i TABLE OF CONTENTS (continued)
ii TABLE OF CONTENTS (continued)
LOAN AND SECURITY AGREEMENT This Loan and Security Agreement dated April 2,1999 is entered into by andbetween CONGRESS FINANCIAL CORPORATION (SOUTHWEST), a Texas corporation(“Lender”), and ALLIED FASHION, INC., a Delaware corporation (“Borrower”). WITNESSETH: WHEREAS, Borrower has requested that Lender enter into certain financingarrangements with Borrower pursuant to which Lender may make loans and provideother financial accommodations to Borrower, and WHEREAS, Lender is willing to make such loans and provide such financialaccommodations on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual conditions and agreementsset forth herein, and for other good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, the parties hereto agree asfollows:SECTION 1. DEFINITIONS. All terms used herein which are defined in Article 1 or Article 9 of theNew York Uniform Commercial Code shall have the respective meanings giventherein unless otherwise defined in this Agreement. All references to the pluralherein shall also mean the singular and to the singular shall also mean theplural. All references to Borrower and Lender pursuant to the definitions setforth in the recitals hereto, or to any other person herein, shall include theirrespective successors and assigns. The words “hereof”, “herein”, “hereunder”,”this Agreement” and words of similar import when used in this Agreement shallrefer to this Agreement as a whole and not any particular provision of thisAgreement and as this Agreement now exists or may hereafter be amended,modified, supplemented, extended, renewed, restated or replaced. An Event ofDefault shall exist or continue or be continuing until such Event of Default iswaived in accordance with Section 11.3. Any accounting term used herein unlessotherwise defined in this Agreement shall have the meaning customarily given tosuch term in accordance with GAAP. For purposes of this Agreement, the followingterms shall have the respective meanings given to them below: 1.1 “Accounts” shall mean all present and future rights of Borrower topayment for goods sold or leased or for services rendered, which are notevidenced by instruments or chattel paper, and whether or not earned byperformance. 1.2 “Adjusted Tangible Net Worth” shall mean as to any Person, at anytime, in accordance with GAAP (except as otherwise specifically set forthbelow), on a consolidated basis for such Person and its subsidiaries (if any),the amount equal to: (a) the difference between: (i) the aggregate net bookvalue of all assets of such Person and its subsidiaries, calculating the bookvalue of inventory for this purpose, as the lower of (A) cost as determined bythe retail method of accounting (which method of accounting includes the nettingofmarkdowns from the Retail Sales Price or ticketed sales price under thefirst-in-first-out method in accordance with GAAP) or (B) market value, andafter deducting from such book values all appropriate reserves in accordancewith GAAP (including all reserves for doubtful receivables, obsolescence,depreciation and amortization) and (ii) the aggregate amount of the indebtednessand other liabilities of such Person and its subsidiaries (including tax andother proper accruals and accounts payable), plus (b) indebtedness of suchPerson and its subsidiaries which is subordinated in right of payment to thefull and final payment of all of the Obligations on terms and conditionsacceptable to Lender, and redeemable preferred stock and junior notes permittedhereunder, minus (c) goodwill, patents, trademarks, copyrights, franchises,formulas, leasehold interests, leasehold improvements, non-compete agreements,engineering plans, organization costs, and any other assets of Borrower thatwould be treated as intangible assets on Borrower’s balance sheet prepared inaccordance with GAAP. 1.3 “Appraised Inventory Value” shall mean, with respect to EligibleInventory, the appraised value of such Eligible Inventory, expressed as apercentage of either the Value or the Retail Sales Price, as required by Lender,determined as of any date on a “going out of business sale” basis, net of allestimated liquidation expenses, shrinkage and markdowns, pursuant to anappraisal conducted, at Borrower’s expense, by an independent appraisal firmacceptable to Lender in its sole and absolute discretion exercised in good faithor such value as otherwise determined by Lender in its reasonable discretion; itbeing understood by the parties hereto that such percentage shall beseventy-three and one-half percent (73.5%) until such time that such percentageshall be adjusted in accordance with this Section 1.3 hereof. 1.4 “Availability Reserves” shall mean, as of any date of determination,such amounts as Lender may from time to time reasonably establish and revisereducing the amount of Revolving Loans and Letter of Credit Accommodations whichwould otherwise be available to Borrower under the lending formula(s) providedfor herein: (a) to reflect events, conditions, contingencies or risks which, asdetermined by Lender in good faith, do or may affect either (i) the Collateralor any other property which is security for the Obligations or its value, (ii)the assets or business of Borrower or any Obligor or (iii) the securityinterests and other rights of Lender in the Collateral (including theenforceability, perfection and priority thereof) or (b) to reflect Lender’s goodfaith belief that any collateral report or financial information furnished by oron behalf of Borrower or any Obligor to Lender is or may have been incomplete,inaccurate or misleading in any material respect or (c) to reflect any state offacts which Lender determines in good faith constitutes an Event of Default ormay, with notice or passage of time or both, constitute an Event of Default.Without limiting the generality of the foregoing, Lender (i) shall establish onthe date hereof and maintain throughout the term of this Agreement andthroughout any renewal term an Availability Reserve for an amount equal to two(2) months of Borrower’s gross rent as lessee for each leased premises ofBorrower which is either a distribution center or warehouse location or islocated in a state where a landlord may be entitled to a priority lien onCollateral to secure unpaid rent and with respect to each such property thelandlord has not executed a form of waiver and consent reasonably acceptable toLender, (ii) may establish an additional Availability Reserve on the datehereof, and from time to time hereafter, and maintain such reserve throughoutthe term of this Agreement and throughout any renewal term in an amountdetermined by Lender in its reasonable discretion to be sufficient to cover theanticipated moving expenses and other costs associated with the transfer ofInventory from each of Borrower’s retail locations to another location for whichthe landlord thereof has not executed a 2form of waiver and consent reasonably acceptable to Lender, (iii) upon an Eventof Default or an event that, with notice or passage of time or both, would be anEvent of Default, may establish and maintain an additional Availability Reservefrom time to time in an amount equal to the Dollar value of cash-on-hand inregisters maintained by Borrower, and (iv) may establish and maintain anadditional Availability Reserve from time to time in an amount equal to anyincrease in shrinking Inventory from the amount reflected in the most recentappraisal conducted by an outside appraiser satisfactory to Lender. 1.5 “Blocked Account” shall have the meaning set forth in Section 6.3hereof. 1.6 “Business Day” shall mean any day other than a Saturday, Sunday, orother day on which commercial banks are authorized or required to close underthe laws of the State of New York or the State of North Carolina, and a day onwhich First Union National Bank, or such other bank as Lender may from time totime designate, and Lender are open for the transaction of business. 1.7 “Code” shall mean the Internal Revenue Code of 1986, as the same nowexists or may from time to time hereafter be amended, modified, recodified orsupplemented, together with all rules, regulations and interpretationsthereunder or related thereto. 1.8 “Collateral” shall have the meaning set forth in Section 5 hereof. 1.9 “Confidential Information” shall have the meaning set forth inSection 12.6 hereof. 1.10 “Credit Card Agreements” shall mean all agreements now or hereafterentered into by Borrower with any Credit Card Issuer or Credit Card Processor asthe same may now exist or may hereafter be amended, modified, supplemented,extended, renewed, restated or replaced. 1.11 “Credit Card Issuer” shall mean any person who issues or whosemembers issue credit cards used by customers of the Borrower to purchase goods,including, without limitation, MasterCard or VISA bank credit or debit cards orother bank credit or debit cards, and American Express, Discover, Diners Club,Carte Blanche, and other non-bank credit or debit cards. 1.12 “Credit Card Processor” shall mean any servicing or processing agentor any factor or financial intermediary who facilities, services, processes ormanages the credit authorization, billing transfer and/or payment from a CreditCard Issuer or Credit Card Processor and other procedures with respect to anysales transactions of the Borrower involving credit card or debit card purchasesby customers using credit cards or debit cards issued by any Credit Card Issuer. 1.13 “Credit Card Receivables” shall mean all Accounts consisting of thepresent and future rights of Borrower to payment by Credit Card Issuers orCredit Card Processors for merchandise sold and delivered to customers ofBorrower who have purchased such goods using a credit card or a debit cardissued by a Credit Card Issuer. 3 1.14 “Eligible Inventory” shall mean Inventory consisting of finishedmerchandise held for sale in the ordinary course of the business of Borrowerwhich are located either at one of Borrower’s retail stores, its distributioncenter or are in transit from one store location or distribution center toanother store location and which are acceptable to Lender based on the criteriaset forth below except, that, any and all Inventory located at a distributioncenter or retail store within the State of Florida shall not be deemed EligibleInventory unless Lender has received a waiver or consent reasonably acceptableto Lender with respect to such distribution center or retail store and executedby the lessor thereof. In general, Eligible Inventory shall not include (a) rawmaterials, (b) work-in-process; (c) components which are not part of finishedgoods; (d) spare parts for equipment; (e) packaging and shipping materials; (f)supplies used or consumed in Borrower’s business; (g)Inventory at premises notowned or controlled by Borrower except Inventory at retail locations of Borrowerwhich are leased or sub-leased by Borrower and are not sub-leased to anotherPerson, (h) Inventory in transit other than Inventory in transit described inthe immediately preceding sentence; (i) Inventory subject to a security interestor lien in favor of any person other than Lender except those permitted in thisAgreement; (j) Inventory which has been sold and not delivered to a customer,provided, that, Layaway Inventory shall be deemed Eligible Inventory to theextent that it meets all other criteria set forth in this Section 1.14; (k)Inventory which is not subject to the first priority, valid and perfectedsecurity interest of Lender; (l) damaged and/or defective Inventory; (m)Inventory held for return to vendors; (n) Inventory returned by customers andnot held for resale or otherwise used by a customer; (o) Inventory consisting ofsamples and not held for resale; (p) display Inventory; (q) that portion of theValue of Inventory attributable to markdowns not posted to the Inventory retailsystem due to month-end cut-off, or to unearned discounts; and (r) Inventorypurchased or sold on consignment. General criteria for Eligible Inventory may beestablished and revised from time to time by Lender in its reasonable creditjudgment. Any Inventory which is not Eligible Inventory shall nevertheless bepart of the Collateral. 1.15 “Equipment” shall mean all of Borrower’s now owned and hereafteracquired equipment, machinery, computers and computer hardware and software(whether owned or licensed), vehicles, tools, furniture, fixtures, allattachments, accessions and property now or hereafter affixed thereto or used inconnection therewith, and substitutions and replacements thereof, whereverlocated. 1.16 “ERISA” shall mean the United States Employee Retirement IncomeSecurity Act of 1974, as the same now exists or may hereafter from time to timebe amended, modified, recodified or supplemented, together with all rules,regulations and interpretations thereunder or related thereto. 1.17 “ERISA Affiliate” shall mean any person required to be aggregatedwith Borrower or any of its affiliates under Section 414(b) or 414(c) of theCode or, for purposes of Section 412 of the Code, Sections 414(m) or 414(o) ofthe Code. 1.18 “Event of Default” shall mean the occurrence or existence of anyevent or condition described in Section 10.1 hereof. 1.19 “Excess Availability” shall mean the amount, as determined byLender, calculated at any time, equal to: 4 (a) the lesser of (i) the amount of the Revolving Loans availableto Borrower as of such time (based on the applicable advance rate set forth inSection 2.1 (a)(i) hereof multiplied by the Retail Sales Price or AppraisedInventory Value of Eligible Inventory, as applicable, as determined by Lender),subject to the sublimits and Availability Reserves from time to timeestablished by Lender hereunder and (ii) the Maximum Credit, minus (b) the sum of: (i) the amount of all then outstanding and unpaidObligations, (ii) the aggregate amount of all trade payables of Borrower whichare more than sixty (60) days past due as of such time, (iii) the aggregateamount of Borrower’s book overdrafts, and (iv) the aggregate amount ofBorrower’s past due lease and notes payable. 1.20 “Financing Agreements” shall mean, collectively, this Agreement andall notes, guarantees, security agreements and other agreements, documents andinstruments now or at any time hereafter executed and/or delivered by Borroweror any Obligor in connection with this Agreement, as the same now exist or mayhereafter be amended, modified, supplemented, extended, renewed, restated orreplaced. 1.21 “GAAP” shall mean generally accepted accounting principles in theUnited States of America as in effect from time to time as set forth in theopinions and pronouncements of the Accounting Principles Board and the AmericanInstitute of Certified Public Accountants and the statements and pronouncementsof the Financial Accounting Standards Boards which are applicable to thecircumstances as of the date of determination consistently applied, except that,for purposes of Section 9.15 hereof, GAAP shall be determined on the basis ofsuch principles in effect on the date hereof and consistent with those used inthe preparation of the audited financial statements delivered to Lender prior tothe date hereof. 1.22 “Information Certificate” shall mean the Information Certificate ofBorrower constituting Exhibit A hereto containing material information withrespect to Borrower, its business and assets provided by or on behalf ofBorrower to Lender in connection with the preparation of this Agreement and theother Financing Agreements and the financing arrangements provided for herein. 1.23 “Inventory” shall mean all of Borrower’s now owned and hereafterexisting or acquired raw materials, work in process, finished goods and allother inventory of whatsoever kind or nature, wherever located. 1.24 “Inventory Advance Rate” shall mean the advance rate applicable toEligible Inventory as determined in accordance with Section 2.1(a)(i). 1.25 “Layaway Inventory” shall mean Inventory of Borrower for which acustomer of Borrower has made a cash deposit towards the purchase of suchInventory and Borrower has retained title and possession of such Inventory. 1.26 “Letter of Credit Accommodations” shall mean the letters of credit,merchandise purchase or other guaranties which are from time to time either (a)issued, opened or provided by Lender for the account of Borrower or any Obligoror (b) with respect to which Lender has agreed to indemnify the issuer orguaranteed to the issuer the performance by Borrower of its obligations to suchissuer. 5 1.27 “Loans” shall mean the Revolving Loans. 1.28 “Maximum Credit” shall mean, with reference to the Revolving Loans,and the Letter of Credit Accommodations, the amount of Eight Million Dollars($8,000,000). 1.29 “Obligations” shall mean any and all Revolving Loans, the Letter ofCredit Accommodations and all other obligations, liabilities and indebtedness ofevery kind, nature and description owing by Borrower to Lender and/or itsaffiliates, including principal, interest, charges, fees, costs and expenses,however evidenced, whether as principal, surety, endorser, guarantor orotherwise, whether arising under this Agreement or otherwise, whether nowexisting or hereafter arising, whether arising before, during or after theinitial or any renewal term of this Agreement or after the commencement of anycase with respect to Borrower under the United States Bankruptcy Code or anysimilar statute (including, without limitation, the payment of interest andother amounts which would accrue and become due but for the commencement of suchcase), whether direct or indirect, absolute or contingent, joint or several, dueor not due, primary or secondary, liquidated or unliquidated, secured orunsecured, and however acquired by Lender. 1.30 “Obligor” shall mean any guarantor, endorser, acceptor, surety orother person liable on or with respect to the Obligations or who is the owner ofany property which is security for the Obligations, other than Borrower. 1.31 “Participant” shall mean any person which at any time participateswith Lender in respect of the Loans, the Letter of Credit Accommodations orother Obligations or any portion thereof. 1.32 “Payment Account” shall have the meaning set forth in Section 6.3hereof. 1.33 “Person” or “person” shall mean any individual, sole proprietorship,partnership, corporation (including, without limitation, any corporation whichelects subchapter S status under the Internal Revenue Code of 1986, as amended),business trust, limited liability company, unincorporated association, jointstock corporation, trust, joint venture or other entity or any government or anyagency or instrumentality or political subdivision thereof. 1.34 “Prime Rate” shall mean the rate from time to time publiclyannounced by First Union National Bank, or its successors, as its prime rate,whether or not such announced rate is the best rate available at such bank. 1.35 “Purchase Agreements” shall mean, individually and collectively, theAsset Purchase Agreement of even date herewith between Borrower and Seller,together with bills of sale, quitclaim deeds, assignment and assumptionagreements and such other instruments of transfer as are referred to therein andall side letters with respect thereto, and all agreements, documents andinstruments executed and/or delivered in connection therewith, as all of theforegoing now exist or may hereafter be amended, modified, supplemented,extended, renewed, restated or replaced; provided, that, the term “PurchaseAgreements” as used herein shall not include any of the “Financing Agreements”as such term is defined herein. 6 1.36 “Purchased Assets” shall mean all of the assets and propertiesacquired by Borrower from Seller pursuant to the Purchase Agreements. 1.37 “Records” shall mean all of Borrower’s present and future books ofaccount of every kind or nature, purchase and sale agreements, invoices, ledgercards, bills of lading and other shipping evidence, statements, correspondence,memoranda, credit files and other data relating to the Collateral or any accountdebtor, together with the tapes, disks, diskettes and other data and softwarestorage media and devices, file cabinets or containers in or on which theforegoing are stored (including any rights of Borrower with respect to theforegoing maintained with or by any other person). 1.38 “Retail Sales Price” shall mean the retail sales price as reflectedin the Borrower’s MIS System, net of markdowns from the original retail salesprice with respect thereto, for the types, categories and styles of inventoryincluded in the Eligible Inventory of Borrower. 1.39 “Revolving Loans” shall mean the loans now or hereafter made byLender to or for the benefit of Borrower on a revolving basis (involvingadvances, repayments and readvances) as set forth in Section 2.1 hereof. 1.40 “Seller” shall mean Variety Wholesalers, Inc., a North Carolinacorporation, and its successors and assigns. 1.41 “Value” shall mean, as determined by Lender in good faith, withrespect to Inventory, the lower of (a) cost as determined by the retail methodof accounting (which method of accounting includes the netting of markdowns fromthe Retail Sales Price or ticketed sales price under the first-in-first-outmethod, in accordance with GAAP) or (b) market value. 1.42 “Year 2000 Problem” shall have the meaning set forth in Section 9.14hereof.SECTION 2. CREDIT FACILITIES. 