-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jl6wh+FhJ4uCT/9DWHK/mfl1hfGhgcKGwPoUoucLoNXZmpKEaa+Orp/LAazYdnJB nH++EZBrqDaAeVs7FrOArA== 0000950137-97-003834.txt : 19971117 0000950137-97-003834.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950137-97-003834 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DECORATIVE HOME ACCENTS INC CENTRAL INDEX KEY: 0001000453 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 570998387 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-96794 FILM NUMBER: 97721964 BUSINESS ADDRESS: STREET 1: INDUSTRIAL PARK DR STREET 2: P.O. BOX 11877 CITY: ABBEVILLE STATE: SC ZIP: 29620 BUSINESS PHONE: 8644462123 MAIL ADDRESS: STREET 1: P.O. BOX 1187 CITY: ABBEVILLE STATE: SC ZIP: 29620 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: March 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number: 33-96794 -------- DECORATIVE HOME ACCENTS, INC. (Exact name of registrant as specified in its charter) Delaware 57-0998387 - ------------------------------- ----------------------------------- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) Industrial Park Drive, Abbeville, South Carolina 29620 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (864) 446-2123 Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports). Yes [ ] No [X] Indicate by check mark whether the registrant has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of September 15, 1997, there were 109,737 shares outstanding of the Registrant's Class A Common Stock ($0.01 par value), 1,756,126 shares outstanding of the Registrant's Class B Non-Voting Common Stock ($0.01 par value), 386,040 shares outstanding of the Registrant's Class C Common Stock ($0.01 par value), 808,333 shares outstanding of the Registrant's Class D Common Stock ($0.01 par value), 118,100 shares outstanding of the Registrant's Class F Common Stock and 60,100 shares outstanding of the Registrant's 14% Cumulative Redeemable Preferred Stock ($0.01 par value). 2 DECORATIVE HOME ACCENTS, INC. QUARTER ENDED MARCH 31, 1997 INDEX
Page No. ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996................ 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 1997 and 1996............................................ 4 Condensed Consolidated Statement of Stockholders' Equity (Deficiency) for the three months ended March 31, 1997...................................... 5 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996............................................ 6 Notes to Condensed Consolidated Financial Statements (Unaudited).............................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings...................................... 16 Item 2. Changes in Securities.................................. 16 Item 3. Defaults Upon Senior Securities........................ 16 Item 4. Submission of Matters to a Vote of Security Holders.... 16 Item 5. Other information...................................... 16 Item 6. Exhibits and Reports on Form 8-K....................... 16 Signature Page.................................................. 17
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) - --------------------------------------------------------------------------------
March 31, December 31, 1997 1996 (1) ----------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,453 $ 1,980 Accounts receivable - net of allowance for doubtful accounts of $5,194 at March 31, 1997 and $7,014 at December 31, 1996 27,060 25,800 Income taxes receivable 164 498 Inventories (Note 3) 35,599 32,565 Other current assets 1,830 1,212 ---------- ---------- Total current assets 66,106 62,055 PROPERTY, PLANT AND EQUIPMENT, NET (Note 3) 31,906 32,262 OTHER ASSETS 7,769 7,946 INTANGIBLE ASSETS, NET 13,404 13,783 ---------- ---------- TOTAL ASSETS $ 119,185 $ 116,046 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Current portion of long-term debt (Note 5) $ 117,930 124,830 Accounts payable 13,739 17,231 Accrued liabilities 5,638 6,176 Accrued interest 4,062 -- ---------- ---------- Total current liabilities 141,369 148,237 LONG-TERM DEBT (Note 5) 43,317 34,100 REDEEMABLE PREFERRED STOCK 51,453 49,351 REDEEMABLE COMMON STOCK 2,749 2,476 STOCKHOLDERS' EQUITY (DEFICIENCY): Common stock 9 9 Additional paid-in capital 4,311 6,685 Reduction of certain equity interest to predecessor basis (6,209) (6,209) Accumulated deficit (117,814) (118,603) ---------- ---------- Total stockholders' equity (deficiency) (119,703) (118,118) ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 119,185 $ 116,046 ========== ==========
(1) Derived from December 31, 1996 audited consolidated financial statements. See notes to condensed consolidated financial statements (unaudited). 3 4 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED) - --------------------------------------------------------------------------------
Three Months Ended March 31, ------------------------------------ 1997 1996 --------------- ------------ SALES (Note 8) $ 35,897 38,783 COST OF GOODS SOLD 27,826 28,836 -------------- ------------- GROSS PROFIT 8,071 9,947 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,390 11,736 -------------- ------------- LOSS FROM OPERATIONS (1,319) (1,789) OTHER INCOME (Note 6) 3,748 -- INTEREST EXPENSE, NET (5,196) (4,605) -------------- ------------- LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM (2,767) (6,394) INCOME TAX BENEFIT -- 2,106 -------------- ------------- NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (2,767) (4,288) EXTRAORDINARY GAIN FROM FORGIVENESS OF DEBT, NET OF TAXES 3,556 -- -------------- ------------- NET INCOME (LOSS) $ 789 $ (4,288) =============== =============
See notes to condensed consolidated financial statements (unaudited). 4 5
DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (IN THOUSANDS) FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ Reduction of Certain Equity Interest to Total Common Additional Predecessor Accumulated Stockholder's Stocks Paid-in Capital Basis Deficiency Equity (Deficiency) ------- ---------------- -------------- ------------ ------------------ Balances at December 31, 1996 $ 9 $ 6,685 $ (6,209) $ (118,603) $ (118,118) Accretion of redeemable common stock for the three months ended March 31, 1997 (273) (273) Accretion of redeemable preferred stock for the three months ended March 31, 1997 (227) (227) Preferred stock dividends paid in-kind for the three months ended March 31, 1997 (1,874) (1,874) Net income for the three months ended March 31, 1997 789 789 ------ ----------- ----------- ----------- ------------- Balances at March 31, 1997 $ 9 $ 4,311 $ (6,209) $ (117,814) $ (119,703) ====== =========== =========== =========== =============
See notes to condensed consolidated financial statements (unaudited). 5 6 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) - --------------------------------------------------------------------------------
Three Months Ended March 31, 1997 1996 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 789 $ (4,288) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,470 2,328 Deferred tax (benefit) provision -- (2,143) Retirement of related party debt (Note 6) (6,900) -- Changes in operating assets and liabilities: Accounts receivable (1,260) (2,273) Inventories (3,034) (3,992) Income tax receivable 334 (774) Other current assets (618) (479) Accounts payable (3,492) (766) Accrued liabilities (538) (1,009) Accrued interest 4,062 (3,516) -------------- ------------ Net cash used in operating activities (9,187) (16,912) -------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (734) (857) Other long-term assets 177 (524) -------------- ------------ Net cash used in investing activities (557) (1,381) -------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving line of credit 9,217 19,874 Redeemable preferred stock dividends paid -- (1,750) -------------- ------------ Net cash provided by financing activities 9,217 18,124 -------------- ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT (527) (169) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,980 169 -------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,453 $ -- ============== ============ SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 1,134 9,875 Non-cash activities: Forgiveness of debt (Note 6) $ 6,900 --
See notes to condensed consolidated financial statements (unaudited). 6 7 DECORATIVE HOME ACCENTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1997 AND 1996 - ------------------------------------------------------------------------------- 1. BASIS OF INTERIM PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the Company's financial position as of March 31, 1997 and the results of its operations and its cash flows for the three months ended March 31, 1997 have been included. Operating results for the three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. The condensed financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 1996. For interim reporting, the Company's subsidiary, Home Innovations. Inc. ("HII") uses an estimated gross profit based on information provided by its accounting and financial systems. At year-end, inventories of the Company are stated at the lower of cost, determined using the first-in, first-out ("FIFO") method, or market. As discussed in Note 7, on September 29, 1997, the Company filed a pre-negotiated filing under the provisions of Chapter 11 of the United States Bankruptcy code in order to effect a financial reorganization of the Company. The plan of reorganization makes provision for the payment of all pre-petition trade debt following the confirmation of the plan. The financial statements of the Company are prepared on a going concern basis which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. In accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" issued by the American Institute of Certified Public Accountants ("SOP 90-7"), subsequent to the September 29, 1997 Chapter 11 filing and until the confirmation date, all pre-petition liabilities that are subject to compromise under the plan of reorganization (the $118.1 million principal amount of 13% Senior Notes plus all accrued and unpaid interest on the Senior Notes and the 14% Redeemable Preferred Stock) will be classified on the condensed balance sheets as liabilities subject to compromise. As of the effective date of the plan of reorganization, the Company will adopt "fresh start" reporting as defined in SOP 90-7. In accordance with "fresh start" reporting, the reorganization value of the Company will be allocated to the emerging entity's specific tangible and identifiable intangible assets. Any excess reorganization value will be reported as "reorganization value in excess of amounts allocable to identifiable assets." As a result of the adoption of such "fresh start" reporting, the Company's post-emergence financial statements ("successor") will not be comparable with its pre emergence financial statements ("predecessor") including the historical financial statements included in this quarterly report. 7 8 2. ORGANIZATION The accompanying interim consolidated financial statements as of March 31, 1997, include the accounts of Decorative Home Accents, Inc. ("DHA" or the "Company") and its wholly-owned subsidiaries, The Rug Barn, Inc. ("Rug Barn") and Home Innovations, Inc. All significant intercompany transactions and accounts have been eliminated. 3. BALANCE SHEET COMPONENTS Inventories are summarized as follows (in $000's):
MARCH 31, DECEMBER 31, 1997 1996 ---------- ----------- Raw materials $ 14,068 $ 13,964 work-in-process 3,002 2,654 Finished goods 18,529 15,947 ---------- ---------- $ 35,599 $ 32,565 ---------- ----------
Property, plant and equipment is summarized as follows (in $000's):
MARCH 31, DECEMBER 31, 1997 1996 ---------- ----------- Land $ 862 $ 862 Buildings and improvements 16,971 16,782 Furniture and fixtures 5,308 5,296 Machinery and equipment 15,687 15,536 ---------- ----------- 38,828 38,476 Accumulated depreciation (8,771) (7,594) ---------- ----------- 30,057 30,882 Construction in progress 1,849 1,380 ---------- ----------- $ 31,906 $ 32,262 ---------- -----------
