sections 3.1, 3.5, 3.6, 3.7, 3.8, Articles IV, V, VIII, XI, XII,
XIII, XIV, and XV, the term “Lender” shall include each Lender and Swingline
Lender.


II.        ADVANCES, PAYMENTS.


2.1. Maximum Advances.


(a) Direct Debt Advances. Subject to the terms and
conditions set forth in this Agreement (including, without limitation, Sections
2.1(b) and (c)), each Lender, severally and not jointly, will make Revolving
Advances to Borrower in aggregate amounts outstanding at any time not to exceed
such Lender’s Commitment Percentage of the Maximum Direct Debt Sublimit. The
Revolving Advances shall be evidenced by one or more secured promissory notes
(each, a “Revolving Credit Note”) substantially in the form attached
hereto as Exhibit 2.1(a).


(b) All Advances. The aggregate balance of Revolving
Advances outstanding plus the aggregate amount of Letters of Credit and
Air Releases/Steamship Guarantees outstanding plus the aggregate
principal amount of Swingline Loans outstanding at any time shall not exceed
the lesser of (x) the Maximum Loan Amount and (y) an amount equal to the sum
of:


(i) the sum subject to the provisions of Section 2.1(c) (A) 85%
(the “Receivables Advance Rate”) of Eligible Receivables plus (B)
Receivables Advance Rate of Eligible Factored Receivables, plus


 


21

















(ii) the lesser of (A) the sum of (1) 50%, subject to the
provisions of Section O (the “Inventory Advance Rate”) of Eligible
Inventory (including up to $10,000,000 of Eligible Inventory consisting of
in-transit Inventory), plus (II) the Inventory Advance Rate of
outstanding Documentary Letters of Credit, provided that the foregoing
shall include only Documentary Letters of Credit utilized to purchase finished
goods Inventory, or (B) the Inventory Advance Cap; minus


(iii) Reserves.


The amount derived
from the sum of Sections 2.1(b)(y)(i) plus 2.1(b)(y)(ii) minus Section
2.1(b)(y)(iii) at any time and from time to time shall be referred to as the “Formula
Amount”.


(c) Discretionary Rights. The Advance Rates may be
increased or decreased by Agent at any time and from time to time, upon five
(5) Business Days notice to Borrower, based upon a material change in such
Borrower’s financial circumstances, to be done in the exercise of its good
faith business judgment based upon the lending practices of Agent, consistent
with criteria customary in the commercial finance industry generally. Borrower
consents to any such increases or decreases and acknowledge that decreasing the
Advance Rates or increasing the Reserves may limit or restrict Advances
requested by the Borrower.


2.2. Procedure for Borrowing.


(a) Borrower may notify Agent prior to 12:00 noon (New York City
time) on a Business Day of Borrower’s request to incur, on that day, a
Revolving Advance hereunder. Any amount required to be paid as interest
hereunder, or as fees or other charges under this Agreement or any other
agreement with Agent, Lenders and/or any Issuer, or with respect to any other
Obligation, which shall become due, shall be deemed a request for an Advance as
of the date such payment is due, in the amount required to pay in full such
interest, fee, charge or Obligation under this Agreement, or any other
agreement with Agent, Lenders and/or any Issuer and such request shall be
irrevocable.


(b) Notwithstanding the provisions of (a) above, in
the event Borrower desires to obtain a Eurodollar Rate Loan, Borrower shall
give Agent at least three (3) Business Days’ prior written notice (or such
shorter period as the Agent, in its sole discretion, is willing to
accommodate), specifying (i) the date of the proposed borrowing (which shall be
a Business Day), (ii) the type of borrowing and the amount on the date of such
Advance to be borrowed, which amount shall be in a minimum amount of $1,000,000
and in integral multiples of $250,000 in excess thereof, and (iii) the duration
of the first Interest Period therefor. Interest Periods for Eurodollar Rate
Loans shall be for one, two, three, four, five, six, nine or twelve months. No
Eurodollar Rate Loan shall be made available to Borrower during the continuance
of a Default or an Event of Default. After giving effect to each such
borrowing, there shall not be outstanding more than ten (10) Eurodollar Rate
Loans, in the aggregate at any time.


(c) Each Interest Period of a Eurodollar Rate Loan
shall commence on the date such Eurodollar Rate Loan is made and shall end on
such date as Borrower may elect as set forth in (b)(iii) above provided that
the exact length of each Interest Period shall be determined in accordance with
the practice of the London interbank market for Dollar deposits and no Interest
Period shall end after the Termination Date.


 


22

















(d) Borrower shall elect the initial Interest Period applicable to
a Eurodollar Rate Loan by its notice of borrowing given to Agent pursuant to
Section 2.2(b) or by its notice of conversion given to Agent pursuant to
Section 2.2(e), as the case may be. Borrower shall elect the duration of each
succeeding Interest Period by giving irrevocable written notice to Agent of
such duration not less than three (3) Business Days prior to the last day of
the then current Interest Period applicable to such Eurodollar Rate Loan. If
Agent does not receive timely notice of the Interest Period elected by
Borrower, Borrower shall be deemed to have elected an Interest Period of one
month.


(e) Provided that no Event of Default shall have occurred and be
continuing, Borrower may, on the last Business Day of the then current Interest
Period applicable to any outstanding Eurodollar Rate Loan, or on any Business
Day with respect to Domestic Rate Loans, convert any such loan into a loan of
another type in the same aggregate principal amount provided that any conversion
of a Eurodollar Rate Loan shall be made only on the last Business Day of the
then current Interest Period applicable to such Eurodollar Rate Loan. If
Borrower desires to convert a loan, Borrower shall give Agent not less than
three (3) Business Days’ prior written notice to convert from a Domestic Rate
Loan to a Eurodollar Rate Loan or one (1) Business Day’s prior written notice
to convert from a Eurodollar Rate Loan to a Domestic Rate Loan, specifying the
date of such conversion, the loans to be converted and if the conversion is
from a Domestic Rate Loan to any other type of loan, the duration of the first
Interest Period therefor. After giving effect to each such conversion, there
shall not be outstanding more than ten (10) Eurodollar Rate Loans, in the
aggregate.


(f) Subject to Section 13.1,


(i) At its option and upon three (3) Business Days’ prior written
notice, Borrower may prepay the Eurodollar Rate Loans in whole at any time or
in part from time to time, without premium or penalty, but with accrued
interest on the principal being prepaid to the date of such repayment. Borrower
shall specify the date of prepayment of Advances which are Eurodollar Rate
Loans and the amount of such prepayment. In the event that any prepayment of a
Eurodollar Rate Loan is required or permitted on a date other than the last
Business Day of the then current Interest Period with respect thereto, Borrower
shall indemnify Agent and Lenders therefor in accordance with Section 2.2(g).


(ii) At its option and upon one (1) Business Days’ prior written
notice, Borrower may prepay the Domestic Rate Loans in whole at any time or in
part from time to time, without premium or penalty, but with accrued interest
on the principal being prepaid to the date of such repayment. Borrower shall
specify the date of prepayment of Advances which are Domestic Rate Loans and
the amount of such prepayment.


(g) Borrower shall indemnify Agent and Lenders and hold Agent and
Lenders harmless from and against any and all losses or expenses that Agent and
Lenders may sustain or incur as a consequence of any prepayment, conversion of
or any default by Borrower in the payment of the principal of or interest on
any Eurodollar Rate Loan or failure by Borrower to complete a borrowing of, a
prepayment of or conversion of or to a Eurodollar Rate Loan after notice
thereof has been given, including, but not limited to, any interest payable by
Agent or Lenders to lenders of funds obtained by it in order to make or
maintain its Eurodollar Rate Loans


 


23

















hereunder. A
certificate as to any additional amounts payable pursuant to the foregoing
sentence submitted by Agent or any Lender to Borrower shall be conclusive
absent manifest error.


(h)
Notwithstanding any other provision hereof, if any applicable law, treaty,
regulation or directive, or any change therein or in the interpretation or
application thereof, shall make it unlawful for any Lender (for purposes of
this Section 2.2(h), the term “Lender” shall include any Lender and the office
or branch where any Lender or any corporation or bank controlling such Lender
makes or maintains any Eurodollar Rate Loans) to make or maintain its
Eurodollar Rate Loans, the obligation of Lenders to make Eurodollar Rate Loans
hereunder shall forthwith be cancelled and Borrower shall, if any affected
Eurodollar Rate Loans are then outstanding, promptly upon request from Agent,
either pay all such affected Eurodollar Rate Loans or convert such affected
Eurodollar Rate Loans into loans of another type, either at the end of the
applicable Interest Periods if the affected Lenders may maintain the affected
Eurodollar Rate Loans until such dates, or otherwise immediately upon such
request. If any such payment or conversion of any Eurodollar Rate Loan is made
on a day that is not the last day of the Interest Period applicable to such
Eurodollar Rate Loan, Borrower shall pay Agent, upon Agent’s request, such
amount or amounts as may be necessary to compensate Lenders for any loss or
expense sustained or incurred by Lenders in respect of such Eurodollar Rate
Loan as a result of such payment or conversion, including (but not limited to)
any interest or other amounts payable by Lenders to lenders of funds obtained
by Lenders in order to make or maintain such Eurodollar Rate Loan. A
certificate as to any additional amounts payable pursuant to the foregoing
sentence submitted by Lenders to Borrower shall be conclusive absent manifest
error.


2.3. Disbursement
of Advance Proceeds.


All Advances shall
be disbursed from whichever office or other place Agent may designate from time
to time and, together with any and all other Obligations of Borrower to Agent
or Lenders, shall be charged to Borrower’s Account on Agent’s books. During the
Term, Borrower may use the Advances by borrowing, prepaying and reborrowing,
all in accordance with the terms and conditions hereof. The proceeds of each
Advance requested by Borrower or deemed to have been requested by Borrower
under Section 2.2(a) shall, with respect to requested Advances to the extent
Lenders make such Advances, be made available to Borrower on the day so
requested by way of credit to Borrower’s operating account maintained with
Agent or such other bank as Borrower may designate following notification to
Agent, in immediately available federal funds or other immediately available
funds or, with respect to Advances deemed to have been requested by Borrower,
be disbursed to Agent to be applied to the outstanding Obligations giving rise
to such deemed request.


2.4. Swingline
Loans.


(a) Agent may
convert any request by Borrower for a Revolving Advance constituting a Domestic
Rate Loan into a request for a Swingline Loan, to be made solely by the
Swingline Lender to Borrower as otherwise provided in Section 2.3 on the date
of the requested Advance. The Swingline Loans shall be Domestic Rate Loans and
shall not exceed in the aggregate at any time outstanding the Maximum Swingline
Loan Amount. In the event that on any Business Day Swingline Lender desires
that all or any portion of the outstanding Swingline Loans should be reduced in
whole or in part, Swingline Lender shall promptly notify Agent to


 


24

















that effect and
indicate the portion of the Swingline Loans to be reduced. Swingline Lender
hereby agrees that it shall notify Agent to reduce the outstanding Swingline
Loans to $0 at least once every week. Agent agrees to promptly transmit to
Lenders the information contained in each notice received by Agent from
Swingline Lender and shall concurrently notify Lenders of each Lender’s
Commitment Percentage of the obligation to make a Revolving Advance to repay
the Swingline Loan (or portion thereof).


(b) Each of the
Lenders hereby unconditionally and irrevocably agrees to fund to Agent for the
benefit of Swingline Lender, in lawful money of the United States and in same
day funds, not later than 1:00 p.m. (New York City time) on the Settlement
Date, such Lender’s Commitment Percentage of a Revolving Advance (which
Revolving Advance shall be a Domestic Rate Loan and shall be deemed to be
requested by Borrower) in the principal amount of such portion of the Swingline
Loans which is required to be paid to Swingline Lender under this Section 2.4
(regardless of whether the conditions precedent thereto set forth in Article
VIII are then satisfied and whether or not Borrower has provided a notice of
borrowing under Section 2.2 and whether or not any Default or Event of Default
exists or all or any of the Advances have been accelerated, but subject to the
other provisions of this Section 2.4). The proceeds of any such Revolving
Advance shall be immediately paid over to Agent for the benefit of Swingline
Lender for application to the Swingline Loan.


(c) In the event
that an Event of Default shall occur and either (i) such Event of Default is of
the type described in Section 10.7 or (ii) no further Revolving Advances are
being made under this Agreement, so long as any such Event of Default is
continuing, then, each of the Lenders (other than Swingline Lender) shall be
deemed to have irrevocably, unconditionally and immediately purchased from
Swingline Lender such Lender’s Commitment Percentage of the Swingline Loan
outstanding as of the date of the occurrence of such Event of Default. Each
Lender shall effect such purchase by making available an amount equal to its
participation on the date of such purchase in Dollars in immediately available
funds to Agent for the benefit of Swingline Lender. In the event any Lender
fails to make available to Swingline Lender when due the amount of such
Lender’s participation in the Swingline Loan, Swingline Lender shall be
entitled to recover such amount on demand from such Lender together with
interest at the Federal Funds Rate. Each such purchase by a Lender shall be
made without recourse to Swingline Lender, without representation or warranty
of any kind, and shall be effected and evidenced pursuant to documents
reasonably acceptable to Swingline Lender. The Swingline Loans shall be
evidenced by one or more promissory notes substantially in the form of Exhibit 2.4. The obligations of the Lenders under
this Section 2.4 shall be absolute, irrevocable and unconditional, shall be
made under all circumstances and shall not be affected, reduced or impaired for
any reason whatsoever.


2.5. Intentionally
Omitted.


2.6. Repayment
of Advances.


(a) The Revolving
Advances shall be due and payable in full on the Termination Date subject to
earlier prepayment as herein provided. The Swingline Loans shall be due and
payable in accordance with Section 2.4, subject to earlier prepayment as herein
provided.


 


25

















(b) All payments of principal, interest and other amounts payable
hereunder, or under any of the related agreements shall be made to Agent at the
Payment Office not later than 1:00 p.m. (New York time) on the due date
therefor in lawful money of the United States of America in federal funds or
other funds immediately available to Agent. Agent shall have the right to
effectuate payment on any and all Obligations due and owing hereunder by
charging Borrower’s Account or by making Revolving Advances as provided in
Section 2.2.


(c) Borrower shall
pay principal, interest, and all other amounts payable hereunder, or under any
related agreement, without any deduction whatsoever, including, but not limited
to, any deduction for any setoff or counterclaim.


2.7. Repayment
of Excess Revolving Advances.


The aggregate
balance of Revolving Advances outstanding at any time in excess of the maximum
amount of Revolving Advances permitted hereunder shall be immediately due and
payable without the necessity of any demand, at the Payment Office, whether or
not a Default or Event of Default has occurred.


2.8. Statement
of Account.


Agent shall
maintain, in accordance with its customary procedures, a loan account (the “Borrower’s
Account”) in the name of Borrower in which shall be recorded the date and
amount of each Advance made by Lenders and the date and amount of each payment
in respect thereof; provided, however, the failure by Agent to
record the date and amount of any Advance shall not adversely affect Agent or
any Lender. Each month, Agent shall send to Borrower a statement showing the
accounting for the Advances made, payments made or credited in respect thereof,
and other transactions between Lenders and Borrower, during such month. The
monthly statements shall be deemed correct and binding upon Borrower in the
absence of manifest error and shall constitute an account stated between
Lenders and Borrower unless Agent receives a written statement of Borrower’s
specific exceptions thereto within thirty (30) days after such statement is
received by Borrower. The records of Agent with respect to the loan account
shall be conclusive evidence absent manifest error of the amounts of Advances
and other charges thereto and of payments applicable thereto.


2.9. Letters of
Credit and Air Releases/Steamship Guarantees.


Subject to the
term and conditions hereof, Agent shall (a) issue or cause the issuance of
Documentary Letters of Credit and Standby Letters of Credit (collectively, “Letters
of Credit”) by the Issuer on behalf of Borrower, and (c) issue or cause the
issuance of Air Release/Steamship Guarantees, provided, however,
that Agent will not be required to issue or cause to be issued any Letter of
Credit or Air Release/Steamship Guarantee to the extent that the face amount of
such Letter of Credit or Air Release/Steamship Guarantee would then cause the
sum of (i) the outstanding Revolving Advances and Swingline Loans plus
(ii) outstanding Letters of Credit and Air Release/Steamship Guarantees to
exceed the lesser of (x) the Maximum Loan Amount or (y) the Formula Amount. All
disbursements or payments related to Letters of Credit and Air
Release/Steamship Guarantees shall be deemed to be Domestic Rate Loans
consisting of Revolving Advances and shall bear interest at the Revolving
Interest Rate for Domestic Rate


 


26

















Loans; Letters of
Credit and Air Releases/Steamship Guarantees that have not been drawn upon
shall not bear interest.


2.10. Issuance of Letters of Credit and Air Releases/Steamship
Guarantees.


(a) Borrower may
request Agent to issue or cause the issuance of a Letter of Credit by
delivering to Agent at the Payment Office, Issuer’s standard form of letter of
credit and security agreement and standard form of letter of credit application
(collectively, the “Letter of Credit Application”) and any draft if
applicable, completed to the satisfaction of Agent; and such other
certificates, documents and other papers and information as Agent or Issuer may
reasonably request. Either HSBC or IDB shall have the right to decline to issue
a Letter of Credit or Air Release/Steamship Guarantee hereunder if, after
giving effect to the issuance thereof, the aggregate balance of Advances
outstanding due to such Lender would exceed its Commitment Percentage of the
lesser of the Maximum Loan Amount or the Formula Amount.


(b) Each Letter of
Credit shall, among other things, (i) provide for the payment of sight drafts
or acceptances of issuance drafts when presented for honor thereunder in
accordance with the terms thereof and when accompanied by the documents
described therein and (ii) (a) with respect to Documentary Letters of Credit,
have an expiry date not later than two hundred and forty (240) days after such
Documentary Letter of Credit’s date of issuance or (b) with respect to Standby
Letters of Credit, have an expiry date not later than twelve (12) months after
such Standby Letter of Credit’s date of issuance, and (with respect to clauses
(ii) (a) and (ii) (b) above) in no event having an expiry date later than the
Termination Date unless Borrower provides cash collateral equal to not less
than one hundred five percent (105%) of the face amount thereof to be held by
Agent pursuant to a cash collateral agreement in form and substance
satisfactory to Agent, Each Documentary Letter of Credit shall be subject to
the Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No. 500, and any amendments or
revision thereof adhered to by the Issuer and, to the extent not inconsistent
therewith, the laws of the State of New York. All Standby Letters of Credit
shall be subject to the laws or rules designated in such Standby Letter of
Credit, or if no laws or rules are designated, the International Standby
Practices (ISP98 - International Chamber of Commerce Publication Number 590)
(the “ISP98 Rules”) and, as to matters not governed by the ISP98 Rules,
the laws of the State of New York.


(c) Subject to the
Borrower’s acceptance into the HSBC L/C Program, all Documentary Letters of
Credit to be issued by HSBC shall be issued in Hong Kong. 


(d) Agent shall
use its reasonable efforts to notify Lenders of the request by Borrower for
issuance of a Letter of Credit or Air Release/Steamship Guarantee.


(e) Subject to
terms set by Agent from time to time in its discretion with respect to the
issuance of air releases and steamship guarantees generally, Borrower may
request Air Release/Steamship Guarantees on any Business Day by delivering to
Agent a request therefor in form reasonably acceptable to Agent (and IDB, in
the case of any Air Release/Steamship Guarantee to be issued by IDB) and, upon
demand, copies of all invoices, delivery receipts and related documents
relating to that request that Agent might require. Provided that the request
for an Air Release/Steamship Guaranty is received prior to 10:30 a.m.


 


27

















on a Business Day
and approved by Agent, Agent shall issue, or cause to be issued, an Air
Release/Steamship Guarantee on the same Business Day; provided, however, that
if any Air Release/Steamship Guarantee is to be issued by IDB, such Air Release/Steamship
Guarantee shall be issued by IDB on the next succeeding Business Day.


(f) To the extent
each Air Release/Steamship Guarantee has not been terminated or been returned
to Agent on the day preceding the expiration of the Term, Borrower shall provide
cash collateral equal to not less than one hundred five percent (105%) of the
face amount thereof plus any variances allowed thereunder to be held by Agent
pursuant to a cash collateral agreement in form and substance satisfactory to
Agent.


(g) Schedule
2.10(g) hereto contains a description of each letter of credit and air
release/steamship guarantee issued by HSBC or by Israel Discount Bank for the
account of Rafaella, Inc. and outstanding on the Closing Date (and setting
forth, with respect to each such letter of credit and air release/steamship
guaranty (if applicable), (i) the name of the issuing leader, (ii) the letter
of credit number, (iii) the name(s) of the account party or account parties,
(iv) the stated amount, (v) the name of the beneficiary, (vi) the expiry date,
and (vii) whether such letter of credit constitutes a standby letter of credit
or a documentary letter of credit). Each such letter or credit and/or air
release/steamship guarantee, including any extension or renewal thereof (each,
an “Existing Letter of Credit”, or an “Existing Air Release/Steamship
Guarantee”, as the case may be), (x) in the use of each Existing Letter of
Credit shall be deemed a “Letter of Credit” for all purposes under this
Agreement, and (y) in the cast of each Existing Air Release/Steamship Guarantee
shall be deemed an “Air Release/Steamship Guarantee” for all purposes under
this Agreement, in each case as if originally issued hereunder for the account
of Borrower.


2.11. Requirements
For issuance of Letters of Credit and Air Releases/Steamship Guarantees.


(a) In connection
with the issuance of any Letter of Credit or Air Release/Steamship Guarantee,
Borrower shall indemnify, save and hold Agent, each Lender and each Issuer
harmless from any loss, cost, expense or liability, including, without
limitation, payments made by Agent, any Lender or any Issuer and expenses and
reasonable attorneys’ fees incurred by Agent, any Lender or any Issuer arising
out of, or in connection with, any Letter of Credit or Air Release/Steamship
Guarantee to be issued. Borrower shall be bound by Agent’s or Issuer’s
regulations and good faith interpretations of any Letter of Credit or Air
Release/Steamship Guarantee issued, although this interpretation may be
different from its own; and neither Agent, nor any Lender, nor any Issuer nor
any of their correspondents shall be liable for any error, negligence, or
mistakes, whether of omission or commission, in following Borrower’s
instructions or those contained in any Letter of Credit, Air Release/Steamship
Guarantee or of any modifications, amendments or supplements thereto or in
issuing or paying any Letter of Credit or Air Release/Steamship Guaranty,
except for its own gross negligence or willful misconduct.


(b) Borrower shall
authorize and direct any Issuer of a Letter of Credit and Air
Releases/Steamship Guarantees to deliver to Agent all related
payment/acceptance advices, to deliver to Agent all instruments, documents, and
other writings and property received by the


 


28

















Issuer pursuant to
the Letter of Credit or Air Release/Steamship Guarantee and to accept and rely
upon Agent’s instructions and agreements with respect to all matters arising in
connection with any Letter of Credit or Air Release/Steamship Guarantee or any
application therefor.


(c) In connection
with all Letters of Credit and Air Releases/Steamship Guarantees issued or
caused to be issued by Agent under this Agreement, Borrower hereby appoints
Agent, or its designee, as its attorney, with full power and authority (i) to
sign and/or endorse Borrower’s name upon any warehouse or other receipts,
Letter of Credit Applications; (ii) to sign Borrower’s name on bills of lading;
(iii) to clear Inventory through Customs in the name of Borrower or Agent or
Agent’s designee, and to sign and deliver to Customs officials powers of
attorney in the name of Borrower for such purpose; and (iv) to complete in
Borrower’s name or Agent’s, or in the name of Agent’s designee, any order, sale
or transaction, obtain the necessary documents in connection therewith, and
collect the proceeds thereof. Neither Agent nor its attorneys will be liable
for any acts or omissions nor for any error of judgment or mistakes of fact or
law, except for its own gross negligence or willful misconduct. This power,
being coupled with an interest, is irrevocable as long as any Letters of Credit
or Air Releases/Steamship Guarantees remain outstanding.


(d) Each Lender
shall to the extent of the amount equal to the product of such Lender’s
Commitment Percentage times the aggregate amount of all unreimbursed
reimbursement obligations arising from disbursements made or obligations
incurred with respect to the Letters of Credit or Air Releases/Steamship
Guarantees be deemed to have irrevocably purchased an undivided participation
in (i) each such unreimbursed reimbursement obligation, (ii) Agent’s (and to
the extent applicable, IDB’s) credit support enhancement provided to the Issuer
of any Letter of Credit or Air Release/Steamship Guarantee, and (iii) each
Revolving Advance made as a consequence of the issuance of a Letter of Credit
or Air Release/Steamship Guarantee and all disbursements thereunder, in each
case in an amount equal to such Lender’s applicable Commitment Percentage times
the outstanding amount of the Letters of Credit and Air Releases/Steamship
Guarantees and disbursements thereunder. In the event that at the time a
disbursement is made the unpaid balance of Revolving Advances exceeds or would
exceed, with the making of such disbursement, the amount permitted under
Section 2.1(b), and such disbursement is not reimbursed by Loan Parties within
two (2) Business Days, Agent shall promptly notify each Lender and upon Agent’s
demand each Lender shall pay to Agent (or, to the extent IDB is the issuer
thereof, IDB) such Lender’s proportionate share of such unreimbursed
disbursement together with such Lender’s proportionate share of Agent’s (or
IDB’s) unreimbursed costs and expenses relating to such unreimbursed
disbursement. Upon receipt by Agent (or IDB) of a repayment from Borrower of
any amount disbursed by Agent for which Agent had already been reimbursed by
Lenders, Agent (or IDB, if applicable) shall deliver to each Lender that
Lender’s pro rata share of such repayment. Each Lender’s participation
commitment shall continue until the last to occur of any of the following
events: (A) Agent (and IDB, to the extent is has issued Letters of Credit
and/or Air Releases/Steamship Guarantees hereunder) ceases to be obligated to
issue or cause to be issued Letters of Credit or Air Releases/Steamship
Guarantees hereunder, (B) no Letter of Credit or Air Release/Steamship
Guarantee issued hereunder remains outstanding and uncancelled, or (C) all
Persons (other than Borrower) have been fully reimbursed for all payments made
under or relating to Letters of Credit and Air Releases/Steamship Guarantees.