2.1 Revolving Loans. (a) Subject to, and upon the terms and conditions containedherein, Lender agrees to make Revolving Loans to Borrower from time to time inamounts requested by Borrower up to the amount equal to the sum of: (i) the least of: (A) sixty-five percent (65%) of the Value of theEligible Inventory; (B) thirty-five percent (35%) of the Retail SalesPrice of the Eligible Inventory;or 7 (C) eighty-five percent (85%) of the AppraisedInventory Value of Eligible Inventory; minus (ii) the then undrawn amounts of outstanding Letter of CreditAccommodations; multiplied by the applicable percentages as provided for inSection 2.2(c)(i)(A) hereof; minus (iii) any Availability Reserves. (b) Lender may, in its discretion, from time to time, upon notless than five (5) days prior notice to Borrower, reduce the lending formula(s)with respect to Eligible Inventory to the extent that Lender determines in goodfaith that: (A) the mix of such Inventory for any period has changed in anymaterially adverse respect or (B) the Appraised Inventory Value of the EligibleInventory, or any category thereof, has decreased in any material respect;provided, however, in the event that Lender reduces such lending formula(s)based on a material decrease in the Appraised Inventory Value, pursuant toclause (B) of this Section 2.1(b), Lender shall not further reduce such lendingformula(s) pursuant to clause (A) of this Section 2.1(b) based on the sameevent, condition, contingency or risk that caused such material decrease in theAppraised Inventory Value. In determining whether to reduce the lendingformula(s), Lender may consider events, conditions, contingencies or risks whichare also considered in determining Eligible Inventory or in establishingAvailability Reserves. (c) Except in Lender’s discretion, the aggregate amount of theLoans, the Letter of Credit Accommodations and other Obligations outstanding atany time shall not exceed the Maximum Credit. In the event that the outstandingamount of any component of the Loans and Letter of Credit Accommodations or theaggregate amount of the outstanding Loans and Letter of Credit Accommodationsand other Obligations exceeds the amounts available under the lending formulasset forth in Section 2.1 (a) hereof, the sublimits for Letter of CreditAccommodations set forth in Section 2.2(d), or the Maximum Credit, asapplicable, such event shall not limit, waive or otherwise affect any rights ofLender in that circumstance or on any future occasions and Borrower shall, upondemand by Lender, which may be made at any time or from time to time,immediately repay to Lender the entire amount of any such excess(es) for whichpayment is demanded. (d) To the extent Lender may revise the lending formula set forthin Section 2.1 (a) hereof or establish new criteria or revise existing criteriafor Eligible Inventory so as to address any circumstance, condition, event orcontingency in a manner satisfactory to Lender, Lender shall not establish anAvailability Reserve for the same purpose. The amount of any AvailabilityReserve established by Lender shall have a reasonable relationship to the event,condition or other matter which is the basis for such reserve as reasonablydetermined by Lender. 2.2 Letter of Credit Accommodations. (a) Subject to, and upon the terms and conditions containedherein, at the request of Borrower, Lender agrees to provide or arrange forLetter of Credit Accommodations for the account of Borrower containing terms andconditions acceptable to Lender and the issuer thereof. Any payments made byLender to any issuer thereof and/or related parties in connection 8with the Letter of Credit Accommodations shall constitute additional RevolvingLoans to Borrower pursuant to this Section 2. (b) In addition to any charges, fees or expenses charged by anybank or issuer in connection with the Letter of Credit Accommodations, Borrowershall pay to Lender a letter of credit fee at a rate equal to one and onequarter percent (1.25%) per annum on the daily outstanding balance of the Letterof Credit Accommodations for the immediately preceding month (or part thereof),payable in arrears as of the first day of each succeeding month; provided,however, that such letter of credit fee shall be increased, at Lender’s optionwithout notice, to three and one quarter percent (3.25%) per annum for theperiod on or after the date of termination or non-renewal of this Agreement, orthe date of the occurrence of an Event of Default. Such letter of credit feeshall be calculated on the basis of a three hundred sixty (360) day year andactual days elapsed and the obligation of Borrower to pay such fee shall survivethe termination or non-renewal of this Agreement. (c) No Letter of Credit Accommodations shall be available unlesson the date of the proposed issuance of any Letter of Credit Accommodations, theRevolving Loans available to Borrower (subject to the Maximum Credit and anyAvailability Reserves) are equal to or greater than: (i) if the proposed Letter of Credit Accommodation is forthe purpose of purchasing Eligible Inventory, the sum of: (A) the product of the Value of such EligibleInventory multiplied by one minus the Inventory Advance Rate under Sections 2.1(a)(i)(A), (B) or (C) hereof, as applicable; plus (B) freight, taxes, duty and other amounts whichLender estimates must be paid in connection with such Inventory upon arrival andfor delivery to one of Borrower’s locations for Eligible Inventory within theUnited States of America; and (ii) if the proposed Letter of Credit Accommodation is forstandby letters of credit guaranteeing the purchase of Eligible Inventory or forany other purpose, an amount equal to one hundred percent (100%) of the faceamount thereof and all other commitments and obligations made or incurred byLender with respect thereto.Effective on the issuance of each Letter of Credit Accommodation, the amount ofRevolving Loans which might otherwise be available to Borrower shall be reducedby the applicable amount set forth in Section 2.2(c)(i) or Section 2.2(c)(ii). (d) Except in Lender’s discretion, the amount of all outstandingLetter of Credit Accommodations and all other commitments and obligations madeor incurred by Lender in connection therewith shall not at any time exceed FiveHundred Thousand Dollars ($500,000). At any time an Event of Default exists orhas occurred and is continuing, upon Lender’s request, Borrower will eitherfurnish cash collateral to secure the reimbursement obligations to the issuer inconnection with any Letter of Credit Accommodations or furnish cash collateralto Lender for the Letter of Credit Accommodations, and in either case, theRevolving Loans otherwise 9available to Borrower shall not be reduced as provided in Section 2.2(c) to theextent of such cash collateral. (e) Borrower shall indemnify and hold Lender harmless from andagainst any and all losses, claims, damages, liabilities, costs and expenseswhich Lender may suffer or incur in connection with any Letter of CreditAccommodations and any documents, drafts or acceptances relating thereto,including, but not limited to, any losses, claims, damages, liabilities, costsand expenses due to any action taken by any issuer or correspondent with respectto any Letter of Credit Accommodation. Borrower assumes all risks with respectto the acts or omissions of the drawer under or beneficiary of any Letter ofCredit Accommodation and for such purposes the drawer or beneficiary shall bedeemed Borrower’s agent. Borrower assumes all risks for, and agrees to pay, allforeign, Federal, State and local taxes, duties and levies relating to any goodssubject to any Letter of Credit Accommodations or any documents, drafts oracceptances thereunder. Borrower hereby releases and holds Lender harmless fromand against any acts, waivers, errors, delays or omissions, whether caused byBorrower, by any issuer or correspondent or otherwise, unless caused by thegross negligence or willful misconduct of Lender, with respect to or relating toany Letter of Credit Accommodation. The provisions of this Section 2.2(e) shallsurvive the payment of Obligations and the termination or non-renewal of thisAgreement. (f) Nothing contained herein shall be deemed or construed to grantBorrower any right or authority to pledge the credit of Lender in any manner.Lender shall have no liability of any kind with respect to any Letter of CreditAccommodation provided by an issuer other than Lender unless Lender has dulyexecuted and delivered to such issuer the application or a guarantee orindemnification in writing with respect to such Letter of Credit Accommodation.Borrower shall be bound by any interpretation reasonably made by Lender, or anyother issuer or correspondent under or in connection with any Letter of CreditAccommodation or any documents, drafts or acceptances thereunder,notwithstanding that such interpretation may be inconsistent with anyinstructions of Borrower. Lender shall have the sole and exclusive right andauthority to, and Borrower shall not at any time an Event of Default exists orhas occurred and is continuing, (i) approve or resolve any questions ofnon-compliance of documents, (ii) give any instructions as to acceptance orrejection of any documents or goods, (iii) execute any and all applications forsteamship or airway guaranties, indemnities or delivery orders, (iv) grant anyextensions of the maturity of, time of payment for, or time of presentation of,any drafts, acceptances, or documents, or (v) agree to any amendments, renewals,extensions, modifications, changes or cancellations of any of the terms orconditions of any of the applications, Letter of Credit Accommodations, ordocuments, drafts or acceptances thereunder or any letters of credit included inthe Collateral. Lender may take such actions either in its own name or inBorrower’s name. (g) Any rights, remedies, duties or obligations granted orundertaken by Borrower to any issuer or correspondent in any application for anyLetter of Credit Accommodation, or any other agreement in favor of any issuer orcorrespondent relating to any Letter of Credit Accommodation, shall be deemed tohave been granted or undertaken by Borrower to Lender. Any duties or obligationsundertaken by Lender to any issuer or correspondent in any application for anyLetter of Credit Accommodation, or any other agreement by Lender in favor of anyissuer or correspondent relating to any Letter of Credit 10Accommodation, shall be deemed to have been undertaken by Borrower to Lender andto apply in all respects to Borrower.SECTION 3. INTEREST AND FEES. 3.1. Interest. (a) Borrower shall pay to Lender interest on the outstandingprincipal amount of the non-contingent Obligations at the rate of three-quartersof one percent (.75%) per annum in excess of the Prime Rate, except thatBorrower shall pay to Lender interest, at Lender’s option, without notice, atthe rate of two and three quarters percent (2.75%) per annum in excess of thePrime Rate: (i) on the non-contingent Obligations for the period fromand after the date of termination or non-renewal hereof, or the date of theoccurrence of an Event of Default, and for so long as such Event of Default iscontinuing as determined by Lender and until such time as Lender has receivedfull and final payment of all such Obligations (notwithstanding entry of anyjudgment against Borrower) and (ii) on the Revolving Loans at any time outstanding in excessof the amounts available to Borrower under Section 2 (whether or not suchexcess(es) arise or are made with or without Lender’s knowledge or consent andwhether made before or after an Event of Default). All interest accruinghereunder on and after the occurrence of any of the events referred to inSections 3.1(a)(i) or 3.1(a)(ii) above shall be payable on demand. (b) Interest shall be payable by Borrower to Lender monthly inarrears not later than the first day of each calendar month and shall becalculated on the basis of a three hundred sixty (360) day year and actual dayselapsed. The interest rate shall increase or decrease by an amount equal to eachincrease or decrease in the Prime Rate effective on the first day of the monthafter any change in such Prime Rate is announced based on the Prime Rate ineffect on the last day of the month in which any such change occurs. In no eventshall charges constituting interest payable by Borrower to Lender exceed themaximum amount or the rate permitted under any applicable law or regulation, andif any part or provision of this Agreement is in contravention of any such lawor regulation, such part or provision shall be deemed amended to conformthereto. 3.2 Closing Fee. Borrower shall pay to Lender as a closing fee EightyThousand Dollars ($80,000), which fee shall be fully earned as of and payable onthe date hereof. Lender and Borrower hereby acknowledge that Borrower has paidto Lender Twenty-Five Thousand Dollars ($25,000) as a deposit against expensesincurred by Lender. Such deposit shall be: (a) retained by Lender and creditedto the loan account of Borrower, less the cost of Lender’s field examinations,legal fees and other expenses directly related to the loan application andcredit review if the loans contemplated hereunder are funded or (b) retained byLender as a fee in addition to expenses payable by Borrower as set forth inclause (a) hereof if the initial loans contemplated hereunder are not fundedprior to April 20,1999, whether as a result of Borrower’s election not to dobusiness with Lender or a failure to fulfill any of the conditions of theproposed financing as approved by Lender. 11 3.3 Loan Servicing Fee. In addition to any fees or expenses payable byBorrower under Section 9.16 hereof, Borrower shall pay to Lender an annual loanservicing fee in an amount equal to Ten Thousand Dollars ($10,000), in respectof Lender’s services for each year (or part thereof) while this Agreementremains in effect and for so long thereafter as any of the Obligations areoutstanding, which fee shall be fully earned as of the date hereof and on eachannual anniversary hereafter, such annual loan servicing fee to be payable on aquarterly basis, in advance, with the first such quarterly payment payable onthe date hereof and on the first day of each quarter hereafter. 3.4 Compensation Adjustment. (a) If after the date of this Agreement the introduction of, orany change in, any law or any governmental rule, regulation, policy, guidelineor directive (whether or not having the force of law), or any interpretationthereof, or compliance by Lender or any Participant therewith: (i) subjects Lender to any tax, duty, charge or withholdingon or from payments due from Borrower (excluding franchise taxes imposed upon,and taxation of the overall net income of, Lender or any Participant), orchanges the basis of taxation of payments, in either case in respect of amountsdue it hereunder, or (ii) imposes or increases or deems applicable any reserverequirement or other reserve, assessment, insurance charge, special deposit orsimilar requirement against assets of, deposits with or for the account of, orcredit extended by Lender or any Participant, or (iii) imposes any other condition the result of which is toincrease the cost to Lender or any Participant of making, funding or maintainingthe Loans or Letter of Credit Accommodations or reduces any amount receivable byLender or any Participant in connection with the Loans or Letter of CreditAccommodations, or requires Lender or any Participant to make payment calculatedby references to the amount of loans held or interest received by it, by anamount deemed material by Lender or any Participant, or (iv) imposes or increases any capital requirement or affectsthe amount of capital required or expected to be maintained by Lender or anyParticipant or any corporation controlling Lender or any Participant, and Lenderor any Participant reasonably determines that such imposition or increase incapital requirements or increase in the amount of capital expected to bemaintained is based upon the existence of this Agreement or the Loans or Letterof Credit Accommodations hereunder, all of which may be determined by Lender’sreasonable allocation of the aggregate of its impositions or increases incapital required or expected to be maintained, and the result of any of theforegoing is to increase the cost to Lender or any Participant of making,renewing or maintaining the Loans or Letter of Credit Accommodations, or toreduce the rate of return to Lender or any Participant on the Loans or Letter ofCredit Accommodations, then upon demand by Lender, Borrower shall pay to Lender,and continue to make periodic payments to Lender or any Participant, suchadditional amounts as may be necessary to compensate Lender or any Participantfor any such additional cost incurred or reduced rate of return realized. 12 (b) A certificate of Lender claiming entitlement to compensationas set forth above will create a rebuttable presumption that it is conclusive inthe absence of manifest error. Such certificate will set forth the nature of theoccurrence giving rise to such compensation, the additional amount or amounts tobe paid and the compensation and the method by which such amounts weredetermined. In determining any additional amounts due from Borrower under thisSection 3.4, Lender shall act reasonably and in good faith and will, to theextent that the increased costs, reductions, or amounts received or receivablerelate to the Lender’s or a Participant’s loans or commitments generally and arenot specifically attributable to the Loans and commitments hereunder, useaveraging and attribution methods which are reasonable and equitable and whichcover all loans and commitments under this Agreement by the Lender or suchParticipant, as the case may be, whether or not the loan documentation for suchother loans and commitments permits the Lender or such Participant to receivecompensation costs of the type described in this Section 3.4.SECTION 4. CONDITIONS PRECEDENT. 4.1 Conditions Precedent to Initial Loans and the Letter of CreditAccommodations. Each of the following is a condition precedent to Lender makingthe initial Loans and providing the initial Letter of Credit Accommodationshereunder: (a) Lender shall have received, in form and substance satisfactoryto Lender, evidence that the Purchase Agreements have been duly executed anddelivered by and to the appropriate parties thereto and the transactionscontemplated under the terms of the Purchase Agreements have been consummatedprior to or contemporaneously with the making of the initial Loans to Borrowerhereunder; it being understood by the parties hereto that if the transactionscontemplated under the terms of the Purchase Agreements are not consummated onor before April 20, 1999, notwithstanding any provision to the contrarycontained in this Agreement or the other Financing Agreements (including, butnot limited to Section 12.1(b) hereof), neither Lender nor Borrower shall haveany obligations to the other party hereunder or under the other FinancingAgreements; provided, however, that in such event, Borrower hereby agrees to payand satisfy in full the obligations of ING Equity Partners II, L.P. and itssuccessors or assigns to pay Lender’s costs and expenses under that certainProposal Letter Agreement dated as of February 25,1999 addressed to GeorgeBellino of The Bellino Group, and that this Agreement and the other FinancingAgreements shall terminate as of the date of such event; (b) Lender shall have received, in form and substance satisfactoryto Lender, all releases, terminations and such other documents as Lender mayrequest to evidence and effectuate the termination of any interest in and to anyassets and properties of Borrower, duly authorized, executed and delivered by itor each of them, including, but not limited to, UCC termination statements forall UCC financing statements and Lender shall have satisfied itself that it hasvalid, perfected and first priority security interests in and liens upon theCollateral and any other property which is intended as security for theObligations or the liability of any Obligor in respect thereto, subject only tothe security interests and liens permitted herein or in the other FinancingAgreements; 13 (c) all requisite corporate action and proceedings in connectionwith this Agreement and the other Financing Agreements shall be satisfactory inform and substance to Lender, and Lender shall have received all information andcopies of all documents, including, without limitation, records of requisitecorporate action and proceedings which Lender may have requested in connectiontherewith, such documents where requested by Lender or its counsel to becertified by appropriate corporate officers or governmental authorities; (d) no material adverse change shall have occurred in the assetsor business prospects of Borrower or the Allied Fashion for Less division ofSeller since the date of Lender’s latest field examination and no change orevent shall have occurred which would materially impair the ability of Borroweror any Obligor to perform its obligations hereunder or under any of the otherFinancing Agreements to which it is a party or of Lender to enforce theObligations or realize upon the Collateral; (e) Lender shall have completed a field review of the Records andof such other financial information, projections, budgets, business plans, cashflows as Lender shall reasonably request from time to time, including, but notlimited to, current agings of receivables, current perpetual inventory recordsand/or rollforwards of Accounts and Inventory through the date of closing(including a physical count of the Inventory by a third party acceptable toLender), together with supporting documentation, including documentation withrespect to Inventory in-transit, goods in bonded warehouses or at otherthird-party locations, that will enable Lender to accurately identify and verifythe Eligible Inventory at or before the date hereof in a manner reasonablysatisfactory to Lender, the results of which shall be reasonably satisfactory toLender; (f) Borrower shall have used its best efforts to obtain, in formand substance satisfactory to Lender, all consents, waivers, acknowledgments andother agreements from lessors of all premises leased by Borrower, acknowledgingLender’s security interests in the Collateral, waivers by such persons of anysecurity interests, liens or other claims by such persons to the Collateral andagreements permitting Lender access to, and the right to remain on, the premisesto exercise its rights and remedies and otherwise deal