4. INCOME TAXES The Company's income tax benefit for the three months ended March 31, 1997 was calculated at an effective rate of 38% before being offset by an increase in the tax valuation allowance. Management of the Company cannot be assured that the net deferred income tax asset will be realized, therefore the deferred tax asset has been fully reserved. 5. LONG-TERM DEBT On November 12, 1996, the Company and certain subsidiaries entered into a Loan and Security Agreement (the "Agreement") with a revolving credit facility to provide for revolving loans ("Loans") and letters of credit ("Letters of Credit") in an aggregate principal amount of up to $50 million, subject to borrowing limitations, for a three year period. The Agreement may be renewed from year to year thereafter at the mutual agreement of the parties. The initial borrowing of $35.4 million on November 12, 1996 was utilized to repay amounts owed the prior lender under the Company's former Revolving 8 9 Credit Facility. Borrowings under the $50 million Revolving Credit Facility bear interest, at the Company's discretion, at a rate of 5/8% percent per annum in excess of the Prime Rate or 3-1/4% percent per annum in excess of the Eurodollar Rate. The borrowings are secured by a first priority lien on the accounts receivable and inventories of the Company's subsidiaries. The Company is required to maintain a minimum adjusted tangible net worth, as defined, and the payment of cash dividends on the Company's common stock is prohibited in accordance with the Agreement. Further, there are limitations on the ability of the Company to incur additional indebtedness and make loans, advances and investments. On March 1, 1997, the Agreement was amended to provide for a line of credit ("Supplemental Facility") pursuant to which the lender made supplemental loans ("Supplemental Loans") of $5 million. At March 31, 1997, the Company's outstanding borrowings under the Revolving Credit Facility and the Supplemental Facility totaled approximately $38.2 million. The Supplemental Loans under the Supplemental Facility were repaid on May 27, 1997. Additionally, on May 23, 1997, the Agreement was amended for, among other things, changes in certain covenants including the tangible net worth calculation. There were no Events of Default (as defined) under the Agreement, as amended, at March 31, 1997. In connection with the pre-negotiated Chapter 11 filing by the Company and its subsidiaries, the Agreement was amended. See Note 7 - Subsequent Events. The Company's did not make the scheduled interest payment of approximately $7.7 million on its Senior Notes due on June 30, 1997. As a result the Company has reclassified $118.1 million of long-term debt as a current liability. See Note 7 regarding the Company's planned financial reorganization. On March 11, 1997, $6.9 million of the Company's Senior Notes were retired. See Note 6 - Related Party Transaction. 6. RELATED PARTY TRANSACTION During 1996, two of the Company's officers who were members of the Board of Directors resigned. Subsequent to their resignation, certain allegations concerning wrongful acts were made by the Company and certain stockholders. On March 11, 1997, in consideration of the release and discharge from all claims, damages, and all causes of action, the two former officers and members of the Board of Directors returned to the Company 965,101 shares of the Company's Class A Common Stock, 6,900 shares of the Company's Class F Common Stock, $6.9 million of the Company's Senior Notes and $448,000 in cash. The Company recorded approximately $3.7 million as other income and approximately $3.6 million as an extraordinary gain in the first quarter of 1997, as a result of this settlement and forgiveness of debt. 7. SUBSEQUENT EVENTS On May 15, 1997, the Company reached an agreement in principle with certain of the Company's bond holders and equity holders providing for a comprehensive capital restructuring plan. The restructuring agreement was entered into by the Company's preferred stockholder, TCW Special Credits Fund V - The Principal Fund ("Fund V") and the beneficial owners of approximately 76% of the principal amount of the Senior Notes, Magten Asset Management Corp., solely as agent for various of its investment advisor clients in their respective accounts at Magten ("Magten"), and CIGNA. The restructuring plan will, among other things, (i) convert the $118.1 million principal amount still outstanding on the 13% Senior Notes plus all accrued and unpaid interest on the Senior Notes into 92.5% of the Company's common equity, (ii) exchange all the Company's 14% redeemable preferred stock into 7.5% of the common equity along with a 5-year warrant to purchase up to 7.5% of the fully diluted common equity and, (iii) exchange all of the classes of common stock into a 5-year warrant to purchase up to 2.5% of the fully diluted equity. In connection with the Company's capital restructuring plan, the Company did not pay interest on the Senior Notes due on June 30, 1997. 9 10 Pursuant to the restructuring plan, Magten provided the Company with a secured term loan facility of up to $20 million (the "Secured Term Loan Facility") ($15 million was advanced to the Company on May 23, 1997 and an additional $5 million was advanced to the Company on July 9, 1997). Magten also earned a $5 million closing fee which will be waived under certain conditions set forth in the credit agreement with respect to the Secured Term Loan Facility. Additionally, the indenture that governs the Senior Notes was modified to permit the Company to incur the Secured Term Loan Facility. It is contemplated that the Secured Term Loan Facility will be repaid with the proceeds of a rights offering to purchase additional shares of the Company's common stock upon a consummation of the restructuring. Pursuant to certain agreements, dated September 26, 1997 (the "Exercise Agreements"), Magten and Fund V each agreed to exercise all rights and/or oversubscription options issued to them in the rights offering so that the Company will receive sufficient proceeds from the rights offering to enable it to pay in full in cash all of the indebtedness under the Secured Term Loan Facility. A portion of the proceeds from the Secured Term Loan Facility was used to retire the Supplemental Facility described in Note 5. In connection with the Secured Term Loan Facility provided by Magten, the Company's existing working capital lender and Magten entered into an inter-creditor agreement. The proposed restructuring plan and the Exercise Agreements are subject to various conditions. On September 29, 1997, a pre-negotiated filing under the provisions of Chapter 11 of the United States Bankruptcy Code was made by the Company and its subsidiaries in order to effect the restructuring plan. Concurrent therewith, the Company filed its plan of reorganization with the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") that reflects the proposed restructuring plan described above. The plan of reorganization provides for the payment in full of all unpaid pre-petition trade debt following the consummation of the plan. The Company is prohibited from making payment on any pre-petition obligations during the course of the Chapter 11 filing. In the event that a restructuring is not consummated, management of the Company believes that the Company's inability to pay all of the current obligations and service its debt as required raises substantial doubt about the Company's ability to continue as a going concern. In connection with the pre-negotiated Chapter 11 filing, the Company (with the approval of the Bankruptcy Court) has entered into a debtor-in-possession post-petition term loan agreement ("Term Loan") with Magten. The Term Loan provided $3.75 million of borrowings and is secured by all of the assets of the Company and its subsidiaries and the common stock of the Company's subsidiaries. Any amounts outstanding under the Term Loan agreement as of the effective date of the restructuring will be repaid with the proceeds from a new secured term loan of up to $7.5 million to be funded by Magten. Funding of this $7.5 million term loan is subject to various conditions. Subsequent to the Chapter 11 bankruptcy filing, the Company (with the approval of the Bankruptcy Court) entered into a debtor-in-possession financing agreement with Congress Financial Corporation which has amended the pre-petition Agreement. The form of this financing substantially conforms with the Company's previous Agreement with Congress. In connection with the restructuring, the Company entered into employment retention agreements with certain key management personnel. The agreements provide for, among other things, a guaranteed bonus payment in March 1998 if the individual is employed by the Company on that date. The maximum obligation to the Company for payments under these agreements is $1.1 million. During the three months ended March 31, 1997 a charge of $256,000 was recorded for these retention agreements. On February 28, 1997, the Company also entered into amended and restated employment and non-competition agreements with certain officers. Each of such agreements provides that if the applicable officer's employment is terminated within 90 days following a change of control of the Company, by (i) the Company without good cause, (ii) a successor to the Company without good cause or (iii) the officer, then the Company shall pay the officer an amount in cash, which amount for all such officers aggregates approximately $2.5 million. 10 11 In connection with the restructuring plan discussed elsewhere herein, the original license with Calvin Klein, Inc. was terminated on April 26, 1997 and on April 27, 1997, Calvin Klein and DHA Home, Inc. entered into interim license agreement (the "Interim License Agreement") with similar terms and conditions. As part of the Interim License Agreement, the Company changed the name of Calvin Klein Home, Inc. to DHA Home, Inc. The Interim License Agreement expires upon the earlier of April 30, 1998, or the completion of the restructuring plan. Upon the consummation of the restructuring, the Company believes that Calvin Klein has committed to enter into a new multiple year license agreement on similar terms and conditions that would extend through the year 2004. DHA Home also believes that it has a good relationship with Calvin Klein and continues to work with Calvin Klein on long-range plans for Calvin Klein license products. Notwithstanding DHA Home's belief, Calvin Kelin has asserted that (i) no assurances can be given that any such license will be entered into and (ii) Calvin Klein has not committed to enter into any such long-term license. At March 31, 1997, the carrying amount of the Calvin Klein license agreement is $8,087,000, which is calculated based on the original contract period ending in 2004. If the above described restructuring is not completed, Calvin Klein, Inc. may not renew its license agreement with the Company. Failure to renew the license agreement on a long-term basis would result in a charge to earnings for the unamortized balance of the license agreement and may otherwise have a material adverse effect on the Company's future results of operations. 8. THE RUG BARN, INC. SALES DECLINE Through September 1997, the Company has experienced a significant decline in sales at The Rug Barn, Inc. Demand for the Rug Barn's core product of two and three-layer cotton throws has continued to decline in the giftware distribution channel served by the Rug Barn. Through September 1997, order bookings have declined approximately 50% compared to the same period in 1996. Management of the Company is addressing the sales decline through reductions in fixed overhead costs and planned expanded product offerings. The fixed overhead reductions are expected to be completed by December 31, 1997. The new product offerings will include both internally manufactured and outsourced products targeted at the giftware distribution channel Management does not expect that the new product offerings will favorably impact 1997 operating results and expects that the operations at the Rug Barn will incur an operating loss through December 31, 1997. 9. LEGAL PROCEEDINGS On July 29, 1997, a fixture supplier of the Company filed suit seeking $1.9 million in damages, against the Company claiming that the Company failed to fulfill its obligations under a supply arrangement. Management of the Company intends to vigorously defend against the suit. Further, management expects to contest the claim during the course of its Chapter 11 case. Management does not expect that the ultimate settlement of the claim will have a material adverse impact on the Company. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion provides management's assessment of the results of operations and liquidity and capital resources of DHA. This discussion should be read in conjunction with the respective unaudited condensed consolidated financial statements of DHA and the notes thereto included elsewhere in this Form 10-Q and the audited consolidated financial statement of DHA and the notes thereto for the year ended December 31, 1996 reported on Form 10-K with the Securities and Exchange Commission. RESULTS OF OPERATIONS Comparison of Three Months Ended March 31, 1997 with Three Months Ended March 31, 1996 NET SALES Net sales for the three months ended March 31, 1997 decreased by approximately $2.9 million, or 7.4%, to $35.9 million from $38.8 million for the three months ended March 31, 1996. The Company experienced significantly weakened sales during the first quarter of 1997 in its gift division (The Rug Barn, Inc.). Sales from the gift division decreased approximately $2.8 million, or 34%, during the first quarter of 1997 compared to the gift division sales during the first quarter of 1996. As discussed in Note 8 to the Condensed Consolidated Financial Statements, order bookings for the gift division through September 1997 have declined approximately 50% from the comparable 1996 period. Accordingly, the Company expects to experience continued weakening in sales from the gift division during 1997. In addition, the gift division was negatively impacted by delivery problems for product offerings sourced from other manufacturers. The liquidity shortages faced by the Company in the three months ended March 31, 1997 and to date have also significantly impacted the Company's ability to service its customer base. Given the limited resources, the Company attempted to service its most significant customers. Sales from the Company's bath division decreased as a result of the Company's inability to procure piece goods as a result of liquidity issues and industry-wide towel blank availability limitations. These declines were partially offset by increased sales from the Company's Calvin Klein Home Collection product line. GROSS PROFIT Gross profit decreased approximately $1.9 million, or 18.9%, to $8.1 million for the three months ended March 31, 1997 from $9.9 million for the three months ended March 31, 1996. Gross profit margin decreased to 22.5% for the three months ended March 31, 1997 from 25.6% for the three months ended March 31, 1996. This decrease primarily resulted from decreased sales in the Company's gift division which accounted for approximately $1.5 million of the decrease in gross profit. Historically, gross profit margins achieved on products in the gift division have been higher than those earned on the Company's other product lines. The Company also experienced efficiency losses in its cut-and-sew plants as a result of liquidity constraints negatively impacting raw material purchases. SELLING, GENERAL & ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses decreased approximately $2.3 million, or 20%, to $9.4 million for the three months ended March 31, 1997 from $11.7 million for the three months ended March 31, 1996. SG&A expenses decreased as a percentage of sales to 26.2% for the three months ended March 31, 1997 from 30.3% million for the three months ended March 31, 1996. Favorably impacting the 1997 results was a decrease of approximately $700,000 in salary and benefit costs as a result of headcount reductions made throughout 1996. Additionally, the 1996 results included approximately $1.1 million of goodwill amortization. As discussed below, the Company wrote-off its unamortized goodwill at December 31, 1996 and accordingly, there was no goodwill amortization in 1997. 