 


29

















2.12. Additional
Payments.


Any sums expended
by Agent or any Lender due to any Loan Party’s failure to perform or comply
with its obligations under this Agreement or any Other Document including,
without limitation, Loan Parties’ obligations under Sections 4.2, 4.4, 4.12,
4.13, 4.14 and 6.1, may be charged to Borrower’s Account as a Revolving Advance
and added to the Obligations.


2.13. Manner of
Borrowing and Payment.


(a) Each borrowing
of Revolving Advances shall be advanced according to the applicable Commitment
Percentages of Lenders.


(b) Each payment
(including each prepayment) by Borrower on account of the principal of the
Revolving Advances, shall be applied to the Revolving Advances pro rata
according to the applicable Commitment Percentages of Lenders. Except as
expressly provided herein, all payments (including prepayments) to be made by Borrower
on account of principal, interest and fees shall be made without set off or
counterclaim and shall be made to Agent on behalf of the Lenders to the Payment
Office, in each case on or prior to 2:00 p.m. (New York City time), in Dollars
and in immediately available funds. Payments (including prepayments) by
Borrower shall be applied first to Domestic Rate Loans and then to Eurodollar
Rate Loans in such order as to eliminate or minimize breakage costs to be paid
by Borrower to Lenders pursuant to Section 2.2(g).


(c)


(i) Notwithstanding anything to the contrary contained in Sections
2.13(a) and 2.13(b), commencing with the first Business Day following the
Closing Date, each borrowing of Advances shall be advanced by Agent and each
payment by Loan Parties on account of Advances shall be applied first to those
Revolving Advances advanced by Agent. On or before 2:00 p.m. (New York City
time) on each Settlement Date commencing with the first Settlement Date
following the Closing Date, Agent and Lenders shall make certain payments as
follows: (I) if the aggregate amount of new Revolving Advances made by Agent
during the preceding Week (if any) exceeds the aggregate amount of repayments
applied to outstanding Revolving Advances during such preceding Week, then each
Lender shall provide Agent with funds in an amount equal to its applicable
Commitment Percentage of the difference between (w) such Revolving Advances and
(x) such repayments and (II) if the aggregate amount of repayments applied to
outstanding Revolving Advances during such Week exceeds the aggregate amount of
new Revolving Advances made during such Week, then Agent shall provide each
Lender with funds in an amount equal to its applicable Commitment Percentage of
the difference between (y) such repayments and (z) such Revolving Advances. 


(ii) Each Leader shall be entitled to earn interest at the
Revolving Interest Rate on outstanding Advances which it has funded.


 


30

















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


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


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


2.14. Mandatory
Prepayments.


(a) When Borrower
sells or otherwise disposes of any Collateral, other than Inventory in the
ordinary course of business (which shall be governed by the provisions of
Section 4.15 (h)), Borrower shall repay the Advances in an amount equal to the
net proceeds of such sale (i.e., gross proceeds less the reasonable costs of
such sales or other dispositions and


 


31

















taxes on the sales
proceeds), such repayments to be made promptly but in no event more than one
(1) Business Day following receipt of such net proceeds, and until the date of
payment, such proceeds shall be held in trust for Agent. The foregoing shall
not be deemed to be implied consent to any such sale otherwise prohibited by
the terms and conditions hereof. Such repayments shall be applied to the
outstanding Advances in such order as Agent may determine, subject to
Borrower’s ability to reborrow Revolving Advances in accordance with the terms
hereof


(b) Subject to the
provisions of Section 4.11, Agent shall apply the proceeds of any insurance
settlements from casualty losses which are received by Agent to the outstanding
Advances in such order as Agent may determine, subject to Borrower’s ability to
reborrow Revolving Advances in accordance with the terms hereof.


2.15. Use of
Proceeds.


Borrower shall
apply the proceeds of (i) Advances made on the Closing Date to refinance (in
conjunction with the proceeds of the Senior Secured Notes) Borrower’s existing
bank debt), and to pay fees and expenses relating to the Transactions, and (ii)
Advances made on and after the Closing Date to provide for its working capital
needs in the ordinary course of business, and (iii) Advances made after the
Closing Date to provide for post-closing adjustments under the Securities Purchase
Agreement.


2.16. Defaulting
Lender.


(a)
Notwithstanding anything to the contrary contained herein, in the event any
Lender (x) has refused (which refusal constitutes a breach by such Lender of
its obligations under this Agreement) to make available its portion of any
Advance or (y) notifies either Agent or Borrower that it does not intend to
make available its portion of any Advance (if the actual refusal would
constitute a breach by such, Lender of its obligations under this Agreement)
(each, a “Lender Default”), all rights and obligations hereunder of such
Lender (a “Defaulting Lender”) as to which a Lender Default is in effect
and of the other parties hereto shall be modified to the extent of the express
provisions of this Section 2.16 while such Lender Default remains in effect.


(b) Advances shall
be incurred pro rata from Lenders (the “Non-Defaulting Lenders”) which
are not Defaulting Lenders based on their respective Commitment Percentages,
and no Commitment Percentage of any Lender or any pro rata share of any
Advances required to be advanced by any Lender shall be increased as a result
of such Lender Default. Amounts received in respect of principal of any type of
Advances shall be applied to reduce the applicable Advances of each Lender pro
rata based on the aggregate of the outstanding Advances of that type of all
Lenders at the time of such application; provided, that, such amount shall not
be applied to any Advances of a Defaulting Lender at any time when, and to the
extent that, the aggregate amount of Advances of any Non-Defaulting Lender
exceeds such Non-Defaulting Lender’s Commitment Percentage of all Advances then
outstanding.


(c) A Defaulting
Lender shall not be entitled to give instructions to Agent or to approve,
disapprove, consent to or vote on any matters relating to this Agreement and
the Other Documents. All amendments, waivers and other modifications of this
Agreement and the


 


32

















Other Documents may be made
without regard to a Defaulting Lender and, for purposes of the definition of
“Required Lenders”, a Defaulting Lender shall be deemed not to be a Lender and
not to have either Advances outstanding or a Commitment Percentage.


(d) Other than as expressly set forth in this
Section 2.16, the rights and obligations of a Defaulting Lender (including the
obligation to indemnify Agent) and the other parties hereto shall remain
unchanged. Nothing in this Section 2.16 shall be deemed to release any
Defaulting Lender from its obligations under this Agreement and the Other
Documents, shall alter such obligations, shall operate as a waiver of any
default by such Defaulting Lender hereunder, or shall prejudice any rights
which Loan Parties, Agent or any Lender may have against any Defaulting Leader
as a result of any default
by such Defaulting Lender hereunder.


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


III.       INTEREST AND FEES.


3.1. Interest.


Interest on
Advances shall be payable to Agent for the benefit of Lenders in arrears
on the first day of each month with respect to Domestic Rate Loans and, with
respect to Eurodollar Rate Loans, at the end of each Interest Period or, for
Eurodollar Rate Loans with an Interest Period in excess of three months, at the
earlier of (a) each three months on the anniversary date of the commencement of
such Eurodollar Rate Loan or (b) the end of the Interest Period. Interest
charges shall be computed on the actual principal amount of Advances
outstanding during the month at a rate per annum equal to the applicable
Revolving Interest Rate. Whenever, subsequent to the date of this Agreement,
the Base Rate is increased or decreased, the Revolving Interest Rate for
Domestic Rate Loans shall be similarly changed without notice or demand of any
kind by an amount equal to the amount of such change in the Base Rate during
the time such change or changes remain in effect. Upon and after the occurrence
of an Event of Default, and during the continuation thereof, at Agent’s option
or at the request of Required Lenders, the Obligations shall bear interest at
the Revolving Interest Rate plus two percent (2.0%) per annum (the “Default Rate”).


3.2. Letter of
Credit and Air Release/Steamship Guarantee Fees; Cash Collateral.


(a) Borrower shall
pay (w) to Agent, for the benefit of Lenders, fees for each Standby
Letter of Credit for the period from and excluding the date of issuance of same
to and including the date of expiration or termination, equal to the average
daily face amount of each outstanding Standby Letter of Credit multiplied by
two and one-quarter percent (2.25%) per annum, the fees under this Section
3.2(a)(w) to be calculated on the basis of a 360-day year for the actual number
of days elapsed and to be payable monthly in arrears on the first day of each
month and on the last day of the Term, (x) to Agent for the benefit of the
Issuer, any and all fees and expenses as agreed upon by the Issuer and the
Borrower in connection with any Documentary Letter of Credit, including,
without limitation, in connection with the issuance, amendment or renewal of
any such Documentary
Letter of Credit (provided that Documentary


 


33

















Letters of Credit issued under the HSBC
L/C Program shall not incur any issuance fee), (y) to Agent for the benefit of
Lenders, a fee equal to one-quarter of one percent (0.25%) of the face amount
of each Documentary Letter of Credit upon any payment, each extension of the
expiry date beyond 120 days from issuance, or cancellation thereof, and (z) to
Agent, solely for its benefit as the issuer of any Air Release/Steamship
Guarantee, a fee of $75 for each Air Release/Steamship Guarantee issued, and
shall reimburse Agent for any and all fees and expenses, if any, paid by Agent
to the Issuer (all of the foregoing fees, the “Letter of Credit and
Guarantee Fees”). All such charges shall be deemed earned in full on the
date when the same are due and payable hereunder and shall not be subject to
rebate or proration upon the termination of this Agreement for any reason. Any
such charge in effect at the time of a particular transaction shall be the
charge for that transaction, notwithstanding any subsequent change in the
Issuer’s prevailing charges for that type of transaction. Upon and after the
occurrence of an Event of Default, and during the continuation thereof, Agent
may, and at the direction of the Required Lenders Agent shall, increase the
Letter of Credit and Guarantee Fees by two percent (2.0%) per annum. All Letter
of Credit and Guarantee Fees payable hereunder shall be deemed earned in full
on the date when the same are due and payable hereunder and shall not be
subject to rebate or proration upon the termination of this Agreement for any reason.


(b) On demand by
Agent following the occurrence and during the continuance of an Event of
Default, Borrower will cause cash to be deposited and maintained in an account
with Agent, as cash collateral, in an amount equal to one hundred and five
percent (105%) of the outstanding Letters of Credit and Air Releases/Steamship
Guarantees, and Borrower hereby irrevocably authorizes Agent, in its
discretion, on Borrower’s behalf and in Borrower’s name, to open such an
account and to make and maintain deposits therein, or in an account opened by
Borrower, in the amounts required to be made by Borrower, out of the proceeds
of Receivables or other Collateral or out of any other funds of Borrower coming
into any Lender’s possession at any time. Agent will invest such cash
collateral (less applicable reserves) in such short-term money-market items as
to which Agent and Borrower mutually agree and the net return on such
investments shall be credited to such account and constitute additional cash
collateral. Borrower may not withdraw amounts credited to any such account
except to pay Obligations in respect of Letters of Credit and Air
Releases/Steamship Guarantees or upon payment and performance in full of all
Obligations and termination of this Agreement.


3.3. Loan Fees.


(a) Fee Letter.
Upon the execution of this Agreement, Borrower shall pay to Agent the
fees set forth in the
Fee Letter.


(b) Facility
Fee. If, for any month during the Term, the average daily unpaid
balance of the Advances for each day of such month does not equal the Maximum
Loan Amount, then Borrower shall pay to Agent for the ratable benefit of
Lenders a fee at a rate equal to one-quarter of one percent (0.25%) per annum
on the amount by which the Maximum Loan Amount exceeds such average daily
unpaid balance. Such fee shall be payable to Agent in arrears on the first day
of each month.


 


34

















(c) Closing Fee.
Upon the execution of this Agreement, Borrower shall pay to Agent for
the ratable benefit of Lenders a closing fee in an amount equal to thirty-five
one-hundredths of one percent (0.35%) of the Maximum Loan Amount.


3.4. Computation
of Interest and Fees.


Interest and fees
hereunder shall be computed on the basis of a year of 360 days and for
the actual number of days elapsed. If any payment to be made hereunder becomes
due and payable on a day other than a Business Day, the due date thereof shall
be extended to the next succeeding Business Day and interest thereon shall be
payable at the Revolving Interest Rate during such extension; provided,
that with respect to Eurodollar Rate Loans, if extending such payment would
cause the last day of the applicable Interest Period to be extended into the
next calendar month, then the due date for such payment shall be the
immediately preceding Business Day.


3.5. Maximum
Charges.


In no event whatsoever
shall interest and other charges charged hereunder exceed the highest rate
permissible under law. In the event interest and other charges as computed
hereunder would otherwise exceed the highest rate permitted under law, such
excess amount shall be first applied to any unpaid principal balance of the
Advances, and if the then remaining excess amount is greater than the
previously unpaid principal balance, Lenders shall promptly refund such excess
amount to Borrower and the provisions hereof shall be deemed amended to provide
for such permissible
rate.


3.6. Increased
Costs.


In the event that
any applicable law, treaty or governmental regulation, or any change
therein or in the interpretation or application thereof, or compliance by any
Lender (for purposes of this Section 3.6, the term “Lender” shall include Agent
or any Lender and any corporation or bank controlling Agent or any Lender) and
the office or branch where Agent or any Lender (as so defined) makes or
maintains any Eurodollar Rate Loans with any request or directive (whether or not
having the force of law) from any central bank or other financial, monetary or
other authority,
shall:


(a) subject Agent
or any Lender to any tax of any kind whatsoever with respect to this
Agreement or any Other Document or change the basis of taxation of payments to
Agent or any Lender of principal, fees, interest or any other amount payable
hereunder or under any Other Documents (except for changes in the rate of tax
on the overall net income of Agent or any Lender by a jurisdiction with which
the Agent or such Lender has a present or former connection); 


(b) impose, modify
or hold applicable any reserve, special deposit, assessment or similar
requirement against assets held by, or deposits in or for the account of,
advances or loans by, or other credit extended by, any office of Agent or any
Lender, including (without limitation) pursuant to Regulation D of the Board of
Governors of the Federal Reserve System; or


 


35

















(c) impose on Agent or any Lender or the London interbank
Eurodollar market any other condition with respect to this Agreement or any
Other Document; 


and the result of any of the
foregoing is to increase the cost to Agent or any Lender of making, renewing or
maintaining its Advances hereunder by an amount that Agent or such Lender deems
to be material or to reduce the amount of any payment (whether of principal,
interest or otherwise) in respect of any of the Advances by an amount that
Agent or such Lender deems to be material, then, in any case Borrower shall
promptly pay Agent or such Lender, upon its demand, such additional amount as
will compensate Agent or such Lender for such additional cost or such
reduction, as the case may be, provided that the foregoing shall not apply to
increased costs which are reflected in the Adjusted LIBO Rate. Agent or such
Lender shall certify the amount of such additional cost or reduced amount to
Borrower, and such certification shall be conclusive absent manifest error.


3.7. Basis For
Determining Interest Rate Inadequate or Unfair. In the event that Agent or
any Lender shall have determined that.


(a) reasonable
means do not exist for ascertaining the Adjusted LIBO Rate applicable pursuant
to Section 2.2 for any Interest Period; or


(b) Dollar
deposits in the relevant amount and for the relevant maturity are not available
in the London interbank Eurodollar market, with respect to an outstanding
Eurodollar Rate Loan, a proposed Eurodollar Rate Loan, or a proposed conversion
of a Domestic Rate Loan into a Eurodollar Rate Loan,


then Agent shall give Borrower
prompt written, telephonic or telegraphic notice of such determination. If such
notice is given, then with respect to any Eurodollar Rate Loan requested on or
after the Business Day that Borrower receives Agent’s notice, (i) any such
requested Eurodollar Rate Loan shall be made as a Domestic Rate Loan, unless
Borrower shall notify Agent no later than 10:00 a.m. (New York City time) two
(2) Business Days prior to the date of such proposed borrowing, that its request
for such borrowing shall be cancelled or made as an unaffected type of
Eurodollar Rate Loan, (ii) any Domestic Rate Loan or Eurodollar Rate Loan which
was to have been converted to an affected type of Eurodollar Rate Loan shall be
continued as or converted into a Domestic Rate Loan, or, if Borrower shall
notify Agent, no later than 10:00 a.m. (New York City time) two (2) Business
Days prior to the proposed conversion, shall be maintained as an unaffected
type of Eurodollar Rate Loan, and (iii) any outstanding affected Eurodollar
Rate Loans shall be converted into a Domestic Rate Loan, or, if Borrower shall
notify Agent, no later than 10:00 a.m. (New York City time) two (2) Business
Days prior to the last Business Day of the then current Interest Period applicable
to such affected Eurodollar Rate Loan, shall be converted into an unaffected
type of Eurodollar Rate Loan, on the last Business Day of the then current
Interest Period for such affected Eurodollar Rate Loans. Until such notice has
been withdrawn, Lenders shall have no obligation to make an affected type of
Eurodollar Rate Loan or maintain outstanding affected Eurodollar Rate Loans and
Borrower shall have no right to convert a Domestic Rate Loan or an unaffected
type of Eurodollar Rate Loan into an affected type of Eurodollar Rate Loan.


3.8. Capital
Adequacy.


 


36

















(a) In the event that Agent or any Lender shall have determined
that any applicable law, rule, regulation or guideline regarding capital
adequacy, or any change therein, 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 Agent or any Lender (for purposes of this Section 3.8, the term
“Lender” shall include Agent or any Lender and any corporation or bank
controlling Agent or any Lender) and the office or branch where Agent or any
Lender (as so defined) makes or maintains any Eurodollar Rate Loans 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 Agent or any Lender’s
capital as a consequence of its obligations hereunder to a level below that
which Agent or such Lender could have achieved but for such adoption, change or
compliance (taking into consideration Agent’s and each Lender’s policies with
respect to capital adequacy) by an amount deemed by Agent or any Lender to be
material, then, from time to time, Borrower shall pay upon demand to Agent or
such Lender such additional amount or amounts as will compensate Agent or such
Lender for such reduction. In determining such amount or amounts, Agent or such
Lender may use any reasonable averaging or attribution methods. The protection
of this Section 3.8 shall be available to Agent and each Lender regardless of
any possible contention of invalidity or inapplicability with respect to the applicable
law, regulation or condition.


(b) A certificate
of Agent or such Lender setting forth such amount or amounts as shall be
necessary to compensate Agent or such Lender with respect to Section 3.8(a)
when delivered to Borrower shall be conclusive absent manifest error.


3.9. Gross-Up
for Taxes.


If Borrower shall
be required by applicable law to withhold or deduct any taxes (excluding taxes
imposed on or measured by the Agent’s or any Lender’s income, and franchise or
similar taxes imposed on it, as a result of a present or former connection
between the Agent or such Lender and the jurisdiction of the taxing authority
imposing such tax) from or in respect of any sum payable under this Agreement
or any of the Other Documents to Agent, or any Lender, assignee of any Lender,
or Participant (each, individually, a “Payee” and collectively, the “Payees”),
(a) the sum payable to such Payee or Payees, as the case may be, shall be
increased as may be necessary so that, after making all required withholding or
deductions, the applicable payee or Payees receives an amount equal to the sum
it would have received had no such withholding or deductions been made (the “Gross-Up
Payment”), (b) Borrower shall make such withholding or deductions, and (c)
Borrower shall pay the full amount withheld or deducted to the relevant
taxation authority or other authority in accordance with applicable law.
Notwithstanding the foregoing, Borrower shall not be obligated to make any
portion of the Gross-Up Payment that is attributable to any withholding or
deductions that would not have been paid or claimed had the applicable Payee or
Payees properly claimed a complete exemption with respect thereto pursuant to
Section 16.3(f).


 


37

















IV.       COLLATERAL: GENERAL TERMS.


4.1. Security
Interest in the Collateral.


To secure the
prompt payment and performance to Agent, each Issuer and each Lender of the
Obligations, each Loan Party hereby assigns, pledges and grants to Agent for
the ratable benefit of Agent, each Issuer and each Lender a continuing security
interest in and to all of its Collateral, whether now owned or existing or
hereafter acquired or arising and wheresoever located. Each Loan Party shall
mark its books and records as may be necessary or appropriate to evidence,
protect and perfect Agent’s security interest and shall cause its financial
statements to reflect such security interest.


4.2. Perfection
of Security Interest.


(a) Each Loan
Party shall take all action that may be necessary or desirable, or that Agent
may request, so as at all times to maintain the validity, perfection,
enforceability and priority of Agent’s security interest in the Collateral or
to enable Agent to protect, exercise or enforce its rights hereunder and in the
Collateral, including, but not limited to, (i) immediately discharging all
Liens other than Permitted Encumbrances, (ii) obtaining landlords’ or
mortgagees’ lien waivers, (iii) delivering to Agent, endorsed or accompanied by
such instruments of assignment as Agent may specify, and stamping or marking,
in such manner as Agent may specify, any and all chattel paper, instruments,
letters of credits and advices thereof and documents evidencing or forming a
part of the Collateral in excess of $500,000, (iv) entering into lockbox
arrangements satisfactory to Agent, and (v) executing and delivering financing
statements, instruments of pledge, mortgages, notices and assignments, in each
case in form and substance reasonably satisfactory to Agent, relating to the
creation, validity, perfection, maintenance or continuation of Agent’s security
interest under the UCC or other applicable law.


(b) Agent may at
any time and from time to time file, without the signature of any Loan Party in
accordance with Section 9-509 of the UCC, financing statements, continuation
statements and amendments thereto that describe the Collateral as “all assets”
of the applicable Loan Party and which contain any other information required
by the UCC for the sufficiency or filing office acceptance of any financing
statements, continuation statements or amendments. Each Loan Party agrees to
furnish any such information to Agent promptly upon request.


(c) Each Loan
Party shall, at any time and from time to time, take such steps as Agent may
reasonably request (i) to obtain an acknowledgment, in form and substance
reasonably satisfactory to Agent, of any bailee having possession of any of the
Collateral, stating that the bailee holds such Collateral for Agent, (ii) to
obtain “control” of any letter-of-credit rights, deposit accounts or electronic
chattel paper (as such terms are defined in the UCC with corresponding
provisions thereof defining what constitutes “control” for such items of
Collateral), with any agreements establishing control to be in form and substance
reasonably satisfactory to Agent, and (iii) otherwise to insure the continued
perfection and priority of Agent’s security interest in any of the Collateral
for the benefit of the Lenders and of its rights therein. If any Loan Party
shall at any time, acquire a “commercial tort claim” (as such term is defined
in the UCC) in excess of $100,000, such Loan Party shall promptly notify Agent
thereof in writing, therein providing a reasonable description and summary
thereof, and upon delivery


 


38

















thereof to Agent,
such Loan Party shall be deemed to thereby grant to Agent for the benefit of
the Lenders (and each Loan Party hereby grants to Agent, for the benefit of
each Lender) a security interest and lien in and to such commercial tort claim
and all proceeds thereof, all upon the terms of and governed by this Agreement.


(d) Each Loan
Party hereby confirms and ratifies all UCC financing statements filed by Agent
with respect to such Loan Party on or prior to the date of the Agreement.


(e) All charges,
expenses and fees Agent may incur in doing any of the foregoing, and any local
taxes relating thereto, shall be charged to Borrower’s Account as a Revolving
Advance and added to the Obligations, or, at Agent’s option, shall be paid to
Agent for the ratable benefit of Lenders immediately upon demand.


4.3. Disposition
of Collateral.


Each Loan Party
will safeguard and protect all Collateral for Agent’s general account and make
no disposition thereof whether by sale, lease or otherwise except (a) the sale
of Inventory in the ordinary course of business and (b) the disposition or
transfer of obsolete and worn-out Equipment in the ordinary course of business
during any fiscal year having an aggregate fair market value of not more than
$500,000 and only to the extent that the proceeds of such disposition of
Equipment are remitted to Agent as a prepayment on the Advances as required by
Section 2.14.


4.4. Preservation
of Collateral.


In addition to the
rights and remedies set forth in Section 11.1, after the occurrence and during
the continuance of an Event of Default (but without limiting the rights of
Agent and Lenders under Section 4.10) Agent: (a) may at any time take such
steps as Agent in good faith deems necessary to protect Agent’s interest in and
to preserve the Collateral, including the hiring of such security guards or the
placing of other security protection measures as Agent may deem appropriate;
(b) may employ and maintain at each Loan Party’s premises a custodian who shall
have full authority to do all acts necessary to protect Agent’s interests in
the Collateral; (c) may lease warehouse facilities to which Agent may move all
or part of the Collateral; (d) may use any Loan Party’s owned or leased lifts,
hoists, trucks and other facilities or equipment for handling or removing the
Collateral; and (e) shall have, and is hereby granted, a right of ingress and
egress to the places where the Collateral is located, and may proceed over and
through any Loan Party’s owned or leased property. Loan Parties shall cooperate
fully with all of Agent’s efforts to preserve the Collateral and will take such
actions to preserve the Collateral as Agent may direct. All of Agent’s expenses
of preserving the Collateral, including any expenses relating to the bonding of
a custodian, shall be charged to Borrower’s Account as a Revolving Advance and
added to the Obligations.