with the Collateral; (g) all Credit Card Processors shall have been irrevocablydirected by the parties to Credit Card Agreements, and such Credit CardProcessors shall agree, that all proceeds of Credit Card Receivables shall beremitted to the Blocked Account; (h) Lender shall have received evidence of insurance and losspayee endorsements required hereunder and under the other Financing Agreements,in form and substance satisfactory to Lender, and certificates of insurancepolicies and/or endorsements naming Lender as loss payee; (i) Lender shall have received, in form and substance satisfactoryto Lender, such opinion letters of counsel to Borrower with respect to thePurchase Agreements, the Financing Agreements and the security interests andliens of Lender with respect to the Collateral and such other matters as Lendermay reasonably request; 14 (j) the Borrower shall have Excess Availability, as determined byLender as of the date hereof, in an amount not less than One Million FiveHundred Thousand Dollars ($1,500,000) after giving effect to the initial Loansmade or to be made hereunder and the payment of all fees and expenses payableupon the consummation of the initial transactions contemplated by thisAgreement, and provided that Borrower’s accounts payable, notes and leasespayable and book overdrafts (including those acquired or to be acquired byBorrower from Allied Fashion for Less) are acceptable to Lender in all respects; (k) Crestar Bank, Lender and Borrower shall have entered into anagreement, pursuant to which Crestar Bank has acknowledged Lender’s securityinterests in the funds deposited into Borrower’s collection account with CrestarBank and has agreed to direct all such funds to the Blocked Account or as Lenderotherwise directs; (l) Lender shall have received, in form and substance satisfactoryto Lender, an executed copy of a Blocked Account agreement, pursuant to Section6.3(a)(ii) hereof, among Lender, Borrower and First Union National Bank; (m) the other Financing Agreements and all instruments anddocuments hereunder and thereunder shall have been duly executed and deliveredto Lender, in form and substance satisfactory to Lender; (n) Lender shall have received, in form and substance satisfactoryto Lender, an estimated pro-forma balance sheet of Borrower reflecting theinitial transactions contemplated hereunder, including, but not limited to, (i)the consummation of the acquisition of the Purchased Assets by Borrower fromSeller and the other transactions contemplated by the Purchase Agreements and(ii) the Loans and Letter of Credit Accommodations provided by Lender toBorrower on the date hereof and the use of the proceeds of the initial Loans asprovided herein, accompanied by a certificate, dated of even date herewith, ofthe chief financial officer of Borrower stating that such pro-forma balancesheet represents the reasonable, good faith opinion of such officer as to thesubject matter thereof as of the date of such certificate; (o) Lender shall have received, in form and substance satisfactoryto Lender, evidence that Borrower has received net cash proceeds from a cashequity capital contribution to Borrower of not less than Six Million EightHundred Ninety-Five Thousand Dollars ($6,895,000) and such proceeds have beenapplied to the purchase price of the Purchased Assets payable pursuant to thePurchase Agreements; (p) the conditions precedent set forth in this Section 4.1 shallhave been satisfied and the initial funding of the Loans contemplated hereundershall have occurred on or prior to April 20,1999; (q) Lender shall have received the Information Certificateexecuted by Borrower and a certificate, in form and substance satisfactory toLender, certifying that all representations and warranties contained herein andin the other Financing Agreements, including, without limitation, theinformation set forth in the Information Certificate and the Schedules hereto,are true and correct in all material respects and any exceptions to suchcertificate or changes to the Information Certificate or Schedules hereto (otherthan changes to 15Schedule 8.7 deleting therefrom Borrower’s violation of certain regulations ofthe Occupational Safety and Hazard Act of 1970, as amended) shall be acceptableto Lender in its sole discretion; (r) receipt of physical inventory count results as conducted by anindependent third party reasonably acceptable to Lender; (s) Lender shall have received evidence, in form and substancereasonably satisfactory to Lender, that any funds released by the Escrow Agentunder the Purchase Price Escrow Agreement (as defined in the PurchaseAgreements) to Borrower shall be paid directly into the Payment Account; and (t) if Borrower acquires any federally registered trademarks orthe rights to any applications therefor pending with the United States Patentand Trademark Office from Seller pursuant to the Purchase Agreements, Borrowershall have executed a Collateral Assignment of Trademarks, in form and substancesatisfactory to Lender, in favor of Lender with respect to such existing orfuture trademarks. 4.2 Conditions Precedent to All Loans and Letter of CreditAccommodations. Each of the following is an additional condition precedent toLender making Loans and/or providing Letter of Credit Accommodations toBorrower, including the initial Loans and Letter of Credit Accommodations andany future Loans and Letter of Credit Accommodations: (a) all representations and warranties contained herein and in theother Financing Agreements shall be true and correct in all material respectswith the same effect as though such representations and warranties had been madeon and as of the date of the making of each such Loan or providing each suchLetter of Credit Accommodation and after giving effect thereto; and (b) no Event of Default and no event or condition which, withnotice or passage of time or both, would constitute an Event of Default, shallexist or have occurred and be continuing on and as of the date of the making ofsuch Loan or providing each such Letter of Credit Accommodation and after givingeffect thereto. 4.3 Condition Subsequent to Initial Loans and Letter of CreditAccommodations. Within sixty (60) days of the date that the initial Loanscontemplated hereunder are made, each of the depository banks used by Borrower’sretail store locations for the deposit of receipts from the sale of merchandiseor for the deposit of other proceeds of Collateral and other property which issecurity for the Obligations shall have been notified of Lender’s securityinterests therein and shall have been irrevocably authorized and directed tosend all funds on deposit with such banks only to the Blocked Account or asLender otherwise directs, and the failure to complete this condition to Lender’ssatisfaction within the time frame set forth herein shall constitute an Event ofDefault. 16SECTION 5. GRANT OF SECURITY INTEREST. To secure payment and performance of all Obligations, Borrower herebygrants to Lender a continuing security interest in, a lien upon, and a right ofset off against, and hereby assigns to Lender as security, the followingproperty and interests in property, whether now owned or hereafter acquired orexisting, and wherever located (collectively, the “Collateral”): 5.1 Accounts, Credit Card Receivables and other indebtedness owed to theBorrower; 5.2 all present and future contract rights, general intangibles(including, but not limited to, tax and duty refunds, registered andunregistered patents, trademarks, service marks, copyrights, trade names,applications for the foregoing, trade secrets, goodwill, processes, drawings,blueprints, customer lists, licenses, whether as licensor or licensee, choosesin action and other claims and existing and future leasehold interests inequipment, real estate and fixtures), chattel paper, documents, instruments,investment property, letters of credit, proceeds of letters of credit, bankers’acceptances and guaranties; 5.3 all present and future monies, securities, credit balances,deposits, deposit accounts and other property of Borrower now or hereafter heldor received by or in transit to Lender or its affiliates or at any otherdepository or other institution from or for the account of Borrower, whether forsafekeeping, pledge, custody, transmission, collection or otherwise, and allpresent and future liens, security interests, rights, remedies, title andinterest in, to and in respect of Accounts, Credit Card Receivables, and otherCollateral, including, without limitation, (a) rights and remedies under orrelating to guaranties, contracts of suretyship, letters of credit and creditand other insurance related to the Collateral, (b) rights of stoppage intransit, replevin, repossession, reclamation and other rights and remedies of anunpaid vendor, lienor or secured party, (c) goods described in invoices,documents, contracts or instruments with respect to, or otherwise representingor evidencing, Accounts, Credit Card Receivables, or other Collateral,including, without limitation, returned, repossessed and reclaimed goods, and(d) deposits by and property of account debtors or other persons securing theobligations of account debtors; 5.4 Inventory; 5.5 Equipment; 5.6 Records; and 5.7 all products and proceeds of the foregoing, in any form, including,without limitation, insurance proceeds and all claims against third parties forloss or damage to or destruction of any or all of the foregoing.SECTION 6. COLLECTION AND ADMINISTRATION. 6.1 Borrower’s Loan Account. Lender shall maintain one or more loanaccount(s) on its books in which shall be recorded (a) all Loans, all Letter ofCredit Accommodations and all other Obligations and the Collateral, (b) allpayments made by or on behalf of Borrower and 17(c) all other appropriate debits and credits as provided in this Agreement,including, without limitation, fees, charges, costs, expenses and interest. Allentries in the loan account(s) shall be made in accordance with Lender’scustomary practices as in effect from time to time. 6.2 Statements. Lender shall render to Borrower each month a statementsetting forth the balance in the Borrower’s loan account(s) maintained by Lenderfor Borrower pursuant to the provisions of this Agreement, including principal,interest, fees, costs and expenses. Each such statement shall be subject tosubsequent adjustment by Lender but shall, absent manifest errors or omissions,be considered correct and deemed accepted by Borrower and conclusively bindingupon Borrower as an account stated except to the extent that Lender receives awritten notice from Borrower of any specific exceptions of Borrower theretowithin thirty (30) days after the date such statement has been mailed by Lender.Until such time as Lender shall have rendered to Borrower a written statement asprovided above, the balance in Borrower’s loan account(s) shall be presumptiveevidence of the amounts due and owing to Lender by Borrower. 6.3 Collection of Accounts. (a) Borrower shall establish and maintain, at its expense, depositaccount arrangements and merchant payment arrangements with the banks set forthon Schedule 6.3 and after prior written notice to Lender, such other banks asBorrower may hereafter select as are acceptable to Lender. The banks set forthon Schedule 6.3 constitute all of the banks with whom Borrower has depositaccount arrangements and merchant payment arrangements as of the date hereof andidentifies each of the deposit accounts at such banks to a retail store locationof Borrower or otherwise describes the nature of the use of such deposit accountby Borrower. (i) Borrower shall deposit all proceeds from sales ofInventory in every form (including, without limitation, cash, checks, creditcard sales drafts, credit card sales or charge slip or receipts and other formsof daily store receipts) from each retail store location of Borrower, and allother proceeds of Collateral, on each Business Day into the deposit accounts ofBorrower used solely for such purpose and identified to each retail storelocation as set forth on Schedule 6.3. Borrower shall irrevocably authorize anddirect in writing, in form and substance satisfactory to Lender, each of thebanks into which proceeds from sales of Inventory from each retail storelocation of Borrower and any and all other proceeds of Collateral are at anytime deposited as provided above to send by wire transfer on a daily basis allfunds deposited in such account, and shall irrevocably authorize and direct inwriting its account debtors, Credit Card Issuers and Credit Card Processors todirectly remit payments on its Accounts, Credit Card Receivables and all otherpayments constituting proceeds of Inventory to the Blocked Accounts described inSection 6.3(a)(ii) below. Such authorizations and directions shall not berescinded, revoked or modified without the prior written consent of Lender. (ii) Borrower shall establish and maintain, at its expense,pursuant to an agreement described in the following sentence, a blocked accountwith such bank or banks as are acceptable to Lender (each a “Blocked Account”and collectively the “Blocked Accounts”). Each bank at which a Blocked Accountis established shall enter into an agreement, in form and substance satisfactoryto Lender, providing (unless otherwise agreed to by Lender) that all itemsreceived or deposited in such Blocked Account are the Collateral of Lender, thatthe depository bank has no lien upon, or right to setoff against, the BlockedAccounts, the items received for 18deposit therein, or the funds from time to time on deposit therein, and that thedepository bank will wire, or otherwise transfer, in immediately availablefunds, on a daily basis, all funds received or deposited into such BlockedAccount to such bank account of Lender as Lender may from time to time designatefor such purpose (the “Payment Account”). Borrower agrees that all amountsdeposited in the Blocked Account[s] or other funds received and collected byLender, whether as proceeds of Inventory, the collection of Accounts or otherCollateral or otherwise shall be the Collateral of Lender. (b) For purposes of calculating interest on the Obligations, suchpayments or other funds received will be applied (conditional upon finalcollection) to the Obligations on the Business Day following the date of receiptof immediately available funds by Lender in the Payment Account, or on theBusiness Day following the date of receipt of funds that are not immediatelyavailable to Lender in the Payment Account, as applicable. For purposes ofcalculating the amount of the Revolving Loans available to Borrower suchpayments will be applied (conditional upon final collection) to the Obligationson the Business Day of receipt by Lender in the Payment Account, if suchpayments are received within sufficient time (in accordance with Lender’s usualand customary practices as in effect from time to time) to credit Borrower’sloan account on such day, and if not, then on the next Business Day. If nomonetary obligations by Borrower are outstanding on any day, Borrower shall payinterest at the applicable rate set forth in Section 3.1(a) on the amount ofany payments or other funds that are received by Lender (irrespective of thecharacterization whether receipts are owned by Lender or Borrower) for such day. (c) Borrower and all of its affiliates, subsidiaries,shareholders, directors, employees or agents shall, acting as trustee forLender, receive, as the property of Lender, any monies, cash, checks, creditcard sales drafts, credit card sales or charge slips or receipts, notes, draftsand all forms of daily store receipts or any other payment relating to and/orproceeds from sales of Inventory or other Collateral which come into theirpossession or under their control and immediately upon receipt thereof, shalldeposit or cause the same to be deposited in the Blocked Accounts, or remit thesame or cause the same to be remitted, in kind, to Lender. In no event shall anysuch monies, checks, credit card sales drafts, credit card sales or charge slipsor receipts, notes, drafts or other payments be commingled with Borrower’s ownfunds. Borrower agrees to reimburse Lender on demand for any amounts owed orpaid to any bank at which a Blocked Account is established or any other bank orperson involved in the transfer of funds to or from the Blocked Accounts arisingout of Lender’s payments to or indemnification of such bank or person, unlesssuch payment or indemnification obligation of Lender was a result of Lender’sgross negligence or willful misconduct. The obligation of Borrower to reimburseLender for such amounts pursuant to this Section 6.3 shall survive thetermination or non-renewal of this Agreement. 6.4 Payments. All Obligations shall be payable to the Payment Account asprovided in Section 6.3 or such other place as Lender may designate from time totime. Lender may apply payments received or collected from Borrower or for theaccount of Borrower (including, without limitation, the monetary proceeds ofcollections or of realization upon any Collateral) to such of the Obligations,whether or not then due, in such order and manner as Lender determines. AtLender’s option, all principal, interest, fees, costs, expenses and othercharges provided for in this Agreement or the other Financing Agreements may becharged 19directly to the loan accounts of Borrower. Borrower shall make all payments toLender on the Obligations free and clear of, and without deduction orwithholding for or on account of, any setoff, counterclaim, defense, duties,taxes, levies, imposts, fees, deductions, withholding, restrictions orconditions of any kind. If after receipt of any payment of, or proceeds ofCollateral applied to the payment of, any of the Obligations, Lender is requiredto surrender or return such payment or proceeds to any Person for any reason,then the Obligations intended to be satisfied by such payment or proceeds shallbe reinstated and continue and this Agreement shall continue in full force andeffect as if such payment or proceeds had not been received by Lender. Borrowershall be liable to pay to Lender, and docs hereby indemnify and hold Lenderharmless for the amount of any payments or proceeds surrendered or returned.This Section 6.4 shall remain effective notwithstanding any contrary actionwhich may be taken by Lender in reliance upon such payment or proceeds. ThisSection 6.4 shall survive the payment of the Obligations and the termination ornon-renewal of this Agreement. 6.5 Authorization to Make Loans. Lender is authorized to make the Loansand provide Letter of Credit Accommodations based upon telephonic or otherinstructions received from anyone purporting to be an officer of Borrower orother authorized person or, at the discretion of Lender, if such Loans arenecessary to satisfy any Obligations. All requests for Loans or Letter of CreditAccommodations hereunder shall specify the date on which the requested advanceis to be made or Letter of Credit Accommodations established (which day shall bea Business Day) and the amount of the requested Loan. Requests received after1:45 p.m. (New York time) on any day shall be deemed to have been made as of theopening of business on the immediately following Business Day. All Loans andLetter of Credit Accommodations under this Agreement shall be conclusivelypresumed to have been made to, and at the request of and for the benefit of,Borrower when deposited to the credit of Borrower or otherwise disbursed orestablished in accordance with the instructions of Borrower or in accordancewith the terms and conditions of this Agreement. 6.6 Use of Proceeds. Borrower shall use the initial proceeds of theLoans provided by Lender to Borrower hereunder only for: (a) payments to each ofthe persons listed in the disbursement direction letter furnished by Borrower toLender on or about the date hereof and (b) costs, expenses and fees inconnection with the preparation, negotiation, execution and delivery of thisAgreement and the other Financing Agreements. All other Loans made or Letter ofCredit Accommodations provided by Lender to Borrower pursuant to the provisionshereof shall be used by Borrower only for the acquisition under the PurchaseAgreements and for general operating, working capital and other proper corporatepurposes of Borrower not otherwise prohibited by the terms hereof. None of theproceeds will be used, directly or indirectly, for the purpose of purchasing orcarrying any margin security or for the purposes of reducing or retiring anyindebtedness which was originally incurred to purchase or carry any marginsecurity or for any other purpose which might cause any of the Loans to beconsidered a “purpose credit” within the meaning of Regulation U of the Board ofGovernors of the Federal Reserve System, as amended. 20SECTION 7. COLLATERAL REPORTING AND COVENANTS. 