12 13 Prior to the fourth quarter of 1996, the Company evaluated the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining amortization period could be recovered through undiscounted future operating cash flows of the acquired operations. In the fourth quarter of 1996, the Company changed its method for evaluating the recoverabilty of goodwill to a method whereby the carrying amount is compared to its estimated fair value, and any excess carrying amount is determined to be impaired. Based on an evaluation of the recoverability of goodwill at December 31, 1996, the Company concluded that its unamortized balance of goodwill, $79.7 million, was impaired and recorded a pre-tax charge for such amount in the 1996 consolidated statement of operations. OTHER INCOME AND EXRAORDINARY ITEM During 1996, two of the Company's officers who were members of the Board of Directors resigned. Subsequent to their resignation, certain allegations concerning wrongful acts were made by the Company and certain stockholders. On March 11, 1997, in consideration of the release and discharge from all claims, damages, and all causes of action, the two former officers and members of the Board of Directors returned to the Company 965,101 shares of the Company's Class A Common Stock, 6,900 shares of the Company's Class F Common Stock, $6.9 million of the Company's Senior Notes and $448,000 in cash. The Company recorded approximately $3.7 million as other income and approximately $3.6 million as an extraordinary gain in the first quarter of 1997, as a result of this settlement and forgiveness of debt. INTEREST EXPENSE, NET Interest expense increased approximately $591,000, or 12.8%, to $5.2 million for the three months ended March 31, 1997 compared to $4.6 million for the same period in 1996. During the first quarter of 1997 the Company incurred additional borrowings from its revolving credit facility of approximately $9.2 million to support operating activities. INCOME TAXES The Company's income tax benefit for the three months ended March 31, 1997 was calculated at an effective rate of 38% before being offset by an increase in the tax valuation allowance. Management of the Company cannot be assured that the net deferred income tax asset will be realized, therefore the deferred tax asset has been fully reserved. SEASONALITY The Company's business is seasonal in nature with its highest sales levels historically occurring during the third and fourth fiscal quarters, which includes the holiday selling season. LIQUIDITY AND CAPITAL RESOURCES During the first half of 1997, the Company experienced significant liquidity constraints as a result of poor operating performance during the fourth quarter of 1996 and a December 31, 1996 payment of the $8.125 million interest on the Company's Senior Notes. Additionally, the Company experienced a significant reduction in vendor trade credit and was forced to operate on a cash-in-advance or cash-on-delivery basis. As a result, the Company was unable to service all of its customers. Also, operating efficiencies of the Company's plants were negatively impacted due to the restricted raw material purchasing ability. The comprehensive restructuring plan discussed herein provided additional liquidity to the Company through a $20 million secured term loan facility. Additionally, the post-petition term loans from Magten and the DIP financing will provide additional liquidity. Management believes that these sources of liquidity combined with operating cash flow will be adequate to service the working capital needs of the Company as well as 13 14 fund operating losses at the Rug Barn which are expected to continue through 1997. In the event that a restructuring is not consummated, the ability of the Company to continue as a going concern is doubtful. The Company's Revolving Credit Facility provides for a revolving loan facility and letters of credit based on specified levels of underlying collateral with a maximum principal amount equal to the lesser of (a) $50 million or (b) a specified borrowing base, which is based on eligible receivables and inventory of the Company and its operating subsidiaries ("Borrowing Subsidiaries"). The Revolving Credit Facility (or a similar credit facility) is essential for the Company's working capital needs. The Company is required to maintain a minimum adjusted tangible net worth, as defined, and the payment of cash dividends on the Company's common stock is prohibited in accordance with the Revolving Credit Facility. Further, there are limitations on the Company's ability to incur additional indebtedness and make loans, advances and investments. On May 23, 1997, the Revolving Credit Facility was amended for, among other things, changes in certain covenants including the tangible net worth calculation. There were no Events of Default (as defined) under the Revolving Credit Facility, as amended, at March 31, 1997. On March 31, 1997, the Company had approximately $1.5 million available for borrowing under the Revolving Credit Facility borrowing base formula. Borrowings under the Revolving Credit Facility are made on a daily basis for requirements for that business day and repayments are made on a daily basis by cash collections from trade accounts receivables. Cash used in operating activities was approximately $9.2 million for the three months ended March 31, 1997 compared to use of cash of $16.9 million for the three months ended March 31, 1996. The principal reason for the change is due to the timing of the Company's $8.1 million interest payment on its Senior Notes. The Company used approximately $3.5 million in the three months ended March 31, 1997 to reduce trade payables as a result of decreasing trade credit from the Company's vendors. Accounts receivable and inventories increased approximately $1.3 million and $3.0 million, respectively, in the three months ended March 31, 1997. Cash used in investing activities was approximately $557,000 for the three months ended March 31, 1997 compared to $1.4 million used in the three months ended March 31, 1996. The Company used approximately the same amount of cash for property and equipment purchases in both periods. Cash used for the purchase of long-term assets decreased by a net of approximately $701,000 in the first quarter of 1997 compared to the first quarter of 1996. This resulted from ongoing systems conversions programs which were cut back in 1997 due to liquidity constraints. Cash provided by financing activities was approximately $9.2 million for the three months ended March 31, 1997 compared to $18.1 million for the three months ended March 31, 1996. This change is primarily due to the timing of the Company's interest payment on its Senior Notes. See Note 7 to the Condensed Consolidated Financial Statements. INFLATION Although the operations of the Company are generally influenced by economic conditions, the Company does not believe that inflation had a material effect on the results of operations during the three months ended March 31, 1997 and 1996. The Company has been historically able to mitigate the impact of the increases in the spot market prices of cotton through fixed price purchase contracts. EFFECT OF COMPLIANCE WITH ENVIRONMENTAL PROTECTION PROVISIONS Compliance with Federal, State and local provisions that have been enacted or adopted regulating the discharge of materials in the environment, or otherwise relating to protection of the environment, has not had, and is not expected to have, a material adverse effect on the capital expenditures, net income or competitive position of the Company. 14 15 PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements contained in this Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this Quarterly Report on Form 10-Q that a number of important factors could cause the Company's actual results in 1997 and beyond to differ materially from those expressed in any such forward-looking statements. These factors include, without limitation, the general economic and business conditions affecting the retail industry, the Company's ability to complete its plan of reorganization, competition from a variety of firms ranging from small manufacturers to large textile mills, the seasonality of the Company's sales, the volatility of the Company's raw material cost, the Company's dependence on key personnel and the risk of loss of a material customer or a significant license. These and other factors are more fully described in the Company's previous filings with the Securities and Exchange Commission including, without limitation, the Company's Prospectus dated November 10, 1995. 15 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 29, 1997, a fixture supplier of the Company filed suit seeking $1.9 million against the Company claiming that the Company failed to fulfill its obligations under a supply arrangement. Prayed damages are approximately $1.9 million. Management of the Company intends on vigorously defending the suit. Further, management expects to contest the claim during the course of its Chapter 11 case. Management does not expect that the ultimate settlement of the claim will have a material adverse impact on the Company. As contemplated by the Company's capital restructuring plan, the Company filed a pre-negotiated filing under the provisions of Chapter 11 of the United States Bankruptcy on September 29, 1997. See Note 7 to the Condensed Consolidated Financial Statements contained in Part I of this Form 10-Q. The Company is involved in various routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings, except for the pre-negotiated Chapter 11 filing, could have a material adverse impact on the financial condition or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES (a) The Company did not make a scheduled interest payment of approximately $7.7 million on its Series B 13% Senior Notes due on June 30, 1997. The principal amount of the Senior Notes is $118.1 million. The terms of the indenture governing the Company's Senior Notes provide that such a failure to pay interest when due results in an event of default on such indebtedness and as a result, the holders of these debt securities are entitled to accelerate the debt represented thereby. In addition, under the indenture, as a consequence of the Chapter 11 bankruptcy filing by the Company, the indebtedness under the Senior Notes was automatically accelerated and became immediately due and payable. (b) On July 15, 1997 the Company did not make a scheduled dividend payment in kind of approximately $1.9 million on its Redeemable Preferred Stock ($0.01 par value). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE ITEM 5. OTHER INFORMATION NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS SEE EXHIBIT INDEX. (B) REPORTS ON FORM 8-K NONE 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. Decorative Home Accents, Inc. ------------------------------------- (Registrant) Date: November 14, 1997 /s/ Jay N. Baker ------------------------------------- Jay N. Baker* Chief Financial Officer *Duly authorized to sign on behalf of the Registrant. 17 18 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- -------------------------------------------------------------- 2.1 Plan of Reorganization 10.1 Credit Agreement between Decorative Home Accents, Inc. and the Lenders, as defined therein. 27 Financial data schedule 18 EX-2.1 2 PLAN OF REORGANIZATION 1 EXHIBIT 2.1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK In re ) Chapter 11 ) DECORATIVE HOME ACCENTS, INC., ) Case Nos. a Delaware corporation; THE RUG ) BARN, INC., a South Carolina ) corporation; HOME INNOVATIONS, ) INC., a Delaware corporation; ) Jointly Administered HOME INNOVATIONS, INC., a New ) York corporation; DHA HOME, ) This Document Applies to INC., a Delaware corporation; ) All Cases R.A. BRIGGS AND COMPANY, an Il- ) linois corporation; and ) DRAYMORE MFG. CORP., a North ) Carolina corporation, ) ) Debtors. ) ______________________________________ DEBTORS' JOINT PLAN OF REORGANIZATION DATED SEPTEMBER 29, 1997 - -------------------------------------------------------------- Michael A. Morris and John Weiss and Thomas F. Berner Thomas R. Kreller, Members of Katten Muchin & Zavis Stutman, Treister & Glatt 1133 Avenue of the Americas Professional Corporation New York, NY 10036 3699 Wilshire Blvd., 9th Floor Los Angeles, CA 90010 General Counsel for Debtors Special Reorganization Counsel for Debtors 2 TABLE OF CONTENTS
Page ---- I. INTRODUCTION..............................................................1 II. DEFINITIONS, INTERPRETATION, AND RULES OF CONSTRUCTION....................2 A. Definitions..........................................................2 B. Interpretation, Rules Of Construction, Computation Of Time, And Choice Of Law..............................17 III. DESIGNATION OF CLASSES OF CLAIMS AND EQUITY INTERESTS................................................................19 A. Secured Claims......................................................20 B. Certain Priority Unsecured Claims...................................20 C. Unsecured Or Partially Secured Claims Without Priority..............20 D. Equity Interests And Related Rights.................................21 IV. TREATMENT OF CLASSES OF CLAIMS, INTERESTS, AND UNCLASSIFIED CLAIMS OR INTERESTS.........................................22 A. Unclassified Claims.................................................22 1. Administrative Claims..........................................22 a. Generally.................................................22 b. Post-Petition Date Trade Claims...........................23 c. Administrative Claims Bar Date............................24 d. Administrative Expenses Incurred After Confirmation Date...................................24 2. Treatment Of Priority Tax Claims...............................24 3. Treatment Of Intercompany And Affiliate Claims.................26