4.5. Ownership
of Collateral.


With respect to
the Collateral, at the time the Collateral becomes subject to Agent’s security
interest: (a) each Loan Party shall be the sole owner of and fully authorized
and able to sell, transfer, pledge and/or grant a first priority security
interest in each and every item of


 


39

















its respective
Collateral to Agent; and, except for Permitted Encumbrances the Collateral
shall be free and clear of all Liens and encumbrances whatsoever; (b) each
document and agreement executed by each Loan Party or delivered to Agent or any
Lender in connection with this Agreement shall be enforceable in all material
respects; (c) all signatures and endorsements of each Loan Party that appear on
such documents and agreements shall be genuine and each Loan Party shall have
full capacity to execute same; and (d) each Loan Party’s Equipment and
Inventory shall be located as set forth on Schedule 4.5 and shall not be removed from
such location(s) without the prior written consent of Agent except with respect
to the sale of Inventory in the ordinary course of business and Equipment to
the extent permitted in Section 4.3.


4.6. Defense of
Agent’s and Lenders’ Interests.


Until (a) payment
and performance in full of all of the Obligations and (b) termination of this
Agreement, Agent’s security interests in and Liens upon the Collateral shall
continue in full force and effect. During such period no Loan Party shall,
without Agent’s prior written consent pledge, sell (except Inventory in the
ordinary course of business and Equipment to the extent permitted in Section
4.3), assign, transfer, create or suffer to exist a Lien upon or encumber or
allow or suffer to be encumbered in any way except for Permitted Encumbrances,
any part of the Collateral. Each Loan Party shall defend Agent’s security
interests in and Liens upon the Collateral against any and all Persons
whatsoever. At any time after an Event of Default has occurred and is
continuing, Agent shall have the right to take possession of the indicia of the
Collateral and the Collateral in whatever physical form contained, including
without limitation, labels, stationery, documents, instruments and advertising
materials. If Agent exercises this right to take possession of the Collateral,
Loan Parties shall, upon demand, assemble it in the best manner possible and
make it available to Agent at a place reasonably convenient to Agent. In
addition, with respect to all Collateral, Agent and Lenders shall be entitled
to all of the rights and remedies set forth herein and further provided by the
UCC or other applicable law. Each Loan Party shall, and Agent may, at its
option, instruct all suppliers, carriers, forwarders, warehouses or others
receiving or holding cash, checks, documents or instruments and, when an Event
of Default has occurred which is then continuing Inventory, in which Agent
holds a security interest to deliver same to Agent and/or subject to Agent’s
order and if they shall come into any Loan Party’s possession, they, and each
of them, shall be held by such Loan Party in trust as Agent’s trustee, and such
Loan Party will immediately deliver them to Agent in their original form
together with any necessary endorsement.


4.7. Books and
Records.


Each Loan Party
shall (a) keep proper books of record and account in which full, true and
correct entries will be made of all dealings or transactions of or in relation
to its business and affairs; (b) set up on its books accruals with respect to
all taxes, assessments, charges, levies and claims; and (c) on a reasonably
current basis set up on its books, from its earnings, allowances against
doubtful Receivables, advances and investments and all other proper accruals
(including without limitation by reason of enumeration, accruals for premiums,
if any, due on required payments and accruals for depreciation, obsolescence,
or amortization of properties), which should be set aside from such earnings in
connection with its business. All determinations pursuant to this Section 4.7
shall be made in accordance with, or as required by, GAAP consistently applied
in the opinion of the Accountants.


 


40

















4.8. Financial Disclosure.


Each Loan Party
hereby irrevocably authorizes and directs all accountants and auditors employed
by such Loan Party at any time during the Term to exhibit and deliver to Agent
and each Lender copies of any of Loan Parties’ financial statements, trial
balances or other accounting records of any sort in the accountant’s or
auditor’s possession, and to disclose to Agent and each Lender any information
such accountants may have concerning such Loan Party’s financial status and
business operations. However, Agent and each Lender will attempt to obtain such
information or materials directly from such Loan Party prior to obtaining such
information or materials from such accountants and auditors.


4.9. Compliance
with Laws.


Each Loan Party
shall comply with all acts, rules, regulations and orders of any legislative,
administrative or judicial body or official applicable to its respective
Collateral or any part thereof or to the operation of such Loan Party’s
business the non-compliance with which could reasonably be expected to have a
Material Adverse Effect. The Collateral at all times shall be maintained in
accordance with the requirements of all insurance carriers which provide
insurance with respect to the Collateral so that such insurance shall remain in
full force and effect.


4.10. Inspection
of Premises.


At all reasonable
times following the occurrence and during the continuance of an Event of
Default and otherwise on reasonable prior written notice and during normal
business hours, Agent and each Lender shall have full access to and the fight
to audit, check, inspect and make abstracts and copies from each Loan Party’s
books, records, audits, correspondence and all other papers relating to the
Collateral and the operation of each Loan Party’s business. Agent, any Lender
and their agents may enter upon any of such Loan Party’s premises at any time
during business hours and at any other reasonable time, and from time to time,
for the purpose of inspecting the Collateral and any and all records pertaining
thereto and the operation of such Loan Party’s business.


4.11. Insurance.


Each Loan Party
shall bear the full risk of any loss of any nature whatsoever with respect to
the Collateral. At each Loan Party’s own cost and expense in amounts and with
carriers reasonably acceptable to Agent, each Loan Party shall (a) keep all its
insurable properties insured against the hazards of fire, flood, sprinkler
leakage, those hazards covered by extended coverage insurance and such other
hazards, and for such amounts, as is customary in the case of companies engaged
in businesses similar to such Loan Party’s including, without limitation,
business interruption insurance; (b) maintain a bond in such amounts as is
customary in the case of companies engaged in businesses similar to such Loan
Party insuring against larceny, embezzlement or other criminal misappropriation
of insured’s officers and employees who may either singly or jointly with
others at any time have access to the assets or funds of such Loan Party either
directly or through authority to draw upon such funds or to direct generally
the disposition of such assets; (c) maintain public and product liability
insurance 


 


41

















against claims for
personal injury, death or property damage suffered by others; (d) maintain all
such worker’s compensation or similar insurance as may be required under the
laws of any state or jurisdiction in which Loan Parties is engaged in business;
(e) furnish Agent with (i) copies of all policies and evidence of the
maintenance of such policies by the renewal thereof at least thirty (30) days
before any expiration date, and (ii) appropriate loss payable endorsements in
form and substance satisfactory to Agent, naming Agent as a co-insured and loss
payee as its interests may appear with respect to all insurance coverage
referred to in clauses (a) and (c) above, and providing (A) that all proceeds
thereunder shall be payable to Agent, (B) no such insurance shall be affected
by any act or neglect of the insured or owner of the property described in such
policy, and (C) that such policy and loss payable clauses may not be cancelled,
amended or terminated unless at least thirty (30) days’ prior written notice
(or ten (10) days’ prior written notice in the case of cancellation for
non-payment of premiums) is given to Agent. In the event of any loss
thereunder, the carriers named therein hereby are directed by Agent and the
applicable Loan Party to make payment for such loss to Agent and not to such
Loan Party and Agent jointly. If any insurance losses are paid by check, draft
or other instrument payable to any Loan Party and Agent jointly, Agent may
endorse such Loan Party’s name thereon and do such other things as Agent may
deem advisable to reduce the same to cash. Agent is hereby authorized during
the continuance of an Event of Default to adjust and compromise claims under
insurance coverage referred to in clauses (a) and (c) above. All loss
recoveries received by Agent upon any such insurance may be applied to the
Obligations, in such order as Agent in its sole discretion shall determine. Any
surplus shall be paid by Agent to Loan Parties or applied as may be otherwise
required by law.


4.12. Failure
to Pay Insurance.


If any Loan Party
fails to obtain insurance as hereinabove provided, or to keep the same in
force, Agent, if Agent so elects, may obtain such insurance and pay the premium
therefor for Borrower’s Account, and charge Borrower’s Account therefor and
such expenses so paid shall be part of the Obligations.


4.13. Payment
of Taxes.


Each Loan Party
will pay, when due, all material taxes, assessments and other Charges lawfully
levied or assessed upon such Loan Party or any of the Collateral including,
without limitation, real and personal property taxes, assessments and charges
and all franchise, income, employment, social security benefits, withholding,
and sales taxes other than those taxes, assessments or Charges that any Loan
Party has contested or disputed in good faith, by expeditious protest,
administrative or judicial appeal or similar proceeding provided that
any related tax lien is stayed and sufficient reserves are established to the
reasonable satisfaction of Agent to protect Agent’s security interest in or
Lien on the Collateral. If any tax by any governmental authority (i) is or may
be imposed on or as a result of any transaction between any Loan Party and
Agent or any Lender which Agent or any Lender may be required to withhold or
pay, or (ii) if any material taxes, assessments, or other Charges remain unpaid
after the date fixed for their payment, or (iii) if any claim shall be made
which, in Agent’s or any Lender’s opinion, may possibly create a valid Lien on
the Collateral, Agent may, following written notice to Borrower and Borrower’s
failure to pay the same within ten (5) Business Days following receipt of such
notice (except no such notice is required for payments under clause (i)), pay
the taxes,


 


42

















assessments or
other Charges and each Loan Party hereby indemnifies and holds Agent and each
Lender harmless in respect thereof. Agent will not pay any taxes, assessments
or Charges as provided above to the extent that any Loan Party has contested or
disputed those taxes, assessments or Charges in good faith, by expeditious
protest, administrative or judicial appeal or similar proceeding provided that
any related tax lien is stayed and sufficient reserves are established to the
reasonable satisfaction of Agent to protect Agent’s security interest in or
Lien on the Collateral. The amount of any payment by Agent under this Section
4.13 shall be charged to Borrower’s Account as a Revolving Advance and added to
the Obligations.


4.14. Payment
of Leasehold Obligations.


Each Loan Party
shall at all times pay, when and as due, its rental obligations under all
leases under which it is a tenant (unless contesting such payments in good
faith), and shall otherwise comply, in all material respects, with all other
terms of such leases and keep them in full force and effect and, at Agent’s
request will provide evidence of having done so.


4.15. Receivables.


(a) Nature of
Receivables. Each of the Receivables shall be a bona fide and valid account
representing a bona fide indebtedness incurred by the Customer therein named,
for a fixed sum as set forth in the invoice relating thereto (provided
immaterial or unintentional invoice errors shall not be deemed to be a breach
hereof) with respect to an absolute sale or lease and delivery of goods upon
stated terms of a Loan Party, or work, labor or services theretofore rendered
by a Loan Party as of the date each Receivable is created. Same shall be due
and owing in accordance with the applicable Loan Party’s standard terms of sale
without dispute, setoff or counterclaim except as may be stated on the accounts
receivable schedules delivered by Loan Parties to Agent.


(b) Solvency of
Customers. Each Customer, to the best of each Loan Party’s knowledge, as of
the date each Receivable is created, is solvent and able to pay all Receivables
on which the Customer is obligated in full when due or with respect to such
Customers of Loan Parties who are not solvent such Loan Party has set up on its
books and in its financial records bad debt reserves adequate to cover such
Receivables.


(c) Locations
of Loan Parties. Each Loan Party’s chief executive office is located at the
addresses set forth on Schedule 4.15(c).
Until written notice is given to Agent by Borrower of any other office at which
any Loan Party keeps its records pertaining to Receivables, all such records
shall be kept at such executive office.


(d) Collection
of Receivables. Until any Loan Party’s authority to do so is terminated by
Agent (which notice Agent may give at any time following the occurrence of an
Event of Default or a Default), each Loan Party will, at such Loan Party’s sole
cost and expense, but on Agent’s behalf and for Agent’s account, subject to the
terms of the Factoring Agreement (as applicable with respect to the Eligible
Factored Receivables), collect or cause Factor to collect as Agent’s property
and in trust for Agent all amounts received on Receivables, and shall not
commingle such collections with any Loan Party’s funds or use the same except
to pay Obligations. Each Loan Party shall, upon request, deliver to Agent, or
deposit in the Blocked


 


43

















Account, in
original form and on the date of receipt thereof, all checks, drafts, notes,
money orders, acceptances, cash and other evidences of Indebtedness.


(e) Notification
of Assignment of Receivables. Subject to the terms of the Factoring
Agreement (as applicable with respect to the Eligible Factored Receivables)
during the continuance of an Event of Default, Agent shall have the right to
send notice of the assignment of, and Agent’s security interest in, the
Receivables to any and all Customers or any third party holding or otherwise
concerned with any of the Collateral. Thereafter, Agent shall have the sole
right to collect the Receivables, take possession of the Collateral, or both.
Agent’s actual collection expenses, including, but not limited to, stationery
and postage, telephone and telecopy, secretarial and clerical expenses and the
salaries of any collection personnel used for collection, may be charged to
Borrower’s Account and added to the Obligations.


(f) Power of
Agent to Act on Loan Parties’ Behalf. Subject to the terms of the Factoring
Agreement (as applicable with respect to the Eligible Factored Receivables),
Agent shall have the right to receive, endorse, assign and/or deliver in the
name of Agent or any Loan Party any and all checks, drafts and other
instruments for the payment of money relating to the Receivables, and each Loan
Party hereby waives notice of presentment, protest and non-payment of any
instrument so endorsed. Subject to the terms of the Factoring Agreement (as
applicable with respect to the Eligible Factored Receivables), each Loan Party
hereby constitutes Agent or Agent’s designee as such Loan Party’s attorney with
power (i) to endorse such Loan Party’s name upon any notes, acceptances,
checks, drafts, money orders or other evidences of payment or Collateral; (ii)
to sign such Loan Party’s name on any invoice or bill of lading relating to any
of the Receivables, drafts against Customers, assignments and verifications of
Receivables; (iii) to send verifications of Receivables to any Customer, (iv)
to sign such Loan Party’s name on all financing statements or any other
documents or instruments deemed necessary or appropriate by Agent to preserve,
protect, or perfect Agent’s interest in the Collateral and to file same; (v) to
demand payment of the Receivables; (vi) to enforce payment of the Receivables
by legal proceedings or otherwise; (vii) to exercise all of such Loan Party’s
rights and remedies with respect to the collection of the Receivables and any
other Collateral; (viii) to settle, adjust, compromise, extend or renew the
Receivables; (ix) to settle, adjust or compromise any legal proceedings brought
to collect Receivables; (x) to prepare, file and sign such Loan Party’s name on
a proof of claim in bankruptcy or similar document against any Customer; (xi)
to prepare, file and sign such Loan Party’s name on any notice of Lien,
assignment or satisfaction of Lien or similar document in connection with the
Receivables; and (xii) to do all other acts and things necessary to carry out
this Agreement. Agent shall not exercise the power of attorney under clauses
(v), (vi), (vii), (viii), (ix) or (x) unless an Event of Default has occurred
and is continuing. All acts of said attorney or designee are hereby ratified
and approved, and said attorney or designee shall not be liable for any acts of
omission or commission nor for any error of judgment or mistake of fact or of
law, unless done maliciously or with gross (not mere) negligence; this power
being coupled with an interest is irrevocable while any of the Obligations
remain unpaid. Subject to the terms of the Factoring Agreement (as applicable
with respect to the Eligible Factored Receivables), Agent shall have the right
at any time when an Event of Default has occurred which is then continuing, to
change the address for delivery of mail addressed to any Loan Party to such address
as Agent may designate and to receive, open and dispose of all mail addressed
to any Loan Party.


 


44

















(g) No Liability. Neither Agent nor any Lender
shall, under any circumstances or in any event whatsoever, have any liability
for any error or omission or delay of any kind occurring in the settlement,
collection or payment of any of the Receivables or any instrument received in
payment thereof, or for any damage resulting therefrom. Subject to the terms of
the Factoring Agreement (as applicable with respect to the Eligible Factored
Receivables), Agent may, during the continuance of an Event of Default, without
notice or consent from any Loan Party, sue upon or otherwise collect, extend
the time of payment of, compromise or settle for cash, credit or upon any terms
any of the Receivables or any other securities, instruments or insurance
applicable thereto and/or release any obligor thereof. Agent is authorized and
empowered to accept the return of the goods represented by any of the
Receivables, without notice to or consent by any Loan Party, all without
discharging or in any way affecting any Loan Party’s liability hereunder. 


(h) Establishment of a Lockbox Account, Dominion
Account. All proceeds of Collateral shall, at the direction of Agent, be
deposited by Loan Parties into a lockbox account, dominion account or such
other blocked account (collectively, the “Blocked Accounts”) as Agent
may require pursuant to an arrangement with such bank as may be selected by
Loan Parties and be reasonably acceptable to Agent. Loan Parties shall issue to
any such bank, an irrevocable letter of instruction directing said bank to
transfer such funds so deposited to Agent, either to any account maintained by
Agent at said bank or by wire transfer to appropriate account(s) of Agent. All
funds deposited in a Blocked Account shall immediately become the property of
Agent and Loan Parties shall obtain the agreement by such bank to waive any
offset rights against the funds so deposited (except with respect to its fees
and charges for the Blocked Accounts and for the chargeback of returned or
dishonored items). Neither Agent nor any Lender assumes any responsibility for
any Blocked Account arrangement, including without limitation, any claim of
accord and satisfaction or release with respect to deposits accepted by any
bank thereunder. Alternatively, Agent may establish depository accounts
(collectively, the “Depository Accounts”) in the name of Agent at a bank
or banks for the deposit of such funds and Loan Parties shall deposit all
proceeds of Collateral or cause same to be deposited, in kind, in such
Depository Accounts of Agent in lieu of depositing same to the Blocked
Accounts.


(i) Adjustments.
No Loan Party will, without Agent’s consent, compromise or adjust any
Receivables (or extend the time for payment thereof) or accept any returns of
merchandise or grant any additional discounts, allowances or credits thereon
except for those compromises, adjustments, returns, discounts, credits and
allowances as have been heretofore customary in the business of such Loan
Party.


4.16. Inventory.


To the extent
Inventory held for sale or lease has been produced by any Loan Party, it has
been and will be produced by such Loan Party in accordance with the Federal
Fair Labor Standards Act of 1938, as amended, and all rules, regulations and
orders thereunder. 


4.17. Maintenance
of Equipment.


The Equipment
shall be maintained in good operating condition and repair (reasonable wear and
tear excepted) and all necessary replacements of and repairs thereto shall 


 


45

















be made so that
the value and operating efficiency of the Equipment, subject to customary
depreciation, shall be maintained and preserved. No Loan Party shall use or
operate the Equipment in violation of any law, statute, ordinance, code, rule
or regulation if such violation could reasonably be expected to cause a
Material Adverse Effect. Each Loan Party shall have the right to sell Equipment
to the extent set forth in Section 4.3. 


4.18. Exculpation
of Liability.


Nothing herein contained shall be construed to
constitute Agent or any Lender as any Loan Party’s agent for any purpose
whatsoever, nor shall Agent or any Lender be responsible or liable for any
shortage, discrepancy, damage, loss or destruction of any part of the
Collateral wherever the same may be located and regardless of the cause
thereof. Neither Agent nor any Lender, whether by anything herein or in any
assignment or otherwise, assume any of such Loan Party’s obligations under any
contract or agreement assigned to Agent or such Lender, and neither Agent nor
any Lender shall be responsible in any way for the performance by any Loan
Party of any of the terms and conditions thereof.


4.19. Environmental
Matters.


(a) Loan Parties shall ensure that the Real Property
remains in compliance in all material respects, with all Environmental Laws and
they shall not place or permit to be placed any Hazardous Substances on any
Real Property except as not prohibited by applicable law or appropriate governmental
authorities.


(b) Loan Parties
shall establish and maintain a system to assure and monitor continued
compliance with all applicable Environmental Laws which system shall include
periodic reviews of such compliance. 


(c) Loan Parties
shall dispose of any and all Hazardous Waste generated at the Real Property
only at facilities and with carriers that maintain valid permits under RCRA and
any other applicable Environmental Laws. Loan Parties shall use their best
efforts to obtain certificates of disposal, such as hazardous waste manifest
receipts, from all treatment, transport, storage or disposal facilities or
operators employed by Loan Parties in connection with the transport or disposal
of any Hazardous Waste generated at the Real Property.


(d) In the event any Loan Party obtains, gives or
receives notice of any Release or threat of Release of a reportable quantity of
any Hazardous Substances at the Real Property (any such event being hereinafter
referred to as a “Hazardous Discharge”) or receives any notice of
violation, request for information or notification that it is potentially
responsible for investigation or cleanup of environmental conditions at the
Real Property, demand letter or complaint, order, citation, or other written
notice with regard to any Hazardous Discharge or violation of Environmental
Laws affecting the Real Property or any Loan Party’s interest therein (any of
the foregoing is referred to herein as an “Environmental Complaint”)
from any Person, including any state agency responsible in whole or in part for
environmental matters in the state in which the Real Property is located or the
United States Environmental Protection Agency (any such person or entity
hereinafter the “Authority”), then Loan Parties shall, within five (5) Business Days, give written notice
of same to Agent detailing facts and circumstances of which


 


46

















any Loan Party is
aware giving rise to the Hazardous Discharge or Environmental Complaint. Such
information is to be provided to allow Agent to protect its security interest
in the Real Property and is not intended to create nor shall it create any
obligation upon Agent or any Lender with respect thereto. 


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


(f) Loan Parties
shall respond promptly to any Hazardous Discharge or Environmental Complaint
and take all necessary action in order to avoid or mitigate any liability
therefrom that would have a Material Adverse Effect and to avoid subjecting the
Collateral or Real Property to any Lien. If any Loan Party shall fail to
respond promptly to any Hazardous Discharge or Environmental Complaint after
demand from Agent or any Loan Party shall fail to comply with any of the
requirements of any Environmental Laws after demand from Agent, and if such
failure could reasonably be expected to cause a Material Adverse Effect, Agent
on behalf of Lenders may, but without the obligation to do so, for the sole purpose
of protecting Agent’s interest in Collateral: (A) give such notices or (B)
enter onto the Real Property (or authorize third parties to enter onto the Real
Property) and take such actions as Agent (or such third parties as directed by
Agent) deem reasonably necessary or advisable, to clean up, remove, mitigate or
otherwise deal with any such Hazardous Discharge or Environmental Complaint.
All reasonable costs and expenses incurred by Agent and Lenders (or such third
parties) in the exercise of any such rights, including any sums paid in
connection with any judicial or administrative investigation or proceedings,
fines and penalties, together with interest thereon from the date expended at
the Default Rate for Domestic Rate Loans constituting Revolving Advances shall
be paid upon demand by Loan Parties, and until paid shall be added to and
become a part of the Obligations secured by the Liens created by the terms of
this Agreement or any other agreement between Agent, any Lender and any Loan
Party.


(g) Promptly upon the written request of Agent from
time to time, Loan Parties shall provide Agent, at Loan Parties’ expense, with
an environmental site assessment or environmental audit report prepared by an
environmental engineering firm acceptable in the reasonable opinion of Agent,
to assess with a reasonable degree of certainty the existence of a Hazardous
Discharge and the potential costs in connection with abatement, cleanup and
removal of any Hazardous Substances found on, under, at or within the Real Property,
in either case that could reasonably be expected to have a Material Adverse
Effect. Any report or investigation of such Hazardous Discharge proposed and
acceptable to an appropriate Authority that is charged to oversee the clean-up
of such Hazardous Discharge shall be acceptable to Agent. If such estimates,
individually or in the aggregate, exceed $500,000, Agent shall have the right
to require Loan Parties to post a bond, letter of credit or other security
reasonably satisfactory to Agent to secure payment of these costs and expenses.


 


47

















(h) Loan Parties shall defend and indemnify Agent and Lenders and
hold Agent, Lenders and their respective employees, agents, directors and
officers harmless from and against all loss, liability, damage and expense,
claims, costs, fines and penalties, including attorney’s fees, suffered or
incurred by Agent or Lenders under or on account of any Environmental Laws,
including, without limitation, the assertion of any Lien thereunder, with
respect to any Hazardous Discharge, or the presence of any Hazardous Substances
affecting the Real Property, whether or not the same originates or emerges from
the Real Property or any contiguous real estate, including any loss of value of
the Real Property as a result of the foregoing except to the extent such loss,
liability, damage and expense is attributable to any Hazardous Discharge
resulting from actions on the part of Agent or any Lender. Loan Parties’
obligation and the indemnification hereunder shall survive the termination of
this Agreement.


(i) For purposes
of Sections 4.19 and 5.7, all references to Real Property shall be deemed to
include all of Loan Parties’ right, title and interest in and to its owned and
leased premises.


4.20. Financing
Statements.


Except as respects
the financing statements filed by Agent and the financing statements described
on Schedule 7.2,
on the Closing Date no financing statement covering any of the Collateral or
any proceeds thereof is on file in any public office.


4.21. Collateral
Audits.


At the request of
Agent in its sole discretion, but no less frequently than twice in each fiscal
year, Loan Parties shall permit Agent or one or more designees of Agent to
perform, at Loan Parties’ expense, such appraisals of Inventory or other
Collateral, field examinations, collateral analysis, monitoring, including,
without limitation, testing of Inventory orders against undrawn Documentary
Letters of Credit to confirm Loan Parties’ compliance with the covenant set forth
in Section 6.8(c), or other business analysis, as required by Agent and shall
provide Agent with access to all facilities and all book and records of Loan
Parties reasonably required by Agent to conduct such audits.