7.1 Collateral Reporting. Borrower shall provide Lender with thefollowing documents in a form satisfactory to Lender: (a) on a monthly basis, on or before the tenth (10th) Business Dayafter the closing date for the immediately preceding monthly period for suchperiod or more frequently Lender may reasonably request: (i) perpetual inventory reports; (ii) inventory reports by category; (iii) summary agings of accounts payable, lease payables andother payables; (iv) summary reports of sales for each category of Inventory; (v) summary reports on sales and use tax collections,deposits and payments, including monthly sales and use tax accruals; (vi) reports on Accounts, Credit Card Receivables, and otherindebtedness owed to Borrower, including aggregate outstanding amounts bycategory, payments, accruals and returns and other credits; (vii) a certificate from an authorized officer of Borrowerrepresenting that Borrower has made payment of sales and use taxes during suchmonth or, at Lender’s request, other evidence of such payment; and (viii) a schedule of the Inventory of Borrower by retail storeand warehouse location of Borrower, setting forth the aggregate cost and RetailSales Price of such Inventory located at each such retail store or warehouselocation; (b) on the Monday of each week, as of the immediately precedingBusiness Day, or more frequently as Lender may reasonably request, a schedule ofthe Inventory of Borrower, setting forth the aggregate cost and Retail SalesPrice of such Inventory; (c) on the Monday of each week for the immediately preceding weekending on the close of business on the Friday of that week or more frequently asLender may reasonable request: (i) reports of deposits in each of Borrower’s depositoryaccounts and in the Blocked Account and amounts retained by Borrower, togetherwith the separate amounts thereof arising from cash sales, Credit CardReceivables; (ii) except as otherwise agreed in writing by Lender, reportsof the costs and other information as required by Lender of Inventory andother goods which are either 21acquired by Borrower with Letter of Credit Accommodations which are the subjectof bills of lading and which have not been delivered to Borrower at thepermitted locations of Eligible Inventory in the United States; (iii) summary reports of sales of Inventory, indicating grosssales, returns, allowances and net sales; and (iv) summary reports of all Inventory purchases (includingall costs related thereto, such as freight, duty and taxes) and identifyingitems of Inventory in transit to Borrower related to the applicable documentaryletter of credit and/or bill of lading number, (d) on a quarterly basis, on or before the tenth (10th) BusinessDay after the end of each of Borrower’s fiscal quarters for the immediatelypreceding fiscal quarter period, or more frequently as Lender may reasonablyrequest: (i) reports by retail store location of sales and operatingprofits for each such retail store location; and (ii) agings of accounts receivable; (e) upon Lender’s reasonable request: (i) copies of customer statements and credit memos,remittance advices and reports, and copies of deposit slips and bank statements; (ii) copies of shipping and delivery documents; (iii) copies of purchase orders, invoices and deliverydocuments for Inventory and Equipment acquired by Borrower; and (iv) the results of periodic counts of Inventory performed byan independent firm satisfactory to Lender, (f) as soon as available, but in any event not later than ten (10)days after receipt by Borrower, the monthly statements received by Borrower fromany Credit Card Issuers or Credit Card Processors, together with such additionalinformation with respect thereto as shall be sufficient to enable Lender tomonitor the transactions pursuant to the Credit Card Agreements; and (g) such other reports as to the Collateral or other propertywhich is security for the Obligations, projections, budgets, business plans,statements of cash flow and other information as Lender shall reasonably requestfrom time to time.If any of Borrower’s records or reports of the Collateral or other propertywhich is security for the Obligations are prepared or maintained by anaccounting service, contractor, shipper or other agent, Borrower herebyirrevocably authorizes such service, contractor, shipper or agent to deliversuch records, reports, and related documents to Lender and to follow Lender’s 22instructions with respect to further services at any time that an Event ofDefault exists or has occurred and is continuing. 7-2 Accounts Covenants. (a) No credit, discount, allowance or extension or agreement forany of the foregoing shall be granted to any Credit Card Issuer or Credit CardProcessor except in the ordinary course of Borrower’s business in accordancewith its most recent past practices and policies. So long as no Event of Defaultexists or has occurred and is continuing, Borrower may settle, adjust orcompromise any claim, offset, counterclaim or dispute with any Credit CardIssuer or Credit Card Processor in the ordinary course of Borrower’s business inaccordance with its most recent past practices and policies. At any time that anEvent of Default exists or has occurred and is continuing, Lender shall, at itsoption, have the exclusive right to settle, adjust or compromise any claim,offset, counterclaim or dispute with account debtors, Credit Card Issuers orCredit Card Processors or grant any credits, discounts or allowances. (b) Borrower shall notify Lender promptly of: (i) any notice of a material default by Borrower under anyof the Credit Card Agreements or of any default which might result in the CreditCard Issuer or Credit Card Processor ceasing to make payments or suspendingpayments to Borrower, (ii) any notice from any Credit Card Issuer or Credit CardProcessor that such person is ceasing or suspending, or will cease or suspend,any present or future payments due or to become due to Borrower from suchperson, or that such person is terminating or will terminate any of the CreditCard Agreements; and (iii) the failure of Borrower to comply with any materialterms of the Credit Card Agreements or any terms thereof which might result inthe Credit Card Issuer or Credit Card Processor ceasing or suspending paymentsto Borrower. (c) With respect to each Account: (i) the amounts shown on any invoice delivered to Lender orschedule thereof delivered to Lender shall be true and complete; (ii) no payments shall be made thereon except paymentsdelivered to Lender pursuant to the terms of this Agreement; (iii) no credit, discount, allowance or extension or agreementfor any of the foregoing shall be granted to any Credit Card Issuer or CreditCard Processor, except as reported to Lender in accordance with this Agreementand except for credits, discounts, allowances or extensions made or given in theordinary course of Borrower’s business in accordance with practices and policiespreviously disclosed to Lender; and (iv) none of the transactions giving rise thereto willviolate any applicable State or Federal Laws or regulations, all documentationrelating thereto will be legally 23sufficient under such laws and regulations and all such documentation will belegally enforceable in accordance with its terms. (d) Lender may, at any time or times that an Event of Defaultexists or has occurred: (i) notify any or all account debtors, Credit Card Issuersand Credit Card Processors that the Accounts have been assigned to Lender andthat Lender has a security interest therein and Lender may direct any or allaccount debtors, Credit Card Issuers and Credit Card Processors to make paymentsof Accounts directly to Lender, (ii) extend the time of payment of, compromise, settle oradjust for cash, credit, return of merchandise or otherwise, and upon any termsor conditions, any and all Accounts or other obligations included in theCollateral and thereby discharge or release the account debtor or any otherparty or parties in any way liable for payment thereof without affecting any ofthe Obligations; (iii) demand, collect or enforce payment of any Accounts orsuch other obligations, but without any duty to do so, and Lender shall not beliable for its failure to collect or enforce the payment thereof or for thenegligence of its agents or attorneys with respect thereto except, for, Lender’sfailure to collect or enforce the foregoing due to Lender’s gross negligence orintentional misconduct; and (iv) take whatever other action Lender may deem reasonablynecessary or desirable for the protection of its interests.At any time that an Event of Default exists or has occurred and is continuing,at Lender’s request, all invoices and statements sent to any account debtor,Credit Card Issuer or Credit Card Processor shall state that the Accounts duefrom such account debtor, Credit Card Issuer or Credit Card Processor and suchother obligations have been assigned to Lender and are payable directly and onlyto Lender and Borrower shall deliver to Lender such originals of documentsevidencing the sale and delivery of goods or the performance of services givingrise to any Accounts as Lender may require. 7.3 Inventory Covenants. With respect to the Inventory: (a) Borrower shall at all times maintain inventory recordsreasonably satisfactory to Lender, keeping correct and accurate recordsitemizing and describing the kind, type, quality and quantity of Inventory,Borrower’s cost therefor, the Retail Sales Price thereof and daily withdrawalstherefrom and additions thereto; (b) Borrower shall cause a third party firm reasonably acceptableto Lender to conduct a complete physical count of the Inventory at a minimum ofonce over every twelve (12) month period (whether by cycle count or otherwise),except, that, (i) upon the occurrence of an Event of Default which results in anacceleration of payment of all Obligations pursuant to Section 10.2(b) hereof,such physical count shall be conducted at any time Lender may request and (ii)upon the occurrence of an Event of Default which does not result in suchacceleration of payment of all Obligations, such physical count shall beconducted at any time as Lender may 24request but no more than once in any three (3) month period, and promptlyfollowing any such physical count, such firm shall supply Lender with a reportin the form and with such specificity as may be reasonably satisfactory toLender concerning such physical count; (c) Borrower shall not remove any Inventory from the locations setforth or permitted herein, without the prior written consent of Lender, exceptfor sales of Inventory in the ordinary course of Borrower’s business and exceptto move Inventory directly from one location set forth or permitted herein toanother such location; (d) upon Lender’s request, Borrower shall, at its expense, no morethan one time in any twelve (12) month period, but at any time or times asLender may request upon the occurrence of an Event of Default, deliver or causeto be delivered to Lender written reports or appraisals as to the Inventory inform, scope and methodology acceptable to Lender by an appraiser acceptable toLender, addressed to Lender or upon which Lender is expressly permitted to rely(with the understanding that Lender may establish Availability Reserves asLender may deem advisable in its reasonable discretion based upon the results ofsuch updated appraisals in accordance with Section 1.4 and 2.1 hereof); (e) Borrower shall produce, use, store and maintain the Inventory,with all reasonable care and caution and in accordance with applicable standardsof any insurance and in conformity with applicable laws (including, but notlimited to, the requirements of the Federal Fair Labor Standards Act of 1938, asamended and all rules, regulations and orders related thereto); (f) Borrower assumes all responsibility and liability arising fromor relating to the production, use, sale or other disposition of the Inventory; (g) Borrower shall not sell Inventory to any customer on approval,or any other basis which entitles the customer to return or may obligateBorrower to repurchase such Inventory with the exception of Inventory sold inthe ordinary course of Borrower’s business subject to Borrower’s normal andcustomary return policy; (h) Borrower shall keep the Inventory in good and marketablecondition; (i) Borrower shall not, without prior written notice to Lender,acquire or accept any Inventory on consignment or approval except as set forthon Schedule 7.3(1) hereto; and (j) upon the occurrence of an Event of Default, Borrower shall notreturn any Inventory to its vendors without the prior consent of Lender. 7.4 Equipment Covenants. With respect to the Equipment: (a) upon Lender’s request, Borrower shall, at its expense, at anytime or times as Lender may request on or after an Event of Default, deliver orcause to be delivered to Lender written reports or appraisals as to theEquipment in form, scope and methodology acceptable to Lender and by anappraiser acceptable to Lender; 25 (b) Borrower shall keep the Equipment in good order, repair,running and marketable condition (ordinary wear and tear excepted); (c) Borrower shall use the Equipment with all reasonable care andcaution and in accordance with applicable standards of any insurance and inconformity with all applicable laws; (d) the Equipment is and shall be used in Borrower’s business andnot for personal, family, household or farming use; (e) Borrower shall not remove any Equipment from the locations setforth or permitted herein, except to the extent necessary to have any Equipmentrepaired or maintained in the ordinary course of the business of Borrower or tomove Equipment directly from one such location set forth or permitted herein toanother such location and except for the movement of motor vehicles used by orfor the benefit of Borrower in the ordinary course of business; (f) the Equipment is now and shall remain personal property andBorrower shall not permit any of the Equipment to be or become a part of oraffixed to real property; and (g) Borrower assumes all responsibility and liability arising fromthe use of the Equipment 7.5 Power of Attorney. Borrower hereby irrevocably designates andappoints Lender (and all persons designated by Lender) as Borrower’s true andlawful attorney-in-fact, and authorizes Lender, in Borrower’s or Lender’s name,to: (a) at any time an Event of Default or event with notice orpassage of time or both would constitute an Event of Default exists or hasoccurred and is continuing; (i) demand payment on Accounts or other proceeds ofInventory or other Collateral; (ii) enforce payment of Accounts, Credit Card,Receivables orother obligations included in the Collateral by legal proceedings or otherwise; (iii) exercise all of Borrower’s rights and remedies tocollect any Account, Credit Card Receivables or other proceeds of Inventory orother Collateral; (iv) sell or assign any Account upon such terms, for suchamount and at such time or times as the Lender deems advisable; (v) settle, adjust, compromise, extend or renew an Account; (vi) discharge and release any Account, Credit CardReceivables or other obligations included in the Collateral; (vii) prepare, file and sign Borrower’s name on any proof ofclaim in bankruptcy or other similar document against an account debtor; 26 (viii) notify the post office authorities to change theaddress for delivery of Borrower’s mail to an address designated by Lender, andopen and dispose of all mail addressed to Borrower; and (ix) do all acts and things which are necessary, in Lender’sdetermination, to fulfill Borrower’s obligations under this Agreement and theother Financing Agreements; and (b) at any time, subject to the terms of the agreement(s) relatingto the Blocked Account(s) to: (i) take control in any manner of any item of payment orproceeds thereof; (ii) have access to any lockbox or postal box into whichBorrower’s mail is deposited; (iii) endorse Borrower’s name upon any items of payment orproceeds thereof and deposit the same in the Lender’s account for application tothe Obligations; (iv) endorse Borrower’s name upon any chattel paper,document, instrument, invoice, or similar document or agreement relating to anyAccount or Credit Card Receivables or any goods pertaining thereto or any otherCollateral; (v) sign Borrower’s name on any verification of Accounts orCredit Card Receivables and notices thereof to account debtors; and (vi) execute in Borrower’s name and file any UCC financingstatements or amendments thereto.Borrower hereby releases Lender and its officers, employees and designees fromany liabilities arising from any act or acts under this power of attorney and infurtherance thereof, whether of omission or commission, except as a result ofLender’s own gross negligence or willful misconduct as determined pursuant to afinal non-appealable order of a court of competent jurisdiction. 7.6 Right to Cure. Lender may, at its option: (a) cure any default byBorrower under any agreement with a third party or pay or bond on appeal anyjudgment entered against Borrower; (b) discharge taxes, liens, securityinterests or other encumbrances at any time levied on or existing with respectto the Collateral; and (c) pay any amount, incur any expense or perform any actwhich, in Lender’s judgment, is necessary or appropriate to preserve, protect,insure or maintain the Collateral and the rights of Lender with respect thereto.Lender may add any amounts so expended to the Obligations and charge Borrower’saccount therefor, such amounts to be repayable by Borrower on demand. Lendershall be under no obligation to effect such cure, payment or bonding and shallnot, by doing so, be deemed to have assumed any obligation or liability ofBorrower. Any payment made or other action taken by Lender under this Section7.6 shall be without prejudice to any right to assert an Event of Defaulthereunder and to proceed accordingly. 27 7.7 Access to Premises. From time to time as requested by Lender, at thecost and expense of Borrower: (a) Lender or its designee shall have complete access to all ofBorrower’s premises during normal business hours and after reasonable notice toBorrower, or at any time and without notice to Borrower if an Event of Defaultexists or has occurred and is continuing, for the purposes of inspecting,verifying and auditing the Collateral and all of Borrower’s books and records,including, without limitation, the Records; (b) Borrower shall promptly furnish to Lender such copies of suchbooks and records or extracts therefrom as Lender may request; and (c) use during normal business hours such of Borrower’s personnel,equipment, supplies and premises as may be reasonably necessary for theforegoing and if an Event of Default exists or has occurred and is continuingfor the collection of Accounts and Credit Card Receivables and realization ofother Collateral.SECTION 8. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Lender as of the date of theinitial funding of the Loans, the following (which shall survive the executionand delivery of this Agreement), the truth and accuracy of which are acontinuing condition of the making of Loans and the providing of Letter ofCredit Accommodations by Lender to Borrower: 8.1 Corporate Existence, Power and Authority; Subsidiaries. Borrower isa corporation duly organized and in good standing under the laws of its state ofincorporation and is duly qualified as a foreign corporation and in goodstanding in all states or other jurisdictions where the nature and extent of thebusiness transacted by it or the ownership of assets makes such qualificationnecessary, except for those jurisdictions in which the failure to so qualifywould not have a material adverse effect on Borrower’s financial condition,results of operation or business or the rights of Lender in or to any of theCollateral. The execution, delivery and performance of this Agreement, the otherFinancing Agreements and the transactions contemplated hereunder and thereunderare all within Borrower’s corporate powers, have been duly authorized and arenot in contravention of law or the terms of Borrower’s certificate ofincorporation, by-laws, or other organizational documentation, or any indenture,agreement or undertaking to which Borrower is a party or by which Borrower orits property are bound. This Agreement and the other Financing Agreementsconstitute legal, valid and binding obligations of Borrower enforceable inaccordance with their respective terms. Borrower does not have any subsidiariesexcept as set forth on the Information Certificate. 8.2 Financial Statements; No Material Adverse Change. All financialstatements relating to Borrower which have been delivered by Borrower to Lenderhave been prepared consistent with previous accounting policies and practices(which were established to enable the inclusion of the financial statements ofthe Allied Fashion for Less division with and into the consolidated financialstatements of Seller, which were prepared in accordance with GAAP) and fairlypresent the financial condition and the results of operations of Borrower as ofthe dates and for the periods set forth therein; it being understood by Lenderthat the working capital of 28Borrower as set forth in such financial statements have been calculated by theaccounting firm of Deloitte and Touche. Except as disclosed in any interimfinancial statements furnished by Borrower to Lender prior to the date of thisAgreement, there has been no material adverse change in the assets, liabilities,properties and condition, financial or otherwise, of Borrower, since the date ofthe most recent financial statements furnished by Borrower to Lender prior tothe date of this Agreement. 8.3 Chief Executive Office; Collateral Locations. The chief executiveoffice of Borrower and Borrower’s Records concerning Accounts are located onlyat the address set forth below and its only other places of business and theonly other locations of Collateral, if any, are the addresses set forth inSchedule 8.3 hereto, subject to the right of Borrower to establish new locationsin accordance with Section 9.2 below. Schedule 8.3 correctly identifies any ofsuch locations which are not owned by Borrower and sets forth the owners and/oroperators thereof. 8.4 Priority of Liens; Title to Properties. The security interests andliens granted to Lender under this Agreement and the other Financing Agreementsconstitute valid and perfected first priority liens and security interests inand upon the Collateral subject only to the liens indicated on Schedule 8.4hereto and the other liens permitted under Section 9.8 hereof. Borrower has goodand marketable title to all of its properties and assets subject to no liens,mortgages, pledges, security interests, encumbrances or charges of any kind,except those granted to Lender and such others as are specifically listed onSchedule 8.4 hereto or permitted under Section 9.8 hereof. 