i 3
Page ---- 4. Treatment Of Joint Liability Duplicate Claims Against Multiple Debtors (Including Guarantee Claims)........................................26 B. Treatment Of Secured Claims..............................................27 1. Class 1A (Macpherson Meistergram, Inc. Secured Claim)......................................................27 2. Class 1B (Other Secured Claims).....................................28 C. Treatment Of Certain Priority Unsecured Claims...........................29 1. Class 2 (Unsecured Priority Claims).................................29 D. Treatment Of Unsecured And Partially Secured Claims......................30 1. Class 3 (General Unsecured Claims)..................................30 2. Class 4 (Senior Note Claims):.......................................31 E. Treatment Of Equity Interests And Certain Rights Related Thereto...................................................32 1. Class 5A (Interests Based On the Redeemable Preferred Stock.)........................................32 2. Class 5B (Interests Of The Existing Common Stock):......................................................33 3. Class 5C (Equity Interests In TRB):.................................34 4. Class 5D (Equity Interests In HII):.................................34 5. Class 5E (Equity Interests In HII-New York):........................34 6. Class 5F (Equity Interests In DHAH):................................35 7. Class 5G (Equity Interests In Briggs):..............................35 8. Class 5H (Equity Interests In Draymore).............................35 9. Class 5I (Equity Interests Based Upon Options, Warrants, Etc.)............................................36 V. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES....................36 A. Assumption Of Executory Contracts And Unexpired Leases....................................................36
ii 4
Page ---- 1. Assumption Generally................................................36 2. Approval Of Assumptions.............................................37 3. Objections To Assumption Of Executory Contracts And Unexpired Leases......................................38 4. Objections To Proposed "Cure" Amounts...............................39 5. Payments Related To Assumption Of Executory Contracts And Unexpired Leases............................40 B. Executory Contracts And Unexpired Leases To Be Rejected..............................................................41 C. Bar Date For Rejection Damages...........................................42 D. Contracts Entered Into On Or After The Petition Date........................................................42 VI. EFFECTIVE DATE...........................................................43 A. Occurrence Of The Effective Date....................................43 B. Waiver Of Conditions................................................45 C. Failure Of The Effective Date.......................................45 VII. MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN.......................45 A. Issuance And Exercise Of Rights.....................................45 B. Issuance Of New Securities..........................................46 C. Cancellation Of Existing Securities And Agreements..........................................................47 D. Surrender Of Existing Securities....................................47 E. Retiree Benefits....................................................48 F. Management Employment Agreements....................................48 G. Employee Benefit Plans..............................................49 H. Stock Incentive Plan................................................49 I. Listing Of New Common Stock; Registration Of Securities.............50 J. New Certificates Of Incorporation And Bylaws........................51 K. Revesting Of Assets.................................................52
iii 5
Page ---- L. Management Of Reorganized Debtors...................................52 M. Exemption From Certain Transfer Taxes...............................52 N. Applicability Of Sections 1125 And 1145 Of The Bankruptcy Code To New Common Stock And Other Securities Issued Under The Plan.............................53 O. Objections To Claims................................................54 P. Discharge Of Debtors And Injunction.................................55 Q. Preservation Of Rights Of Action....................................58 R. Limitation Of Liability.............................................58 S. Maintenance Of Directors' And Officers Liability Insurance.................................................59 T. Allocation of Consideration.........................................60 VIII. DISTRIBUTION...........................................................60 A. General.............................................................60 1. Disbursing Agents..............................................60 2. Transmittal Of Distributions To Parties Entitled Thereto...............................................61 3. No Fractional Shares...........................................62 4. Timing Of Distributions........................................63 5. Compliance With Tax Requirements...............................63 6. No Distributions On Account Of Disputed Claims Pending Allowance.......................................64 7. Treatment Of Contingent Claims.................................65 B. Undeliverable Distributions.........................................65 1. Holding And Investment Of Undeliverable Distributions..................................................65 2. Failure To Claim Undeliverable Distributions...................66 C. Estimation Of Unliquidated And Disputed Claims......................67 IX. CONFIRMATION REQUEST.....................................................67
iv 6
Page ---- X. RETENTION OF JURISDICTION................................................67 A. Retained Jurisdiction...............................................67 B. Jurisdiction Over The New Securities................................70 XI. MISCELLANEOUS PROVISIONS................................................69 A. Amendment And Modification Of The Plan..............................70 B. Withdrawal Or Revocation Of The Plan................................70 C. Section 1111(b)(2) Election.........................................71 D. Creditors' Committee................................................71 E. Successors And Assigns..............................................72 F. Severability Of Provisions Of The Plan..............................72
v 7 I. INTRODUCTION This "Debtors' Joint Plan of Reorganization Dated September 29, 1997" (the "Plan") is proposed by Decorative Home Accents, Inc., a Delaware corporation; The Rug Barn, Inc., a South Carolina corporation; Home Innovations, Inc., a Delaware corporation; Home Innovations, Inc., a New York corporation; DHA Home, Inc., a Delaware corporation; R.A. Briggs and Company, an Illinois corporation; and Draymore Mfg. Corp., a North Carolina corporation, the debtors and debtors in possession in the above-captioned, jointly administered cases pending under chapter 11 of the Bankruptcy Code (collectively, the "Debtors"), for the resolution of the Debtors' outstanding creditor Claims (as hereinafter defined) and Equity Interests (as hereinafter defined). Reference is made to the "Disclosure Statement to Accompany Debtors' Joint Plan of Reorganization" dated September 29, 1997 (the "Disclosure Statement") for (i) a discussion of the Debtors' history, business, results of operations, historical financial information, and projections, and (ii) a summary and analysis of the Plan. All creditors and holders of Equity Interests entitled to vote to accept or reject the Plan are encouraged to review the Disclosure Statement and the Plan before voting to accept or reject the Plan. To the extent that the Plan is inconsistent with the Disclosure Statement, the Plan will govern. 1 8 II. DEFINITIONS, INTERPRETATION, AND RULES OF CONSTRUCTION A. DEFINITIONS. In addition to those capitalized terms that are defined in other sections of the Plan, the following terms (which appear in the Plan as capitalized terms) have the following meanings as used in the Plan: 1. "ADMINISTRATIVE CLAIM" means a Claim for costs and expenses of administration under sections 503(b) or 507(b) of the Bankruptcy Code. 2. "ALLOWED CLAIM" means a Claim against one or more of the Debtors to the extent that the Claim is allowed pursuant to the Plan, or (a) a proof of such Claim was (i) timely Filed; or (ii) deemed timely Filed under applicable law or by reason of an order of the Bankruptcy Court; and (b)(i) after the applicable deadlines for Filing an objection to the Claim in accordance with Section VII.O of the Plan has passed, the Debtors, Reorganized Debtors, or any other party in interest entitled to do so has not Filed an objection or any such objection is withdrawn following the expiration of such applicable deadline(s); (ii) the Claim is allowed (but only to the extent allowed) by a Final Order; or (iii) the Claim is a Class 3 Claim that is listed on the Allowed Claims List as of the Effective Date or any supplement to the Allowed Claims List Filed by the Debtors (with the prior written consent of Magten) after the Effective Date. Prior to the time that an objection has been or may be timely Filed, for the pur- 2 9 poses of the Plan, a Claim shall be considered an Allowed Claim if (a) the Claim has been Scheduled; (b) the amount of the Claim specified in any Filed proof of Claim equals or is less than the amount of the Claim Scheduled by a Debtor as other than disputed, contingent or unliquidated; (c) the priority of the Claim specified in any Filed proof of Claim is of an equal or more junior priority than the priority of the Claim Scheduled by a Debtor; and (d) the Claim has not been Scheduled as disputed, contingent or unliquidated or as being in the amount of $0.00. Terms such as "ALLOWED PRIORITY TAX CLAIM" or "ALLOWED SECURED CLAIM" mean, by way of example, an Allowed Claim that is also a Priority Tax Claim or Secured Claim, respectively. 3. "ALLOWED CLAIMS LIST" means the list, which the Debtors shall File (with the prior written consent of Magten) on or prior to the Effective Date, as supplemented by the Debtors thereafter (with the prior written consent of Magten), of all Class 3 Claims to which the Debtors will not File objections and which will be deemed Allowed as of the Effective Date. After the Effective Date, the Debtors may File (with the prior written consent of Magten) supplements to the Allowed Claims List identifying Class 3 Claims that will be deemed Allowed as of the Filing of such supplements. The Allowed Claims List shall not include any Claim as to which an objection is Filed by an entity other than the Debtors prior to the Effective Date (unless such objection has been properly withdrawn). 4. "ALLOWED EQUITY INTEREST" means (a) an Equity Interest in DHA as reflected in the official records of the stock 3 10 transfer agent as of the Confirmation Date, (b) DHA's 100 percent Equity Interest in TRB, HII or HII-New York or (c) HII's 100 percent Equity Interest in DHAH, Briggs or Draymore. 5. "BANKRUPTCY CODE" means title 11 of the United States Code, as the same was in effect on the Petition Date, as amended from time to time. 6. "BANKRUPTCY COURT" means the United States Bankruptcy Court for the Southern District of New York or, in the event such court ceases to or does not exercise jurisdiction over the Reorganization Cases, such other court or adjunct thereof that exercises jurisdiction over the Reorganization Cases. 7. "BANKRUPTCY RULES" means the Federal Rules of Bankruptcy Procedure, the Local Rules of the United States District Court for the Southern District of New York, the Local Bankruptcy Rules of the United States Bankruptcy Court for the Southern District of New York, and the guidelines and requirements of the Office of the United States Trustee for the Southern District of New York, as the same may from time to time be in effect and applicable to the Reorganization Cases and proceedings therein. 8. "BAR DATE ORDER" means the "Order (1) Establishing Procedures and Deadlines for Filing Proofs of Claims and Interests; (2) Establishing Sanctions for Failure to Comply Therewith; and (3) Approving Form and Scope of Notice Thereof" entered by the Bankruptcy Court on September __, 1997, as may be subsequently amended, modified, or supplemented. 4 11 9. "BRIGGS" means R.A. Briggs and Company, an Illinois corporation. 10. "CASH" means lawful currency of the United States and equivalents thereof, including, but not limited to, bank deposits, wire transfers, checks, and other similar items. 11. "CIGNA" means CIGNA Mezzanine Partners II, L.P., Connecticut General Life Insurance Company, Connecticut General Life Insurance Company, on behalf of one or more separate accounts, and Life Insurance Company of North America, collectively. 12. "CLAIM" means a claim as such term is defined in section 101(5) and construed in section 102(2) of the Bankruptcy Code, as supplemented by the Bar Date Order. 13. "CLASS" means one of the classes of Claims or Equity Interests established under Article III of the Plan pursuant to section 1122 of the Bankruptcy Code. 14. "CONFIRMATION" means the entry of the Confirmation Order. 15. "CONFIRMATION DATE" means the date of Confirmation. 16. "CONFIRMATION HEARING" means the hearing to be held by the Bankruptcy Court to consider confirming the Plan. 17. "CONFIRMATION ORDER" means the order of the Bankruptcy Court confirming the Plan. 18. "CONGRESS" means Congress Financial Corporation. 