V.        REPRESENTATIONS
AND WARRANTIES.


Each Loan Party
represents and warrants as follows:


5.1. Authority.


Each Loan Party
has full power, authority and legal right to enter into this Agreement and the
Other Documents and to perform all its respective Obligations hereunder and
thereunder. The execution, delivery and performance of this Agreement and of
the Other Documents (a) are within such Loan Party’s limited liability company,
partnership or corporate powers, have been duly authorized, are not in
contravention of (i) law or (ii) the terms of such Loan Party’s certificate of
formation, partnership agreement, limited liability company agreement, by-laws,
certificate of incorporation or other applicable documents relating to such
Loan Party’s formation or to the conduct of such Loan Party’s business or (iii)
of any material agreement or undertaking to which such Loan Party is a party or
by which such Loan Party is


 


48

















bound except in
the case of clause (iii) for customary restrictions on the assignability
thereof and except in the case of clauses (i) and (ii) to the extent such
violation could not reasonably be expected to have a Material Adverse Effect,
and (b) will not conflict with nor result in any breach in any of the
provisions of or constitute a default under or result in the creation of any
Lien except Permitted Encumbrances upon any asset of such Loan Party under the
provisions of any agreement, charter document, by-law, or other instrument to
which such Loan Party or its property is a party or by which it may be bound.
This Agreement and the Other Documents, as applicable, constitute the legal,
valid and binding obligation of each Loan Party, enforceable in accordance with
their respective terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors’ rights generally or by equitable principles relating to
enforceability.


5.2. Formation
and Qualification.


(a) Each Loan
Party is duly formed or incorporated and in good standing under the laws of the
state listed on Schedule
5.2(a) and is qualified to do business and is in good standing
in the states listed on Schedule
5.2(a) which constitute all states in which qualification and
good standing are necessary for such Loan Party to conduct its business and own
its property and where the failure to so qualify could reasonably be expected
to have a Material Adverse Effect. The exact State organizational number of
Borrower is set forth on Schedule
5.2(a). Each Loan Party has delivered to Agent true and complete
copies of its certificate of formation, certificate of limited partnership,
partnership agreement, limited liability company agreement, or certificate of
incorporation and by-laws, as the case may be and will promptly notify Agent of
any amendment or changes thereto that adversely affects the Agent or Lenders.


(b) The only
Subsidiaries of and equityholders in each Loan Party are listed on Schedule 5.2(b).


5.3. Survival
of Representations and Warranties.


All
representations and warranties of such Loan Party contained in this Agreement
and the Other Documents shall be true at the time of such Loan Party’s
execution of this Agreement and the Other Documents, and shall survive the
execution, delivery and acceptance thereof by the parties thereto and the
closing of the transactions described therein or related thereto.


5.4. Tax
Returns.


Each Loan Party’s
federal tax identification number is set forth on Schedule 5.4. Each Loan Party has filed all material federal, state and
local tax returns and other reports each is required by law to file and has
paid all material taxes, assessments, fees and other governmental charges that
are due and payable (other than those taxes, assessments, fees and other
governmental charges that are currently being contested in good faith and with
respect to which reserves or other appropriate provisions, if any, as shall be
required in conformity with GAAP shall have been made or provided for). The
provision for taxes on the books of Loan Parties are adequate for all years not
closed by applicable statutes, and for its current fiscal year, and no


 


49

















Loan Party has any
knowledge of any deficiency or additional assessment in connection therewith
not provided for on its books.


5.5. Financial
Statements.


(a) The pro forma
balance sheet of Loan Parties on a Consolidated Basis (the “Pro Forma
Balance Sheet”) furnished to Agent on the Closing Date reflects (i) the
consummation of the transactions contemplated under this Agreement and (ii) the
Recapitalization (collectively, the “Transactions”) and is accurate,
complete and correct in all material respects and fairly reflects in all
material respects the financial condition of Loan Parties on a Consolidated
Basis as of the Closing Date after giving effect to the Transactions, and has
been prepared in accordance with GAAP, consistently applied, except as may be
disclosed in such financial statements. The Pro Forma Balance Sheet has been
certified as accurate, complete and correct in all material respects by the
President and Chief Financial Officer of Loan Parties.


(b) The
twelve-month cash flow projections of Loan Parties on a Consolidated Basis and
their projected balance sheets (including Letter of Credit requirements) as of
the Closing Date, copies of which are annexed hereto as Exhibit 5.5 were
prepared by the Chief Financial Officer of Loan Parties, are based on
underlying assumptions which are believed by management to provide a reasonable
basis for the projections contained therein and reflect Loan Parties’ judgment
based on present circumstances of the most likely set of conditions and course
of action for the projected period as of the Closing Date. The cash flow
projections together with the Pro Forma Balance Sheet are referred to as the “Pro
Forma Financial Statements”.


5.6. Organization
Name.


The exact name of
each Loan Party is set forth on the signature pages of this Agreement. No Loan
Party has been known by any other corporate, limited liability company or
partnership name in the past five years and no Loan Party sells Inventory under
any other name except as set forth on Schedule 5.6, nor has any Loan Party been the
surviving corporation of a merger or consolidation or acquired all or substantially
all of the assets of any Person during the preceding five (5) years except for
the Transaction.


5.7. O.S.H.A.
and Environmental Compliance.


(a) Each Loan
Party has duly complied in all material respects with, and its facilities,
business, assets, property, leaseholds and Equipment are in compliance in all
material respects with, the provisions of the Federal Occupational Safety and
Health Act, the Environmental Protection Act, RCRA and all other Environmental
Laws; there have been no outstanding citations, notices or orders of
non-compliance issued to any Loan Party or relating to its business, assets,
property, leaseholds or Equipment under any such laws, rules or regulations, in
each case except as set forth on Schedule 5.7.


(b) Each Loan
Party has been issued all required federal, state and local licenses,
certificates or permits relating to all applicable Environmental Laws, except
as set forth on Schedule
5.7.


 


50

















(c)       (i) There are no visible signs of
releases, spills, discharges, leaks or disposal (each, a “Release”) of
Hazardous Substances at, upon, under or within any Real Property; (ii) to the
best knowledge of the Loan Parties, there are no underground storage tanks or
polychlorinated biphenyls on any Real Property; (iii) to the best knowledge of
the Loan Parties, the Real Property has never been used as a treatment, storage
or disposal facility of Hazardous Waste;
and (iv) no Hazardous Substances are present on any Real Property, excepting such
quantities as are handled in accordance with all applicable manufacturer’s
instructions and governmental regulations
and in proper storage containers and as are necessary for the operation of the
commercial business of any Loan Party or of its tenants, in each case except as
set forth on Schedule 5.7.


5.8. Solvency; No Litigation, Violation,
Indebtedness or Default.


(a) After giving effect to the
Transactions, Borrower and Verrazano taken as a whole is solvent, able
to pay its debts as they mature, has capital sufficient to carry on its
business and all businesses in which it is about to engage, and (i) as of the
Closing Date, the fair present saleable value of the assets of Borrower and
Verrazano taken as a whole, calculated on a going
concern basis, is in excess of the amount of its liabilities and (ii)
subsequent to the Closing Date, the fair saleable value of the assets of
Borrower and Verrazano taken as a whole (calculated on a going concern basis)
will be in excess of the amount of its liabilities.


(b) Except as disclosed in Schedule 5.8(b), no Loan Party has
(i) any pending or threatened litigation, arbitration, actions or proceedings
which could reasonably be expected to have a Material Adverse Effect, and (ii)
any Indebtedness for borrowed money other than the Obligations.


(c) No Loan Party is in violation of any applicable
statute, regulation or ordinance in any
respect which could reasonably be expected to have a Material Adverse Effect, nor
is any Loan Party in violation of any order of any court, governmental
authority or arbitration board or tribunal which could reasonably be expected
to have a Material Adverse Effect.


(d) No Loan Party nor any member of the Controlled
Group maintains or contributes to any Plan other than those listed on Schedule 5.8(d). Except
as set forth in Schedule
5.8(d), (i) no Plan has incurred any “accumulated
funding deficiency,” as defined in Section 302(a)(2) of ERISA and Section
412(a) of the Code, whether or not waived, and each Loan Party and each member of the Controlled Group have met all
applicable minimum funding requirements under Section 302 of ERISA in
respect of each Plan, (ii) each Plan which is intended to be a qualified plan
under Section 401(a) of the Code as currently in effect has been determined by the Internal Revenue Service to be
qualified under Section 401 (a) of the Code and the trust related thereto is
exempt from federal income tax under Section 501 (a) of the Code, (iii) no
Loan Party nor any member of the Controlled Group has incurred any liability to
the PBGC other than for the payment of
premiums, and there are no premium payments which have become due which
are unpaid, (iv) no Plan has been terminated by the plan administrator thereof
nor by the PBGC, and there is no occurrence which would cause the PBGC to
institute proceedings under Title IV of
ERISA to terminate any Plan, (v) at this time, the current value of the assets
of each Plan exceeds the present value of the accrued benefits and other
liabilities of such Plan and


 


51

















no Loan Party nor any member of the Controlled Group
knows of any facts or circumstances which would materially change the value of
such assets and accrued benefits and other liabilities, (vi) no Loan Party or any member of the Controlled Group has breached
any of the responsibilities, obligations or duties imposed on it by
ERISA with respect to any Plan, except where any Breach could not reasonably be
expected to result in a Material Adverse Effect, (vii) no Loan Party nor any
member of a Controlled Group has incurred any liability for any excise tax
arising under Section 4972 or 4980B of the Code, and no fact exists which could
give rise to any such liability, except
where any Breach could not reasonably be expected to result in a Material
Adverse Effect, (viii) no Loan Party nor any member of the Controlled Group nor
any fiduciary of, nor any trustee to, any Plan, has engaged in a “prohibited
transaction” described in Section 406 of ERISA or Section 4975 of the
Code nor taken any action which would constitute or result in a Termination Event with respect to any such Plan which is
subject to ERISA, (ix) each Loan Party and each member of the Controlled
Group has made all contributions due and payable
with respect to each Plan, (x) there exists no event described in Section
4043(b) of ERISA, for which the thirty (30) day notice period contained in 29
CFR §2615.3 has not been waived, (xi) no Loan Party nor any member of the
Controlled Group has any fiduciary responsibility for investments with respect
to any plan existing for the benefit of persons other than employees or former
employees of any Loan Party and any member of the Controlled Group, and
(xii) no Loan Party nor any member of the Controlled Group has withdrawn, completely or partially, from any Multiemployer
Plan so as to incur liability under the Multiemployer Pension Plan
Amendments Act of 1980.


5.9. Patents,
Trademarks, Copyrights and Licenses.


All material patents, patent applications, trademark
registrations, trademark applications, service mark registrations, service mark
applications, copyright registrations, copyright applications, trade names,
assumed names, trade secrets, and licenses (except for licenses to use computer
software with a price or license fee of less than $10,000) (the “Intellectual
Property”) owned or used by any Loan Party are set forth on Schedule 5.9. To
the knowledge of each Loan Party, all registrations and applications for all
Intellectual Property owned by a Loan Party are valid and, as indicated on Schedule 5.9, have been duly registered or applied for
with appropriate governmental authorities. The Intellectual Property set forth
on Schedule 5.9 constitutes all material Intellectual
Property rights which are necessary for the operation of each Loan Party’s
business; there are no claims or proceedings pending against a Loan Party or
threatened against a Loan Party in writing challenging the validity of any such
Intellectual Property owned by a Loan Party and no Loan Party is aware of any valid
grounds for any such challenge, except as set
forth in Schedule 5.9. All
material Intellectual Property used by any Loan Party is owned by such
Loan Party or is used by such Loan Party with the permission of the owner
thereof. Each Loan Party has taken reasonable measures to preserve the value of
each item of material Intellectual Property owned by such Loan Party from the
date of creation or acquisition thereof. With respect to all material software
used by any Loan Party (other than commercially available software with a price
or license fee of less than $10,000), such Loan Party is in possession of all
source and object codes related to each piece of software or is the beneficiary
of a source code escrow agreement, each such source code escrow agreement being
listed on Schedule 5.9.


5.10. Licenses and
Permits.


 


52

















Except as set forth in Schedule 5.10, each
Loan Party (a) is in compliance with and (b) has procured and is now in
possession of, all material licenses or permits required by any applicable
federal, state or local law or regulation for the operation of its business in
each jurisdiction wherein it is now conducting or proposes to conduct business
and where the failure to procure such licenses or permits could reasonably be
expected to have a Material Adverse Effect.


5.11. No Defaults.


(a) No Loan Party is in default in the payment of the
principal of or interest on any material Indebtedness or under any material
instrument or agreement under or subject to which any material Indebtedness has
been issued and no event has occurred under the provisions of any such
instrument or agreement which with or without the lapse of time or the giving
of notice, or both, constitutes or would constitute an event of default
thereunder.


(b) No Loan Party is in default in the payment or
performance of any other contractual obligations except as could not reasonably
be expected to have a Material Adverse Effect and no Default has occurred.


5.12. No Burdensome
Restrictions.


No Loan Party is party to any contract or agreement
the performance of which could reasonably be expected to have a Material
Adverse Effect. No Loan Party has agreed or consented to cause or permit in the
future (upon the happening of a contingency or otherwise) any of its property,
whether now owned or hereafter acquired, to be subject to a Lien which is not a
Permitted Encumbrance.


5.13. No Labor
Disputes.


No Loan Party is involved in any labor dispute; there
are no strikes or walkouts or union organization of any Loan Party’s employees
threatened or in existence and no labor contract is scheduled to expire during
the Term other than as set forth on Schedule
5.13.


5.14. Margin
Regulations.


No Loan Party is engaged principally or as one of its
important activities, in the business of extending credit for the purpose of
“purchasing” or “carrying” any “margin stock” within the meaning of the quoted
term under Regulation U of the Board of Governors of the Federal Reserve System
as now and from time to time hereafter in effect. No part of the proceeds of
any Advance will be used for “purchasing” or “carrying” “margin stock” as
defined in Regulation U of such Board of Governors.


5.15. Investment
Company Act.


No Loan Party is an “investment company” registered or
required to be registered under the Investment Company Act of 1940, as amended,
nor is it controlled by such a company.


5.16. Disclosure.


 


53

















No representation or warranty made by any Loan Party in this Agreement
or in any financial statement, report, certificate or any other document
furnished in connection herewith contains any untrue statement of a material
fact or omits to state any material fact necessary to make the statements
herein or therein, taken as a whole, not misleading. There is no fact known to
any Loan Party or which reasonably should be known to any Loan Party which such
Loan Party has not disclosed to Agent in writing with respect to the
transactions contemplated by this Agreement which could reasonably be expected
to have a Material Adverse Effect.


5.17. Delivery
of Senior Note Documentation and Factoring Agreement.


Agent has been
provided with complete copies of Senior Note Documentation and the Factoring
Agreement (including all exhibits, schedules and disclosure letters referred to
therein or delivered pursuant thereto, if any) and all amendments thereto,
waivers relating thereto and other side letters or agreements affecting the
terms thereof. None of such documents and agreements has been amended or
supplemented, nor have any of the provisions thereof been waived, except
pursuant to a written agreement or instrument which has heretofore been
provided to Agent.


5.18. Swaps.


As of the Closing
Date, no Loan Party is a party to any swap agreement whereby such Loan Party
has agreed or will agree to swap interest rates or currencies.


5.19. Conflicts.


No provision of
any mortgage, indenture, contract, agreement, judgment, decree or order binding
on any Loan Party or affecting the Collateral or any provision of applicable
law of any Governmental Body conflicts with, or requires any Consent which has
not already been obtained to, or would in any way prevent the execution,
delivery or performance of, the terms of this Agreement or the Other Documents.


5.20. Application
of Certain Laws and Regulations.


No Loan Party nor
any Affiliate of any Loan Party is subject to any statute, rule or regulation
which regulates the incurrence of any Indebtedness, including without
limitation, statutes or regulations relative to common or interstate carriers
or to the sale of electricity, gas, steam, water, telephone, telegraph or other
public utility services.


5.21. Business
and Property of Loan Parties.


Upon and after the
Closing Date, Loan Parties do not propose to engage in any business other than
designing, sourcing and marketing one or more lines of women’s apparel. On the
Closing Date, each Loan Party will own all the property and possess all of the
rights and Consents necessary for the conduct of the business of such Loan
Party.


5.22. Material
Contracts.


 


54

















Schedule 5.22 contains a true, correct and
complete list of all contracts the termination of which could reasonably be
expected to have a Material Adverse Effect. Except as set forth on Schedule 5.22, each
such contract is in full force and effect and no material defaults enforceable
against such Loan Party exist thereunder. No Loan Party has received written
notice from any party to such contract stating that it intends to terminate or
amend such contract.


VI.                    AFFIRMATIVE COVENANTS.


Each Loan Party
shall, until payment in full of the Obligations and termination of this
Agreement:


6.1. Payment of
Fees.


Pay to Agent on
demand all usual and customary fees and expenses which Agent incurs in
connection with (a) the forwarding of Advance proceeds and (b) the
establishment and maintenance of any Blocked Accounts or Depository Accounts as
provided for in Section 4.15(h). Agent may, without making demand, charge
Borrower’s Account for all such fees and expenses.


6.2. Conduct of
Business and Maintenance of Existence and Assets.


(i) Conduct
continuously and operate actively its business according to good business
practices and maintain all of its properties useful or necessary in its
business in good working order and condition (reasonable wear and tear excepted
and except as may be disposed of in accordance with the terms of this
Agreement), including, without limitation, all material Intellectual Property
and take all commercially reasonable actions necessary to enforce and protect
the validity of any material Intellectual Property right or other right
included in the Collateral except where the failure to do the foregoing could
not reasonably be expected to have a Material Adverse Effect; (ii) keep in full
force and effect its existence and comply in all material respects with the
laws and regulations governing the conduct of its business where the failure to
do so could reasonably be expected to have a Material Adverse Effect; and (iii)
make all such reports and pay all such franchise and other taxes and license
fees and do all such other acts and things as may be lawfully required to
maintain its rights, licenses, powers and franchises under the laws of the
United States or any political subdivision thereof, except where the failure to
do the foregoing could not reasonably be expected to have a Material Adverse
Effect. Notwithstanding anything herein to the contrary, so long as no Event of
Default has occurred and is continuing, no Loan Party shall have an obligation
to use or to maintain any trademark, service mark, patent or copyright (A) that
relates solely to any product, brand or work that has been, or is in the
process of being, discontinued, abandoned or terminated, (B) that is being
replaced with a trademark, service mark, patent or copyright substantially
similar to the trademark, service mark, patent or copyright that may be
abandoned or otherwise become invalid, so long as the failure to use or
maintain such trademark, service mark, patent or copyright does not materially
adversely affect the validity of such replacement trademark, service mark,
patent or copyright, and so long as such replacement trademark, service mark,
patent or copyright is subject to the Lien and security interest created by
this Agreement, (C) that is substantially the same as another trademark,
service mark, patent or copyright that is in full force, so long as the failure
to use or maintain such trademark, service mark, patent or copyright does not
materially adversely affect


 


55

















the validity of
such other trademark, service mark, patent or copyright, and so long as such
other trademark, service mark, patent or copyright is subject to the Lien and
security interest created by this Agreement or (D) that is or becomes the
subject of any formal or informal dispute and/or any administrative or legal
proceeding (whether ex parte or inter partes) or other circumstances such that
the Loan Party, using good faith business judgment, reasonably determines it to
be imprudent to maintain or continue use of such trademark, service mark,
patent or copyright.


6.3. Violations.


Promptly notify
Agent in writing of any violation of any law, statute, regulation or ordinance
of any Governmental Body, or of any agency thereof, applicable to any Loan
Party which could reasonably be expected to have a Material Adverse Effect.


6.4. Government
Receivables.


Take all steps
necessary to protect Agent’s interest in the Collateral under the Federal
Assignment of Claims Act or other applicable state or local statutes or
ordinances and deliver to Agent appropriately endorsed, any instrument or
chattel paper connected with any Receivable arising out of contracts between
any Loan Party and the United States, any state or any department, agency or
instrumentality of any of them.


6.5. Execution
of Supplemental Instruments.


Execute and
deliver to Agent from time to time, upon demand, such supplemental agreements,
statements, assignments and transfers, or instructions or documents relating to
the Collateral, and such other instruments as Agent may reasonably request, in
order to maintain the validity, perfection and priority of the Agent’s Liens
and security interests and the preservation of its rights and remedies
hereunder.


6.6. Payment of
Indebtedness.


Subject at all
times to any applicable subordination arrangement in favor of Agent and/or
Lenders, pay, discharge or otherwise satisfy at or before maturity (subject,
where applicable, to specified grace periods and, in the case of the trade
payables, to normal payment practices) all its obligations and liabilities of
whatever nature, except when the failure to do so could not reasonably be
expected to have a Material Adverse Effect or when the amount or validity
thereof is currently being contested in good faith by appropriate proceedings
and each Loan Party shall have provided for reserves in accordance with GAAP.


6.7. Standards
of Financial Statements.


Cause all
financial statements referred to in Sections 9.7, 9.8, 9.9, 9.10 and 9.12 as to
which GAAP is applicable to be complete and correct in all material respects
(subject, in the case of interim financial statements, to normal year-end audit
adjustments and the absence of footnotes) and to be prepared in reasonable
detail and in accordance with GAAP applied consistently throughout the periods
reflected therein (except as concurred in by the reporting accountants or
officer, as the case may be, and disclosed therein).


 


56

















6.8. Financial
Covenants.


(a) Minimum
Working Capital. Maintain at all times during the periods set forth below
Working Capital in an amount not less than the amount set forth below for the
applicable period:


 




	
  Period

  	
   

  	
  Minimum Working 

  Capital Amount

  
	
  Closing Date through December 30, 2005 

  	
   

  	
  $20,000,000

  
	
  December 31, 2005 through June 29, 2006 

  	
   

  	
  $25,000,000

  
	
  June 30, 2006 through June 29, 2007 

  	
   

  	
  $35,000,000

  
	
  June 30, 2007 through June 29, 2008 

  	
   

  	
  $40,000,000

  
	
  June 30, 2008 through June 29, 2009 

  	
   

  	
  $45,000,000

  
	
  June 30, 2009 and thereafter 

  	
   

  	
  $50,000,000

  






(b) Positive
Net Income. Maintain Net Income in excess of $0 during each fiscal quarter
ending on or after September 30, 2005.


6.9. Subsidiaries.


In the event that
any Person becomes a Subsidiary of Borrower, Borrower shall promptly cause such
Subsidiary, if organized under the laws of any state of the United States of
America or the District of Columbia, to become a Guarantor hereunder by
executing and delivering to Agent a counterpart agreement in the form attached
as Exhibit 6.9 hereto. With respect to each such Subsidiary, Borrower shall
promptly send to Agent written notice setting forth with respect to such Person
(i) the date on which such Person became a Subsidiary of Borrower, and (ii) all
of the data required to be set forth in Schedules 4.5, 4.15(c), 5.2(a), 5.2(b),
5.4 and 5.6 and with respect to Subsidiaries of Borrower; provided, such
written notice shall be deemed to supplement such Schedules for all purposes
hereof.


VII.     NEGATIVE COVENANTS.


No Loan Party
shall, until satisfaction in full of the Obligations and termination of this
Agreement:


7.1. Merger,
Consolidation, Acquisition and Sale of Assets.


(a) Enter into any
merger, consolidation or other reorganization with or into any other Person or
acquire all or a substantial portion of the assets or stock of any Person or
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution) or permit any other Person to consolidate with or merge with it
other than a merger or consolidation of a Subsidiary of any Loan Party into
such Loan Party; provided, however that any Subsidiary of any Loan party may
merge with and into any other Subsidiary of any Loan party which is also
a Loan Party.


 


57

















(b) Other than Permitted Dispositions, sell, lease,
transfer or otherwise dispose of
any of its properties or assets.


7.2. Creation
of Liens; Negative Pledges.


Create or suffer to exist any Lien upon or against any
of its property or assets now owned or hereafter acquired, except Permitted
Encumbrances, or enter into any agreement prohibiting the creation or
assumption of any Lien upon its properties or assets now owned or hereafter
acquired except for (a) restrictions on Liens on specific property securing
payment of other Indebtedness permitted hereunder or to be sold pursuant to an
executed agreement with respect to a permitted sale or other disposition of
assets or property, (b) the Senior Note Documentation as in effect on the date
hereof, and (c) restrictions by reason of customary provisions restricting
assignments, subletting or other transfers contained in leases, licenses and
similar agreements entered into in the ordinary course of business (provided
that such restrictions are limited to the property or assets secured by such
Liens or the property or assets subject to such leases, licenses or similar
agreements, as the case may be).


7.3. Guarantees.


Become liable upon the obligations of any Person by
assumption, endorsement or guaranty thereof or otherwise (other than to Lenders
under this Agreement or to the holders of the Senior Secured Notes under the
Senior Note Purchase Agreement) except the endorsement of checks in the
ordinary course of business and guarantees of other Indebtedness permitted by
Section 7.8.


7.4. Investments.


Purchase or acquire obligations or stock of, or any
other interest in, any Person, except Permitted Investments.