8.5 Tax Returns. Borrower has filed, or caused to be filed, in a timelymanner all tax returns, reports and declarations which are required to be filedby it (without requests for extension except as previously disclosed in writingto Lender). All information in such tax returns, reports and declarations iscomplete and accurate in all material respects. Borrower has paid or caused tobe paid all taxes due and payable or claimed due and payable in any assessmentreceived by it, except taxes the validity of which are being contested in goodfaith by appropriate proceedings diligently pursued and available to Borrowerand with respect to which adequate reserves have been set aside on its books.Adequate provision has been made for the payment of all accrued and unpaidFederal, State, county, local, foreign and other taxes whether or not yet dueand payable and whether or not disputed. 8.6 Litigation. Except as set forth on the Information Certificate,there is no present investigation by any governmental agency pending, or to thebest of Borrower’s knowledge threatened, against or affecting Borrower, itsassets or business and there is no action, suit, proceeding or claim by anyPerson pending, or to the best of Borrower’s knowledge threatened, againstBorrower or its assets or goodwill, or against or affecting any transactionscontemplated by this Agreement, which if adversely determined against Borrowerwould result in any material adverse change in the assets or business ofBorrower or would impair the ability of Borrower to perform its obligationshereunder or under any of the other Financing Agreements to which it is a partyor of Lender to enforce any Obligations or realize upon any Collateral. 8.7 Compliance with Other Agreements and Applicable Laws. Except asotherwise set forth on Schedule 8.7 hereto, Borrower is not in default in anymaterial respect under, or in violation in any material respect of any of theterms of, any agreement, contract, instrument, 29lease or other commitment to which it is a party or by which it or any of itsassets are bound and Borrower is in compliance in all material respects with allapplicable provisions of laws, rules, regulations, licenses, permits, approvalsand orders of any foreign, Federal, State or local governmental authority. 8.8 Acquisition of Purchased Assets. (a) The Purchase Agreements and the transactions contemplatedthereunder have been duly executed, delivered and performed in accordance withtheir terms by the respective parties thereto in all respects, including thefulfillment (not merely the waiver, except as may be disclosed to Lender andconsented to in writing by Lender) of all conditions precedent set forth thereinand giving effect to the terms of the Purchase Agreements and the assignments tobe executed and delivered by Seller (or any of its affiliates or subsidiaries)thereunder, and, except as set forth on Schedule 8.8 hereto, Borrower acquiredand has good and marketable title to the Purchased Assets, free and clear of allclaims, liens, pledges and encumbrances of any kind, except as permittedhereunder. (b) All actions and proceedings, required by the PurchaseAgreements, applicable law or regulation (including, but not limited to,compliance with the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, asamended) have been taken and the transactions required thereunder have been dulyand validly taken and consummated. (c) No court of competent jurisdiction has issued any injunction,restraining order or other order which prohibits consummation of thetransactions described in the Purchase Agreements and no governmental or otheraction or proceeding has been threatened or commenced, seeking any injunction,restraining order or other order which seeks to void or otherwise modify thetransactions described in the Purchase Agreements. (d) Borrower has delivered, or caused to be delivered, to Lender,true, correct and complete copies of the Purchase Agreements. 8.9 Capitalization. (a) Ninety-seven percent (97%) of the primary issued andoutstanding shares of capital stock of Borrower are directly and beneficiallyowned and held by Hampshire Equity Partners II, L.P. (as successor in interestto ING Equity Partners II, L.P.). All issued and outstanding shares of capitalstock of Borrower have been duly authorized and are fully paid andnon-assessable, free and clear of all claims, liens, pledges and encumbrances ofany kind, except as disclosed in writing to Lender. (b) Borrower is solvent and will continue to be solvent after thecreation of the Obligations, the security interests of Lender and the othertransaction contemplated hereunder, is able to pay its debts as they mature andhas (and has reason to believe it will continue to have) sufficient capital (andnot unreasonably small capital) to carry on its business and all businesses inwhich it is about to engage. The assets and properties of Borrower at a fairvaluation and at their present fair salable value are, and will be, greater thanthe Indebtedness of Borrower, and including subordinated and contingentliabilities computed at the amount which, 30to the best of Borrower’s knowledge, represents an amount which can reasonablybe expected to become an actual or matured liability. (c) Hampshire Equity Partners II, L.P. (as successor in interestto ING Equity Partners II, L.P.) has on or before the date that the initialLoans are funded hereunder, made a cash equity capital contribution to Borrowerin an aggregate amount not less than Six Million Eight Hundred Ninety-FiveThousand Dollars ($6,895,000) as consideration for shares of capital stock ofBorrower consisting of common stock and the proceeds of such cash equity capitalcontribution have been applied, contemporaneously herewith, to the purchaseprice for the Purchased Assets. 8.10 Employee Benefits. (a) Borrower has not engaged in any transaction in connection withwhich Borrower or any of its ERISA Affiliates is subject to either a civilpenalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section4975 of the Code. (b) No liability to the Pension Benefit Guaranty Corporation(other than liability for premiums) has been or is expected by Borrower to beincurred with respect to any employee pension benefit plan of Borrower or any ofits ERISA Affiliates. There has been no reportable event (within the meaning ofSection 4043(c) of ERISA) or any other event or condition with respect to anyemployee pension benefit plan of Borrower or any of its ERISA Affiliates whichpresents a material risk of termination of any such plan by the Pension BenefitGuaranty Corporation. (c) Full payment has been made of all amounts which Borrower orany of its ERISA Affiliates is required under Section 302 of ERISA and Section412 of the Code to have paid under the terms of each employee pension benefitplan as contributions to such plan as of the last day of the most recent fiscalyear of such plan ended prior to the date hereof, and no accumulated fundingdeficiency (as defined in Section 302 of ERISA and Section 412 of the Code),whether or not waived, exists with respect to any such employee pension benefitplan. (d) The current value of all vested accrued benefits under allemployee pension benefit plans maintained by Borrower that are subject to TitleIV of ERISA does not exceed the current value of the assets of such plansallocable to such vested accrued benefits. The terms “current value” and”accrued benefit” have the meanings specified in ERISA. (e) Neither Borrower nor any of its ERISA Affiliates is or hasever been obligated to contribute to any “multiemployer plan” (as such term isdefined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA. 8.11 Accuracy and Completeness of Information. All information furnishedby or on behalf of Borrower in writing to Lender in connection with thisAgreement or any of the other Financing Agreements or any transactioncontemplated hereby or thereby, including, without limitation, all informationon the Information Certificate is true and correct in all material respects onthe date as of which such information is dated or certified and does not omitany material fact necessary in order to make such information not misleading. Noevent or circumstance has occurred which has had or could reasonably be expectedto have a material 31adverse affect on the business, assets or prospects of Borrower, which has notbeen fully and accurately disclosed to Lender in writing. 8.12 Survival of Warranties; Cumulative. All representations andwarranties contained in this Agreement or any of the other Financing Agreementsshall survive the execution and delivery of this Agreement and shall be deemedto have been made again to Lender on the date of each additional borrowing orother credit accommodation hereunder and shall be conclusively presumed to havebeen relied on by Lender regardless of any investigation made or informationpossessed by Lender. The representations and warranties set forth herein shallbe cumulative and in addition to any other representations or warranties whichBorrower shall now or hereafter give, or cause to be given, to Lender.SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS. 9.1 Maintenance of Existence. Borrower shall at all times preserve,renew and keep in full force and effect its corporate existence and rights andfranchises with respect thereto and maintain in full force and effect allpermits, licenses, trademarks, trade names, approvals, authorizations, leasesand contracts necessary to carry on the business as presently or proposed to beconducted. Borrower shall give Lender forty-five (45) days prior written noticeof any proposed change in its corporate name, which notice shall set forth thenew name and Borrower shall deliver to Lender a copy of the amendment to theCertificate of Incorporation of Borrower providing for the name change certifiedby the Secretary of State of the jurisdiction of incorporation of Borrower assoon as it is available. 9.2 New Collateral Locations. Borrower may open any new location withinthe continental United States provided Borrower (a) gives Lender forty-five (45)days prior written notice of the intended opening of any such new location, and(b) executes and delivers, or causes to be executed and delivered, to Lendersuch agreements, documents, and instruments as Lender may deem reasonablynecessary or desirable to protect its interests in the Collateral at suchlocation, including, without limitation, UCC financing statements and, ifBorrower leases such new location, uses its best efforts to provide a landlordwaiver or subordination in form and substance reasonably satisfactory to Lender,or, in the alternative, Lender may apply an Availability Reserve, all in amanner consistent with the Availability Reserve established to cover rent asdefined in Section 1.4 hereof. 9.3 Compliance with Laws, Regulations, Etc. Except as provided onSchedule 8.7 hereto, Borrower shall, at all times, comply in all materialrespects with all laws, rules, regulations, licenses, permits, approvals andorders applicable to it and duly observe all requirements of any Federal, Stateor local governmental authority, including, without limitation, the EmployeeRetirement Security Act of 1974, as amended, the Occupational Safety and HazardAct of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, andall statutes, rules, regulations, orders, permits and stipulations relating toenvironmental pollution and employee health and safety, including, withoutlimitation, all of the Environmental Laws. 9.4 Payment of Taxes and Claims. Borrower shall duly pay and discharge alltaxes, assessments, contributions and governmental charges upon or against it orits properties or 32assets, except for taxes the validity of which are being contested in good faithby appropriate proceedings diligently pursued and available to Borrower and withrespect to which adequate reserves have been set aside on its books. If, at anytime, Lender assigns, or sells participations in, all or any part of the Loans,the Letter of Credit Accommodations or any other interest herein to a foreignfinancial institution or other foreign Person, Borrower shall be liable for anytax or penalties imposed on Lender as a result of the financing arrangementsprovided for herein and Borrower agrees to indemnify and hold Lender harmlesswith respect to the foregoing, and to repay to Lender on demand the amountthereof, and until paid by Borrower such amount shall be added and deemed partof the Loans, provided, that, nothing contained herein shall be construed torequire Borrower to pay any income or franchise taxes attributable to the incomeof Lender from any amounts charged or paid hereunder to Lender. The foregoingindemnity shall survive the payment of the Obligations and the termination ornon-renewal of this Agreement. 9.5 Insurance. Borrower shall, at all times, maintain with financiallysound and reputable insurers insurance with respect to the Collateral againstloss or damage and all other insurance of the kinds and in the amountscustomarily insured against or carried by corporations of established reputationengaged in the same or similar businesses and similarly situated. Said policiesof insurance shall be satisfactory to Lender as to form, amount and insurer.Borrower shall furnish certificates, policies or endorsements to Lender asLender shall require as proof of such insurance, and, if Borrower fails to doso, Lender is authorized, but not required, to obtain such insurance at theexpense of Borrower. All policies shall provide for at least thirty (30) daysprior written notice to Lender of any cancellation or reduction of coverage andthat Lender may act as attorney for Borrower in obtaining, and at any time anEvent of Default exists or has occurred and is continuing, adjusting, settling,amending and canceling such insurance; provided, that, so long as no Event ofDefault exists or has occurred and is continuing, Lender shall not amend suchinsurance so as to reduce the amounts of coverage without the consent ofBorrower. Borrower shall cause Lender to be named as a loss payee and anadditional insured (but without any liability for any premiums) under suchinsurance policies and Borrower shall obtain non-contributory lender’s losspayable endorsements to all insurance policies in form and substancesatisfactory to Lender. Such lender’s loss payable endorsements shall specifythat the proceeds of such insurance shall be payable to Lender as its interestsmay appear and further specify that Lender shall be paid regardless of any actor omission by Borrower or any of its affiliates. At its option, Lender mayapply any insurance proceeds received by Lender at any time to the cost ofrepairs or replacement of Collateral and/or to payment of the Obligations,whether or not then due, in any order and in such manner as Lender may determineor hold such proceeds as cash collateral for the Obligations. 9.6 Financial Statements and Other Information. (a) Borrower shall keep proper books and records in which true andcomplete entries shall be made of all dealings or transactions of or in relationto the Collateral and the business of Borrower and its subsidiaries (if any) inaccordance with GAAP and Borrower shall furnish or cause to be furnished toLender: (i) within thirty (30) days after the end of each fiscal month, monthlyunaudited consolidated financial statements, and, if Borrower has anysubsidiaries, unaudited consolidating financial statements (including in eachcase balance sheets, statements of income and loss, statements of cash flow andstatements of shareholders’ equity), all in reasonable detail, fairly presentingthe financial position and the results of the operations of 33Borrower and its subsidiaries as of the end of and through such fiscal month;(ii) within thirty (30) days after the end of each calendar month, astore-by-store profitability report for each of Borrower’s retail locations; and(iii) within one hundred twenty (120) days after the end of each fiscal year,audited consolidated financial statements and, if Borrower has any subsidiaries,audited consolidating financial statements of Borrower and its subsidiaries(including in each case balance sheets, statements of income and loss,statements of cash flow and statements of shareholders’ equity), and theaccompanying notes thereto, all in reasonable detail, fairly presenting thefinancial position and the results of the operations of Borrower and itssubsidiaries as of the end of and for such fiscal year, together with theopinion of independent certified public accountants, which accountants shall bean independent accounting firm selected by Borrower and reasonably acceptable toLender, that such financial statements have been prepared in accordance withGAAP, and present fairly the results of operations and financial condition ofBorrower and its subsidiaries as of the end of and for the fiscal year thenended. (b) Borrower shall promptly notify Lender in writing of thedetails of (i) any loss, damage, investigation, action, suit, proceeding orclaim relating to the Collateral or any other property which is security for theObligations or which would result in any material adverse change in Borrower’sbusiness, properties, assets, goodwill or condition, financial or otherwise and(ii) the occurrence of any Event of Default or event which, with the passage oftime or giving of notice or both, would constitute an Event of Default. (c) Borrower shall promptly after the sending or filing thereoffurnish or cause to be furnished to Lender copies of all financial reports whichBorrower sends to its stockholders generally and copies of all reports andregistration statements which Borrower files with the Securities and ExchangeCommission, any national securities exchange or the National Association ofSecurities Dealers, Inc. (d) Borrower shall furnish or cause to be furnished to Lender suchbudgets, forecasts, projections and other information in respect of theCollateral and the business of Borrower, as Lender may, from time to time,reasonably request. Lender is hereby authorized to deliver a copy of anyfinancial statement or any other information relating to the business ofBorrower to any court or other government agency or to any participant orassignee or prospective participant or assignee. Borrower hereby irrevocablyauthorizes and directs all accountants or auditors to deliver to Lender, atBorrower’s expense, copies of the financial statements of Borrower and anyreports or management letters prepared by such accountants or auditors on behalfof Borrower and to disclose to Lender such information as they may haveregarding the business of Borrower. Any documents, schedules, invoices or otherpapers delivered to Lender may be destroyed or otherwise disposed of by Lenderone (1) year after the same are delivered to Lender, except as otherwisedesignated by Borrower to Lender in writing. (e) Borrower shall deliver, or cause to be delivered, to Lender,within ninety (90) days from the date hereof, an opening balance sheet ofBorrower after giving effect to the transactions contemplated by this Agreementand the Purchase Agreements, together with the unqualified opinion ofindependent certified public accountants, which accountants shall be anindependent accounting firm selected by Borrower and reasonably acceptable toLender, to the effect that such opening balance sheet has been prepared inaccordance with GAAP and presents fairly the financial condition of Borrower asof such date. 34 9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrowershall not, directly or indirectly, (a) merge into or with or consolidate withany other Person or permit any other Person to merge into or with or consolidatewith it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose ofany stock or indebtedness to any other Person or any of its assets to any otherPerson (except for (i) sales of Inventory in the ordinary course of business,(ii) the sale or other disposition of Equipment in the event of a store closure,and (iii) the disposition of Equipment so long as (A) if an Event of Defaultexists or has occurred and is continuing, any proceeds are paid to Lender (B)such sales do not involve Equipment having an aggregate fair market value inexcess of One Hundred Thousand Dollars ($ 100,000) for all such Equipmentdisposed of in any fiscal year of Borrower and (C) Borrower reinvests theproceeds from the sale of such Equipment (other than worn-out or obsoleteEquipment or Equipment no longer used in the business of Borrower) to benefitthe ordinary business purpose of Borrower), or (c) form or acquire anysubsidiaries, or (d) wind up, liquidate or dissolve or (e) agree to do any ofthe foregoing. 9.8 Encumbrances. Borrower shall not create, incur, assume or suffer toexist any security interest, mortgage, pledge, lien, charge or other encumbranceof any nature whatsoever on any of its assets or properties, including, withoutlimitation, the Collateral, except: (a) the liens and security interests ofLender, (b) liens securing the payment of taxes, either not yet overdue or thevalidity of which are being contested in good faith by appropriate proceedingsdiligently pursued and available to Borrower and with respect to which adequatereserves have been set aside on its books; (c) security deposits in the ordinarycourse of business; (d) non-consensual statutory liens (other than lienssecuring the payment of taxes) arising in the ordinary course of Borrower’sbusiness to the extent: (i) such liens secure indebtedness which is not overdueor (ii) such liens secure indebtedness relating to claims or liabilities whicharc fully insured and being defended at the sole cost and expense and at thesole risk of the insurer (subject to applicable deductibles) or being contestedin good faith by appropriate proceedings diligently pursued and available toBorrower, in each case prior to the commencement of foreclosure or other similarproceedings and with respect to which adequate reserves have been set aside onits books; (e) liens in favor of credit card processors with respect to CreditCard Receivables processed by them; (f) zoning restrictions, easements,licenses, covenants and other restrictions affecting the use of real propertywhich do not interfere in any material respect with the use of such realproperty or ordinary conduct of the business of Borrower as presently conductedthereon or materially impair the value of the real property which may be subjectthereto; (g) purchase money security interests in Equipment (including capitalleases) and purchase money mortgages on real estate or other security interestsin equipment or fixtures so long as such security interests and mortgages do notapply to any property of Borrower other than the Equipment or real estate soacquired, and the indebtedness secured thereby does not exceed the cost of theEquipment or real estate so acquired, as the case may be; (h) deposits of cashwith the owner or lessor of premises leased by Borrower, and (i) the securityinterests and liens set forth on Schedule 8.4 hereto. 