19. "CONGRESS CREDIT AGREEMENT" means that certain Credit Agreement entered into between those Debtors party thereto 5 12 and Congress and dated as of November 12, 1996, as amended from time to time prior to the Petition Date in accordance with the terms thereof and following the Petition Date, as amended with the approval of the Bankruptcy Court with the prior written consent of Magten. 20. "CONGRESS FINANCING ORDER" means (i) that certain interim order in the form of Exhibit Q hereto from and after the date such order is entered by the Bankruptcy Court until the date that the final order in respect thereof becomes a Final Order and (ii) such final order from and after the date such order becomes a Final Order. 21. "CREDITORS' COMMITTEE" means the Official Unsecured Creditors' Committee in the Reorganization Cases, as and if appointed by the Office of the United States Trustee. 22. "DATE OF ASSESSMENT" of an Allowed Priority Tax Claim means (a) if the governmental unit holding such Allowed Priority Tax Claim assessed such Claim prior to the Petition Date, the date of such assessment, or (b) otherwise, the Effective Date. 23. "DEBTORS" means DHA, TRB, HII, HII-New York, DHAH, Briggs and Draymore, the debtors in the Reorganization Cases. 24. "DEBTORS in Possession" means the Debtors, when acting in the capacity of representatives of the Estates in the Reorganization Cases. 25. "DHA" means Decorative Home Accents, Inc., a Delaware corporation. 6 13 26. "DHA CHARTER" means the Certificate of Incorporation for Reorganized DHA, substantially in the form of Exhibit A hereto. 27. "DHA BYLAWS" means the bylaws of Reorganized DHA substantially in the form of Exhibit B hereto. 28. "DHAH" means DHA Home, Inc., a Delaware corporation. 29. "DISBURSING AGENT" means any qualified Person that is designated under the Plan, the Confirmation Order, or by the Debtors or the Reorganized Debtors (including, if appropriate, Reorganized DHA), with the prior written consent of Magten, to disburse property pursuant to the Plan. 30. "DISCLOSURE STATEMENT" means the "Disclosure Statement to Accompany Debtors' Plan of Reorganization Dated September 29, 1997" (and all annexes attached thereto or referenced therein) which relates to the Plan and is approved pursuant to section 1125 of the Bankruptcy Code in an order entered by the Bankruptcy Court, as such Disclosure Statement may be amended, modified, or supplemented. 31. "DISPUTED CLAIM" or "DISPUTED EQUITY INTEREST" means a Claim or Equity Interest, respectively, as to which a proof of Claim or Equity Interest has been Filed or deemed Filed and that is not an Allowed Claim or Allowed Equity Interest. 32. "DISPUTED CLAIMS RESERVE" means the property that may be reserved by the Disbursing Agent for the benefit of holders of Disputed Claims pursuant to Article VIII of the Plan. 7 14 33. "DRAYMORE" means Draymore Mfg. Corp., a North Carolina corporation. 34. "EFFECTIVE DATE" means the date specified as the Effective Date of the Plan in Article VI. 35. "EQUITY INTEREST" means any interest in an equity security as defined in section 101(16) of the Bankruptcy Code, including but not limited to, any interest evidenced by Existing Common Stock, Redeemable Preferred Stock, and any options, warrants, calls, subscriptions, or any other similar rights or other agreements or commitments, contractual or otherwise, obligating any Debtor to acquire, issue, transfer or sell any shares of Existing Common Stock or Redeemable Preferred Stock. 36. "ESTATES" means the estates created in the Reorganization Cases by section 541 of the Bankruptcy Code. 37. "EXCESS UNDERLYING SHARES" means collectively, the SN Excess Underlying Shares and the RPS Excess Underlying Shares. 38. "EXISTING COMMON STOCK" means the common stock of DHA issued and outstanding prior to the Effective Date including, without limitation, the Class A Common Stock, Class B Common Stock, Class C Common Stock, Class D Common Stock, Class E Common Stock and Class F Common Stock of DHA, and any and all rights incident thereto. 39. "FILE" or "FILED" means file or filed with the Bankruptcy Court in the Reorganization Cases. 40. "FINAL ORDER" means an order that is in effect and is not stayed and as to which (a) the time to appeal or petition for certiorari has expired and as to which no appeal, petition 8 15 for certiorari or other proceeding for reargument or rehearing shall then be pending, or (b) in the event that an appeal, writ of certiorari or reargument or rehearing thereof has been sought and is pending, such order of the Court shall have been affirmed by the highest court to which the order was appealed or certiorari, reargument or rehearing has been denied, and the time to take any further appeal, petition for certiorari, or move for reargument or rehearing shall have expired. 41. "FUND V" means TCW Special Credits Fund V - The Principal Fund. 42. "FUND V AGREEMENT" means the Agreement, dated as of September 26, 1997, by and between DHA and Fund V, a copy of which is attached hereto as Exhibit C, pursuant to which Fund V agreed to exercise all of the Rights and the RPS Oversubscription Options issued to it pursuant to the Plan and the Rights Plan. 43. "HII" means Home Innovations, Inc., a Delaware corporation. 44. "HII-NEW YORK" means Home Innovations, Inc., a New York corporation. 45. "INDENTURE" means the Indenture dated as of July 13, 1995 between Decorative Home Accents, Inc., as issuer, and Firstar Bank of Minnesota, N.A., as successor to American Bank National Association, as trustee, as amended and/or supplemented from time to time. 46. "MAGTEN" means Magten Asset Management Corp. solely as agent for various of its investment advisory clients in their respective accounts at Magten. 9 16 47. "MAGTEN AGREEMENT" means the Agreement, dated as of September 26, 1997, by and between DHA and certain entities listed on Schedule I thereto, a copy of which is attached hereto as Exhibit D, pursuant to which such entities agreed to exercise all of the Rights and the SN Oversubscription Options issued to them pursuant to the Plan and the Rights Plan. 48. "NEW COMMON STOCK" means the common stock of Reorganized DHA par value $0.01 per share to be distributed pursuant to the Plan. 49. "OVERSUBSCRIPTION OPTIONS" means collectively, the SN Oversubscription Options and the RPS Oversubscription Options. 50. "PETITION DATE" means September 29, 1997. 51. "POST-PETITION SECURED LOAN AGREEMENT" means that certain Credit Agreement dated September 29, 1997, among the Term Lenders and the Debtors, as amended from time to time. 52. "POST-PETITION CLOSING FEE" means the "Post-Petition Closing Fee" as defined in the Post-Petition Secured Loan Agreement. 53. "PRE-PETITION CLOSING FEE" means the "Closing Fee" as defined in the "Pre-Petition Secured Term Loan Agreement. 54. "PRE-PETITION SECURED TERM LOAN AGREEMENT" means that certain "Credit Agreement" dated May 23, 1997, among the Term Lenders, TRB, HII, DHAH and Briggs, as borrowers, and DHA, Draymore, and HII-New York, as guarantors, as amended from time to time. 10 17 55. "PRIORITY TAX CLAIM" means a Claim by a governmental unit entitled to priority in payment pursuant to any provision of section 507(a)(8) of the Bankruptcy Code. 56. "PROFESSIONAL PERSON" means a person retained or to be compensated pursuant to order of the Bankruptcy Court or under section 326, 327, 328, 330, 503(b)(2) or (4), 1103, or 1107(b) of the Bankruptcy Code. 57. "PRO RATA" means proportionately so that the ratio of the amount of consideration distributed on account of a particular Allowed Claim or Allowed Equity Interest at a particular time to the amount of the Allowed Claim or Allowed Equity Interest is the same as the ratio such Allowed Claim or Allowed Equity Interest bears to the total amount of all Allowed Claims and Allowed Equity Interests of the Class in which the particular Allowed Claim or Allowed Equity Interest is included (including all Disputed Claims and Disputed Equity Interests of that Class until disallowed). 58. "REDEEMABLE PREFERRED STOCK" means the Redeemable Preferred Stock issued by DHA and outstanding on the Petition Date. 59. "REGISTRATION RIGHTS AGREEMENT" means the agreement, substantially in the form of Exhibit E hereto, by and among the Debtors and certain entities listed on Annexes A and B thereto with respect to, among other things the registration pursuant to the Securities Act of 1933 of the New Common Stock (including the shares of New Common Stock to be issued upon the exercise of the Series A Warrants and the Series B Warrants). 11 18 60. "REORGANIZATION CASES" means the above-captioned cases pending in the Bankruptcy Court under chapter 11 of the Bankruptcy Code for the Debtors. 61. "REORGANIZED DEBTORS" means the Debtors on and after the Effective Date. 62. "REORGANIZED DHA" means DHA on and after the Effective Date. 63. "REQUIRED PARTIES" means Magten, Fund V and Cigna. 64. "RIGHTS" means the rights granted to certain parties under the Rights Plan, and distributed pursuant to the Plan, to purchase up to 3,333,333 shares of New Common Stock. 65. "RIGHTS EXERCISE PRICE" means $6.00 per share of New Common Stock. 66. "RIGHTS EXPIRATION DATE" means the date which is forty-five (45) days after the Rights Issue Date. 67. "RIGHTS ISSUE DATE" means the day the Confirmation Order becomes a Final Order. 68. "RIGHTS PLAN" means the document governing the terms and conditions of the offering of the Rights, substantially in the form of Exhibit F hereto. 69. "RIGHTS SHARES" means the shares of New Common Stock to be issued by DHA upon exercise of the Rights and the Oversubscription Options. 70. "RPS EXCESS UNDERLYING SHARES" means the shares of New Common Stock represented by the Rights issued to the holders of Redeemable Preferred Stock that remain unexercised immediately following the Rights Expiration Date. 12 19 71. "RPS OVERSUBSCRIPTION OPTIONS" means the options of holders of Redeemable Preferred Stock to subscribe for and purchase, with respect to each Right issued to such holders pursuant to this Plan and the Rights Plan, at the Exercise Price, one RPS Excess Underlying Share, subject to the terms and conditions of the Rights Plan. 72. "SCHEDULED" means set forth in the Schedules of Assets and Liabilities. 73. "SCHEDULES OF ASSETS AND LIABILITIES" means the Schedules of Assets and Liabilities Filed by each of the Debtors, as the same have been or may be amended from time to time prior to the Effective Date. 74. "SECURED CLAIM" means a Claim other than an Administrative Claim or Priority Tax Claim, plus any allowable interest thereon from the Petition Date until the Effective Date at a rate determined under Bankruptcy Code section 506(b) and any fees or charges that are allowable under Bankruptcy Code section 506(b), that is secured by a lien on property in which the Estates have an interest or that is subject to setoff under Bankruptcy Code section 553. Notwithstanding the preceding sentence, in the absence of a proper and timely election under Bankruptcy Code section 1111(b)(2) with respect to the Plan by the Class including such Secured Claim, which election shall not have been revoked by such Class within 20 days following a material modification of this Plan with respect to such Class, a Claim shall be a Secured Claim only to the extent of the lesser of (a) the amount of the Claim that is an Allowed Claim or (b) the value of 13 20 the claimholder's interest in the Estates' interest in such property or to the extent of the amount subject to setoff, as applicable, as determined under section 506(a) of the Bankruptcy Code. 75. "SECURED CONGRESS CLAIM" means the Claims of Congress arising under the Congress Credit Agreement, which Claims shall be deemed for all purposes hereunder to be Allowed Administrative Claims pursuant to this Plan in the aggregate amount of $37,000,000, plus accrued and unpaid interest as of the Effective Date and all other amounts (including, without limitation, expenses) arising and due thereunder through and including the Effective Date. 76. "SECURED TERM LOAN CLAIMS" means the Claims of the Term Lenders arising under the Pre-Petition Secured Term Loan Agreement, the Post-Petition Secured Loan Agreement and/or the Term Lender Financing Order, which claims shall be deemed for all purposes hereunder to be Allowed Administrative Claims pursuant to this Plan in the aggregate amount of $20,945,347, plus accrued and unpaid interest as of the Effective Date, the Term Lender Closing Fees if they are payable and all other amounts (including, without limitation, fees and expenses of the Term Lenders' outside counsel, Fried, Frank, Harris, Shriver & Jacobson, and financial advisor, Ernst & Young LLP, payable thereunder) arising and due thereunder through and including the Effective Date. 77. "SENIOR NOTES" means the 13% Senior Notes issued pursuant to the Indenture and which are outstanding on the Peti- 14 21 tion Date having a principal amount of $118,100,000 plus accrued and unpaid interest through the Petition Date of $11,753,531. 78. "SENIOR NOTE CLAIMS" means the claims of the holders of Senior Notes under the Indenture and the Senior Notes (including, without limitation, claims based upon the guaranties of the Senior Notes by TRB, HII, HII-New York, DHAH, Briggs and Draymore), which claims shall be deemed for all purposes hereunder to be Allowed Claims pursuant to this Plan in the aggregate amount of $129,853,531. 79. "SERIES A WARRANTS" means the warrants to purchase 833,333 shares of New Common Stock at a price of $15.00 per share which shall be exercisable commencing on the Effective Date and ending on the fifth anniversary of the Effective Date and which shall have such other terms and conditions, not inconsistent with the foregoing as shall be set forth in the Series A Warrant Agreement. 80. "SERIES A WARRANT AGREEMENT" means the document governing the terms and conditions of the Series A Warrants, substantially in the form of Exhibit G hereto. 81. "SERIES B WARRANTS" means the warrants to purchase 277,777 shares of New Common Stock at a price of $25.00 per share which shall be exercisable commencing on the Effective Date and ending on the fifth anniversary of the Effective Date and which shall have such other terms and conditions as shall be set forth in the Series B Warrant Agreement. 