7.5. Loans.


Make advances, loans or extensions of credit to any
Person, including without limitation, any Parent, Subsidiary or Affiliate
except with respect to (i) the extension of commercial trade credit in
connection with the sale of Inventory in the ordinary course of its business,
(ii) loans to employees on an arm’s-length basis in the ordinary course of
business consistent with past practices for travel expenses, relocation costs
and similar purposes up to a maximum of $500,000 in the aggregate at any one
time outstanding, (iii) so long as no Default or Event of Default shall exist
before and after giving effect thereto, loans or extensions of credit to
another Loan Party that are unsecured and subordinated in right of payment to
the payment in full of the Obligations pursuant to terms reasonably
satisfactory to Agent, (iv) so long as no Default or Event of Default shall
exist before and after giving effect thereto and Borrower would be able to
obtain Advances of at least $500,000 after giving effect thereto, other
advances, loans or extensions of credit not to exceed $1,500,000 outstanding at
any one time, and (v) loans, advances or extensions of credit that constitute Permitted Investments.


7.6. Intentionally
Omitted.


 


58

















7.7. Dividends and Distributions.


Declare, pay or make any dividend or distribution on
any shares of the common stock, preferred stock or other equity interests of
any Loan Party (other than dividends or distributions payable in its stock or
other equity interests or split-ups or reclassifications of its stock or other
equity interests) or apply any of its funds, property or assets to the
purchase, redemption or other retirement of any common or preferred stock, or
of any options to purchase or acquire any such shares of common or preferred
stock or other equity interests of any Loan Party, provided, however,
that (a) any Loan Party which is a Subsidiary of Borrower (or any Subsidiary of
such Subsidiary) shall be permitted to pay dividends to Borrower (or its parent
which is a Subsidiary of Borrower) and (b) so long as (i) a notice of
termination with regard to this Agreement shall not be outstanding (ii) no
Event of Default or Default shall have occurred and be continuing or would
occur after giving effect to any dividend payment hereunder, and (iii) the
purpose for such purchase, redemption or dividend shall be as set forth in
writing to Agent at least ten (10) days prior to such purchase, redemption or
dividend and such purchase, redemption or dividend shall in fact be used for
such purpose: (A) Borrower shall be permitted to pay dividends to its
shareholders so long as after giving effect to such dividend, Loan Parties
shall be in compliance with the financial covenants set forth in Section 6.8
hereof as of the most recently ended fiscal period calculated assuming that the
dividend had been paid during such fiscal period, (B) Borrower shall be
permitted to pay dividends to its Parent in an aggregate amount not to exceed
$500,000 in any Fiscal Year, to the extent necessary to permit its Parent to
pay general administrative costs and expenses and out-of-pocket legal,
accounting and filing and other general corporate overhead costs of Parent
actually incurred by Parent, and to the extent necessary to permit Parent to
pay franchise taxes and other fees required to maintain its existence, in each
case so long as Parent applies the amount of any such distribution for such
purpose, (C) the Borrower or any of its Subsidiaries may repurchase, redeem or
otherwise acquire or retire for value any capital stock of Borrower or any of its
Subsidiaries held by any current or former officer, director, consultant or
employee of Borrower or any of its Subsidiaries, or his or her estate, spouse,
former spouse, or family member (or pay principal or interest on any
Indebtedness issued in connection with such repurchase, redemption or other
acquisition) and may make distributions to the Borrower’s Parent utilized for
the repurchase, redemption or other acquisition or retirement for value of any
capital stock of Borrower’s Parent held by any current or former officer,
director, employee or consultant of the Borrower or any of its Subsidiaries, or
his or her estate, spouse, former spouse, or family member (or for the payment
of principal or interest on any Indebtedness issued in connection with such
repurchase, redemption or other acquisition) in each case, pursuant to any
equity subscription agreement, stock option agreement, shareholders’ agreement
or similar agreement or benefit plan of any kind; provided that the aggregate
price paid for all such repurchased, redeemed, acquired or retired equity
interests may not exceed $2,000,000 in any calendar year period (with unused
amounts in any immediately preceding calendar year being carried over to the
succeeding calendar year subject to a maximum carry-over amount of $4,000,000
in any calendar year); provided further, that such amount in any calendar year
may be increased by an amount not to exceed: (I) to the extent of any such
proceeds that are not required to be applied to prepay Loans in accordance with
Section 2.14, the cash proceeds from the sale of capital stock of Borrower and,
to the extent contributed to Borrower as common equity capital, capital stock
of any of Borrower’s direct or indirect parent entities, in each case to
members of management, directors or consultants of Borrower, any of its
Subsidiaries or any of its direct or indirect parent entities that occurs after the Closing Date,
plus


 


59

















(II) the cash
proceeds of key person life insurance policies received by Borrower and its
Subsidiaries after the Closing Date, less (III) the amount of any payments
previously made pursuant to clauses (I) and (II) of this clause (C); and (D)
Borrower may repurchase or redeem its capital stock owned by Rafaella Inc. in
connection with the Recapitalization.


7.8. Indebtedness.


Create, incur,
assume or suffer to exist any Indebtedness (exclusive of trade debt) except in
respect of (i) Indebtedness to the Lenders pursuant to this Agreement and the
Other Documents; (ii) Indebtedness to the Factors pursuant to the Factoring
Agreement as in effect on the date hereof; (iii) Indebtedness under the Senior
Secured Notes; (iv) Indebtedness existing on the Closing Date as set forth on Schedule 7.8; (v)
Indebtedness with respect to capital leases and purchase money Indebtedness in
an aggregate amount not to exceed at any time $5,000,000; provided, any
such Indebtedness (A) shall be secured only by the asset acquired in connection
with the incurrence of such Indebtedness; (vi) refinancings, renewals, or
extensions of Indebtedness permitted under clauses (iii), (iv), (v) and (ix)
(and continuance or renewal of any Permitted Encumbrances associated therewith)
so long as: (A) such refinancings, renewals, or extensions do not result in an
increase in the principal amount of the Indebtedness so refinanced, renewed, or
extended (other than principal increases attributable to the costs and expenses
attributable to, or any premium or penalty payable in connection with, such
refinancing, renewal or extension), (B) such refinancings, renewals, or
extensions do not result in a shortening of the average weighted maturity of
the Indebtedness so refinanced, renewed, or extended, nor are they on terms or
conditions that are not at least as favorable to the Lenders as those that were
applicable to the refinanced, renewed, or extended Indebtedness, and (C) the
Indebtedness that is refinanced, renewed, or extended is not recourse to any
Person that is liable on account of the Obligations other than those Persons
which were obligated with respect to the Indebtedness that was refinanced,
renewed, or extended; (vii) endorsement of instruments or other payment items
for deposit; (viii) Indebtedness under Hedge Agreements entered into in the
ordinary course of business; (ix) Indebtedness of any Loan Party to any other
Loan Party; (x) guaranties by a Loan Party of Indebtedness of any other Loan
Party with respect to Indebtedness otherwise permitted to be incurred pursuant
to this Section 7.8; (xi) Indebtedness which may be deemed to exist pursuant to
any guaranties, performance, surety, statutory, appeal or similar obligations
incurred in the ordinary course of business; (xii) Indebtedness in respect of
overdraft protections and otherwise in connection with deposit accounts; (xiii)
obligations on account of non-current accounts payable which the applicable
Loan Party is contesting in good faith and by appropriate proceedings
diligently conducted and with respect to which adequate reserves have been established
and are being maintained in accordance with GAAP; and (xiv) other unsecured
Indebtedness of any Loan Party not to exceed $1,000,000 in the aggregate at any
time.


7.9. Nature of
Business.


Without the
consent of Agent, engage in any business other than the business in which it is
presently engaged and businesses related or complimentary to the business now
engaged in by the Loan Parties.


7.10. Transactions
with Affiliates.


 


60

















Directly or indirectly, purchase, acquire or lease any property
from, or sell, transfer or lease any property to, or otherwise deal with, any
Affiliate, except transactions disclosed in the ordinary course of business, on
an arm’s-length basis on terms no less favorable than terms which would have
been obtainable from a Person other than an Affiliate; provided, the
foregoing restriction shall not apply to (a) reimbursement of reasonable
expenses actually incurred by Cerberus and its Affiliates in connection with
the Transactions, (b) Transactions described in Section 7.10, (c) the
Transactions, (d) any transaction between and among Loan Parties and their
Subsidiaries which are also Loan Parties, (e) reasonable fees paid to,
reasonable compensation paid to, and reasonable indemnification arrangements
provided on behalf of (which shall in no event include indemnification against
gross negligence or willful misconduct), officers, directors, employees and
consultants of Borrower, its Parent and Borrower’s Subsidiaries, and (f) any
transaction otherwise permitted by Sections 7.1, 7.2, 7.4, 7.7 or 7.8.


7.11. Intentionally
Omitted.


7.12. Subsidiaries.


(a) Form any
Subsidiary unless such Subsidiary expressly joins in this Agreement as a
Guarantor pursuant to the provisions of Section 6.9 hereof.


(b) Enter into any
partnership, joint venture or similar arrangement.


7.13. Fiscal
Year and Accounting Changes.


Without the
consent of Agent, change its fiscal year from December 31 of each calendar year
or make any material change (i) in accounting treatment and reporting practices
except as required by GAAP or (ii) in tax reporting treatment except as
required by law.


7.14. Pledge of
Credit.


Other than in
accordance with Article II hereof, now or hereafter pledge Agent’s or any
Lender’s credit on any purchases or for any purpose whatsoever or use any
portion of any Advance in or for any business other than the applicable Loan
Party’s business as conducted on the date of this Agreement or as permitted
under Section 7.9.


7.15. Amendment
of Organizational Documents and Material Agreements.


Amend, modify or
waive any term or provision of (a) its certificate of incorporation or by-laws,
or any shareholders’ agreement in a manner adverse to Agent or Lenders, unless
required by law or (b) any of the agreements set forth on Schedule 5.22 in any
material respect without the consent of Agent,


7.16. Compliance
with ERISA.


(i) (x) Maintain,
or permit any member of the Controlled Group to maintain, or (y) become
obligated to contribute, or permit any member of the Controlled Group to become
obligated to contribute, to any Plan, other than those Plans disclosed on Schedule 5.8(d), (ii)
engage, or permit any member of the Controlled Group to engage, in any
non-exempt


 


61

















“prohibited
transaction”, as that term is defined in section 406 of ERISA and Section 4975
of the Code, (iii) incur, or permit any member of the Controlled Group to
incur, any “accumulated funding deficiency”, as that term is defined in Section
302 of ER1SA or Section 412 of the Code, (iv) terminate, or permit any member
of the Controlled Group to terminate, any Plan where such event could result in
any liability of any Loan Party or any member of the Controlled Group or the
imposition of a lien on the property of any Loan Party or any member of the
Controlled Group pursuant to Section 4068 of ERISA, (v) assume, or permit any
member of the Controlled Group to assume, any obligation to contribute to any
Multiemployer Plan not disclosed on Schedule 5.8(d), (vi) incur, or permit any
member of the Controlled Group to incur, any withdrawal liability to any
Multiemployer Plan; (vii) fail promptly to notify Agent of the occurrence of
any Termination Event, (viii) fail to materially comply, or permit a member of
the Controlled Group to fail to materially comply, with the requirements of
ERISA or the Code or other applicable laws in respect of any Plan, (ix) fail to
meet, or permit any member of the Controlled Group to fail to meet, all minimum
funding requirements under ERISA or the Code or postpone or delay or allow any
member of the Controlled Group to postpone or delay any funding requirement
with respect of any Plan.


7.17. Prepayment
of Indebtedness.


Except as
permitted pursuant to Section 7.18, at any time, directly or indirectly, prepay
any Indebtedness (other than to Lenders), or repurchase, redeem, retire or
otherwise acquire any Indebtedness of any Loan Party.


7.18. Senior
Secured Notes.


At any time,
directly or indirectly, pay, prepay, repurchase, redeem, retire or otherwise
acquire, or make any payment on account of any principal of, interest on or
premium payable in connection with the repayment or redemption of the Senior
Secured Notes, except as expressly required by the terms of the Senior Secured
Notes as in effect on the Closing Date. Notwithstanding the foregoing, Borrower
may voluntarily prepay, redeem or purchase Senior Secured Notes so long as no
Default or Event of Default has occurred and is continuing or would occur after
giving effect to such prepayment and Agent receives a certificate from the
President or Chief Financial Officer of Borrower not less than two (2) Business
Days and not more than one week prior to the proposed prepayment certifying as
to the amount of such prepayment and that no Default or Event f Default exists
or would occur after giving effect to such prepayment.


7.19. State of
Organization.


Change the State
in which it is incorporated or otherwise organized, unless it has given Agent
not less than thirty (30) days prior written notice thereof.


7.20. Other
Agreements.


Enter into any
material amendment, waiver or modification of the Factoring Agreement or any
related agreements.


VIII.    CONDITIONS PRECEDENT.


 


62

















8.1. Conditions to Initial Advances.


The agreement of
Lenders to make the initial Advances requested to be made on the Closing Date
is subject to the satisfaction, or waiver by Lenders, immediately prior to or
concurrently with the making of such Advances, of the following conditions precedent:


(a) Notes.
Agent shall have received the Notes duly executed and delivered by an
authorized officer of Borrower;


(b) Filings,
Registrations, Recordings and Searches. Each document (including, without
limitation, any UCC financing statement, termination statement or release)
required by this Agreement, any related agreement or under law or reasonably
requested by Agent to be filed, registered or recorded in order to create, in
favor of Agent, a perfected first priority security interest in or lien upon
the Collateral shall have been properly filed, registered or recorded in each
jurisdiction in which the filing, registration or recordation thereof is so
required or requested, and Agent shall have received an acknowledgment copy, or
other evidence satisfactory to it, of each such filing, registration or
recordation and satisfactory evidence of the payment of any necessary fee, tax
or expense relating thereto. Agent shall also have received UCC, tax and
judgment lien searches with respect to each Loan Party in such jurisdictions as
Agent shall require, and the results of such searches shall be satisfactory to
Agent;


(c) Corporate
Proceedings of Loan Parties. Agent shall have received a copy of the
resolutions, in form and substance reasonably satisfactory to Agent, of the
Board of Directors (or equivalent authority) of each Loan Party authorizing (i)
the execution, delivery and performance of this Agreement and the Other
Documents, the Notes, any related agreements, the Senior Note Documentation and
(ii) the granting by each Loan Party of the security interests in and liens
upon the Collateral in each case certified by the Secretary or an Assistant
Secretary of each Loan Party as of the Closing Date; and, such certificate
shall state that the resolutions thereby certified have not been amended,
modified, revoked or rescinded as of the date of such certificate;


(d) Incumbency
Certificates of Loan Parties. Agent shall have received a certificate of
the Secretary or an Assistant Secretary of each Loan Party, dated the Closing
Date, as to the incumbency and signature of the officers of each Loan Party
executing this Agreement, any certificate or other documents to be delivered by
it pursuant hereto, together with evidence of the incumbency of such Secretary or
Assistant Secretary;


(e) Organizational
Documents. Agent shall have received a copy of the organization documents
of each Loan Party, and all amendments thereto, certified by the Secretary of
State or other appropriate official of its jurisdiction of organization
together with copies of the bylaws or operating agreement, as applicable, of
each Loan Party, certified as accurate and complete by the Secretary of each
Loan Party;


(f) Good
Standing Certificates. Agent shall have received good standing certificates
(or the equivalent thereof) for each Loan Party dated not more than thirty (30)
days prior to the Closing Date, issued by the Secretary of State or other
appropriate official of each Loan Party’s jurisdiction of organization and each
jurisdiction where the conduct of each Loan


 


63

















Party’s business
activities or the ownership of its properties necessitates qualification,
except where the failure to qualify could not reasonably be expected to have a
Material Adverse Effect;


(g) Legal
Opinion. Agent shall have received the executed legal opinion of Schulte
Roth & Zabel LLP, special counsel to the Loan Parties, in form and
substance reasonably satisfactory to Agent which shall cover such matters
incident to the transactions contemplated by this Agreement and the Other
Documents as Agent may reasonably require and each Loan Party hereby authorizes
and directs such counsel to deliver such opinions to Agent and Lenders;


(h) No
Litigation. (i) No litigation, investigation or proceeding before or by any
arbitrator or Governmental Body shall be continuing or threatened in writing
against any Loan Party or against the officers or directors of any Loan Party
in connection with this Agreement and/or the Other Documents or any of the
transactions contemplated thereby and which could reasonably be expected to
have a Material Adverse Effect; and (ii) no injunction, writ, restraining order
or other order of any nature materially adverse to any Loan Party or the
conduct of its business or inconsistent with the due consummation of the
Transactions shall have been issued by any Governmental Body;


(i) Financial
Condition Certificates. Agent shall have received an executed Financial
Condition Certificate in the form of Exhibit 8.1(i).


(j) Collateral
Examination. Agent shall have completed Collateral examinations and due
diligence reviews and received appraisals, the results of which shall be
reasonably satisfactory in form and substance to Agent, of the Receivables,
Inventory, General Intangibles (including intellectual property and licensing
arrangements related thereto), Investment Property, Real Property and Equipment
of each Loan Party and all books and records in connection therewith;


(k) Fees and
Expenses. Agent shall have received all fees payable to Agent and Lenders
on or prior to the Closing Date pursuant to Article III and under the Fee
Letter and all other fees and expenses incurred by Agent in connection with the
Transactions on or prior to the Closing Date;


(l) Pro Forma Financial Statements. Agent shall have received a copy of
the Pro Forma Financial Statements which shall be reasonably satisfactory in
all respects to Agent;


(m) Senior Note
Documentation; Other Debt. Agent shall have received executed copies of the
Senior Note Documentation and all related agreements, documents and instruments
as in effect on the Closing Date, which shall contain such terms and provisions
including, without limitation, Lien subordination terms, reasonably
satisfactory to Agent, and all other Indebtedness of Loan Parties not expressly
permitted hereunder shall have been terminated and paid in full and any Liens
other than Permitted Encumbrances on the assets of Loan Parties securing such
Indebtedness shall have been terminated;


(n) Intercreditor
Agreement. Agent shall have entered into the Intercreditor Agreement, which
shall be satisfactory in form and substance to Agent and Lenders in their sole
discretion;


 


64

















(o) Contribution Agreement; Securities Purchase Agreement.
Agent shall have received executed copies of the Contribution Agreement,
Securities Purchase Agreement and all related agreements, documents and
instruments as in effect on the Closing Date, all of which shall be in form and
substance reasonably satisfactory to Agent, and Borrower shall have
collaterally assigned its rights thereunder to Agent pursuant to one or more
agreements in form and substance satisfactory to Agent;


(p) Recapitalization.
The Recapitalization shall have been consummated in accordance with the terms
of the Contribution Agreement and the Securities Purchase Agreement;


(q) Factoring
Agreement. Agent shall have received executed copies of the Factoring
Agreement and all related agreements, documents, and instruments and Agent
shall have received the executed Assignment of Factoring Proceeds, duly
acknowledged and agreed to by Factor, all of which shall be satisfactory in
form and substance to Agent in its reasonable discretion;


(r) Other
Documents. Agent shall have received all Other Documents, each executed and
in form and substance reasonably satisfactory to Agent;


(s) Insurance.
Agent shall have received in form and substance reasonably satisfactory to
Agent, copies of Loan Parties’ casualty insurance policies, together with loss
payable endorsements on Agent’s standard form of loss payee endorsement naming
Agent as loss payee, and copies of Loan Parties’ liability insurance policies,
together with endorsements naming Agent as a co-insured;


(t) Payment
Instructions. Agent shall have received written instructions from Borrower
directing the application of proceeds of the initial Advances made pursuant to
this Agreement;


(u) Blocked
Accounts. Agent shall have received duly executed agreements establishing
the Blocked Accounts or Depository Accounts with financial institutions
reasonably acceptable to Agent for the collection or servicing of the
Receivables which are not factored pursuant to the Factoring Agreement and
proceeds of the Collateral;


(v) Consents.
Agent shall have received any and all Consents necessary to permit the
effectuation of the transactions contemplated by this Agreement and the Other
Documents; and, Agent shall have received such Consents and waivers of such
third parties as might assert claims with respect to the Collateral, as Agent
and its counsel may reasonably request;


(w) No Material
Adverse Change. (i) Since June 30, 2004, there shall not have occurred any
event, condition or state of facts, with respect to Rafaella Inc. or any Loan
Party, which could reasonably be expected to have a Material Adverse Effect;
(ii) no representations made or information supplied to Agent and Lenders shall
have been proven to be inaccurate or misleading in any material respect and
(iii) there shall not have occurred any material disruption of, or material
adverse change in, the financial, banking or capital markets 


 


65

















that could, in HSBC’s judgment, materially impair
HSBC’s ability to syndicate the Advances under this Agreement;


(x) Third Party Agreements and
Consents. Agent shall have received all landlord, mortgagee,
warehouseman, processor and freight forwarder agreements, imported inventory security agreements and/or Customs
brokerage agreements, waivers and consents and intellectual property licensor
consents or assignments reasonably required by and satisfactory to Agent;


(y) Contract Review. Agent
shall have reviewed all material contracts of Loan Parties identified on Schedule 5.22 and such contracts and agreements
shall be reasonably satisfactory to Agent;


(z) Closing Certificate. Agent shall have
received a closing certificate signed by the Chief Financial Officer of Loan
Parties dated as of the date hereof, stating that (i) all representations and warranties set forth in this
Agreement and the Other Documents are true and correct on and as of such
date, (ii) each Loan Party is on such date in compliance with all the terms and provisions set forth in this Agreement
and the Other Documents and (iii) on such date no Default or Event of
Default has occurred or is continuing or would result from the consummation of
the Transactions;


(aa) Borrowing Base. Agent
shall have received a duly executed Borrowing Base Certificate which shall indicate that the Formula Amount is
sufficient to support Advances in the amount requested by Loan Parties on the
Closing Date;


(bb) Control Agreements.
Agent shall have received control agreements with respect to all Collateral in which a security
interest may be perfected by means of control under the UCC;


(cc) Successful Syndication.
Agent shall have received Commitments from Lenders other than HSBC for
at least 44% of the Maximum Loan Amount;


(dd) Other. All corporate
and other proceedings, and all documents, instruments and other legal matters in connection with the Transactions
shall be reasonably satisfactory in form and substance to Agent, Lenders and
their counsel.


Each Lender, by delivering its signature page to this
Agreement and funding a Loan on the Closing Date, shall be deemed to have
acknowledged receipt of, and consented to and
approved this Agreement and each Other Document and each other document
required to be approved by any Agent, the Required Lenders or Lenders,
as applicable on the Closing Date.


8.2.                Conditions to Each
Advance.


The agreement of Lenders to make any Advance requested
to be made on any date (including, without limitation, the initial Advance), is
subject to the satisfaction of the following conditions precedent as of the
date such Advance is made:


 


66

















(a) Representations
and Warranties. Each of the
representations and warranties made by any Loan Party in or pursuant to
this Agreement and any related agreements to which it is a party, and each of
the representations and warranties contained in any certificate, document or
financial or other statement furnished at any time under or in connection with
this Agreement or any related agreement
shall be true and correct in all material respects on and as of such date as if
made on and as of such date (unless such representation or warranty is stated
to be true as of an earlier date, in which case it shall have been true
as of such date);


(b) No Default. No Event
of Default or Default shall have occurred and be continuing on such
date, or would exist after giving effect to the Advances requested to be made,
on such date; provided, however that Lenders in their sole
discretion, may continue to make Advances notwithstanding the existence of an
Event of Default or Default and that any Advances so made shall not be deemed a
waiver of any such Event of Default or Default; and


(c) Maximum Revolving Advances and Swingline Loans.
In the case of any Revolving Advances
requested to be made, after giving effect thereto, the aggregate Revolving Advances
shall not exceed the maximum amount of Revolving Advances permitted under
Section 2.1, and in the case of any Swingline Loans requested to be made, after
giving effect thereto, the aggregate outstanding principal amount of Swingline
Loans shall not exceed the Maximum Swingline Loan Amount.


Each request for an Advance by Borrower hereunder
shall constitute a representation and warranty by Loan Parties as of the date
of such Advance that the conditions contained in this subsection shall have
been satisfied.


IX.                   INFORMATION
AS TO BORROWER.


Each Loan Party shall, until satisfaction in full of
the Obligations and the termination of this Agreement:


9.1.                 Disclosure of Material Matters.


Immediately upon learning thereof, report to Agent all
matters materially affecting the value, enforceability or collectibility of any
material portion of the Collateral including,
without limitation, any Loan Party’s reclamation or repossession of, or the
return to any Loan Party of, a
material amount of goods or claims or disputes asserted by any Customer
or other obligor with respect to any material amount of Receivables.


9.2.                 Schedules.


(a) Deliver to Agent, on or before the twentieth (20th) day of each
month as and for the prior month (or more frequently if required by
Agent), (i) a Borrowing Base Certificate (which shall be calculated as of the
last day of the immediately preceding month and which shall not be binding upon
Agent or restrictive of Agent’s rights under this Agreement), (ii) accounts
receivable agings, (iii) accounts payable agings, (iv) Inventory reports and
(iv) management reports setting forth the order, shipping and production
position of Loan Parties. In addition, each
Loan Party shall deliver to Agent at such intervals as Agent may require: (i) confirmatory
assignment schedules, (ii) copies of Customer’s invoices, (iii) evidence of
shipment


 


67

















or delivery, and (iv) such further schedules, documents and/or
information regarding the Collateral as Agent may require including, without
limitation, trial balances and test verifications. Agent shall have the right
to confirm and verify all Receivables by any manner and through any medium it
considers advisable and do whatever it may deem reasonably necessary to protect
its interests hereunder so long as it acts in good faith and otherwise
accordance with the terms of this Agreement.