9.9 Indebtedness. Borrower shall not incur, create, assume, become or beliable in any manner with respect to, or permit to exist, any obligations orindebtedness, except: (a) the Obligations; 35 (b) trade obligations and normal accruals in the ordinary courseof business not yet due and payable, or with respect to which Borrower iscontesting in good faith the amount or validity thereof by appropriateproceedings diligently pursued and available to Borrower and with respect towhich adequate reserves have been set aside on its books; (c) purchase money indebtedness (including capital leases) to theextent not incurred or secured by liens (including capital leases) in violationof any other provision of this Agreement; (d) unsecured indebtedness to former employees of Borrower in anaggregate amount not to exceed Five Hundred Thousand Dollars ($500,000) at anytime, provided, that, (i) such indebtedness shall at all times be evidenced by apromissory note, containing terms and conditions satisfactory to Lender,including, without limitation, a provision subordinating the right of payment ofsuch indebtedness to the right of Lender to receive the prior final payment andsatisfaction in full of all of the Obligations, (ii) Borrower shall not,directly or indirectly, make any payments in respect of such indebtedness,including, but not limited to, any prepayments or other non-mandatory payments,except that until an Event of Default, or event which with notice or passage oftime or both would constitute an Event of Default, shall exist or have occurredand be continuing, Borrower may make regularly scheduled payments of principaland interest in accordance with the terms of such agreement or instrument as ineffect on the date hereof, (ii) Borrower shall not, directly or indirectly, (A)amend, modify, alter or change any terms of such indebtedness or any agreement,document or instrument related thereto, or (B) redeem, retire, defease, purchaseor otherwise acquire such indebtedness, or set aside or otherwise deposit orinvest any sums for such purpose, and (iii) Borrower shall furnish to Lender allnotices, demands or other materials concerning such indebtedness either receivedby Borrower or on its behalf, promptly after receipt thereof, or sent byBorrower or on its behalf, concurrently with the sending thereof, as the casemay be; and (e) obligations or indebtedness set forth on the InformationCertificate; provided, that, (i) Borrower may only make regularly scheduledpayments of principal and interest in respect of such indebtedness in accordancewith the terms of the agreement or instrument evidencing or giving rise to suchindebtedness as in effect on the date hereof, (ii) Borrower shall not, directlyor indirectly, (A) amend, modify, alter or change the terms of such indebtednessor any agreement, document or instrument related thereto as in effect on thedate hereof, or (B) except as otherwise permitted under this Agreement, redeem,retire, defease, purchase or otherwise acquire such indebtedness, or set asideor otherwise deposit or invest any sums for such purpose, and (iii) Borrowershall furnish to Lender all notices or demands in connection with suchindebtedness either received by Borrower or on its behalf, promptly after thereceipt thereof, or sent by Borrower or on its behalf, concurrently with thesending thereof, as the case may be. 9.10 Loans, Investments, Guarantees, Etc. Borrower shall not, directly orindirectly, make any loans or advance money or property to any person, or investin (by capital contribution, dividend or otherwise) or purchase or repurchasethe stock or indebtedness or all or a substantial part of the assets or propertyof any person, or guarantee, assume, endorse, or otherwise become responsiblefor (directly or indirectly) the indebtedness, performance, obligations ordividends of any Person or agree to do any of the foregoing, except: (a) the 36endorsement of instruments for collection or deposit in the ordinary course ofusiness; (b) investments in: (i) short-term direct obligations of the UnitedStates Government, (ii) negotiable certificates of deposit issued by any banksatisfactory to Lender, payable to the order of the Borrower or to bearer anddelivered to Lender, and (iii) commercial paper rated Al or P1; provided, that,as to any of the foregoing, unless waived in writing by Lender, Borrower shalltake such actions as are deemed necessary by Lender to perfect the securityinterest of Lender in such investments; (c) the loan to Ted Boswell and GeorgeBellino in an amount not to exceed Thirty-Five Thousand Dollars ($35,000) in theaggregate as evidenced by a promissory note; and (d) the guarantees set forth inthe Information Certificate. 9.11 Dividends and Redemptions. Borrower shall not, directly orindirectly, declare or pay any dividends on account of any shares of any classof capital stock of Borrower now or hereafter outstanding, or set aside orotherwise deposit or invest any sums for such purpose, or redeem, retire,defease, purchase or otherwise acquire any shares of any class of capital stock(or set aside or otherwise deposit or invest any sums for such purpose) for anyconsideration other than common stock or apply or set apart any sum, or make anyother distribution (by reduction of capital or otherwise) in respect of any suchshares or agree to do any of the foregoing, except Borrower may redeem shares ofcapital stock owned by the management employees of Borrower, provided, that, (a)no Event of Default exists, or has occurred and is continuing (b) no more thanFive Hundred Thousand Dollars ($500,000) is paid by Borrower to its employees inany twelve (12) month period to redeem such stock and (c) Excess Availability isnot less than One Million Dollars ($1,000,000) after giving effect to suchredemption. 9.12 Transactions with Affiliates. Borrower shall not enter into anytransaction for the purchase, sale or exchange of property or the rendering ofany service to or by any affiliate, except in the ordinary course of andpursuant to the reasonable requirements of Borrower’s business and upon fair andreasonable terms no less favorable to the Borrower than Borrower would obtain ina comparable arm’s length transaction with an unaffiliated person, except solong as an Event of Default does not exist or has occurred and is continuing,Borrower may pay Hampshire Equity Partners II, L.P. a management fee not toexceed One Hundred Twenty Thousand Dollars ($120,000) in any fiscal year ofBorrower. 9.13 Compliance with ERISA. Borrower shall not with respect to any”employee pension benefit plans” maintained by Borrower or any of its ERISAAffiliates: (a) (i) terminate any of such employee pension benefit plans so asto incur any liability to the Pension Benefit Guaranty Corporation establishedpursuant to ERISA; (ii) allow or suffer to exist any prohibited transactioninvolving any of such employee pension benefit plans or any trust createdthereunder which would subject Borrower or such ERISA Affiliate to a materialtax or penalty or other liability on prohibited transactions imposed underSection 4975 of the Code or ERISA; (iii) fail to pay to any such employeepension benefit plan any contribution which it is obligated to pay under Section302 of ERISA, Section 412 of the Code the terms of such plan; (iv) allow orsuffer to exist any accumulated funding deficiency, whether or not waived, withrespect to any such employee pension benefit plan; (v) allow or suffer to existany occurrence of a reportable event or any other event or condition whichpresents a material risk of termination by the Pension Benefit GuarantyCorporation of any such employee pension benefit plan that is a single employerplan, which termination could result in any 37material liability to the Pension Benefit Guaranty Corporation; or (vi) incurany withdrawal liability with respect to any multiemployer pension plan. (b) As used in this Section 9.13, the term “employee pensionbenefit plans,” “employee benefit plans,” “accumulated funding deficiency” and”reportable event” shall have the respective meanings assigned to them in ERISA,and the term “prohibited transaction” shall have the meaning assigned to it inSection 4975 of the Code and ERISA. 9.14 Year 2000 Matter. The Borrower has reviewed the areas within itsbusiness and operations which could be adversely affected by, and have developedor are developing a program to address on a timely basis, the “Year 2000Problem” (that is, the risk that computer applications used by the Borrower maybe unable to recognize and perform properly date-sensitive functions involvingcertain dates prior to and any date on or after December 31, 1999). Based onsuch review and program, the Borrower believes that the “Year 2000 Problem”, tothe extent resulting from a deficiency in the hardware or software operated bythe Borrower, will not have a material adverse effect on the Borrower, and thatsuch program to address the “Year 2000 Problem” shall have been resolved in allmaterial respects by June 30, 1999. From time to time, at the request of theLender, the Borrower shall provide to the Lender such updated information ofdocumentation as is requested regarding the status of their efforts to addressthe “Year 2000 Problem”. 9.15 Adjusted Tangible Net Worth. Borrower shall, at the end of eachfiscal quarter of Borrower, maintain Adjusted Tangible Net Worth of not lessthan (i) Adjusted Tangible Net Worth as calculated by Deloitte & Touche in theiropening audited balance sheet, minus (ii) One Million Two Hundred Fifty ThousandDollars ($1,250,000). In no event shall Adjusted Tangible Net Worth be less thanOne Million Dollars ($1,000,000). 9.16 Costs and Expenses. Borrower shall pay to Lender on demand allcosts, expenses, filing fees and taxes paid or payable in connection with thepreparation, negotiation, execution, delivery, recording, administration,collection, liquidation, enforcement and defense of the Obligations, Lender’srights in the Collateral, this Agreement, the other Financing Agreements and allother documents related hereto or thereto, including any amendments, supplementsor consents which may hereafter be contemplated (whether or not executed) orentered into in respect hereof and thereof, including, but not limited to: (a)all costs and expenses of filing or recording (including Uniform Commercial Codefinancing statement filing taxes and fees, documentary taxes, intangibles taxesand mortgage recording taxes and fees, if applicable);(b) costs and expenses andfees for title insurance and other insurance premiums, environmental audits,surveys, assessments, engineering reports and inspections, appraisal fees andsearch fees; (c) costs and expenses of remitting loan proceeds, collectingchecks and other items of payment, and establishing and maintaining the BlockedAccounts, together with Lender’s customary charges and fees with respectthereto; (d) charges, fees or expenses charged by any bank or issuer inconnection with the Letter of Credit Accommodations; (e) costs and expenses ofpreserving and protecting the Collateral; (f) costs and expenses paid orincurred in connection with obtaining payment of the Obligations, enforcing thesecurity interests and liens of Lender, selling or otherwise realizing upon theCollateral, and otherwise enforcing the provisions of this Agreement and theother Financing Agreements or defending any claims made or threatened againstLender arising out of the transactions contemplated hereby and thereby(including, 38without limitation, preparations for and consultations concerning any suchmatters); (g) all out-of-pocket expenses and costs incurred by Lender’sexaminers in the conduct of their periodic field examinations of the Collateraland Borrower’s operations, plus a per diem charge at the rate of $650 per personper day for Lender’s examiners in the field and office; and (h) the reasonablefees and disbursements of counsel (including legal assistants) to Lender inconnection with any of the foregoing. 9.17 Further Assurances. At the request of Lender at any time and fromtime to time, Borrower shall, at its expense, duly execute and deliver, or causeto be duly executed and delivered, such further agreements, documents andinstruments, and do or cause to be done such further acts as may be necessary orproper to evidence, perfect, maintain and enforce the security interests and thepriority thereof in the Collateral and to otherwise effectuate the provisions orpurposes of this Agreement or any of the other Financing Agreements. Lender mayat any time and from time to time request a certificate from an officer ofBorrower representing on behalf of Borrower that all conditions precedent to themaking of Loans and providing Letter of Credit Accommodations contained hereinare satisfied. In the event of such request by Lender, Lender may, at itsoption, cease to make any further Loans or provide any further Letter of CreditAccommodations until Lender has received such certificate and, in addition,Lender has determined that such conditions are satisfied. Where permitted bylaw, Borrower hereby authorizes Lender to execute and file one or more UCCfinancing statements signed only by Lender.SECTION 10. EVENTS OF DEFAULT AND REMEDIES. 10.1 Events of Default. The occurrence or existence of any one or more ofthe following events are referred to herein individually as an “Event ofDefault,” and collectively as “Events of Default”: (a) Borrower fails to pay when due any of the Obligations; (b) Borrower fails to perform any of the covenants contained inSections 9.1, 9.2, 9.3, 9.4, 9.6, 9.13, 9.14, 9.15 and 9.16 of this Agreementand such failure shall continue for fifteen (15) days; provided, that, suchfifteen (15) day period shall not apply in the case of: (i) any failure toobserve any such covenant which is not capable of being cured at all or withinsuch fifteen (15) day period or which has previously been the subject of aprior failure within the prior twelve (12) months period or (ii) an intentionalbreach by Borrower of any such covenant; (c) Borrower fails to perform any of the terms, covenants,conditions or provisions contained in this Agreement or any of the otherFinancing Agreements (other than the covenants set forth in Section 10.1(b)above) and such failure shall continue for five (5) Business Days; provided;that, such five (5) Business Day period shall not apply in the case of: (i) anyfailure to observe any such term, covenant, condition or provision which is notcapable of being cured at all or within such five (5) Business Day period orwhich has previously been the subject of a prior failure within the prior twelve(12) month period or (ii) an intentional breach by Borrower of such term,covenant, condition or provision; 39 (d) any representation, warranty or statement of fact made byBorrower to Lender in this Agreement, the other Financing Agreements or anyother agreement, schedule, confirmatory assignment or otherwise shall when madeor deemed made be false or misleading in any material respect; (e) any Obligor revokes, terminates or fails to perform any of theterms, covenants, conditions or provisions of any guarantee, endorsement orother agreement of such party in favor of Lender; (f) any judgment for the payment of money is rendered againstBorrower in excess of Fifty Thousand Dollars ($50,000) in any one case or inexcess of Two Hundred Thousand Dollars ($200,000) in the aggregate and shallremain undischarged or unvacated for a period in excess of thirty (30) days orexecution shall at any time not be effectively stayed, or any material judgmentother than for the payment of money, or injunction, attachment, garnishment orexecution is rendered against Borrower or any Obligor or any of their assets; (g) Borrower or any Obligor, which is a partnership, limitedliability company, or corporation, dissolves or suspends or discontinues doingbusiness; (h) Borrower or any Obligor becomes insolvent (however defined orevidenced), makes an assignment for the benefit of creditors, makes or sendsnotice of a bulk transfer or calls a meeting of its creditors or principalcreditors; (i) a case or proceeding under the bankruptcy laws of the UnitedStates of America now or hereafter in effect or under any insolvency,reorganization, receivership, readjustment of debt, dissolution or liquidationlaw or statute of any jurisdiction now or hereafter in effect (whether at law orin equity) is filed against Borrower or any Obligor or all or any part of itsproperties and such petition or application is not dismissed within thirty (30)days after the date of its filing or Borrower or any Obligor shall file anyanswer admitting or not contesting such petition or application or indicates itsconsent to, acquiescence in or approval of, any such action or proceeding or therelief requested is granted sooner; (j) a case or proceeding under the bankruptcy laws of the UnitedStates of America now or hereafter in effect or under any insolvency,reorganization, receivership, readjustment of debt, dissolution or liquidationlaw or statute of any jurisdiction now or hereafter in effect (whether at a lawor equity) is filed by Borrower or for all or any Obligor or any part of itsproperty; (k) any default by Borrower or any Obligor under any agreement,document or instrument relating to any indebtedness for borrowed money owing toany person other than Lender, or any capitalized lease obligations, contingentindebtedness in connection with any guarantee, letter of credit, indemnity orsimilar type of instrument in favor of any person other than Lender, in any casein an amount in excess of One Hundred Fifty Thousand Dollars ($150,000) whichdefault continues for more than the applicable cure period, if any, with respectthereto, or any default by Borrower or any Obligor under any material contract,lease, license or other obligation to any person other than Lender, whichdefault continues for more than the applicable cure period, if any, with respectthereto; 40 (l) Hampshire Equity Partners II, L.P. shall own or otherwisecontrol less than 50.1% of all issued and outstanding voting stock of Borrower; (m) the indictment or threatened indictment of Borrower or anyObligor under any criminal statute, or the commencement or threatenedcommencement of criminal or civil proceedings against Borrower or any Obligor,pursuant to which statute or proceedings the penalties or remedies sought oravailable include forfeiture of any of the property of Borrower or suchObligor; (n) there shall be a material adverse change in the business orassets of Borrower or any Obligor after the date hereof; or (o) there shall be an event of default under any of the otherFinancing Agreements. 10.2 Remedies. (a) At any time an Event of Default exists or has occurred and iscontinuing, Lender shall have all rights and remedies provided in thisAgreement, the other Financing Agreements, the Uniform Commercial Code and otherapplicable law, all of which rights and remedies may be exercised without noticeto or consent by Borrower or any Obligor, except as such notice or consent isexpressly provided for hereunder or required by applicable law. All rights,remedies and powers granted to Lender hereunder, under any of the otherFinancing Agreements, the Uniform Commercial Code or other applicable law, arecumulative, not exclusive and enforceable, in Lender’s discretion,alternatively, successively, or concurrently on any one or more occasions, andshall include, without limitation, the right to apply to a court of equity foran injunction to restrain a breach or threatened breach by Borrower of thisAgreement or any of the other Financing Agreements. Lender may, at any time ortimes, proceed directly against Borrower or any Obligor to collect theObligations without prior recourse to the Collateral. (b) Without limiting the foregoing, at any time an Event ofDefault exists or has occurred and is continuing, Lender may, in its discretionand without limitation: (i) accelerate the payment of all Obligations and demandimmediate payment thereof to Lender (provided, that, upon the occurrence of anyEvent of Default described in Sections 10.1(i) and 10.1(j), all Obligationsshall automatically become immediately due and payable); (ii) with or without judicial process or the aid orassistance of others, enter upon any premises on or in which any of theCollateral may be located and take possession of the Collateral or completeprocessing, manufacturing and repair of all or any portion of the Collateral; (iii) require Borrower, at Borrower’s expense, to assemble andmake available to Lender any part or ail of the Collateral at any place and timedesignated by Lender; 41 (iv) collect, foreclose, receive, appropriate, setoff andrealize upon any and all Collateral; (v) remove any or all of the Collateral from any premises onor in which the same may be located for the purpose of effecting the sale,foreclosure or other disposition thereof or for any other purpose; (vi) sell, lease, transfer, assign, deliver or otherwisedispose of any and all Collateral (including, without limitation, entering intocontracts with respect thereto,public or private sales at any exchange, broker’sboard, at any office of Lender or elsewhere) at such prices or terms as Lendermay deem reasonable, for cash, upon credit or for future delivery, with theLender having the right to purchase the whole or any part of the Collateral atany such public sale, all of the foregoing being free from any right or equityof redemption of Borrower, which right or equity of redemption is herebyexpressly waived and released by Borrower, and/or (vii) terminate this Agreement.If any of the Collateral is sold or leased by Lender upon credit terms or forfuture delivery, the Obligations shall not be reduced as a result thereof untilpayment therefor is finally collected by Lender. If notice of disposition ofCollateral is required by law, five (5) days prior notice by Lender to Borrowerdesignating the time and place of any public sale or the time after which anyprivate sale or other intended disposition of Collateral is to be made, shall bedeemed to be reasonable notice thereof and Borrower waives any other notice. Inthe event Lender institutes an action to recover any Collateral or seeksrecovery of any Collateral by way of prejudgment remedy, Borrower waives theposting of any bond which might otherwise be required. (c) Lender shall apply the cash proceeds of Collateral actuallyreceived by Lender from any sale, lease, foreclosure or other disposition of theCollateral to payment of the Obligations, in such order as Lender may elect,whether or not then due. Borrower shall remain liable to Lender for the paymentof any deficiency with interest at the highest rate provided for herein and allcosts and expenses of collection or enforcement, including reasonable attorneys’fees and legal expenses. (d) Without limiting the foregoing, upon the occurrence of anEvent of Default or an event which with notice or passage of time or both wouldconstitute an Event of Default, Lender may, at its option, without notice: (i)cease making Loans or arranging Letter of Credit Accommodations or reduce thelending formulas or amounts of Loans and Letter of Credit Accommodationsavailable to Borrower, and/or (ii) terminate any provision of this Agreementproviding for any future Loans or Letter of Credit Accommodations to be made byLender to Borrower. 42SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW. 11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. (a) The validity, interpretation and enforcement of this Agreementand the other Financing Agreements and any dispute arising out of therelationship between the parties hereto, whether in contract, tort, equity orotherwise, shall be governed by the internal laws of the State of New York(without giving effect to principles of conflicts of law); provided, however,with respect to perfecting Lender’s security interest and lien on the depositaccounts of Borrower, such acts shall be governed by the Uniform Commercial Codeof the State of California (without giving effect to principles of conflicts oflaw. (b) Borrower and Lender irrevocably consent and submit to thenon-exclusive jurisdiction of the state courts of the County of New York, Stateof New York and of the United States District Court for the Southern District ofNew York and waive any objection based on venue or forum non conveniens withrespect to any action instituted therein arising under this Agreement or any ofthe other Financing Agreements or in any way connected with or related orincidental to the dealings of the parties hereto in respect of this Agreement orany of the other Financing Agreements or the transactions related hereto orthereto, in each case whether now existing or hereafter arising, and whether incontract, tort, equity or otherwise, and agree that any dispute with respect toany such matters shall be heard only in the courts described above (except thatLender shall have the right to bring any action or proceeding against Borroweror its property in the courts of any other jurisdiction which Lender deemsnecessary or appropriate in order to realize on the Collateral or to otherwiseenforce its rights against Borrower or its property). (c) Borrower hereby waives personal service of any and all processupon it and consents that all such service of process may be made by certifiedmail (return receipt requested) directed to its address set forth on thesignature pages hereof and service so made shall be deemed to be completed five(5) days after the same shall have been so deposited hi the U.S. mails, or, atLender’s option, by service upon Borrower in any other manner provided under therules of any such courts. (d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BYJURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THISAGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTEDWITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECTOF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONSRELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTERARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDEREACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OFACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER ORLENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS 43AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIESHERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to Borrower (whether intort, contract, equity or otherwise) for losses suffered by Borrower inconnection with, arising out of, or in any way related to the transactions orrelationships contemplated by this Agreement, or any act, omission or eventoccurring in connection herewith, unless it is determined by a final andnon-appealable judgment or court order binding on Lender, that the losses werethe result of acts or omissions constituting gross negligence or willfulmisconduct. In any such litigation, Lender shall be entitled to the benefit ofthe rebuttable presumption that it acted in good faith and with the exercise ofordinary care in the performance by it of the terms of this Agreement. 11.2 Waiver of Notices. Borrower hereby expressly waives demand,presentment, protest and notice of protest and notice of dishonor with respectto any and all instruments and commercial paper, included in or evidencing anyof the Obligations or the Collateral, and any and all other demands and noticesof any kind or nature whatsoever with respect to the Obligations, the Collateraland this Agreement, except such as are expressly provided for herein. No noticeto or demand on Borrower which Lender may elect to give shall entitle Borrowerto any other or further notice or demand in the same, similar or othercircumstances. 11.3 Amendments and Waivers. Neither this Agreement nor any provisionhereof shall be amended, modified, waived or discharged orally or by course ofconduct, but only by a written agreement signed by an authorized officer ofLender. Lender shall not, by any act, delay, omission or otherwise be deemed tohave expressly or impliedly waived any of its rights, powers and/or remediesunless such waiver shall be in writing and signed by an authorized officer ofLender. Any such waiver shall be enforceable only to the extent specifically setforth therein. A waiver by Lender of any right, power and/or remedy on any oneoccasion shall not be construed as a bar to or waiver of any such right, powerand/or remedy which Lender would otherwise have on any future occasion, whethersimilar in kind or otherwise. 11.4 Indemnification. Borrower shall indemnify and hold Lender, and itsdirectors, agents, employees and counsel, harmless from and against any and alllosses, claims, damages, liabilities, costs or expenses imposed on, incurred byor asserted against any of them in connection with any litigation,investigation, claim or proceeding commenced or threatened related to thenegotiation, preparation, execution, delivery, enforcement, performance oradministration of this Agreement, any other Financing Agreements, or anyundertaking or proceeding related to any of the transactions contemplated herebyor any act, omission, event or transaction related or attendant thereto,including, without limitation, amounts paid in settlement, court costs, and thereasonable fees and expenses of counsel. To the extent that the undertaking toindemnify, pay and hold harmless set forth in this Section 11.4 may beunenforceable because it violates any law or public policy, Borrower shall paythe maximum portion which it is permitted to pay under applicable law to Lenderin satisfaction of indemnified matters under this Section. The foregoingindemnity shall survive the payment of the Obligations and the termination ornon-renewal of this Agreement. 44SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS. 12.1 Term. (a) This Agreement and the other Financing Agreements shall becomeeffective as of the date set forth on the first page hereof and shall continuein full force and effect for a term ending on the date three (3) years from thedate hereof. Regardless of the timing of termination, this Agreement and allother Financing Agreements must be terminated simultaneously. Upon me effectivedate of termination of the Financing Agreements, Borrower shall pay to Lender,in full, all outstanding and unpaid Obligations and shall furnish cashcollateral to Lender in such amounts as Lender determines are reasonablynecessary to secure Lender from loss, cost, damage or expense, includingreasonable attorneys’ fees and legal expenses, in connection with any contingentObligations, including issued and outstanding Letter of Credit Accommodationsand checks or other payments provisionally credited to the Obligations and/or asto which Lender has not yet received final and indefeasible payment Such cashcollateral shall be remitted by wire transfer in Federal funds to such bankaccount of Lender, as Lender may, in its discretion, designate in writing toBorrower for such purpose. Interest shall be due until and including the nextBusiness Day, if the amounts so paid by Borrower to the bank account designatedby Lender are received in such bank account later than 3:00 p.m., New York time. (b) No termination of this Agreement or the other FinancingAgreements shall relieve or discharge Borrower of its respective duties,obligations and covenants under this Agreement or the other Financing Agreementsuntil all Obligations have been fully and finally discharged and paid, andLender’s continuing security interest in the Collateral and the rights andremedies of Lender hereunder, under the other Financing Agreements andapplicable law, shall remain in effect until all such Obligations have beenfully and finally discharged and paid. (c) If for any reason this Agreement is terminated prior to theend of the then current term or any agreed upon renewal term of this Agreement,in view of the impracticality and extreme difficulty of ascertaining actualdamages and by mutual agreement of the parties as to a reasonable calculation ofLender’s lost profits as a result thereof, Borrower agrees to pay to Lender,upon the effective date of such termination, an early termination fee in theamount set forth below if such termination is effective in the period indicated:
Such early termination fee shall be presumed to be the amount of damagessustained by Lender as a result of such early termination and Borrower agreesthat it is reasonable under the circumstances currently existing. Lender shallbe entitled to such early termination fee upon the occurrence of any Event ofDefault described in Sections 10.1(i) and 10.1(j) hereof, even if Lender doesnot exercise its right to terminate this Agreement, but elects, at its option,to provide financing to Borrower or permit the use of cash collateral under theUnited States Bankruptcy Code; provided, however, if Lender waives such Event ofDefault, does not exercise its rights to terminate this Agreement and continuesfinancing Borrower, such early termination fee shall not be due and payable byBorrower at such time. The early termination fee provided for in this Section12.1 shall be deemed included in the Obligations. Notwithstanding the foregoing, the early termination fee shall be waived(a) after the first anniversary of this Agreement, if the termination is due tothe refinancing of the Obligations by First Union National Bank and if there isno Event of Default or event or circumstance which, with notice or passage oftime or both, would become an Event of Default under this Agreement or (b) ifBorrower chooses to exercise the right to terminate this Agreement and the otherFinancing Agreements upon any assignment by Lender of its rights or obligationsunder or related to this Agreement or the other Financing Agreements to anon-U.S. Lender, defined as any Lender that is not a “United States person,”within the meaning of Section 7701(a)(30) of the Code. 12.2 Notices. All notices, requests and demands hereunder shall be inwriting and: (a) made to Lender at its address set forth below and to Borrowerat its chief executive office set forth below, or to such other address aseither party may designate by written notice to the other in accordance withthis provision; and (b) deemed to have been given or made: if delivered inperson, immediately upon delivery; if by telex, telegram or facsimiletransmission, immediately upon sending and upon confirmation of receipt; if bynationally recognized overnight courier service with instructions to deliver thenext Business Day, one (1) Business Day after sending; and if by certified mail,return receipt requested, five (5) days after mailing. 12.3 Partial Invalidity. If any provision of this Agreement is held to beinvalid or unenforceable, such invalidity or unenforceability shall notinvalidate this Agreement as a whole, but this Agreement shall be construed asthough it did not contain the particular provision held to be invalid orunenforceable and the rights and obligations of the parties shall be construedand enforced only to such extent as shall be permitted by applicable law. 12.4 Successors. This Agreement, the other Financing Agreements and anyother document referred to herein or therein shall be binding upon and inure tothe benefit of and be enforceable by Lender, Borrower and their respectivesuccessors and assigns, except that Borrower may not assign its rights underthis Agreement, the other Financing Agreements and 46any other document referred to herein or therein without the prior writtenconsent of Lender. Lender may, after notice to Borrower, assign its rights anddelegate its obligations under this Agreement and the other Financing Agreements(a) to any of its present and future domestic subsidiaries or affiliates thatare in the business of making loans or otherwise have arrangements for themaking of loans or (b) to the extent of the interests of Participants asprovided herein, or (c) upon the merger, consolidation, sale, transfer, or otherdisposition of all or any substantial portion of its business, loan portfolio orother assets or (d) at any time an Event of Default shall exist or have occurredand be continuing or (e) with the consent of Borrower, which shall not beunreasonably withheld, delayed or conditioned. In addition, Lender may sellparticipations in any part of the Loans, the Letter of Credit Accommodations orany other interest herein to another financial institution or other Person. 12.5 Entire Agreement. This Agreement, the other Financing Agreements,any supplements hereto or thereto, and any instruments or documents delivered orto be delivered in connection herewith or therewith represents the entireagreement and understanding concerning the subject matter hereof and thereofbetween the parties hereto, and supersede all other prior agreements,understandings, negotiations and discussions, representations, warranties,commitments, proposals, offers and contracts concerning the subject matterhereof, whether oral or written. 12.6 Confidentiality. Lender hereby agrees that all written or oralinformation disseminated by Borrower to Lender concerning Borrower, now orhereafter is confidential (the “Confidential Information”). The ConfidentialInformation: (i) shall be kept confidential by Lender and will not be disclosed,divulged or provided to any Person without Borrower’s prior written consent;provided, however, that the Confidential Information may be disclosed: (A) toLender’s officers and employees or any of Lender’s affiliated companies’officers and employees, independent attorneys, accountants, loan participantsand appraisers who need to know such Confidential Information for the purpose ofevaluating the financing of Borrower hereunder; or (B) if such disclosure isrequired by operation of law, and (ii) shall not be deemed to includeinformation which: (A) is public knowledge or becomes generally available to thepublic; (B) becomes available to Lender, on a non-confidential basis, fromBorrower or its agents; or (c) is in Lender’s possession prior to disclosure byBorrower. 12.7 Publicity. Lender may publish a tombstone or similar advertisingmaterial relating to the financing transaction contemplated by this Agreementwith Borrower’s consent, which shall not be unreasonably withheld. 47 IN WITNESS WHEREOF, Lender and Borrower have caused these presentsto be duly executed as of the day and year first above written.LENDER BORROWERCONGRESS FINANCIAL CORPORATION ALLIED FASHION, INC.(SOUTHWEST)By:/s/ Frederick P. Kiehne By: /s/ Olivier C. Trouveroy ———————– ————————Name:Frederick P. Kiehne Name:Olivier C. Trouveroy ——————– ———————–Title:Vice President Title:Executive Vice President ——————- ————————Address: Chief Executive Office:1201 Main Street, Suite 1625 102 Fahm StreetDallas, Texas 75202 Savannah, Georgia 31401 48 INFORMATION CERTIFICATE OF ALLIED FASHION, INC. Dated:_______199__Congress Financial Corporation (Western)225 South Lake Avenue Suite 1000Pasadena, CA 91101In order to assist you in the continuing evaluation of the financing you areconsidering for Allied Fashion Inc. (“the Corporation”), and to expedite thepreparation of any documentation which may be required, and to induce you toprovide such financing to the Corporation, we represent and warrant to you thefollowing information about the Corporation, its organizational structure andother manners of interest to you:1. The full and exact name of the Corporation as set forth in its Certificate of Incorporation is: Allied Fashion, Inc.2. The Corporation uses and owns the following trade name(s) in the operation of its business (i.e. billing, advertising, etc.): (Note, do not include names which are product names only): Allied Fashion for kids, Allied Department Store, Allied Kidswear, Kidswear, Sugar Grove, ALady fashions, APlus Fashions, Mad Mervin’s3. The date of incorporation of the Corporation was March 3, 1999, under the laws of the State of Delaware, and the Corporation is in good standing under those laws. Check one: Correct [X] Incorrect[ ]. If incorrect, explain: __________________________________________________________________________ __________________________________________________________________________4. The Corporation has never been involved in a bankruptcy or reorganization. Check one: Correct[X] Incorrect[ ]. If incorrect, explain: __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________5. The Corporation is duly qualified and authorized to transact business as a foreign corporation in the following states and is in good standing in such states: Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina 16. Since the date of incorporation, the corporate name of the Corporation has been changed as follows: Check, if appropriate: Not Applicable [X]7. Since the date of incorporation, the Corporation has made or entered into the following mergers or acquisitions: Check. if appropriate: None, Acquisition of the Allied Division of Variety Wholesalers, Inc., as of the date hereof.8. The chief executive office of the Corporation is located at: 102 Fahm Street, Savannah 6A9: The books and records of the Corporation pertaining to accounts, contract rights, inventory, etc. are located at (if other than the chief executive office referred to in Section 7 above): 102 Fahm Street Savannah 6A10. The Corporation has other places of business and/or maintains inventory or other assets at the following addresses (indicate whether locations are: owned, leased or operated by third parties and if leased or operated by third parties, their names and addresses): See Exhibit A attached here to. 211. Listed below is a complete list of real property owned by the Corporation with all respective trust deeds or mortgages against the properties. Check if appropriate: No real property owned [X].12. The places of business or other locations of any assets utilized by the Corporation during the last four (4) months other than those listed above are as follows: None
13. The Corporation is affiliated with, or has ownership in, the following corporations (including subsidiaries): None
14. The Federal Employer Identification Number of the Corporation is as follows 52-215069715. There is no provision in the Certificate of Incorporation or By-laws of the Corporation, or in the laws of the State of its incorporation, requiring any vote or consent of shareholders to borrow or to authorize the mortgage or pledge of or creation of a security interest in any assets of the Corporation or any subsidiary. Such power is vested exclusively in its Board of Directors. Check one: Correct [X] Incorrect[ ]. If incorrect, explain:__________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 316. The primary officers of the Corporation and their respective titles are as follows: Title Name —– —- President & CEO George Bellino Assistant Secretary, Executive VP Olivier Trouveroy CFO, Secretary Ted Boswell The following will have signatory powers as to all of your transaction with the Corporation: Olivier Trouveroy, George Bellino, Ted Boswell17. With respect to the officers noted above, such officers are affiliated with or have ownership in the following corporations: If none, check here See Exhibit B attached here to.