15 22 82. "SERIES B WARRANT AGREEMENT" means the document governing the terms and conditions of the Series B Warrants, substantially in the form of Exhibit H hereto. 83. "SN EXCESS UNDERLYING SHARES" means the shares of New Common Stock represented by the Rights issued to the holders of Senior Notes that remain unexercised immediately following the Rights Expiration Date. 84. "SN OVERSUBSCRIPTION OPTIONS" means the options of holders of Senior Notes to subscribe for and purchase, with respect to each Right issued to such holders pursuant to this Plan and the Rights Plan, at the Exercise Price, one SN Excess Underlying Share, subject to the terms and conditions of the Rights Plan. 85. "STOCK INCENTIVE PLAN" means the stock option or other plan, substantially in the form attached hereto as Exhibit I, providing for the grant of options to purchase up to ten percent (10%) of the New Common Stock (on a fully diluted basis) to (a) the non-employee directors of the Reorganized Debtors and (b) those members of management of the Reorganized Debtors as approved by the non-management members of the board of directors of Reorganized DHA. 86. "STOCKHOLDERS' AGREEMENT" means the agreement, substantially in the form of Exhibit J hereto, among the entities listed on Schedule I thereto, Fund V and Cigna governing certain of their rights and obligations as shareholders of Reorganized DHA. 16 23 87. "TERM LENDERS" means the lenders party to the Secured Term Loan Agreement. 88. "TERM LENDER CLOSING FEES" means collectively the Pre-Petition Closing Fee and the Post-Petition Closing Fee. 89. "TERM LENDER FiNANCING ORDER" means (i) that certain interim order in the form of Exhibit R hereto from and after the date such order is entered by the Bankruptcy Court until the date that the final order in respect thereof becomes a Final Order and (ii) such final order from and after the date such order becomes a Final Order. 90. "TRB" means The Rug Barn, Inc., a South Carolina corporation. 91. "UNSECURED CLAIM" means a Claim against Debtors that is not an Administrative Claim, Priority Tax Claim or Secured Claim. B. INTERPRETATION, RULES OF CONSTRUCTION, COMPUTATION Of TIME, AND CHOICE OF LAW. 1. The contents of the Plan shall control over the contents of the Disclosure Statement. The provisions of the Confirmation Order shall control over the contents of the Plan. 2. Any term used in the Plan that is not otherwise defined in the Plan, either in this Article II (Definitions) or elsewhere, but that is used in the Bankruptcy Code or the Bankruptcy Rules has the meaning assigned to that term in (and shall be construed in accordance with the rules of construction under) the Bankruptcy Code or the Bankruptcy Rules. Without limiting the foregoing, the rules of construction set forth in section 102 17 24 of the Bankruptcy Code shall apply. The definitions and rules of construction contained herein shall also apply to the Disclosure Statement and to the Exhibits to the Plan except to the extent expressly so stated in the Disclosure Statement or in each particular Exhibit to the Plan. 3. The words "herein", "hereof", "hereto", "hereunder", and others of similar import refer to the Plan as a whole and not to any particular Article, Section, Subsection, or Clause contained in the Plan. 4. Unless specified otherwise in a particular reference, all references in the Plan to Articles, Sections, Subsections, Clauses, and Exhibits are references to Articles, Sections, Subsections, Clauses, and Exhibits of or to the Plan. 5. Any reference in the Plan to a contract, document, instrument, release, bylaw, certificate, exhibit, or other agreement or document being in a particular form or on particular terms and conditions means that such document shall be substantially in such form or substantially on such terms and conditions. 6. Any reference in the Plan to an existing document or exhibit means such document or exhibit, as it may have been amended, restated, modified, or supplemented as of the Effective Date. 7. Captions and headings to Articles, Sections, Subsections, and Clauses in the Plan are inserted for convenience of reference only and shall neither constitute a part of the Plan 18 25 nor in any way affect the interpretation of the provisions hereof. 8. Whenever from the context it is appropriate, each term stated in either the singular or the plural shall include both the singular and the plural. 9. In computing any period of time prescribed or allowed by the Plan, the provisions of Bankruptcy Rule 9006(a) shall apply. 10. Whenever a distribution of property is required to be made on a particular date, the distribution shall be made on such date or as soon as practicable thereafter. 11. All exhibits to the Plan are incorporated into the Plan, and shall be deemed to be included in the Plan, regardless of when they are Filed. 12. Subject to the provisions of any contract, certificate, bylaws, instrument, release, or other agreement or document entered into in connection with the Plan, the rights and obligations arising under the Plan shall be governed by, and construed and enforced in accordance with, federal law, including the Bankruptcy Code and Bankruptcy Rules. III. DESIGNATION OF CLASSES OF CLAIMS AND EQUITY INTERESTS The following is a designation of the Classes of Claims and Equity Interests under the Plan. Administrative Claims and Priority Tax Claims have not been classified and are excluded 19 26 from the following Classes in accordance with section 1123(a)(1) of the Bankruptcy Code. A Claim or Equity Interest is classified in a particular Class only to the extent that the Claim or Equity Interest qualifies within the description of that Class and is classified in a different Class to the extent that any remainder of the Claim or Equity Interest qualifies within the description of such different Class. A. SECURED CLAIMS. Class 1A: Class 1A consists of the Allowed Secured Claims of Macpherson Meistergram, Inc. secured by equipment purchased by the Debtors from Macpherson Meistergram, Inc. Class 1B: Class 1B consists of all Secured Claims against any of the Debtors other than the Allowed Secured Claims in Class 1A or Allowed Secured Claims entitled to treatment as Administrative Claims hereunder. Each Secured Claim in Class 1B shall be considered to be in its own separate sub-Class within Class 1B. B. CERTAIN PRIORITY UNSECURED CLAIMS. Class 2: Class 2 consists of all Unsecured Claims against the Debtors that are specified as having priority in section 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)(6) of the Bankruptcy Code. C. UNSECURED OR PARTIALLY SECURED CLAIMS WITHOUT PRIORITY. Class 3: Class 3 consists of all Unsecured Claims against the Debtors, other than Allowed Claims in Class 4, that 20 27 are not entitled to priority under section 507(a) of the Bankruptcy Code and that are not classified in any other Class. Class 4: Class 4 consists of all Allowed Senior Note Claims. D. EQUITY INTERESTS AND RELATED RIGHTS. Class 5A: Class 5A consists of all Equity Interests consisting of the Redeemable Preferred Stock. Class 5B: Class 5B consists of all Equity Interests consisting of the Existing Common Stock. Class 5C: Class 5C consists of all Equity Interests in TRB. Class 5D: Class 5D consists of all Equity Interests in HII. Class 5E: Class 5E consists of all Equity Interests in HHI-New York. Class 5F: Class 5F consists of all Equity Interests in DHAH. Class 5G: Class 5G consists of all Equity Interests in Briggs. Class 5H: Class 5H consists of all Equity Interests in Draymore. Class 5I: Class 5I consists of all Equity Interests in DHA consisting of or related to options, warrants, calls, subscriptions or any other entitlement, contractual or otherwise, to acquire Existing Common Stock or Redeemable Preferred Stock. 21 28 IV. TREATMENT OF CLASSES OF CLAIMS, INTERESTS, AND UNCLASSIFIED CLAIMS OR INTERESTS A. UNCLASSIFIED CLAIMS. 1. ADMINISTRATIVE CLAIMS. a. GENERALLY. Except as provided otherwise in this Article IV of the Plan, each holder of an Allowed Administrative Claim (including, without limitation, the Allowed Secured Congress Claim, the Allowed Secured Term Loan Claims and the professionals' fees and expenses incurred by the Professional Persons and allowed in a Final Order of the Bankruptcy Court) shall be paid by the Reorganized Debtors on the later to occur of the Effective Date or the date the order allowing such Administrative Claim becomes a Final Order and shall receive, on account of, and in full satisfaction of such Allowed Administrative Claim, Cash equal to the amount thereof unless the holder agrees to less favorable treatment of such Allowed Administrative Claim. Without limiting the foregoing, all fees payable by the Debtors under section 1930 of title 28 of the United States Code that have not been paid prior to the Effective Date shall be paid by the Reorganized Debtors on the Effective Date. The Secured Congress Claim shall be deemed to be an Allowed secured Administrative Claim pursuant to the Plan in the aggregate amount of $37,000,000, plus accrued and unpaid interest as of the Effective Date and all other amounts (including, without limitation, expenses) owing and due under the Congress Credit 22 29 Agreement and/or the Congress Financing Order through and including the Effective Date. The Secured Term Loan Claims shall be deemed to be Allowed secured Administrative Claims pursuant to this Plan in the aggregate amount of $23,945,347, plus accrued and unpaid interest as of the Effective Date, the Term Lender Closing Fees if they are payable, and all other amounts (including, without limitation, expenses) owing and due under the Pre-Petition Secured Term Loan Agreement, the Post-Petition Secured Loan Agreement and/or the Term Lender Financing Order through and including the Effective Date. Notwithstanding anything to the contrary contained in the Plan, all security interests in and liens upon property of the Debtors granted to the Term Lenders pursuant to the Pre-Petition Secured Term Loan Agreement, the Post-Petition Secured Loan Agreement and/or the Term Lender Financing Order shall remain in full force and effect and shall continue to secure the payment of all of the Secured Term Loan Claims until satisfaction of the Secured Term Loan Claims is in accordance with the terms of the Plan. b. POST-PETITION DATE TRADE CLAIMS. Post-Petition Date trade Claims representing obligations incurred by the Debtors in the ordinary course of their business, consistent with past practice, shall be paid according to ordinary trade terms. c. ADMINISTRATIVE CLAIMS BAR DATE. Sixty days following the Effective Date shall be the last date by which Administrative Claims other than trade Claims 23 30 arising in the ordinary course of business and Claims of Professional Persons for services rendered after the Petition Date and prior to the Confirmation Date, must be Filed. Any such Claim that is not Filed within 60 days after the Effective Date shall be barred and the holder shall not be entitled to any distribution on account of such Claim. d. ADMINISTRATIVE EXPENSES INCURRED AFTER CONFIRMATION DATE. Administrative Claims representing obligations incurred by the Debtors or Reorganized Debtors after Confirmation Date (including, without limitation, claims for professionals' fees and expenses) shall not be subject to application to the Bankruptcy Court and may be paid by the Debtors or the Reorganized Debtors, as the case may be, in the ordinary course of business and without further Bankruptcy Court approval. 2. TREATMENT OF PRIORITY TAX CLAIMS. a. The holder of an Allowed Priority Tax Claim shall not be entitled to receive any payment on account of post-Petition Date interest, or on account of any penalty arising with respect to or in connection with the Allowed Priority Tax Claim (except to the extent allowable as a part of an Allowed Priority Tax Claim pursuant to section 507(a)(1) of the Bankruptcy Code). Any such Claim or demand for any such penalty shall be discharged by Confirmation of the Plan and section 1141(d)(1) of the Bankruptcy Code, and the holder of an Allowed Priority Tax Claim shall not assess or attempt to collect such penalty from the Debtors, the Re- 24 31 organized Debtors, their respective affiliates, or their directors or officers. b. Each holder of an Allowed Priority Tax Claim that has not been paid prior to the Effective Date shall receive deferred Cash payments over a period not exceeding six (6) years from the date of assessment of such Allowed Priority Tax Claim, in an aggregate amount equal to the amount of such Allowed Priority Tax Claim, plus interest from the Effective Date on the unpaid portion thereof, without penalty of any kind, at the rate prescribed below. The payment of each such Allowed Priority Tax Claim shall be made in equal quarterly installments with the first installment due on the latest of: (i) the first business day following the end of the first full calendar quarter following the Effective Date, (ii) the first business day following the end of the first full calendar quarter following the date on which an order allowing such Priority Tax Claim becomes a Final Order, and (iii) such other time or times as may be agreed in writing between the applicable Reorganized Debtor, Magten, and the holder of such Allowed Priority Tax Claim. Each installment shall include simple interest on the unpaid balance of the Allowed Priority Tax Claim, without premium or penalty of any kind, at the non-penalty statutory rate of interest provided for such taxes under applicable nonbankruptcy law as of the Effective Date; provided, however, that the Reorganized Debtors reserve the right to pay or to prepay any Allowed Priority Tax Claim, or any remaining balance 25 32 thereof, in full, at any time on or after the Effective Date, without premium or penalty. 