(b) The items to be provided
under Section 9.2(a) are to be in form satisfactory to Agent and executed by
each Loan Party and delivered to Agent from time to time solely for Agent’s
convenience in maintaining records of the Collateral, and any Loan Party’s
failure to deliver any of such items to Agent shall not affect, terminate,
modify or otherwise limit Agent’s Lien with respect to the Collateral.


9.3. Environmental Reports.


Furnish Agent, concurrently with the delivery of the financial statements
referred to in Sections 9.7 and 9.8, with a certificate signed by the President
of each Loan Party stating, to the best of his knowledge, that each Loan Party
is in compliance in all material respects with all federal, state and local
laws relating to environmental protection and control and occupational safety
and health. To the extent any Loan Party is not in compliance in all material
respects with the foregoing laws, the certificate shall set forth with
specificity all areas of non-compliance and the proposed action Loan Parties
will implement in order to achieve full compliance.


9.4. Litigation.


Promptly notify
Agent in writing of any litigation, suit or administrative proceeding
affecting any Loan Party, whether or not the claim is covered by insurance
which in any such case could reasonably be expected to have a Material Adverse
Effect.


 


68

















9.5. Material Occurrences.


Promptly notify
Agent in writing upon the occurrence of (a) any Event of Default or Default;
(b) any event of default under the Senior Not Documentation; (c) any event
which with the giving of notice or lapse of time, or both, would constitute an
event of default under the Senior Note Documentation; (d) any event,
development or circumstance whereby any financial statements or other reports
furnished to Agent fail in any material respect to present fairly, in accordance
with GAAP consistently applied, the financial condition or operating results of
any Loan Party as of the date of such statements; (e) any accumulated
retirement plan funding deficiency which, if such deficiency continued for two
plan years and was not corrected as provided in Section 4971 of the Code, could
subject any Loan Party to a tax imposed by Section 4971 of the Code; (f) each
and every default of which a Loan Party has received a default notice which
might result in the acceleration of the maturity of any Indebtedness in excess
of $1,000,000, including the names and addresses of the holders of such
Indebtedness with respect to which there is a default existing or with respect
to which the maturity has been or could be accelerated, and the amount of such
Indebtedness; and (g) any other development in the business or affairs of any
Loan Parties which could reasonably be expected to have a Material Adverse
Effect; in each case describing the nature thereof and the action Loan parties
propose to take with respect thereto.


9.6. Government
Receivables.


Notify Agent
immediately if any of its Receivables in excess of $500,000 arise out of
contracts between any Loan Party and the United States, any state, or any
department, agency or instrumentality of any of them.


9.7. Annual
Audited Financial Statements.


Furnish Agent and
Lenders within one hundred twenty (120) days after the end of each fiscal year
of Loan Parties, financial statements of Loan Parties on a Consolidated Basis
including, but not limited to, statements of income and equityholders’ equity
and cash flow from the beginning of the current fiscal year to the end of such
fiscal year, and the balance sheet as at the end of such fiscal year, all
prepared in accordance with GAAP applied on a basis consistent with prior
practices, and in reasonable detail and reported upon without qualification by
an independent certified public accounting firm selected by Loan Parties and
satisfactory to Agent (the “Accountants”). The report of the Accountants
shall be accompanied by a statement of the Accountants certifying that (i) they
have caused the Agreement to be reviewed, and (ii) in making the examination
upon which such report was based either no information came to their attention
which to their knowledge constituted an Event of Default or a Default under
this Agreement or any related agreement or, if such information came to their
attention, specifying any such Default or Event of Default, its nature, when it
occurred and whether it is continuing, and such report shall contain or have
appended thereto calculations which set forth Loan Parties’ compliance with the
requirements or restrictions imposed by Section 6.8. In addition, the reports
shall be accompanied by a certificate of Borrower’s Chief Financial Officer
which shall state that, based on an examination sufficient to permit him to
make an informed statement, no Default or Event of Default exists, or, if such
is not the case, specifying such Default or Event of Default, its nature, when
it occurred, whether it is continuing and the steps being taken by Loan


 


69

















Parties with
respect to such event, and such certificate shall have appended thereto
calculations which set forth Loan Parties’ compliance with the requirements or
restrictions imposed by Section 6.8.


9.8. Semi-Annual
Reviewed Financial Statements.


Furnish Agent and
Lenders within one hundred twenty (120) days after the end of the second fiscal
quarter, an unaudited balance sheet of Loan Parties on a Consolidated Basis and
unaudited statements of income and equityholders’ equity and cash flow of Loan
Parties reflecting results of operations from the beginning of the fiscal year
to the end of such quarter, prepared on a basis consistent with prior practices
and complete and correct in all material respects, reviewed by the Accountants
subject to normal and recurring year end adjustments that individually and in
the aggregate are not material to the business of Loan Parties. Each such
balance sheet, statement of income and equityholders’ equity and statement of
cash flow shall set forth a comparison of the figures for (x) the current
year-to-date with the figures for (y) the same year-to-date period of the
immediately preceding fiscal year and (z) the projections for such year-to-date
period delivered pursuant to Section 5.5(b) or Section 9.12, as applicable. The
financial statements shall be accompanied by a certificate signed by the Chief
Financial Officer of Borrower, which shall state that, based on an examination
sufficient to permit him to make an informed statement, no Default or Event of
Default exists, or, if such is not the case, specifying such Default or Event
of Default, its nature, when it occurred, whether it is continuing and the
steps being taken by Loan Parties with respect to such default and, such
certificate shall have appended thereto calculations which set forth Loan
Parties’ compliance with the requirements or restrictions imposed by Section
6.8.


9.9. Quarterly
Internally Prepared Financial Statements.


Furnish Agent and
Lenders within sixty (60) days after the end of each first and third fiscal
quarter of Loan Parties, an unaudited balance sheet of Loan Parties on a
Consolidated Basis and unaudited statements of income and equityholders’ equity
and cash flow of Loan Parties on a Consolidated Basis reflecting results of
operations from the beginning of the fiscal year to the end of such fiscal
quarter and for such fiscal quarter prepared on a basis consistent with prior
practices and complete and correct in all material respects, subject to normal
and recurring year end adjustments that individually and in the aggregate are
not material to the business of Loan Parties. Each such balance sheet,
statement of income and stockholders’ equity and statement of cash flow shall
set forth a comparison of the figures for (w) the current fiscal period and (x)
the current year-to-date with the figures for (y) the same fiscal period and
year-to-date period of the immediately preceding fiscal year and (z) the
projections for such fiscal period and year-to-date period delivered pursuant
to Section 5.5(b) or Section 9.12, as applicable. The financial statements
shall be accompanied by a certificate of Borrower’s Chief Financial Officer,
which shall state that, based on an examination sufficient to permit him to
make an informed statement, no Default or Event of Default exists, or, if such
is not the case, specifying such Default or Event of Default, its nature, when
it occurred, whether it is continuing and the steps being taken by Loan Parties
with respect to such event and, such certificate shall have appended thereto
calculations which set forth Loan Parties’ compliance with the requirements or
restrictions imposed by Section 6.8.


 


70

















9.10. Other Reports.


Furnish Agent as
soon as available, but in any event within ten (10) days after the issuance
thereof, with copies of (i) such financial statements, reports and returns as
Loan Parties shall send to their stockholders or members and (ii) all notices
sent pursuant to the Senior Note Documentation.


9.11. Additional
Information.


Furnish Agent with
such additional information as Agent shall reasonably request in order to
enable Agent to determine whether the terms, covenants, provisions and
conditions of this Agreement and the Notes have been complied with by Loan
Parties including, without limitation and without the necessity of any request
by Agent, (a) copies of all environmental audits and reviews, (b) at least thirty
(30) days prior thereto, notice of any Loan Party’s opening of any new office
or place of business or any Loan Party’s closing of any existing office or
place of business, and (c) promptly upon any Loan Party’s learning thereof,
notice of any labor dispute to which any Loan Party may become a party, any
strikes or walkouts relating to any of its plants or other facilities, or the
expiration of any labor contract to which any Loan Party is a party or by which
any Loan Party is bound, in the case of this clause (c), which could reasonably
be expected to have a Material Adverse Effect.


9.12. Projected
Operating Budget.


Furnish Agent, no
later than July 31 of each year, a month by month projected operating budget
and cash flow of Loan Parties on a Consolidated Basis for the fiscal year
having commenced on July 1 (including an income statement for each month and a
balance sheet as at the end of the last month in each fiscal quarter and
proposed business plan for such fiscal year), such projections to be accompanied
by a certificate signed by the President or Chief Financial Officer of each
Loan Party to the effect that such projections have been prepared on the basis
of sound financial planning practice consistent with past budgets and financial
statements and that such officer has no reason to question the reasonableness
of any material assumptions on which such projections were prepared. In
addition, Loan Parties will provide Agent with such projections and business
plans as and when requested by Agent in connection with any request by Loan
Parties to increase or permanently reduce the amount of Advances available
under this Agreement. All such projections and business plans are subject to
the written approval of Agent in its sole discretion before such projections
and business plans shall be effective for purposes of this Agreement.


9.13. Variances
From Operating Budget.


Furnish Agent,
concurrently with the delivery of the financial statements referred to in
Section 9.7, 9.8 and 9.9, a written report summarizing all material variances
from budgets submitted by Loan Parties pursuant to Sections 8.1(1) and 9.12,
and a discussion and analysis by management with respect to such variances.


9.14. Notice of
Suits, Adverse Events. 


 


71

















Furnish Agent with prompt notice of (i) any lapse or other
termination of any Consent issued to any Loan Party by any Governmental Body or
any other Person that is material to the operation of any Loan Party’s
business, (ii) any refusal by any Governmental Body or any other Person to
renew or extend any such Consent; and (iii) copies of any periodic or special
reports filed by any Loan Party with any Governmental Body or Person, if such
reports indicate any material change in the business, operations, affairs or
condition of any Loan Party, or if copies thereof are requested by Agent or any
Lender, and (iv) copies of any material notices and other communications from
any Governmental Body or Person which specifically relate to any Loan Parties.


9.15. ERISA
Notices and Requests.


Furnish Agent with
immediate written notice in the event that (i) any Loan Party or any member of
the Controlled Group knows or has reason to know that a Termination Event has
occurred, together with a written statement describing such Termination Event
and the action, if any, which such Loan Party or member of the Controlled Group
has taken, is taking, or proposes to take with respect thereto and, when known,
any action taken or threatened by the Internal Revenue Service, Department of
Labor or PBGC with respect thereto, (ii) any Loan Party or any member of the
Controlled Group knows or has reason to know that a prohibited transaction (as
defined in Sections 406 of ERISA and 4975 of the Code) has occurred together
with a written statement describing such transaction and the action which such
Loan Party or any member of the Controlled Group has taken, is taking or
proposes to take with respect thereto, (iii) a funding waiver request has been
filed with respect to any Plan together with all communications received by any
Loan Party or any member of the Controlled Group with respect to such request,
(iv) any increase in the benefits of any existing Plan or the establishment of
any new Plan or the commencement of contributions to any Plan to which any Loan
Party or any member of the Controlled Group was not previously contributing
shall occur, (v) any Loan Party or any member of the Controlled Group shall
receive from the PBGC a notice of intention to terminate a Plan or to have a
trustee appointed to administer a Plan, together with copies of each such
notice, (vi) any Loan Party or any member of the Controlled Group shall receive
any favorable or unfavorable determination letter from the Internal Revenue
Service regarding the qualification of a Plan under Section 401(a) of the Code,
together with copies of each such letter; (vii) any Loan Party or any member of
the Controlled Group shall receive a notice regarding the imposition of
withdrawal liability, together with copies of each such notice; (viii) any Loan
Party or any member of the Controlled Group shall fail to make a required
installment or any other required payment under Section 412 of the Code on or
before the due date for such installment or payment; (ix) any Loan Party or any
member of the Controlled Group knows that (a) a Multiemployer Plan has been
terminated, (b) the administrator or plan sponsor of a Multiemployer Plan
intends to terminate a Multiemployer Plan, or (c) the PBGC has instituted or
will institute proceedings under Section 4042 of ERISA to terminate a
Multiemployer Plan.


9.16. Additional
Documents.


Execute and
deliver to Agent, upon request, such documents and agreements as Agent may,
from time to time, reasonably request to carry out the purposes, terms or
conditions of this Agreement.


 


72

















X.        EVENTS OF DEFAULT.


The occurrence of
any one or more of the following events shall constitute an “Event of
Default”:


10.1 Failure by
any Loan Party to pay any principal or interest on the Obligations when due,
whether at maturity or by reason of acceleration pursuant to the terms of this
Agreement or by notice of intention to prepay, or by required prepayment or
failure to pay any other liabilities or make any other payment, fee or charge
provided for herein when due or in any Other Document;


10.2 (i) Failure
by any Loan Party to perform, keep or observe any provision of Sections 4.2,
4.3, 4.4, 4.5, 4.6, 4.9 (except with respect to the (x) first sentence thereof
if non-compliance has not, in Agent’s reasonable credit judgment, resulted in a
Material Adverse Effect, and (y) second sentence thereof), 4.10, 4.11, 6.8,
Article VII or (ii) any representation or warranty made or deemed made by any
Loan Party in this Agreement or any related agreement or in any certificate,
document or financial or other statement furnished at any time in connection
herewith or therewith shall prove to have been misleading in any material
respect on the date when made or deemed to have been made;


10.3 Failure by
any Loan Party to (i) furnish financial information when due or when requested
which is unremedied for a period of fifteen (15) days, or (ii) permit the
inspection of its books or records;


10.4 Issuance of a
notice of Lien, levy, assessment, injunction or attachment (other than
Permitted Encumbrances) against a material portion of any Loan Party’s property
which is not stayed or lifted within thirty (30) days;


10.5 Failure or
neglect of any Loan Party to perform, keep or observe any term, provision,
condition, covenant herein contained, or contained in any Other Document, now
or hereafter entered into between any Loan Party, Agent and/or any Lender (to
the extent such breach is not otherwise embodied in any other provision of this
Article X for which a different grace or cure period is specified or which
constitute an immediate Event of Default under this Agreement or the Other
Documents), which is not cured within twenty (20) days after the occurrence of
such Event of Default;


10.6 Any judgment
or judgments are rendered or judgment liens filed against one or more of Loan
Parties for an aggregate amount in excess of $1,000,000 which within thirty
(30) days of such rendering or filing is not either satisfied, stayed or
discharged of record;


10.7 Any Loan
Party shall (i) apply for, consent to or suffer the appointment of, or the
taking of possession by, a receiver, custodian, trustee, liquidator or similar
fiduciary of itself or of all or a substantial part of its property, (ii) make
a general assignment for the benefit of creditors, (iii) commence a voluntary
case under any state or federal bankruptcy laws (as now or hereafter in
effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vi) acquiesce to, or fail to have dismissed, within forty-five (45) days, any
petition filed against it in any involuntary case under such bankruptcy laws,
or (vii) take any action for the purpose of effecting any of the foregoing;


 


73

















10.8 Any Loan Party shall admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of
its present business;


10.9 Intentionally
Omitted;


10.10
Intentionally Omitted;


10.11 Any Lien
created hereunder or provided for hereby or under any Other Document for any
reason ceases to be or is not a valid and perfected Lien having a first
priority interest, except with respect to Liens on Collateral subject to such
Permitted Encumbrances which pursuant to provisions of this Agreement, may be
senior to the Liens in favor of Agent for the benefit of Lenders;


10.12 An event of
default has occurred and been declared under the Senior Note Documentation or
any Factoring Agreement which default shall not have been cured or waived
within any applicable grace period and for which Senior Note Agent or the
Factor, as applicable, is permitted to take action pursuant to the terms of the
Senior Secured Notes as in effect on the Closing Date or any Factoring
Agreement, as applicable;


10.13 A default of
the obligations of any Loan Party under any other agreement to which it is a
party shall occur which could or does result in at least $1,000,000 of
Indebtedness becoming due and payable prior to its scheduled maturity which
default is not cured within any applicable grace period;


10.14 Termination
or breach of any Guaranty, or if any Guarantor attempts to terminate,
challenges the validity of, or its liability under, any Guaranty;


10.15 Any Change
of Control shall occur;


10.16 Any material
provision of this Agreement shall, for any reason, cease to be valid and
binding an any Loan Party, or any Loan Party shall so claim in writing to
Agent;


10.17 (i) Any
Governmental Body shall revoke, terminate, suspend or adversely modify any
license, permit, patent trademark or tradename of any Loan Party (the
continuation of which is material to the continuation of any Loan Party’s
business), (ii) any agreement which is necessary or material to the operation
of any Loan Party’s business shall be revoked or terminated and not replaced by
a substitute acceptable to Agent within thirty (30) days after the date of such
revocation or termination, and such revocation or termination and non-replacement
would reasonably be expected to have a Material Adverse Effect;


10.18 Any portion
of the Collateral having a value in excess of $1,000,000 shall be seized or
taken by a Governmental Body; or


10.19 An event or
condition specified in Section 7.16 or Section 9.15 shall occur or exist with
respect to any Plan and, as a result of such event or condition, together with
all other such events or conditions, Loan Parties or any member of the
Controlled Group shall incur, or in the opinion of Agent be reasonably likely
to incur, a liability to a Plan or the PBGC (or both) which, in the reasonable
judgment of Agent, would have a Material Adverse Effect.


 


74

















XI.      LENDERS’ RIGHTS AND REMEDIES AFTER
DEFAULT.


11.1. Rights
and Remedies.


Upon the
occurrence of (i) an Event of Default pursuant to Section X.10.7, all
Obligations shall be immediately due and payable and this Agreement and the
obligation of Lenders to make Advances shall be deemed terminated, (ii) any of
the other Events of Default and at any time thereafter (such default not having
previously been cured), at the option of Required Lenders all Obligations shall
be immediately due and payable and Lenders shall have the right to terminate
this Agreement and to terminate the obligation of Lenders to make Advances, and
(iii) a filing of a petition against any Loan Party in any involuntary case
under any state or federal bankruptcy laws, the obligation of Lenders to make
Advances hereunder shall be terminated other than as may be required by an
appropriate order of the bankruptcy court having jurisdiction over any Loan
Party. Upon the occurrence of any Event of Default, Agent shall have the right
to exercise any and all other rights and remedies provided for herein, under
the UCC and at law or equity generally, including, without limitation, the
right to foreclose the security interests granted herein and to realize upon
any Collateral by any available judicial procedure and/or to take possession of
and sell any or all of the Collateral with or without judicial process. Subject
to Section 4.10, following the occurrence and during the continuance of an
Event of Default, Agent may enter any Loan Party’s premises or other premises
without legal process and, subject to applicable law, without incurring
liability to any Loan Party therefor, and Agent may thereupon, or at any time
thereafter, in its discretion without notice or demand, take the Collateral and
remove the same to such place as Agent may deem advisable and Agent may require
Loan Parties to make the Collateral available to Agent at a convenient place.
With or without having the Collateral at the time or place of sale, Agent may
following the occurrence and during the continuance of an Event of Default sell
the Collateral, or any part thereof, at public or private sale, at any time or
place, in one or more sales, at such price or prices, and upon such terms,
either for cash, credit or future delivery, as Agent may elect. Except as to
that part of the Collateral which is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Agent shall give Loan Parties reasonable notification of such sale or sales, it
being agreed that in all events written notice mailed to Loan Parties at least
ten (10) days prior to such sale or sales is reasonable notification. At any
public sale Agent or any Lender may bid for and become the purchaser, and
Agent, any Lender or any other purchaser at any such sale thereafter shall hold
the Collateral sold absolutely free from any claim or right of whatsoever kind,
including any equity of redemption and such right and equity are hereby
expressly waived and released by each Loan Party. Agent may specifically
disclaim any warranties of title or the like at any sale of Collateral. In
connection with the exercise of the foregoing remedies, Agent is granted
permission to use all of each Loan Party’s trademarks, trade styles, trade
names, patents, patent applications, licenses, franchises and other proprietary
rights which are used in connection with (a) Inventory for the purpose of
disposing of such Inventory and (b) Equipment for the purpose of completing the
manufacture of unfinished goods.


11.2. Application
of Proceeds.


The proceeds
realized from the sale of any Collateral shall be applied as follows: first,
to the reasonable costs, expenses and attorneys’ fees and expenses incurred by
Agent for collection and for acquisition, completion, protection, removal,
storage, sale and delivery of the


 


75

















Collateral; second,
to interest due upon any of the Obligations; third, to fees payable in
connection with this Agreement; fourth, to furnish to Agent cash
collateral in an amount not to exceed 105% of the aggregate undrawn amount of
all Letters of Credit and Air Releases/Steamship Guarantees, such cash
collateral arrangements to be in form and substance satisfactory to Agent; and,
fifth, to the principal of the Obligations. If any deficiency shall
arise, Loan Parties shall remain liable to Agent and Lenders therefor. If it is
determined by an authority of competent jurisdiction that a disposition by
Agent did not occur in a commercially reasonably manner, Agent may obtain a
deficiency judgment for the difference between the amount of the Obligation and
the amount that a commercially reasonable sale would have yielded. Agent will
not be considered to have offered to retain the Collateral in satisfaction of
the Obligations unless Agent has entered into a written agreement with Loan
Parties to that effect.


11.3. Agent’s
Discretion.


Agent shall have
the right in its sale discretion to determine which rights, liens, security
interests or remedies Agent may at any time pursue, relinquish, subordinate, or
modify or to take any other action with respect thereto and such determination
will not in any way modify or affect any of Agent’s or Lenders’ rights
hereunder.


11.4. Setoff.


In addition to any
other rights which Agent, any Lender or any Issuer may have under applicable
law, upon the occurrence of an Event of Default hereunder, Agent, such Lender
and such Issuer shall have a right to apply any Loan Party’s property held by
Agent, such Lender or such Issuer to reduce the Obligations.


11.5. Rights
and Remedies not Exclusive.


The enumeration of
the foregoing rights and remedies is not intended to be exhaustive and the
exercise of any right or remedy shall not preclude the exercise of any other
right or remedies provided for herein or otherwise provided by law, all of
which shall be cumulative and not alternative.


XII.     WAIVERS AND JUDICIAL PRQCEEDINGS.


12.1. Waiver of
Notice.


Each Loan Party
hereby waives notice of non-payment of any of the Receivables, demand,
presentment, protest and notice thereof with respect to any and all
instruments, notice of acceptance hereof, notice of loans or advances made,
credit extended, Collateral received or delivered, or any other action taken in
reliance hereon, and all other demands and notices of any description, except
such as are expressly provided for herein or which cannot be waived under
applicable law.


12.2. Delay.


 


76

















No delay or omission on Agent’s or any Lender’s part in exercising
any right, remedy or option shall operate as a waiver of such or any other
right, remedy or option or of any default.


12.3. Jury
Waiver.


EACH PARTY TO THIS
AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH,
OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF
THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH,
OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING
OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND
EACH PARTY HEREBY CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO
THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENTS OF THE PARTIES HERETO TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.


XIII.    EFFECTIVE DATE AND TERMINATION.


13.1. Term.


This Agreement,
which shall inure to the benefit of and shall be binding upon the respective
successors and permitted assigns of Loan Parties, Agent and each Lender, shall
become effective on the date hereof and shall continue in full force and effect
until the earliest of (x) June 20, 2010 (the “Original Term”), (y) the
acceleration of all Obligations pursuant to the terms of this Agreement or (z)
the date on which this Agreement shall be terminated in accordance with the
provisions hereof or by operation of law (the “Termination Date”). Loan
Parties may terminate this Agreement at any time upon ninety (90) days’ prior
written notice upon payment in full of the Obligations. In the event the
Obligations are prepaid in full prior to the last day of the Term (the date of
such prepayment hereinafter referred to as the “Early Termination Date”),
Loan Parties shall pay to Agent for the benefit of Lenders an early termination
fee in an amount equal to (x) one-half percent (0.5%) of the Maximum Loan
Amount if the Early Termination Date occurs on or after the Closing Date to and
including the date immediately preceding the first anniversary of the Closing
Date, and (y) one quarter of one percent (0.25%) of the Maximum Loan Amount if
the Early Termination Date occurs on or after the first anniversary of the
Closing Date to and including the date immediately preceding the second
anniversary of the Closing Date.


13.2. Termination.


 


77

















The
termination of the Agreement shall not affect any Loan Party’s, Agent’s or any
Lender’s rights, or any of the Obligations having their inception prior to the
effective date of such termination, and the provisions hereof shall continue to
be fully operative until all transactions entered into, rights or interests
created or Obligations have been fully disposed of, concluded or liquidated. The security interests, Liens and rights
granted to Agent and Lenders hereunder and the financing statements
filed hereunder shall continue in full force and effect, notwithstanding the
termination of this Agreement or the fact that Borrower’s Account may from time
to time be temporarily in a zero or credit position, until all of the
Obligations of each Loan Party have been paid or performed in full after the
termination of this Agreement or each Loan Party
has furnished Agent and Lenders with an indemnification satisfactory to Agent
and Lenders with respect thereto. Accordingly, each Loan Party waives
any rights which it may have under Section
9-513(c) of the UCC to demand the filing of termination statements with respect
to the Collateral, and Agent shall not be required to send such
termination statements to each Loan Parties, or to file them with any filing
office, unless and until this Agreement shall have been terminated in
accordance with its terms and all Obligations paid in full in immediately
available funds. All representations, warranties, covenants, waivers and
agreements contained herein shall survive termination hereof until all
Obligations are paid or performed in full.