18. The members of the Board of Directors of the Corporation are: Olivier Trouveroy _________________ _________________ _________________ _________________ _________________ _________________19. The name of the stockholders of the Corporation and their stock holdings are as follows (if stock is widely held indicate only stockholders owning 10% or more of the voting stock):
420. There are no pending or threatened judgments and there is no pending or threatened litigation by or against the Corporation, its subsidiaries and/or affiliates or any of its officers/principals. Check one : Correct [X] Incorrect [ ]. If incorrect, explain exceptions :______________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________21. At the present time, there are no delinquent taxes due (including, but not limited to, all payroll taxes, personal property taxes). Check one: Correct [X] Incorrect [ ]. If incorrect, explain exceptions :______________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________22. The Corporation’s assets are owned and held free and clear of any security interests, liens or attachments. Check one: Correct [ ] Incorrect [X]. If incorrect, list below:
23. The Corporation has not guaranteed and is not otherwise liable for the obligations of others. Check one: Correct [X] Incorrect [ ]. If incorrect, explain: __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________24. The Corporation does not own or license any trademarks, patents, copyright or other intellectual property. Check one: Correct [ ] Incorrect [X]. If incorrect, indicate the type of intellectual property and whether owned or licensed, registration number, date of registration, and if licensed, the name and address of the licensor: Trademark Applications for Allied Fashion for Less (751,512,682) and Allied Department Stores (751,512,681)25. The Corporation’s fiscal year end is: December 31 526. With regard to any pension or profit sharing plan; N/A (a.) A determination as to qualification has been issued: Yes [ ] No [ ]. (b.) Funding is on a current basis and in compliance with established requirements:Yes [ ] No [ ].27. The Certified Public Accounting firm for the Corporation is: Name of firm Deloitte & Touche LLP Address 191 Peachtree Street, St. 1500, Atlanta, GA 30303 Patrner handling relationship Roger Herndon Phone Number 404-220-1864 Were financial statements uncertified for any fiscal year Yes [ ] No [X].28. The law firm for the Corporation is: Name of firm Mayer, Brown & Platt Address 1675 Broadway, New York, NY 10019 Partner handling relationship Kathleen A. Walsh Phone Number 212-506-250029. The name of all insurers, who have issued policies of insurance to the Corporation, their address, the number of the policy and the nature of the insurance coverage provided are as follows: See Exhibit D attached hereto.
30. The following are all banks or savings institutions at which the Corporation and its subsidiaries maintain deposit accounts: See Exhibit C attached hereto.
631. Prompt written notice will be given to you of any change or amendment with respect to any of the foregoing. Until such notice is received by you. you shall be entitled to rely upon the foregoing in all respects. CORPORATE SEAL TO BE Very Truly Yours. AFFIXED HEREIN BELOW ALLIED FASHION, INC. By: George Bellino Title: President EXHIBIT A Collateral Locations
EXHIBIT B Officer AffiliationsOlivier Trouveroy is a principal of Hampshire Equity Partners, which controlsseveral investment funds, including the sole shareholder of Allied Fashion, Inc.Through its investment funds, Hampshire Equity Partners holds investments inmany corporations. In addition, Olivier Trouveroy is a director of two publiccompanies, Cost Plus, Inc. and E.Spire Communications, Inc. DEPOSIT ACCOUNTS
-3- DATE (MM/DD/YY)ACORD CERTIFICATE OF LIABILITY INSURANCE 4/13/99PRODUCER THIS CERTIFICATE IS ISSUED AS MATTER OF Aon Risk Services Inc of NY INFORMATION ONLY AND CONFERS NO RIGHTS Two World Trade Center UPON THE CERTIFIED HOLDER. THIS New York, NY 10048 CERTIFICATE DOES NOT AMEND, EXTEND OF ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW COMPANIES AFFORDING COVERAGE COMPANY 212-441-1000 A American Home Assurance Co.INSURED COMPANY Allied Fashion, Inc. B CIGNA 102 Fahm Street COMPANY Savannah, GA 31401 C COMPANY DCOVERAGE THIS IS TO CERTIFY THAT THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD INDICATED. NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THE CERTIFICATE MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERM EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN MAY HAVE BEEN REDUCED BY PAID CLAIMS.
DESCRIPTION OF OPERATIONS/LOCATIONS/VEHICLES/SPECIAL ITEMS Congress Financial Corporation (Southwest), as lender is named as an additional insured.CERTIFICATE HOLDER CANCELLATION Congress Financial SHOULD ANY OF THE ABOVE DESCRIBED POLICIES Corporation (Southwest) BE CANCELLED BEFORE THE EXPIRATION DATE 1201 Main Street, Suite 1625 THEREOF, THE ISSUING COMPANY WILL ENDEAVOR TO Dallas, TX 75202 MAIL 30 DAYS WRITTEN NOTICE TO THE CERTIFICATE HOLDER NAMED TO THE LEFT. BUT FAILURE TO MAIL SUCH NOTICE SHALL IMPOSE NO OBLIGATION OR LIABILITY OF ANY KIND UPON THE COMPANY, ITS AGENTS OR REPRESENTATIVES. AUTHORIZED REPRESENTATIVE 337725000 /s/ Deirdre LinkyACORD 25,9 DATE (MM/DD/YY)ACORD. EVIDENCE OF PROPERTY INSURANCE 4/02/99THIS IS EVIDENCE THAT INSURANCE AS IDENTIFIED BELOW HAS BEEN ISSUED, IS INFORCE, AND CONVEYS ALL THE RIGHTS AND PRIVILEGES AFFORDED UNDER THE POLICY.
PROPERTY INFORMATIONLOCATION/DESCRIPTIONCOVERAGE INFORMATION
REMARKS (Including Special Conditions) Congress Financial Corporation (Southwest), as lender, is hereby named as a loss payee and/or additional insured as its interests may appear.CANCELLATION THE POLICY IS SUBJECT TO THE PREMIUMS, FORMS, AND RULES IN EFFECT FOR EACH POLICY PERIOD. SHOULD THE POLICY BE TERMINATED, THE COMPANY WILL GIVE THE ADDITIONAL INTEREST IDENTIFIED BELOW 30 DAYS WRITTEN NOTICE, AND WILL SEND NOTIFICATION OF ANY CHANGES TO THE POLICY THAT WOULD AFFECT THAT INTEREST, IN ACCORDANCE WITH THE POLICY PROVISIONS OR AS REQUIRED BY LAW.ADDITIONAL INTERESTNAME AND ADDRESS [ ] MORTGAGEE [X] ADDITIONAL INSURED [X] LOSS PAYEE [ ] Congress Financial Corporation LOAN’ (Southwest)-Suite 1625 AUTHORIZED REPRESENTATIVE 1201 Main Street /s/ Dallas, TX 75202 Lender’s Loss Payable Endorsement- Form 438 BFU1 Loss or damage, if any, under this policy shall be paid to CONGRESS FINANCIAL CORPORATION (SOUTHWEST), 1201 MAIN STREET, SUITE 1625, DALLAS, TX 75202, its assigns, as agent, its successors and assigns, hereinafter referred to as “the Lender” in whatever form or capacity its interests may appear and whether said interest be vested in said Lender in its individual or in its disclosed or undisclosed fiduciary or representative capacity, or otherwise, or vested in a nominee or trustee of said Lender.2 The insurance under this policy, or any rider or endorsement attached thereto, as to the interest only of the Lender, its successors and assigns, shall not be invalidated nor suspended: (a) by any error, omission, or change respecting the ownership, description, possession, or location of the subject of the insurance or interest therein, or the title thereto; (b) by the commencement of foreclosure proceedings or the giving of notice of sale of any of the property covered by this policy by virtue of any mortgage or trust deed; (c) by any breach of warranty, act, omission, neglect, or non-compliance with any of the provisions of this policy, including any and all riders now or hereafter attached thereto, by the named insured, the borrower, mortgagor, trustor, vendee, owner, tenant, warehouseman, custodian, occupant, or by the agents of either or any of them or by the happening of any event permitted by them or either of them, or their agents or which they failed to prevent whether occurring before or after the attachment of this endorsement, or whether before or after a loss, which under the provisions of this policy of insurance or of any rider or endorsement attached thereto would invalidate or suspend the insurance as to the named insured, excluding herefrom, however, any acts or omissions of the lender while exercising active control and management of the property.3 In the event of failure of the insured to pay any premium or additional premium which shall be or become due under the terms of this policy or on account of any change in occupancy or increase in hazard not permitted by this policy, this Company agrees to give written notice to the Lender of such non-payment or premium after sixty (60) days from and within one hundred and twenty (120) days after due date of such premium and it is a condition of the continuance of the rights of the Lender hereunder that the Lender when so notified in writing by this Company of the failure of the insured to pay such premium shall pay or cause to be paid the premium due within ten (10) days following receipt of the Company’s demand in writing therefor. If the Lender shall decline to pay said premium or additional premium, the rights of the Lender under this Lender’s Loss Payable Endorsement shall not be terminated before ten (10) days after receipt of said written notice by the Lender.4 Whenever this Company shall pay to the Lender any sum for loss or damage under this policy and shall claim that as to the insured no liability therefor exists, this Company, at its option, may pay to the Lender the whole principal sum and interest and other indebtedness due or to become due from the insured, whether secured or unsecured, (with refund of all interest not accrued), and this Company, to the extent of such payment, shall thereupon receive a full assignment and transfer, without recourse, of the debt and all rights and securities held as collateral thereto.5 If there be any other insurance upon the within described property, this Company shall be liable under this policy as to the Lender for the proportion of such loss or damage that the sum hereby bears to the entire insurance of similar character on said property under policies held by, payable to and expressly consented to by the Lender. Any Contribution Clause included in any Fallen Building Clause Waiver or any Extended Coverage Endorsement attached to this contract of insurance is hereby nullified, and also any Contribution Clause in any other endorsement or rider attached to this contract of insurance is hereby nullified except Contribution Clauses for the compliance with which the insured has received reduction in the rate charged or has received extension of the coverage to include hazards other than fire and compliance with such Contribution Clause is made a part of the consideration for insuring such other hazards. The Lender upon the payment to it of the full amount of its claim, will subrogate this Company (pro rata with all other insurers contributing to said payment) to all of the Lender’s rights of contribution under said other insurance.6 This Company reserves the right to cancel this policy at any time, as provided by its terms, but in such case this policy shall continue in force for the benefit of the Lender for ten (10) days after written notice of such cancellation is received by the Lender and shall then cease.7 This policy shall remain in full force and effect as to the interests of the Lender for a period of ten (10) days after its expiration unless an acceptable policy in renewal therefore with loss thereunder payment to the Lender in accordance with the terms of this Lender’s Loss Payable Endorsement, shall have been issued by some insurance company and accepted by the Lender.8 Should legal title to and beneficial ownership of any of the property covered under this policy become vested in the Lender or its agents, insurance under this policy shall continue for the term thereof for the benefit of the Lender but, in such event, any privileges granted by this Lender’s Loss Payable Endorsement which are not also granted the insured under the terms and conditions of this policy and/or under riders or endorsements attached thereto shall not apply to the insurance hereunder as respects such property.9 All notices herein provided to be given by the Company to the Lender in connection with this policy and this Lender’s Loss Payable Endorsement shall be mailed to or be delivered to the Lender at its office or branch at 1201 Main Street, Suite 1625, Dallas, TX 75202. Insured to: Allied Fashion, Inc. Agency at: Aon Risk Services Inc. of NY. 2 WTC. New York. NY 10048 Date: April 13, 1999 Schedule 6.3 DEPOSIT ACCOUNTS See Attached. DEPOSIT ACCOUNTS
Schedule 7.3(i) CONSIGNMENT INVENTORY None Schedule 8.3 CHIEF EXECUTIVE OFFICE; COLLATERAL LOCATIONSChief Executive Office:102 Fahm StreetSavannah, GA 31401Collateral Locations:See Attached.
-2- Collateral Locations (Schedule 8.3)
-8- Schedule 8.7 COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS See Attached Memo. Schedule 8.4 OTHER LIENS Any UCC Financing Statements filed of record with respect to equipmentleased by Borrower. Borrower is not aware of any liens on any owned equipment.[ENSR LOGO] MEMORANDUMTo: Laurene Goff/ING Equity Partners Date: March 23,1999From: Jennifer Ledbetter. P.E. File: 4507-061-100RE: Allied Fashion for Less CC: Halley Moriyama / ENSR George Bellino / Allied Fashion for LessOn Wednesday, March 17, 1999, I conducted a walk-through safety inspection ofAllied Fashion for Less (Allied) located at 102 Fahm Street in Savannah,Georgia. During the Inspection, I met with Mr. George Bellino, Mr. Ted Boswelland Ms. Terasa Reckner of Allied. This memo outlines the findings of myinspection.Emergency Action Plan (28 CFR 1910.38). The facility should prepare asite-specific emergency action plan that covers required items such asevacuation routes, procedures for accounting for employee during an emergency,assignments of designated personnel during an emergency, and means of reportingan emergency. Finding: The facility does not have a site-specific emergencyaction plan. Estimated cost to mitigate: S2,000.Means of Egress (29 CFR 1910.37). The facility should conduct a comprehensiveevaluation of exit doors, egress routes, signs, emergency lighting, alarmsystems, etc. Finding: Exit doors were locked; slide locks that could preventegress were observed on the exterior of office doors ; egress routes wereblocked with boxes or other items; combustible items were observed in an exithallway; exit signs were confusing. Estimated cost to mitigate: $2,000.Fire Extinguishers (29 CFR 1910.157). The facility should routinely inspect andmaintain fire extinguishers. Finding: Fire Extinguishers had not inspectedwithin the last year, extinguishers are not being checked monthly: someextinguishers were not mounted or were missing from designated locations; someextinguishers were inaccessible due to items in front of extinguishers; someextinguishers were not charged. Estimated cost to mitigate: $500.Electrical Safety (29 CFR 1910.303 et al.). Damaged electrical receptacle boxes,panel boxes, and extension cords should be replaced. Finding: An electricalpanel box cover behind the cardboard bailer had fallen off, outlet box coverswere missing; all outlets in the conference room had broken receptacles and oneshowed signs of heat damage; a prong was broken inside of a receptacle locatedon the wall with the elevator, wires were observed in the A/C unit drip pans;extension cords used as permanent wiring were observed throughout the building;damaged electrical cords on fans and the battery charging station were observed.Estimated cost to mitigate: $2,000 to $5,000.Hazard Communication (29 CFR 1910.1200). Most Allied personnel do not come intocontact with chemicals during their normal job function. Those employees (e.g.,maintenance and janitorial staff) that do come into contact with chemicalsshould be trained in hazard communication. Finding: The facility does not have awritten hazard communication plan; MSOSs are not being maintained; unlabelledchemicals were observed. Estimated cost to mitigate:$1,000.Bloodborne Pathogens ( 29CFR 1910.1030). The facility should implement aBloodborne Pathogen Program and train affected personnel. Finding: Alliedpersonnel are responsible for janitorial duties, and therefore could be exposedto bloodborne pathogens. Estimated cost to mitigate: $1,000.Record keeping of Occupational Injuries and Illnesses (29 CFR 1904). Thefacility should maintain OSHA 200 logs and supplementary records. Finding: Thefacility has not been maintaining OSHA 200 logs. Some injury reports are beingkept but the reports do not cover injuries for all employees at the facility.Estimated cost to mitigate: $0.Lock Out/Tag Out (29 CFR 1910.147). The facility should implement a lock out tagout program (or ensure that their contractor maintains one) for any workconducted on equipment (e.g., conveyors, automatic rollers, the[ENSR LOGO]cardboard bailer) that could become energized and cause injury. Finding: Thefacility does not maintain or require contractors to have a lock out/tag outprogram. Estimated cost to mitigate: $1,500.Asbestos (29 CFR 1910.1001). An asbestos survey should be conducted beforedisturbing any building materials. Finding: Suspect materials were observedin the office areas and on piping on the third floor. No asbestos survey hasbeen conducted at the facility. Estimated cost to conduct survey; $1,500.The following is a list of miscellaneous items that were noted during theinspection:- – Compressed gas cylinders (Helium in the loading area, Oxygen in the mezzanine, and welding gases in the maintenance shop) were observed. According to facility personnel, compressed gases are not needed; therefore, these cylinders should be removed from the site or maintained (e.g., secured) properly.- – A guard covering the belt on the motor located underneath the loading area conveyor was missing.- – Chains at the top of the concretes stairs should be replaced w/ permanent railings. One of the chains was secured to an electrical conduit.- – The fork lift driver’s training should be documented.- – Due to the addition of the mezzanine level,some space heaters are now floor level and should be protected so employees are not injured by the heaters.- – Kill switches and lines on automatic rollers should be routinely tested. The pull line on the third floor automatic rollers appeared to be loose.- – Distance between wheel and resting area of pedestal grinder in maintenance shop appeared to be greater than 1/8 inch.- – The cardboard bailer could be construed as a confined space. At a minimum, a warning sign indicating that employees are not to enter the bailer should be visible and employees should be instructed to never enter the bailer.- – The mezzanine level should be placarded to show that it is rated properly for loads placed upon it.- – A 55-gallon drum containing residual dry spot cleaner was observed on the third floor. According to facility personnel, this chemical is no longer used at the facility. The drum and residual chemical should be disposed of properly.- – Two wooden walkways across the rollers on the third floor should be replaced with manufactured walkways.- – The water fountain in reception area should be turned off or repaired so that water leaking from it does not create a slip hazard.- – On the mezzanine level, the metal platform (by the concrete stairs) that passes through the doorway should be moved or extended so there is no gap between the platform and gate.Estimated cost to mitigate the above Items: $2,000 to $3,000In addition. I visited the Allied Fashion retail store (#19-649) located at theWest Side Shopping Mall on Highway 50 in Garden City, Georgia. Items notedduring the walk through Included:- – The rear fire exit door was locked with a pad lock.- – The fire extinguisher in the storeroom was not mounted and is not being routinely inspected. Also, a fire extinguisher should be available in the store area.- – The panic bar alarm leading to the store room exit was not activated.- – Allied employees, who are responsible for janitorial duties and/or chemical use, should be trained in bloodborne pathogens and hazard communication. Page 2 Schedule 8.8 TITLE TO PURCHASED ASSETS Any UCC Financing Statements filed of record with respect to equipmentleased by Borrower. Borrower is not aware of any liens on any owned equipment.