XIV.    REGARDING
AGENT.


14.1. Appointment.


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


 


78

















14.2. Nature
of Duties.


Agent shall have no duties or responsibilities except
those expressly set forth in this Agreement and the Other Documents. None of
Agent, any Lender, or any Issuer nor any of their
respective officers, directors, employees or agents shall be (i) liable for any
action taken or omitted by them as such hereunder or in connection
herewith, unless caused by their gross (not mere) negligence or willful
misconduct, or (ii) responsible in any manner for any recitals, statements, representations or warranties made by
any Loan Party or any officer thereof contained in this Agreement, or in
any of the Other Documents or in any certificate, report, statement or other
document referred to or provided for in, or received by Agent under or in
connection with, this Agreement or any of the Other Documents or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement, or any of the Other Documents or for any failure of Loan Parties to
perform their respective obligations hereunder. Agent shall not be under any
obligation to any Lender to ascertain or to inquire as to the observance or
performance of any of the agreements contained in, or conditions of, this Agreement or any of the Other Documents, or to
inspect the properties, books or records of any Loan Party. The duties of Agent as respects the Advances shall be
mechanical and administrative in nature; Agent shall not have by reason
of this Agreement a fiduciary relationship in respect of any Lender; and
nothing in this Agreement, expressed or implied, is intended to or shall be so
construed as to impose upon Agent any obligations in respect of this Agreement
except as expressly set forth herein.


14.3. Lack of
Reliance on Agent and Resignation.


(a) Independently and without reliance upon Agent, any
Issuer or any other Lender, each Lender has made and shall continue to make (i)
its own independent investigation of the financial condition and affairs of
each Loan Party in connection with the making and the continuance of the
Advances hereunder and the taking or not taking of any action in connection
herewith, and (ii) its own appraisal of the creditworthiness of each Loan
Party. Agent shall have no duty or
responsibility, either initially or on a continuing basis, to provide any
Lender with any credit or other information with respect thereto, whether
coming into its possession before making of the Advances or at any time or
times thereafter except as shall be provided by any Loan Party pursuant to the terms hereof. Agent shall not be responsible
to any Lender for any recitals, statements, information, representations
or warranties herein or in any agreement, document, certificate or a statement
delivered in connection with or for the execution, effectiveness, genuineness,
validity, enforceability, collectibility or sufficiency of this Agreement or any
Other Document, or of the financial condition of any Loan Party, or be required
to make any inquiry concerning either the performance or observance of any of
the terms, provisions or conditions of this Agreement, the Notes, the Other
Documents or the financial condition of any Loan Party, or the existence of any
Event of Default or any Default.


(b) Agent may resign on sixty
(60) days’ written notice to each of Lenders and Borrower and upon such
resignation, the Required Lenders will promptly designate a successor Agent
reasonably satisfactory to Loan Parties. If no such successor Agent is
appointed at the end of such sixty (60) day period, Agent may designate one of
the Lenders as a successor Agent.


 


79

















(c) Any such successor
Agent shall succeed to the rights, powers and duties of Agent, and the term
“Agent” shall mean such successor agent effective upon its appointment, and the
former Agent’s rights, powers and duties as Agent shall be terminated, without
any other or further act or deed on the part
of such former Agent. After any Agent’s resignation as Agent, the
provisions of this Article XIV shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under this Agreement.


14.4. Certain Rights of Agent.


If Agent shall request instructions from Lenders with
respect to any act or action (including
failure to act) in connection with this Agreement or any Other Document, Agent
shall be entitled to refrain from such act or taking such action unless
and until Agent shall have received instructions from the Required Lenders; and
Agent shall not incur liability to any Person
by reason of so refraining. Without limiting the foregoing, Lenders shall not
have any right of action whatsoever against Agent as a result of its acting or
refraining from acting hereunder in accordance with the instructions of
the Required Lenders.


14.5. Reliance.


Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, statement,
certificate, telex, teletype or telecopier message, cablegram, order or other
document or telephone message believed by it to be genuine and correct and to have been signed, sent or made by
the proper person or entity, and, with respect to all legal matters pertaining
to this Agreement and the Other Documents and its duties hereunder, upon
advice of counsel selected by it. Agent may employ agents and attorneys-in-fact
and shall not be liable for the default or misconduct of any such agents or
attorneys-in-fact selected by Agent with
reasonable care.


14.6. Notice of Default.


Agent shall not be deemed to have knowledge or notice
of the occurrence of any Default or Event of Default hereunder or under the
Other Documents, unless Agent has received notice from a Lender or a Loan Party
referring to this Agreement or the Other Documents, describing such Default or
Event of Default and stating that such notice is a “notice of default”. In the
event that Agent receives such a notice, Agent shall give notice thereof to
Lenders. Agent shall take such action with respect to such Default or Event of
Default (including, without limitation, the institution of the Default Rate
pursuant to Section 3.1 hereof) as shall be reasonably directed by the Required
Lenders; provided, that, unless and until Agent shall have
received such directions, Agent may (but shall not be obligated to) take such
action, or refrain from taking such action, with respect to such Default or
Event of Default (including, without limitation, the institution of the Default
Rate pursuant to Section 3.1 hereof) as it shall deem advisable in the best
interests of Lenders.


14.7. Indemnification.


To the extent Agent is not reimbursed and indemnified
by Loan Parties, each Lender will reimburse and indemnify Agent and each Issuer
in proportion to its respective portion of
the Advances (or, if no Advances are outstanding, according to its Commitment


 


80

















Percentage), from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by or asserted against
Agent and such Issuer in performing its duties hereunder, or in any way
relating to or arising out of this Agreement or any Other Document; provided that,
Lenders shall not be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from the indemnified party’s gross (not mere)
negligence or willful misconduct.


14.8. Agent in
its Individual Capacity.


With respect to
the obligation of Agent to lend under this Agreement, the Advances made by it
shall have the same rights and powers hereunder as any other Lender and as if
it were not performing the duties as Agent specified herein; and the term
“Lender” or any similar term shall, unless the context clearly otherwise
indicates, include Agent in its individual capacity as a Lender. Agent may
engage in business with any Loan Party as if it were not performing the duties
specified herein, and may accept fees and other consideration from Borrower for
services in connection with this Agreement or otherwise without having to
account for the same to Lenders.


14.9. Delivery
of Documents.


To the extent
Agent receives documents and information from Loan Parties pursuant to Sections
9.7, 9.8 and 9.9 and any Lender does not receive such items, Agent will
promptly upon request furnish such documents and information to any Lender
requesting same.


14.10. Intentionally
Deleted.


14.11. Agent
under Collateral Documents and Guaranty.


Subject to Section
16.2, without further written consent or authorization from Lenders, Agent may execute
any documents or instruments necessary to (i) release any Lien encumbering any
item of Collateral that is the subject of a sale or other disposition of assets
permitted hereby or to which Required Lenders (or such other Lenders as may be
required to give such consent under Section 16.2) have otherwise consented or
(ii) release any Guarantor from the Guaranty pursuant to Section 15.10 or with
respect to which Required Lenders (or such other Lenders as may be required to
give such consent under Section 16.2) have otherwise consented. Without
limiting the generality of the foregoing, upon the termination of the
Commitments and the payment of all Obligations then due and payable and the
cancellation, expiration or cash collateralization (in a manner reasonably
acceptable to Agent, but in no event to exceed 105% of the face amount thereof)
of all Letters of Credit, (i) the Liens created by the Collateral Documents
shall terminate and all rights to the Collateral shall revert to the applicable
Loan Party, and (ii) Agent will, upon a Lou Party’s request and at such Loan
Party’s expense, (x) return to such Loan Party such of the Collateral as shall
not have been sold or otherwise disposed of or applied pursuant to the terms of
the Loan Documents and (y) at such Loan Party’s expense, execute and deliver to
such Loan Party such UCC termination statements, releases, mortgage releases,
discharges of security interests, reassignments of Intellectual Property,
terminations of


 


81

















control agreements
and other similar discharge or release documents (and, if applicable, in
recordable form) as are necessary to release, of record, the Liens and security
interests granted pursuant to this Agreement and any other Loan Documents as
such Loan Party shall reasonably request to evidence such termination, all
without any representation, warranty or recourse whatsoever.


XV.     GUARANTEE.


15.1. Guaranty.


Each Guarantor
hereby unconditionally guarantees, as a primary obligor and not merely as a
surety, jointly and severally with each other Guarantor when and as due,
whether at maturity, by acceleration, by notice of prepayment or otherwise, the
due and punctual performance of all Obligations. Each payment made by any
Guarantor pursuant to this Guarantee shall be made in lawful money of the
United States in immediately available funds.


15.2. Waivers.


Each Guarantor
hereby absolutely, unconditionally and irrevocably waives (i) promptness,
diligence, notice of acceptance, notice of presentment of payment and any other
notice hereunder, (ii) demand of payment, protest, notice of dishonor or
nonpayment, notice of the present and future amount of the Obligations and any
other notice with respect to the Obligations, (iii) any requirement that the Agent
or any Lender protect, secure, perfect or insure any security interest or Lien
or any property subject thereto or exhaust any right or take any action against
any other Loan Party, or any Person or any Collateral, (iv) any other action,
event or precondition to the enforcement hereof or the performance by each such
Guarantor of the obligations, and (v) any defense arising by any lack of
capacity or authority or any other defense of any Loan Party or any notice,
demand or defense by reason of cessation from any cause of Obligations other
than payment and performance in full of the Obligations by the Loan Parties and
any defense that any other guarantee or security was or was to be obtained by
Agent.


15.3. No
Defense.


No invalidity,
irregularity, voidableness, voidness or unenforceability of this Agreement or
any Other Document or any other agreement or instrument relating thereto, or of
all or any part of the Obligations or of any collateral security therefor shall
affect, impair or be a defense hereunder.


15.4. Guaranty
of Payment.


The Guaranty
hereunder is one of payment and performance, not collection, and the
obligations of each Guarantor hereunder are independent of the Obligations of
the other Loan Parties, and a separate action or actions may be brought and
prosecuted against any Guarantor to enforce the terms and conditions of this
Article XV, irrespective of whether any action is brought against any other
Loan Party or other Persons or whether any other Loan Party or other Persons
are joined in any such action or actions. Each Guarantor waives any right to
require that any resort be had by Agent or any Lender to any security held for
payment of the Obligations or to any balance of any deposit account or credit
on the books of any Agent or any Lender in favor of


 


82

















any Loan Party or
any other person. No election to proceed in one form of action or proceedings,
or against any Person, or on any Obligations, shall constitute a waiver of
Agent’s right to proceed in any other form of action or proceeding or against
any other Person unless Agent has expressed any such right in writing. Without
limiting the generality of the foregoing, no action or proceeding by Agent
against any Loan Party under any document evidencing or securing indebtedness
of any Loan Party to Agent shall diminish the liability of any Guarantor
hereunder, except to the extent Agent receives actual payment on account of
Obligations by such action or proceeding, notwithstanding the effect of any
such election, action or proceeding upon the right of subrogation of any
Guarantor in respect of any Loan Party.


15.5. Liabilities
Absolute.


The liability of
each Guarantor hereunder shall be absolute, unlimited and unconditional and
shall not be subject to any reduction, limitation, impairment, discharge or
termination for any reason, including, without limitation, any claim of waiver,
release, surrender, alteration or compromise, and shall not be subject to any
claim, defense or setoff, counterclaim, recoupment or termination whatsoever by
reason of the invalidity, illegality or unenforceability of any other
Obligation or otherwise. Without limiting the generality of the foregoing, the
obligations of each Guarantor shall not be discharged or impaired, released,
limited or otherwise affected by:


(i) any change in
the manner, place or terms of payment or performance, and/or any change or
extension of the time of payment or performance of, release, renewal or
alteration of, or any new agreements relating to any Obligation, any security
therefor, or any liability incurred directly or indirectly in respect thereof,
or any rescission of, or amendment, waiver or other modification of, or any
consent to departure from, this Agreement or any Other Document, including any
increase in the Obligations resulting from the extension of additional credit
to the Borrower or otherwise;


(ii) any sale,
exchange, release, surrender, loss, abandonment, realization upon any property
by whomsoever at any time pledged or mortgaged to secure, or howsoever
securing, all or any of the Obligations, and/or any offset there against, or
failure to perfect, or continue the perfection of, any Lien in any such
property, or delay in the perfection of any such Lien, or any amendment or
waiver of or consent to departure from any other guaranty for all or any of the
Obligations;


(iii) the failure
of the Agent or any Lender to assert any claim or demand or to enforce any
right or remedy against the Borrower or any other Loan Party or any other Person
under the provisions of this Agreement or any Other Document or any other
document or instrument executed and delivered in connection herewith or
therewith;


(iv) any
settlement or compromise of any Obligation, any security therefor or any
liability (including any of those hereunder) incurred directly or indirectly in
respect thereof or hereof, and any subordination of the payment of all or any
part thereof to the payment of any obligation (whether due or not) of any Loan
Party to creditors of any Loan Party other than any other Loan Party;


 


83

















(v) any manner of application of Collateral, or proceeds thereof,
to all or any of the Obligations, or any manner of sale or other disposition of
any Collateral for all or any of the Obligations or any other assets of any
Loan Party; and


(vi) any other
agreements or circumstance of any nature whatsoever that may or might in any
manner or to any extent vary the risk of any Guarantor, or that might otherwise
at law or in equity constitute a defense available to, or a discharge of, the
Guaranty hereunder and/or the obligations of any Guarantor, or a defense to, or
discharge of, any Loan Party or any other Person or party hereto or the
Obligations or otherwise with respect to the Advances or other financial
accommodations to the Borrower pursuant to this Agreement and/or the Other
Documents.


15.6. Waiver of
Notice.


The Agent shall
have the right to do any of the above without notice to or the consent of any
Guarantor and each Guarantor expressly waives any right to notice of, consent
to, knowledge of and participation in any agreements relating to any of the
above or any other present or future event relating to Obligations whether
under this Agreement or otherwise or any right to challenge or question any of
the above and waives any defenses of such Guarantor which might arise as a
result of such actions.


15.7. Agent’s
Discretion.


Agent may at any
time and from time to time (whether prior to or after the revocation or termination
of this Agreement) without the consent of, or notice to, any Guarantor, and
without incurring responsibility to any Guarantor or impairing or releasing the
Obligations, apply any sums by whomsoever paid or howsoever realized to any
Obligations regardless of what Obligations remain unpaid.


15.8. Reinstatement.


(a) The Guaranty
provisions herein contained shall continue to be effective or be reinstated, as
the case may be, if claim is ever made upon the Agent or any Lender for
repayment or recovery of any amount or amounts received by such Person in
payment or on account of any of the Obligations and such Person repays all or
part of said amount for any reason whatsoever, including, without limitation,
by reason of any judgment, decree or order of any court or administrative body
having jurisdiction over such Person or the respective property of each, or any
settlement or compromise of any claim effected by such Person with any such
claimant (including any Loan Party); and in such event each Guarantor hereby
agrees that any such judgment, decree, order, settlement or compromise or other
circumstances shall be binding upon such Guarantor, notwithstanding any
revocation hereof or the cancellation of any note or other instrument
evidencing any Obligation, and each Guarantor shall be and remain liable to the
Agent and/or Lenders for the amount so repaid or recovered to the same extent
as if such amount had never originally been received by such Person(s). 


(b) Agent shall
not be required to marshal any assets in favor of any Guarantor, or against or
in payment of Obligations.


 


84

















(c) No Guarantor shall be entitled to claim against any present or
future security held by Agent from any Person for Obligations in priority to or
equally with any claim of Agent, or assert any claim for any liability of any
Loan Party to any Guarantor in priority to or equally with claims of Agent for
Obligations, and no Guarantor shall be entitled to compete with Agent with
respect to, or to advance any equal or prior claim to any security held by
Agent for Obligations.


(d) If any Loan
Party makes any payment to Agent, which payment is wholly or partly
subsequently invalidated, declared to be fraudulent or preferential, set aside
or required to be repaid to any Person under any federal or provincial statute
or at common law or under equitable principles, then to the extent of such
payment, the Obligation intended to be paid shall be revived and continued in
full force and effect as if the payment had not been made, and the resulting
revived Obligation shall continue to be guaranteed, uninterrupted, by each
Guarantor hereunder.


(e) Excluding all
intercompany transfers permitted under this Agreement (except following the
occurrence and during the continuance of an Event of Default), all present and
future monies payable by any Loan Party to any Guarantor, whether arising out
of a right of subrogation or otherwise, are assigned to Agent for its benefit
and for the ratable benefit of Lenders as security for such Guarantor’s
liability to Agent and Lenders hereunder and are postponed and subordinated to
Agent’s prior right to payment in full of Obligations. Except to the extent
prohibited otherwise by this Agreement, all monies (but if no Event of Default
has occurred and is continuing, excluding those intercompany transfers
permitted under this Agreement) received by any Guarantor from any Loan Party
shall be held by such Guarantor as agent and trustee for Agent. This
assignment, postponement and subordination shall only terminate when the
Obligations are paid in full in cash and this Agreement is irrevocably
terminated.


(f) Each Loan
Party acknowledges this assignment, postponement and subordination and, except
as otherwise set forth herein, agrees to make no payments to any Guarantor
without the prior written consent of Agent. Each Loan Party agrees to give full
effect to the provisions hereof.


15.9. Action
Upon Event of Default.


Upon the
occurrence and during the continuance of any Event of Default, the Agent may
and upon written request of the Required Lenders shall, without notice to or
demand upon any Loan Party or any other Person, declare any obligations of such
Guarantor hereunder immediately due and payable, and shall be entitled to
enforce the obligations of each Guarantor. Upon such declaration by the Agent,
the Agent and Lenders are hereby authorized at any time and from time to time
to set off and apply any and all deposits (general or special, time or demand,
provisions or final) at any time held and other indebtedness at any time owing
by the Agent or Lenders to or for the credit or the account of any Guarantor
against any and all of the obligations of each Guarantor now or hereafter
existing hereunder, whether or not the Agent or Lenders shall have made any
demand hereunder against any other Loan Party and although such obligations may
be contingent and unmatured. The rights of the Agent and Lenders hereunder are
in addition to other rights and remedies (including other rights of set-off) which
the Agent


 


85

















and Lenders may
have. Upon such declaration by the Agent, with respect to any claims (other
than those claims referred to in the immediately preceding paragraph) of any
Guarantor against any Loan Party (the “Claims”), the Agent shall have
the full right on the part of the Agent in its own name or in the name of such
Guarantor to collect and enforce such Claims by legal action, proof of debt in
bankruptcy or other liquidation proceedings, vote in any proceeding for the
arrangement of debts at any time proposed, or otherwise, the Agent and each of
its officers being hereby irrevocably constituted attorneys-in-fact for each
Guarantor for the purpose of such enforcement and for the purpose of endorsing
in the name of each Guarantor any instrument for the payment of money. Each
Guarantor will receive as trustee for the Agent and will pay to the Agent
forthwith upon receipt thereof any amounts which such Guarantor may receive
from any Loan Party on account of the Claims. Each Guarantor agrees that at no
time hereafter will any of the Claims be represented by any notes, other
negotiable instruments or writings, except and in such event they shall either
be made payable to the Agent, or if payable to any Guarantor, shall forthwith
be endorsed by such Guarantor to the Agent. Each Guarantor agrees that no
payment on account of the Claims or any security interest therein shall be
created, received, accepted or retained during the continuance of any Event of
Default nor shall any financing statement be filed with respect thereto by any
Guarantor.


15.10. Statute
of Limitations.


Any acknowledgment
or new promise, whether by payment of principal or interest or otherwise and
whether by any Loan Party or others (including any Lenders) with respect to any
of the Obligations shall, if the statute of limitations in favor of any
Guarantor against the Agent or Lenders shall have commenced to run, toll the
running of such statute of limitations and, if the period of such statute of
limitations shall have expired, prevent the operation of such statute of
limitations.


15.11. Interest.


All amounts due,
owing and unpaid from time to time by any Guarantor hereunder shall bear
interest at the interest rate per annum then chargeable with respect to
Domestic Rate Loans constituting Revolving Advances.


15.12. Guarantor’s
Investigation.


Each Guarantor
acknowledges receipt of a copy of each of this Agreement and the Other
Documents. Each Guarantor has made an independent investigation of the Loan
Parties and of the financial condition of the Loan Parties. Neither Agent nor
any Lender has made and neither Agent nor any Lender does make any
representations or warranties as to the income, expense, operation, finances or
any other matter or thing affecting any Loan Party nor has Agent or any Lender
made any representations or warranties as to the amount or nature of the
Obligations of any Loan Party to which this Article XV applies as specifically
herein set forth, nor has Agent or any Lender or any officer, agent or employee
of Agent or any Lender or any representative thereof, made any other oral
representations, agreements or commitments of any kind or nature, and each
Guarantor hereby expressly acknowledges that no such representations or
warranties have been made and such Guarantor expressly disclaims reliance on
any such representations or warranties.


 


86

















15.13. Termination.


The provisions
of this Article XV shall remain in effect until the indefeasible payment in full in cash of all Obligations and
irrevocable termination of this Agreement.


15.14. Discharge
of Guaranty Upon Sale of Guarantor.


If all of the
stock (or other ownership interest) of any Guarantor or any of its
successors in interest hereunder shall be sold or otherwise disposed of
(including by merger or consolidation) in accordance with the terms and
conditions hereof, the Guaranty of such Guarantor or such successor in
interest, as the case may be, hereunder shall automatically be discharged and
released without any further action by any beneficiary or any other Person
effective as of the time of such sale.


XVI.    MISCELLANEOUS.


16.1. Governing
Law.


This Agreement
shall be governed by and construed in accordance with the laws of the
State of New York applied to contracts to be performed wholly within the State
of New York. Any judicial proceeding brought by or against any Loan Party with
respect to any of the Obligations, this Agreement or any related agreement may
be brought in any court of competent jurisdiction in New York County, State of
New York, United States of America, and, by execution and delivery of this
Agreement, each Loan Party accepts for itself and in connection with its
properties, generally and unconditionally, the non-exclusive jurisdiction of
the aforesaid courts, and irrevocably agrees to be bound by any judgment
rendered thereby in connection with this Agreement. Each Loan Party hereby
waives personal service of any and all process upon it and consents that all
such service of process may be made by registered mail (return receipt
requested) directed to each Loan Party at its address set forth in Section 16.6
and service so made shall be deemed completed five (5) days after the same
shall have been so deposited in the mails of the United States of America.
Nothing herein shall affect the right to serve process in any manner permitted
by law or shall limit the right of Agent or any Lender to bring proceedings
against any Loan Party in the courts of any other jurisdiction. Each Loan Party
waives any objection to jurisdiction and venue of any action instituted
hereunder and shall not assert any defense based on lack of jurisdiction or
venue or based upon forum non conveniens. Any judicial proceeding by any
Loan Party against Agent or any Lender involving, directly or indirectly, any
matter or claim in any way arising out of, related to or connected with this
Agreement or any related agreement, shall be brought only in a federal or state
court located in the City of New York, State of New York.


16.2. Entire
Understanding; Amendments.


(a) This Agreement
and the documents executed concurrently herewith contain the entire
understanding between each Loan Party, Agent and each Lender and supersedes all
prior agreements and understandings, if any, relating to the subject matter
hereof. Any promises, representations, warranties or guarantees not herein
contained and hereinafter made shall have no force and effect unless in
writing, signed by Loan Parties’, Agent’s and each Lender’s respective officers. Neither this Agreement nor any
portion or provisions hereof may


 


87

















be changed, modified,
amended, waived, supplemented, discharged, cancelled or terminated orally or by
any course of dealing, or in any manner other than by an agreement in writing,
signed by the party to be charged. Each Loan Party acknowledges that it has
been advised by counsel in connection with the execution of this Agreement and
Other Documents and is not relying upon oral representations or statements
inconsistent with the terms and provisions of this Agreement.


(b) The Required
Lenders, Agent with the consent in writing of the Required Lenders, and Loan
Parties may, subject to the provisions of this Section 16.2(b), from time to
time enter into written supplemental agreements to this Agreement or the Other
Documents executed by Loan Parties, for the purpose of adding or deleting any
provisions or otherwise changing, varying or waiving in any manner the rights
of Lenders, Agent or Loan Parties thereunder or the conditions, provisions or
terms thereof or waiving any Event of Default thereunder, but only to the
extent specified in such written agreements; provided, however,
that no such supplemental agreement
shall, without the consent of all Lenders:


(i) increase the
Commitment Percentage of any Lender;


(ii) increase
the Inventory Advance Cap or the Maximum Loan Amount;


(iii) extend
the Original Term or the due date for any amount payable hereunder, or decrease the rate of interest
or reduce any scheduled principal payment or fee payable by Loan Parties to
Lenders pursuant to this Agreement;


(iv) alter the
definition of the term Required Lenders or alter, amend or modify this Section 16.2(b);


(v) release
any Collateral during any calendar year (other than in accordance with the
provisions of this Agreement) having an aggregate value in excess of $1,000,000;


(vi) change the
rights and duties of Agent;


(vii) permit
any Revolving Advance to be made if after giving effect thereto the total of
Revolving Advances outstanding hereunder would exceed the Formula Amount for
more than sixty (60) consecutive Business Days or exceed one hundred and ten
percent (110%) of the
Formula Amount; or


(viii) increase
the Advance Rates above the Advance Rates in effect on the Closing Date.


and provided, further,
that the Maximum Swingline Loan Amount may not be increased without the consent
of the Swingline
Lender.


Any such supplemental
agreement shall apply equally to each Lender and shall be binding upon Loan
Parties, Lenders and Agent and all future holders of the Obligations. In the
case of any waiver, Loan Parties,
Agent and Lenders shall be restored to their former positions and rights,


 


88

















and any Event of Default waived shall be deemed to be
cured and not continuing, but no waiver of a specific Event of Default shall
extend to any subsequent Event of Default (whether or not the subsequent Event
of Default is the same as the Event of Default which was waived), or impair any right consequent thereon.


(c) In the
event that Agent requests the consent of a Lender pursuant to this Section 16.2
and such Lender shall not respond or reply to Agent in writing within ten (10)
days of delivery of such report, such Lender shall be deemed to have consented
to the matter that was the subject of the request. In the event that Agent
requests the consent of a Lender pursuant to this Section 16.2 and such consent
is denied, then HSBC may, at its option, require such Lender to assign its
interest in the Advances to HSBC or to another Lender or to any other Person
designated by Agent (the “Designated Lender”), for a price equal to the
then outstanding principal amount thereof plus accrued and unpaid interest and
fees due such Lender, which interest and fees shall be paid when collected from
Loan Parties. In the event HSBC elects to require any Lender to assign its
interest to HSBC or to the Designated Lender, HSBC will so notify such Lender
in writing within forty five (45) days following such Lender’s denial, and such
Lender will assign its interest to HSBC or the Designated Lender no later than
five (5) days following receipt of such notice pursuant to a Commitment
Transfer Supplement executed by such Lender, HSBC or the Designated Lender, as appropriate, and Agent.


(d) Notwithstanding
the foregoing, Agent may at its discretion and without the consent of the
Required Lenders, voluntarily permit the outstanding Revolving Advances at any
time to exceed the Formula Amount by up to one hundred and ten percent (110%)
of the Formula Amount for up to thirty (30) consecutive Business Days. For
purposes of the preceding sentence, the discretion granted to Agent hereunder
shall not preclude involuntary overadvances that may result from time to time
due to the fact that the Formula Amount was unintentionally exceeded for any
reason, including, but not limited to, Collateral previously deemed to be
either “Eligible Factored Receivables”, “Eligible Receivables” or “Eligible Inventory”,
as applicable, becomes ineligible, collections of Receivables applied to reduce
outstanding Advances are thereafter returned for insufficient funds or
overadvances are made to protect or preserve the Collateral. In the event Agent
involuntarily permits the outstanding Revolving Advances to exceed the Formula
Amount by more than ten percent (10%), Agent shall decrease such excess in as
expeditious a manner as is practicable under the circumstances and not
inconsistent with the reason for such excess. Revolving Advances made after
Agent has determined the existence of involuntary overadvances shall be deemed
to be involuntary overadvances and shall be decreased in accordance with the preceding sentence.


(e) Anything
contained herein to the contrary notwithstanding, in connection with any
proposed amendment, modification, termination, waiver or consent with respect
to any of the provisions hereof as contemplated by Section 16.2, the consent of
Required Lenders shall have been obtained but the consent of one or more of
such other Lenders (each a “Non-Consenting Lender”) whose consent is
required shall not have been obtained; then, with respect to each such
Non-Consenting Lender, Borrower may, by giving written notice to Agent and any
Non-Consenting Lender of its election to do so, elect to cause such
Non-Consenting Lender (and such Non-Consenting Lender irrevocably agrees) to
assign its outstanding Loans and its Commitments to a Transferee (each a “Replacement
Lender”) in accordance with the provisions of Section 16.3; provided, (1) on the
date of such assignment, the Replacement Lender shall pay


 


89

















to Non-Consenting Lender an amount equal to the sum of
(A) an amount equal to the principal of, and all accrued interest on, all
outstanding Advances of the Non-Consenting Lender, (B) an amount equal to all
unreimbursed drawings that have been funded by such Non-Consenting Lender, together with all then unpaid interest
with respect thereto at such time and (C) an amount equal to all
accrued, but theretofore unpaid fees owing to such Non-Consenting Lender
pursuant to Section 3.3; (2) on the date of such assignment, Borrower shall pay
any amounts payable to such Non-Consenting Lender pursuant to Section 2.2(g),
3.6, 3.8 or 3.9. Upon the prepayment of all amounts owing to any Non-Consenting
Lender and the termination of such Non-Consenting Lender’s Commitments, if any, such Non-Consenting Lender shall no longer
constitute a “Lender” for purposes hereof; provided, any rights
of such Non-Consenting Lender to indemnification hereunder shall survive as to
such Non-Consenting Lender.


16.3. Successors and Assigns; Participations; New
Lenders.


(a) This Agreement shall be binding upon and inure to
the benefit of Loan Parties, Agent, each
Lender, all future holders of the Obligations and their respective successors and
assigns, except that no Loan Party may assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of Agent and
each Lender.


(b) Each Loan Party acknowledges that in the regular
course of commercial banking business one or more Lenders may at any time and
from time to time sell participating interests in the Advances to other
financial institutions (each such transferee or purchaser of a participating interest, a “Transferee”).
Each Transferee may exercise all rights of payment (including without limitation rights of set-off)
with respect to the portion of such Advances held by it or other Obligations
payable hereunder as fully as if such Transferee were the direct holder thereof
provided that Loan Parties shall not be required to pay to any Transferee more
than the amount which it would have been required to pay to Lender which
granted an interest in its Advances or other Obligations payable hereunder to
such Transferee had such Lender retained such interest in the Advances
hereunder or other Obligations payable hereunder and in no event shall Loan
Parties be required to pay any such amount arising from the same circumstances
and with respect to the same Advances or other Obligations payable hereunder to
both such Lender and such Transferee. Loan Parties hereby grant to any
Transferee a continuing security interest in any deposits, moneys or other
property actually or constructively held by such Transferee as security for the
Transferee’s interest in the Advances.


(c) Any Lender may, with the consent of Agent and Loan
Parties, which consent shall not be unreasonably withheld or delayed, sell,
assign or transfer all or any part of its rights under this Agreement and the
Other Documents to one or more additional banks or financial institutions and
one or more additional banks or financial institutions may commit to make
Advances hereunder (each a “Purchasing Lender”), in minimum amounts of
not less than $5,000,000, pursuant to a Commitment Transfer Supplement,
executed by a Purchasing Lender, the transferor Lender, and Agent and delivered
to Agent for recording. Notwithstanding the foregoing, the consent of Agent and
Loan Parties shall not be required in the case of an assignment by a Lender to
another Lender or to an Affiliate of a Lender, and the consent of Loan Parties
shall not be required at any time that an Event of Default or a Default has
occurred and is continuing hereunder. 
Upon such execution, delivery, acceptance and recording, from and after the
transfer effective date determined pursuant to such Commitment Transfer
Supplement, (i)


 


90

















Purchasing Lender thereunder shall be a party hereto
and, to the extent provided in such Commitment Transfer Supplement, have the
rights and obligations of a Lender thereunder with a Commitment Percentage as
set forth therein, and (ii) the transferor Lender thereunder shall, to the
extent provided in such Commitment Transfer Supplement, be released from its
obligations under this Agreement, the Commitment Transfer Supplement creating a
novation for that purpose. Such Commitment Transfer Supplement shall be deemed
to amend this Agreement to the extent, and only to the extent, necessary to
reflect the addition of such Purchasing Lender and the resulting adjustment of
the Commitment Percentages arising from the purchase by such Purchasing Lender
of all or a portion of the rights and obligations of such transferor Lender
under this Agreement and the Other Documents. Loan Parties hereby consent to
the addition of such Purchasing Lender and the resulting adjustment of the
Commitment Percentages arising from the purchase by such Purchasing Lender of
all or a portion of the rights and obligations of such transferor Lender under
this Agreement and the Other Documents in accordance with this subsection. Loan
Parties shall execute and deliver such further documents and do such further acts
and things in order to effectuate the foregoing.


(d) Agent shall maintain at its address a copy of each
Commitment Transfer Supplement delivered to
it and a register (the “Register”) for the recordation of the names and addresses
of the Advances owing to each Lender from time to time. The entries in the
Register shall be conclusive, in the absence of manifest error, and Loan
Parties, Agent and Lenders may treat each Person whose name is recorded in the
Register as the owner of the Advance recorded therein
for the purposes of this Agreement. The Register shall be available for
inspection by Loan Parties or any Lender at any reasonable time and from
time to time upon reasonable prior notice. Agent shall receive a fee in the
amount of $3,500 payable by the applicable Purchasing Lender upon the effective date of each transfer or assignment to such
Purchasing Lender.


(e) Subject to Section 16.15, Loan Parties authorize
each Lender to disclose to any Transferee or
Purchasing Lender and any prospective Transferee or Purchasing Lender any and
all financial information in such Lender’s possession concerning Loan Parties
which has been delivered to such Lender by or on behalf of Loan Parties
pursuant to this Agreement or in connection with such Lender’s credit
evaluation of Loan Parties.


(f)


(i) Each Lender or Participant agrees that it will
deliver to Borrower and Agent two (2) duly completed appropriate valid
Withholding Certificates (as defined under §1.1441-l(c)(16) of the Income Tax
Regulations (“Regulations”)) certifying its status (i.e., U.S. or foreign
person) and, if a foreign person, making a claim of exemption from, U.S.
withholding tax on the basis of an income tax treaty or an exemption provided
by the Code. Such delivery may be made by electronic transmission as described
in §1.1441-l(e)(4)(iv) of the Regulations if Agent establishes an electronic
delivery system. The term “Withholding Certificate” means a Form W-9; a Form
W-8BEN; a Form W-8ECI; a Form W-8IMY and the related statements and
certifications as required under §1.1441-l(e)(3) of the Regulations; a
statement described in §1.871-14(c)(2)(v) of the Regulations; or any other
certificates under the Code or Regulations that certify or establish the status
of a payee or beneficial owner as a U.S. or foreign person.


 


91

















(ii) Each Lender or
Participant required to deliver to Borrower and Agent a valid Withholding
Certificate pursuant to Section 16.3(f)(i) hereof shall deliver such valid Withholding Certificate as follows: (A)
each Lender which is a party hereto on the Closing Date shall deliver
such valid Withholding Certificate at least five (5) Business Days prior to the
first date on which any interest or fees are payable by Loan Parties hereunder
for the account of such Lender; (B) each Purchasing Lender or Participant shall
deliver such valid Withholding Certificate at least five (5) Business Days
before the effective date of any applicable assignment or participation. Each Lender or Participant which so delivers a valid
Withholding Certificate further undertakes to deliver to Loan Parties
and Agent two (2) additional copies of such Withholding Certificate (or a
successor form) on or before the date that such Withholding Certificate expires or becomes obsolete or after
the occurrence of any event requiring a change in the most recent
Withholding Certificate so delivered by it, and such amendments thereto or
extensions or renewals thereof as may be reasonably requested by Loan Parties
or Agent.


(iii) Notwithstanding the submission
of a Withholding Certificate claiming any exemption from U.S.
withholding tax required under Section 16.3(f)(ii) hereof, Agent shall be
entitled to withhold United States federal income taxes at the full 30%
withholding rate if in its reasonable judgment it is required to do so under
the due diligence requirements imposed upon
a withholding agent under §1.1441-7(b) of the Regulations. Further, Agent is indemnified under §1.1461-l(e) of the
Regulations against any claims and demands of any Lender or Participant for the amount of any tax it deducts and
withholds in accordance with regulations under §1441 of the Code.


(iv) No Purchasing Lender, Participant or Transferee
shall be entitled to receive any greater amount pursuant to Section 3.9 than
the transferor Lender would have been entitled to receive in respect of the
amount assigned or transferred by such transferor Lender to such Purchasing Lender, Participant or Transferee had no such
assignment or transfer occurred.


16.4. Application of Payments.


Agent shall have the continuing and exclusive right to
apply or reverse and re-apply any payment
and any and all proceeds of Collateral to any portion of the Obligations. To the extent that any Loan Party makes a payment or
Agent or any Lender receives any payment or proceeds of the Collateral
for any Loan Party’s benefit, which are subsequently invalidated, declared to
be fraudulent or preferential, set aside or required to be repaid to a trustee,
debtor in possession, receiver, custodian or any other party under any
bankruptcy law, common law or equitable
cause, then, to such extent, the Obligations or part thereof intended to be
satisfied shall be revived and continue as if such payment or proceeds
had not been received by Agent or such Lender.


16.5. Indemnity.


(a) Each Loan Party shall
indemnify Agent, each Issuer, each Lender and each of their respective officers, directors, Affiliates, employees and
agents from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, and reasonable costs, expenses
and disbursements of any kind or nature whatsoever (including,


 


92

















without limitation, reasonable fees and disbursements
of counsel) which may be imposed on, incurred by, or asserted against Agent,
such Issuer or any Lender in any litigation, proceeding or investigation
instituted or conducted by any governmental agency or instrumentality or any
other Person with respect to any aspect of, or any transaction contemplated by,
or referred to in, or any matter related to, this Agreement or the Other
Documents, whether or not Agent, any Issuer or any Lender is a party thereto,
except to the extent that any of the foregoing arises out of the gross
negligence or willful misconduct of the party being indemnified.


(b) In connection with the issuance of any Letter of
Credit or Air Release/Steamship Guarantee, each Loan Party shall indemnify,
save and hold Agent, each Lender and each Issuer harmless from any loss,
reasonable cost, expense or liability, including, without limitation, any
claims, damages, costs and expenses, and reimbursement obligations with respect
to cargo value, incurred by the issuer of any Air Release/Steamship Guarantee
to the steamship line or airway carrier to which such Air Release/Steamship
Guarantee is issued, and other payments made by Agent, any Lender or any Issuer
and expenses and reasonable attorneys’ fees incurred by Agent, any Lender or
any Issuer arising out of, or in connection with, any Letter of Credit or Air
Release/Steamship Guarantee to be issued or created for the Borrower


(c) Each Loan Party shall defend and indemnify Agent
and Lenders and hold Agent, Lenders and their respective employees, agents,
directors and officers harmless from and against all loss, liability, damage
and expense, claims, costs, fines and penalties, including reasonable
attorney’s fees, suffered or incurred by Agent or Lenders (i) under or on
account of such Loan Party’s violation of any applicable Environmental Laws, including,
without limitation, the assertion of any Lien thereunder, and/or (ii) with
respect to any Hazardous Discharge, the presence of any Hazardous Substances
affecting the Real Property, whether or not the same originates or emerges from
the Real Property or any contiguous real estate, including any loss of value of
the Real Property as a result of the foregoing except to the extent such loss,
liability, damage and expense is attributable to any Hazardous Discharge or
presence of Hazardous Substances resulting from actions on the part of Agent or
any Lender.


16.6. Notice.


Any notice or request hereunder may be given to any
Loan Party or to Agent or any Lender at their respective addresses set forth
below or at such other address as may hereafter be specified in a notice
designated as a notice of change of address under this Section 16.6. Any notice
or request hereunder shall be given by (a) hand delivery, (b) overnight
courier, (c) registered or certified mail, return receipt requested, or (d)
telecopy to the number set out below (or such other number as may hereafter be
specified in a notice designated as a notice of change of address) with
electronic confirmation of its receipt. Any notice or other communication
required or permitted pursuant to this Agreement shall be deemed given (a) when
personally delivered to any officer of the party to whom it is addressed, (b)
on the earlier of actual receipt thereof or three (3) days following posting
thereof by certified or registered mail, postage prepaid, or (c) upon actual
receipt thereof when sent by a recognized overnight delivery service or (d)
upon actual receipt thereof when sent by telecopier to the number set forth
below with electronic confirmation of its receipt, in each case addressed to
each party at its address set forth below or at such other address as has been
furnished in writing by a party to the other by like notice:


 


93

















 


	
  (A)

  	
  If to Agent or
  HSBC:

  	
   

  	
  HSBC Bank USA

  452 Fifth Avenue

  New York, New York 10018

  
	
   

  	
   

  	
   

  	
  Attention:

  	
  Douglas
  Taliaferro

  
	
   

  	
   

  	
   

  	
  Telephone:

  	
  212-525-5799

  
	
   

  	
   

  	
   

  	
  Facsimile:

  	
  212-525-6905

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  with a copy to:

  	
   

  	
  Hahn &
  Hessen LLP

  488 Madison Avenue

  New York, New York 10022 

  
	
   

  	
   

  	
   

  	
  Attention:

  	
  Steven Seif,
  Esq.

  
	
   

  	
   

  	
   

  	
  Telephone:

  	
  212-478-7200

  
	
   

  	
   

  	
   

  	
  Telecopier:

  	
  212-478-7400

  
	
   

  	
   

  	
   

  	
   

  
	
  (B)

  	
  If to any other
  Lender, as specified on the signature pages hereof.

  
	
   

  	
   

  	
   

  	
   

  
	
  (C)

  	
  If to Borrower

  or any Loan Party:

  	
   

  	
  Rafaella Apparel
  Group, Inc.

  1411 Broadway

  New York, NY 10018

  
	
   

  	
   

  	
   

  	
  Attention:

  	
  Chad Spooner

  
	
   

  	
   

  	
   

  	
  Telephone:

  	
  212-403-0300

  
	
   

  	
   

  	
   

  	
  Facsimile:

  	
  212-764-9275

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  with a copy to:

  	
   

  	
  Schulte Roth
  & Zabel LLP

  919 Third Avenue

  New York, New York 10006

  
	
   

  	
   

  	
   

  	
  Attention:

  	
  Ronald Risdon,
  Esq.

  
	
   

  	
   

  	
   

  	
   

  	
  and David
  Rosewater, Esq.

  
	
   

  	
   

  	
   

  	
  Telephone:

  	
  212-756-2000

  
	
   

  	
   

  	
   

  	
  Facsimile:

  	
  212-593-5955

  



16.7. Survival.


The obligations of Loan Parties under Sections 2.2(g),
3.6, 3.8,4.19(h) and 16.5 and the obligations of Lenders under Section 14.7
shall survive termination of this Agreement and the Other Documents and payment
in full of the Obligations.


16.8. Severability.


If any part of this Agreement is contrary to,
prohibited by, or deemed invalid under applicable laws or regulations, such
provision shall be inapplicable and deemed omitted to the extent so contrary,
prohibited or invalid, but the remainder hereof shall not be invalidated
thereby and shall be given effect so far as possible.


16.9. Expenses.


All costs and expenses including, without limitation:


 


94

















(a) reasonable attorneys’
fees and disbursements incurred by Agent and, with respect to clause (iv)
below, the applicable Lenders, (i) in all efforts made to enforce payment of
any Obligation or effect collection of any Collateral, or (ii) in connection
with the entering into, modification, amendment, administration and enforcement
of this Agreement or any consents or waivers hereunder and all related
agreements, documents and instruments, or (iii) in instituting, maintaining,
preserving, enforcing and foreclosing on Agent’s security interest in or Lien
on any of the Collateral, whether through judicial proceedings or otherwise, or
(iv) in defending or prosecuting any actions or proceedings arising out of or
relating to Agent’s or any Lender’s transactions with Loan Parties, or (v) in
connection with any advice given to Agent with respect to its rights and
obligations under this Agreement and all related agreements; and


(b) reasonable fees and disbursements incurred by
Agent or Agent on behalf of Lenders in connection with any appraisals of
Inventory or other Collateral, field examinations, collateral analysis or
monitoring or other business analysis conducted by outside Persons in
connection with this Agreement and all related agreements, provided that
so long as no Default or Event of Default has occurred and is continuing, the
Loan Parties’ obligation with respect to such fees and disbursements for field
examinations shall be limited to two (2) such field examinations in any
calendar year;


may be charged to Borrower’s Account and shall be part of the
Obligations.


16.10. Injunctive Relief.


Each Loan Party recognizes that, in the event any Loan
Party fails to perform, observe or discharge any of its obligations or
liabilities under this Agreement, any remedy at law may prove to be inadequate
relief to Lenders; therefore, Agent, if Agent so requests, shall be entitled to
temporary and permanent injunctive relief in any such case without the
necessity of proving that actual damages are not an adequate remedy.


16.11. Consequential Damages.


None of Agent, any Issuer, any Lender, nor any agent
or attorney for any of them, shall be liable to any Loan Parties for
consequential damages arising from any breach of contract, tort or other wrong
relating to the establishment, administration or collection of the Obligations.


16.12. Captions.


The captions at various places in this Agreement are
intended for convenience only and do not constitute and shall not be
interpreted as part of this Agreement.


16.13. Counterparts; Telecopied Signatures.


This Agreement may be executed in any number of and by
different parties hereto on separate counterparts, all of which, when so
executed, shall be deemed an original, but all such counterparts shall
constitute one and the same agreement. Any signature delivered by a party by
facsimile transmission shall be deemed to be an original signature hereto.


 


95

















16.14. Construction.


The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction
to the effect that any ambiguities are to be resolved
against the drafting party shall not be employed in the interpretation of this
Agreement or any amendments, schedules or exhibits thereto.


16.15. Confidentiality;
Sharing Information.


(a) Agent, each Lender and each Transferee shall hold
all non-public information obtained by
Agent, such Lender or such Transferee pursuant to the requirements of this
Agreement in accordance with Agent’s, such Lender’s and such Transferee’s
customary procedures for handling confidential information of this
nature; provided, however, Agent, each Lender and each Transferee
may disclose such confidential information (i) to its examiners, affiliates,
outside auditors, counsel and other professional advisors, (ii) to Agent, any
Lender or to any prospective Transferees and Purchasing Lenders which agree to
hold such non-public information confidential in a manner similar to the
provisions of this Section 16.15, and (iii) as required or requested by any
Governmental Body or representative thereof or pursuant to legal process; provided, further that (x)
unless specifically prohibited by applicable law or court order Agent,
each Lender and each Transferee shall use reasonable efforts prior to
disclosure thereof, to notify Loan Parties
of the applicable request for disclosure of such non-public information (A) by
a Governmental Body or representative thereof (other than any such request in
connection with an examination of the
financial condition of a Lender or a Transferee by such Governmental Body)
or (B) pursuant to legal process and (y) in no event shall Agent, any Lender or
any Transferee be obligated to return any materials furnished by any Loan Party
other than those documents and instruments in possession of Agent or any Lender
in order to perfect its Lien on the Collateral once the Obligations have been
paid in full and this Agreement has been terminated.


(b) Each Loan Party acknowledges that from time to
time financial advisory, investment banking and other services may be offered
or provided to such Loan Party or one or more of its Affiliates (in connection
with this Agreement or otherwise) by any Lender or by one or more Subsidiaries
or Affiliates of such Lender and each Loan Party hereby authorizes each Lender
to share any information delivered to such Lender by such Loan Party and its
Subsidiaries pursuant to this Agreement, or in connection with the decision of
such Lender to enter into this Agreement,
to any such Subsidiary or Affiliate of such Lender, it being understood that
any such Subsidiary or Affiliate of any Lender receiving such information shall
be bound by the provision of this
Section 16.15 as if it were a Lender hereunder. Such authorization shall survive
the repayment of the Obligations and the termination of this Agreement.


16.16. Publicity.


Each Loan Party hereby authorizes Agent, in
consultation with the Borrower, to make
appropriate announcements of the financial arrangement entered into among Loan
Parties, Agent and Lenders, including, without limitation, announcements
which are commonly known as tombstones, in such publications and to such
selected parties as Agent shall in its sole and absolute discretion deem
appropriate. In addition, each Loan Party authorizes Agent to include


 


96

















such Loan Party’s name and logo in select transaction
profiles and client testimonials prepared by Agent for use in publications,
company brochures and other marketing materials of Agent.


[THE REMAINDER OF
THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK.]


[SIGNATURE PAGES
FOLLOW.]


 


97

















Each of the parties has
signed this Financing Agreement as of the day and year first above written.


 




	
   

  	
   

  	
  RAFAELLA APPAREL GROUP, INC.,

  as Borrower

  
	
  



  	
   

  	
  By: 

  	
  

  /s/ Glenn S. Palmer

  
	
   

  	
   

  	
  Name:

  	
  Glenn Palmer

  
	
   

  	
   

  	
  Title:

  	
  Chief Executive Officer

  






 




	
   

  	
   

  	
  VERRAZANO, INC.,

  as Guarantor

  
	
  



  	
   

  	
  By: 

  	
  

  /s/ Glenn S. Palmer

  
	
   

  	
   

  	
  Name:

  	
  Glenn Palmer

  
	
   

  	
   

  	
  Title:

  	
  President

  






 




	
   

  	
   

  	
  HSBC BANK USA, NATIONAL
  ASSOCIATION, 

  as Agent and as a Lender

  
	
  



  	
   

  	
  By: 

  	
  

  /s/ Lisa H. Augustus

  
	
   

  	
   

  	
  Name:

  	
  Lisa H. Augustus

  
	
   

  	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  	
  

  Commitment Percentage: 56%

  






 




	
   

  	
   

  	
  ISRAEL DISCOUNT BANK OF NEW
  YORK 

  as a Lender

  
	
  



  	
   

  	
  By: 

  	
  

  /s/ Howard Weinberg

  
	
   

  	
   

  	
  Name:

  	
  Howard Weinberg

  
	
   

  	
   

  	
  Title:

  	
  Senior Vice President

  
	
   

  	
   

  	
   

  	
   

  
	
  



  	
   

  	
  By: 

  	
  

  /s/ Matilda Reyes

  
	
   

  	
   

  	
  Name:

  	
  Matilda Reyes

  
	
   

  	
   

  	
  Title:

  	
  Senior Vice President

  
	
   

  	
   

  	
  

  Commitment Percentage: 44%

  






 


i