3. TREATMENT OF INTERCOMPANY AND AFFILIATE CLAIMS. Claims of one or more Debtors against one or more other Debtors shall not be considered Allowed Claims under the Plan for any purpose. Additionally, notwithstanding any other provision contained in the Plan or otherwise to the contrary, no distribution shall be made on account of the Claim of any affiliate or insider of the Debtors except distribution to such entities on account of any Senior Notes, Existing Common Stock or Redeemable Preferred Stock held by such affiliate or insider. Such Claims may, at the discretion of the Debtors (with the prior written consent of Magten), be eliminated for all purposes by offset, dividend or contribution to capital. 4. TREATMENT OF JOINT LIABILITY DUPLICATE CLAIMS AGAINST MULTIPLE DEBTORS (INCLUD- ING GUARANTEE CLAIMS). Any party that asserts Claims against two or more Debtors based on their joint liability (including any party who asserts Claims against one Debtor as primary obligor and against another Debtor based on such Debtor's guarantee of the primarily obligated Debtor's obligation to that party), will hold only one such Claim; and any duplicative Claims against any other Debtor based on that other Debtor's joint liability will be disallowed. 26 33 B. TREATMENT OF SECURED CLAIMS. 1. CLASS 1A (MACPHERSON MEISTERGRAM, INC. SECURED CLAIM). Class 1A is not impaired under the Plan. The holder of the Allowed Secured Claim in Class 1A shall, at the election of the Debtors with the prior written consent of Magten, receive one of the following treatments, except to the extent such holder agrees to a different treatment: a. payment in full, in Cash, and otherwise rendered unimpaired in accordance with section 1124 of the Bankruptcy Code; or b. (i) any default other than a default of a kind specified in section 365(b)(2) of the Bankruptcy Code shall be cured, without recognition of any default rate of interest or other similar penalty or charge, and upon such cure, no default shall then exist with respect to the Allowed Secured Claim in Class 1A; (ii) the maturity of the Allowed Secured Claim in Class 1A shall be reinstated as the maturity existed before any default without recognition of any default rate of interest or other similar penalty or charge; (iii) the holder of the Allowed Secured Claim in Class 1A shall be compensated for actual damages incurred as a result of any reasonable reliance by the holder on any provision that entitled the holder to 27 34 accelerate the maturity of the Allowed Secured Claim in Class 1A; and (iv) the legal, equitable, or contractual rights to which the Allowed Secured Claim in Class 1A entitles the holder shall not otherwise be altered. 2. CLASS 1B (OTHER SECURED CLAIMS). Class 1B is not impaired under the Plan. At the sole election of the Debtors (with the prior written consent of Magten) each holder of an Allowed Secured Claim in Class 1B, if any, shall receive one of the following, except to the extent such holder agrees to a different treatment: a. The collateral securing the Allowed Secured Claim in full and complete satisfaction of such Allowed Secured Claim; or b. (i) Any default other than a default of a kind specified in section 365(b)(2) of the Bankruptcy Code shall be cured, without recognition of any default rate of interest or other similar penalty or charge and upon such cure, no default shall then exist with respect to such Allowed Secured Claim; (ii) the maturity of the Allowed Secured Claim shall be reinstated as the maturity existed before any default without recognition of any default rate of interest or other similar penalty or charge; (iii) the holder of the Allowed Secured Claim shall be compensated for any actual damages incurred as a result of any reasonable reliance by the holder on any provision that entitled the holder to accelerate the maturity of the Allowed Secured 28 35 Claim; and (iv) the legal, equitable, or contractual rights to which the Allowed Secured Claim entitles the holder shall not otherwise be altered. To the extent the Bankruptcy Court, or any other court of competent jurisdiction, determines, either before or after the Effective Date of the Plan, that any agreement in the form of a lease of real or personal property identified for assumption pursuant to Article V of the Plan is, in fact, a disguised secured transaction, the resulting secured indebtedness arising from such determination shall be treated in accordance with this Section, but only to the extent constituting a Secured Claim. C. TREATMENT OF CERTAIN PRIORITY UNSECURED CLAIMS. 1. CLASS 2 (UNSECURED PRIORITY CLAIMS). Pursuant to section 1124(1) of the Bankruptcy Code, Class 2 is not impaired under the Plan, and each holder of an Allowed Claim in Class 2 is conclusively presumed to have voted to accept the Plan under section 1126(f) of the Bankruptcy Code. At the sole discretion of the Debtors or Reorganized Debtors, exercised with the prior written consent of Magten, all holders of Allowed Claims in Class 2 shall receive payment in full, in Cash, and shall otherwise be rendered unimpaired in accordance with section 1124 of the Bankruptcy Code or shall retain unaltered their legal, equitable, and contractual rights with respect to such Allowed Claims. 29 36 D. TREATMENT OF UNSECURED AND PARTIALLY SECURED CLAIMS. 1. CLASS 3 (GENERAL UNSECURED CLAIMS). Pursuant to section 1124(2) of the Bankruptcy Code, Class 3 is not impaired under the Plan and the holders of the Allowed Claims in Class 3 are conclusively presumed to have voted to accept the Plan under section 1126(f) of the Bankruptcy Code. Except as otherwise agreed in writing between the holder of an Allowed Claim in Class 3 and the Debtors (or the Reorganized Debtors), with the prior written consent of Magten, each holder of an Allowed Claim in Class 3 shall at the sole option of the Debtors exercised with the prior written consent of Magten receive one of the following treatments in respect of its Allowed Claims: a. payment in full, in Cash, and otherwise rendered unimpaired in accordance with section 1124 of the Bankruptcy Code; or b. (i) any default other than a default of a kind specified in section 365(b)(2) of the Bankruptcy Code shall be cured, without recognition of any default rate of interest or other similar penalty or charge, and upon such cure, no default shall then exist with respect to the Allowed Claim; (ii) the maturity of the Allowed Claim shall be reinstated as the maturity existed before any default without recognition of any default rate of interest or other similar penalty or charge; 30 37 (iii) the holder of the Allowed Claim shall be compensated for actual damages incurred as a result of any reasonable reliance by the holder on any provision that entitled the holder to accelerate the maturity of the Allowed Claim; and (iv) the legal, equitable, or contractual rights to which the Allowed Claim entitles the holder shall not otherwise be altered. 2. CLASS 4 (SENIOR NOTE CLAIMS): Class 4 is impaired under the Plan. On the Effective Date, the holders of the Allowed Claims in Class 4 shall receive a Pro Rata distribution of each of the following: (a) 9,250,000 shares of New Common Stock, to be issued on the Effective Date; (b) 62.5% of the Rights issued under the Rights Plan, all of which shall be issued on the Rights Issue Date and exercisable on or prior to the Rights Expiration Date, with the shares of New Common Stock underlying those Rights exercised to be paid for in Cash at the Rights Exercise Price and issued on the Effective Date, all in accordance with the terms and conditions of the Rights Plan; and (c) the SN Oversubscription Options issued under the Rights Plan, all of which shall be issued on the Rights Issue Date and exercisable on or prior to the Rights Expiration Date, with the shares of New Common Stock underlying those SN Oversubscription Options exercised to be paid for in Cash at the Rights Exercise Price and issued on the Ef- 31 38 fective Date, all in accordance with the terms and conditions of the Rights Plan. The Senior Note Claims shall be deemed Allowed pursuant to the Plan in the aggregate amount of $129,853,531. The indenture trustee for the Senior Notes may file a proof of claim with respect to the Claims in Class 4 but is not required to file such proof of claim in order for the Senior Note Claims to be Allowed pursuant to the Plan. Any other Claims filed with respect to Class 4 shall be disallowed as duplicative of the Claim filed by the indenture trustee for the Senior Notes but only to the extent such Claim is in fact filed by such indenture trustee. E. TREATMENT OF EQUITY INTERESTS AND CERTAIN RIGHTS RELATED THERETO. 1. CLASS 5A (INTERESTS BASED ON THE REDEEM- ABLE PREFERRED STOCK.) Class 5A is impaired under the Plan. Each holder of Class 5A Equity Interests shall receive a Pro Rata distribution of the following in respect of its Allowed Equity Interests in Class 5A: a. 750,000 shares of New Common Stock, to be issued on the Effective Date; b. 37.5% of the Rights, all of which shall be issued on the Rights Issue Date and exercisable on or prior to the Rights Expiration Date, with the shares of New Common Stock underlying those Rights exercised to be paid for in Cash at the Rights Exercise Price and issued on the Effec- 32 39 tive Date, all in accordance with the terms and conditions of the Rights Plan; c. the RPS Oversubscription Options issued under the Rights Plan, all of which shall be issued on the Rights Issue Date and exercisable on or prior to the Rights Expiration Date, with the shares of New Common Stock underlying those RPS Oversubscription Options exercised to be paid for in Cash at the Rights Exercise Price and issued on the Effective Date, all in accordance with the terms and conditions of the Rights Plan. d. 100% of the Series A Warrants, to be issued on the Effective Date. On the Effective Date, the Equity Interests represented by the Redeemable Preferred Stock shall be deemed canceled and the shares of Redeemable Preferred Stock shall thereafter represent only the right of the holder to receive the appropriate number of shares of New Common Stock, Rights, RPS Oversubscription Options and Series A Warrants pursuant to the Plan. 2. CLASS 5B (INTERESTS OF THE EXISTING COMMON STOCK): Class 5B is impaired under the Plan. On the Effective Date, the holders of the Equity Interests in Class 5B shall receive a Pro Rata distribution of the Series B Warrants (based upon the number of shares of Existing Common Stock outstanding on the Petition Date, without regard to the liquidation preferences of the different classes of Existing Common Stock). On the Effective Date, the Equity Interests of the Existing Common Stock 33 40 shall be deemed canceled and the shares of Existing Common Stock shall represent only the right to receive the Series B Warrants pursuant to the Plan. 3. CLASS 5C (EQUITY INTERESTS IN TRB): Pursuant to section 1124(1) of the Bankruptcy Code, Class 5C is not impaired under the Plan. The holder of the Equity Interests in Class 5C shall retain its legal, equitable and contractual rights unaltered by the Plan. The holder of the Equity Interests in Class 5C is conclusively deemed to have accepted the Plan pursuant to section 1126(f) of the Bankruptcy Code and therefore shall not be entitled to vote on the Plan. 4. CLASS 5D (EQUITY INTERESTS IN HII): Pursuant to section 1124(1) of the Bankruptcy Code, Class 5D is not impaired under the Plan. The holder of the Equity Interests in Class 5D shall retain its legal, equitable and contractual rights unaltered by the Plan. The holder of the Equity Interests in Class 5D is conclusively deemed to have accepted the Plan pursuant to section 1126(f) of the Bankruptcy Code and therefore shall not be entitled to vote on the Plan. 5. CLASS 5E (EQUITY INTERESTS IN HII-NEW YORK): Pursuant to section 1124(1) of the Bankruptcy Code, Class 5E is not impaired under the Plan. The holder of the Equity Interests in Class 5E shall retain its legal, equitable and contractual rights unaltered by the Plan. The holder of the Equity Interests in Class 5E is conclusively deemed to have ac- 34 41 cepted the Plan pursuant to section 1126(f) of the Bankruptcy Code and therefore shall not be entitled to vote on the Plan. 6. CLASS 5F (EQUITY INTERESTS IN DHAH): Pursuant to section 1124(1) of the Bankruptcy Code, Class 5F is not impaired under the Plan. The holder of the Equity Interests in Class 5F shall retain its legal, equitable and contractual rights unaltered by the Plan. The holder of the Equity Interests in Class 5F is conclusively deemed to have ac- cepted the Plan pursuant to section 1126(f) of the Bankruptcy Code and therefore shall not be entitled to vote on the Plan. 7. CLASS 5G (EQUITY INTERESTS IN BRIGGS): Pursuant to section 1124(1) of the Bankruptcy Code, Class 5G is not impaired under the Plan. The holder of the Equity Interests in Class 5G shall retain its legal, equitable and contractual rights unaltered by the Plan. The holder of the Equity Interests in Class 5G is conclusively deemed to have accepted the Plan pursuant to section 1126(f) of the Bankruptcy Code and therefore shall not be entitled to vote on the Plan. 8. CLASS 5H (EQUITY INTERESTS IN DRAYMORE). Pursuant to section 1124(1) of the Bankruptcy Code, Class 5H is not impaired under the Plan. The holder of the Equity Interests in Class 5H shall retain its legal, equitable and contractual rights unaltered by the Plan. The holder of the Equity Interests in Class 5H is conclusively deemed to have accepted the Plan pursuant to section 1126(f) of the Bankruptcy Code and therefore shall not be entitled to vote on the Plan. 35 42 9. CLASS 5I (EQUITY INTERESTS BASED UPON OPTIONS, WARRANTS, ETC.). Class 5I is impaired under the Plan. The holders of Equity Interests in Class 5I shall receive no distribution under the Plan and the Class 5I Equity Interests shall be terminated and cancelled on the Effective Date. Class 5I shall be deemed to have voted to reject the Plan. V. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES A. ASSUMPTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES. 1. ASSUMPTION GENERALLY. Except as otherwise provided in the Plan or in any order of the Bankruptcy Court, subject to the occurrence of the Effective Date, on the Effective Date, pursuant to section 365 of the Bankruptcy Code, all executory contracts, settlement agreements, and unexpired leases not listed on the schedule of Rejected Contracts attached as Exhibit K hereto, and which is not the subject of a motion to reject as of Confirmation, and is not rejected under Section V.B hereof, are assumed, subject to the same rights that the Debtors or the Reorganized Debtors held or hold at, on, or after the Petition Date to modify or terminate such agreements under applicable nonbankruptcy law. Each contract and lease assumed under this Section shall be assumed only to the extent, if any, that it constitutes an executory contract or unexpired lease, and nothing contained herein shall constitute 36 43 an admission by the Debtors or the Reorganized Debtors that such contract or lease is an executory contract or unexpired lease or that the Debtors or the Reorganized Debtors have any liability thereunder. To the extent the Bankruptcy Court, or any other court of competent jurisdiction, determines, either before, on, or after the Effective Date, that any agreement in the form of a lease of real or personal property identified for assumption in this Article V of the Plan, is, in fact, a disguised secured transaction, the resulting secured indebtedness arising from such determination shall be treated in accordance with Subsection IV.B.2 of the Plan. Each executory contract and unexpired lease assumed pursuant to this Article V by any Debtor in Possession shall revest in and be fully enforceable by such Reorganized Debtor in accordance with its terms, except as modified by the provisions of the Plan, any order of the Bankruptcy Court authorizing and providing for its assumption, or applicable federal law. 2. APPROVAL OF ASSUMPTIONS. Subject to the occurrence of the Effective Date, the Confirmation Order (except as otherwise provided therein) shall constitute an order of the Bankruptcy Court approving the assumptions, revestments and, to the extent not subject to dispute as set forth in Section V.A.4 hereof, the "cure" amounts described in this Article V and the Cure Amount Schedule attached hereto as Exhibit L pursuant to section 365 of the Bankruptcy Code effective as of the Effective Date. 37 44 3. OBJECTIONS TO ASSUMPTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES. a. If any party objecting to the Debtors' proposed assumption of an executory contract or unexpired lease based on a lack of adequate assurance of future performance or on any ground other than the adequacy of the "cure" amount set forth in the Cure Amount Schedule, shall file and serve a written objection to the assumption of such contract or lease within the same deadline and in the same manner established for filing objections to Confirmation. Failure to file an objection within the time period set forth above shall constitute consent to the assumption and revestment of those contracts and leases, including an acknowledgment that the proposed assumption provides adequate assurance of future performance. b. If any party files an objection to assumption based on any ground other than the adequacy of the "cure" amount set forth in Exhibit L hereto, and the Bankruptcy Court ultimately determines that the Debtors in Possession cannot assume the executory contract or lease or that the Debtors cannot provide adequate assurance of future performance as proposed or in any modified proposal submitted by the Debtors or the Reorganized Debtor, then the unexpired lease or executory contract shall automatically thereupon be deemed to have been included on the schedule of Rejected Contracts and shall be rejected pursuant to Section V.B hereof. 38 45 4. OBJECTIONS TO PROPOSED "CURE" AMOUNTS. a. The Debtors believe that any executory contract of the Debtors that is not listed on the schedule of Rejected Contracts or in the Cure Amount Schedule may be assumed by the Debtors in Possession without the payment of any monetary cure amount. Any party to an executory contract or unexpired lease to be assumed that asserts arrearages or damages pursuant to section 365(b)(1) of the Bankruptcy Code that exceeds the amount set forth in the Cure Amount Schedule, or which is not listed therein and pertains to an executory contract not listed in the schedule of Rejected Contracts must file and serve an objection to the proposed cure amount within the same deadline and in the same manner established for filing objections to Confirmation. Failure to assert arrearages different from the amount set forth on Exhibit L hereto or which pertains to an executory contract not listed in the schedule of Rejected Contracts or the Cure Amount Schedule within the time period set forth above shall constitute consent to the cure amount set forth in Exhibit L hereto or to the Debtors' position that no cure amount must be paid and an acknowledgment that the amount identified for "cure" on the Cure Amount Schedule is the only amount necessary to cover any and all outstanding defaults under the respective executory contract or unexpired lease to be assumed and an acknowledgment that no other defaults exist under said contract or lease. b. To the extent that any objections to the amounts set forth in the Cure Amount Schedule are timely filed and served and such objections are not resolved between the Debt- 39 46 ors and the objecting parties, the Bankruptcy Court shall resolve such disputes at a hearing to be held at a date to be determined by the Bankruptcy Court at the Confirmation Hearing. The resolution of such disputes shall not affect the Debtors' assumption of the contracts or leases that are subject of such a dispute, but rather shall affect only the "cure" amount the Debtors must pay in order to assume such contract or lease. Notwithstanding the immediately preceding sentence, if the Debtors in their sole discretion (with the prior written consent of Magten) determine that the amount asserted to be the necessary "cure" amount would, if ordered by the Bankruptcy Court, make the assumption of the contract or lease imprudent, then the Debtors may, prior to or at the Confirmation Hearing, elect to (1) reject the contract or lease pursuant to Section V.B hereof, or (2) request an expedited hearing on the resolution of the "cure" dispute, exclude assumption or rejection of the contract or lease from the scope of the Confirmation Order, and retain the right to reject the contract or lease pursuant to Section V.B hereof pending the outcome of such dispute. 5. PAYMENTS RELATED TO ASSUMPTION OF EXECUTORY CONTRACTS AnD UNEXPIRED LEASES. If not the subject of dispute pursuant to Section V.A.4 hereof as of Confirmation, any monetary defaults under each executory contract and unexpired lease to be assumed under the Plan shall be satisfied by the Debtors, pursuant to section 365(b)(1) of the Bankruptcy Code, by payment of the amount set forth in the Cure Amount Schedule or such other amount as ordered by the Bank- 40 47 ruptcy Court or agreed upon by the Debtors in Cash within 60 days following the Effective Date or on such other terms as agreed to by the parties to such executory contract or unexpired lease. In the event of a dispute pursuant to Section V.A.4, payment of the amount otherwise payable hereunder shall be made following entry of a Final Order or agreement by the Debtors or the Reorganized Debtors and the party to the contract or lease. B. EXECUTORY CONTRACTS AND UNEXPIRED LEASES TO BE REJECTED. 1. Effective as of, and subject to the occurrence of, the Effective Date, the executory contracts and unexpired leases listed on the schedule of Rejected Contracts, attached as Exhibit K hereto, shall be rejected as of the Effective Date. The Debtors may amend Exhibit K at any time prior to the final Confirmation Hearing (with the prior written consent of Magten) by filing such amendment with the Bankruptcy Court and serving it on parties directly affected by the amendment. Listing a contract or lease by category above or on the schedule of Rejected Contracts shall not constitute an admission by the Debtors or the Reorganized Debtors that such contract or lease, including related agreements, is an executory contract or unexpired lease or that the Debtors or the Reorganized Debtors have any liability thereunder. 2. The Confirmation Order shall constitute an order of the Bankruptcy Court approving such rejections on the Confirmation Date, pursuant to section 365 of the Bankruptcy Code, effective as of the Effective Date. Any party to an executory con- 41 48 tract or unexpired lease identified for rejection as provided herein may, within the same deadline and in the same manner established for filing objections to Confirmation, file any objection thereto. Failure to file any such objection within the time period set forth above shall constitute consent and agreement to the rejection. C. BAR DATE FOR REJECTION DAMAGES. If the rejection of an executory contract or unexpired lease pursuant to Section V.B above gives rise to a Claim by the other party or parties to such contract or lease, such Claim, to the extent that it is timely Filed and is a Secured Claim, shall be classified in Class 1B, and to the extent that it is timely Filed and is an Unsecured Claim, shall be classified in Class 3; provided, however, that in either event any Claim arising from the rejection shall be forever barred and shall not be enforceable against the Debtors, the Reorganized Debtors, their affiliates, their successors, estates, or their properties, unless a proof of claim is Filed and served on the Debtors or the Reorganized Debtors within thirty (30) days after the earlier of (a) the date of the entry of the first order of the Bankruptcy Court rejecting the executory contract or unexpired lease, or (b) the Confirmation Date. D. CONTRACTS ENTERED INTO ON OR AFTER THE PETITION DATE. On the Effective Date, all contracts, leases, and other agreements entered into by the Debtors in Possession on or after the Petition Date, which agreements have not been terminated in 42 49 accordance with their terms on or before the Confirmation Date shall revest in and remain in full force and effect as against the Reorganized Debtors. VI. EFFECTIVE DATE A. OCCURRENCE OF THE EFFECTIVE DATE. The Effective Date shall occur on the second business day after which all of the following conditions have been satisfied (or such later date as agreed upon in writing between the Debtors and Magten): 1. The Confirmation Order has become a Final Order; 2. The registration of the New Common Stock under the Securities Exchange Act of 1934, as amended, has become effective and DHA shall have filed a "shelf" registration statement with respect to the New Common Stock (including the Rights Shares), and the shares of New Common Stock to be issued upon exercise of the Series A Warrants and the Series B Warrants; 3. Sufficient net Cash proceeds shall have been received by the Reorganized Debtors from the exercise of the Rights and/or Oversubscription Options to enable the Reorganized Debtors to pay in full in Cash all amounts due under the Pre-Petition Secured Term Loan Agreement on the Effective Date; 43 50 4. The Reorganized Debtors shall have executed an agreement for a secured working capital facility on terms and conditions reasonably satisfactory to Magten; 5. The Reorganized Debtors shall have received proceeds of not less than the aggregate amount of all obligations under the Post-Petition Secured Loan Agreement outstanding as of the Effective Date and up to $7.5 million under a secured term loan facility providing for a term loan on the terms and conditions set forth in Exhibit S or on such other terms and conditions acceptable to Magten in its sole discretion; 6. The DHA Charter (and the Certificates of Incorporation filed with the Bankruptcy Court prior to the Confirmation Hearing with respect to the Reorganized Debtors other than DHA) shall have been filed with the Secretary of State of the State of each such entity's incorporation in accordance with such State's corporation laws; 7. All members of the boards of directors of each of the Debtors shall have resigned; 8. All authorizations, consents and regulatory approvals required, if any, in connection with the Plan's effectiveness shall have been obtained; 9. As of the Effective Date, the aggregate prepetition Claims against the Reorganized Debtors, including all Allowed Claims and Disputed Claims (but excluding Claims under the Senior Notes, and any Claims for which a bar date 44 51 has not been set by the Bankruptcy Court), does not exceed $20,000,000; and 10. The Debtors shall have received approval from the Required Parties or their counsel for any modifications to any documents attached as a form to the Plan. B. WAIVER OF CONDITIONS. With the prior written consent of Magten, the Debtors may waive, by a writing signed by an authorized representative and subsequently Filed, one or more of the conditions precedent to the Effective Date. C. FAILURE OF THE EFFECTIVE DATE. If each of the conditions to the occurrence of the Effective Date has not been satisfied or duly waived on or before the first Business Day that is more than 120 days after the date the Bankruptcy Court enters the Confirmation Order, or by such later date as is agreed upon between the Debtors and Magten, then the Plan shall automatically be deemed to be null and void in all respects, and nothing contained in the Plan shall (a) constitute a waiver or release of any Claims against or Equity Interests in any of the Debtors or (b) prejudice in any manner the rights of the holder of any Claim against, or Equity Interest in, any of the Debtors. 45 52 VII. MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN A. ISSUANCE AND EXERCISE OF RIGHTS. 1. On the Confirmation Date, the board of directors of DHA shall be deemed to have approved the Rights Plan and its implementation. On the Right Issue Date, the Rights and the Oversubscription Options shall be issued to the holders of Allowed Claims in Classes 4 and 5A in the amounts specified in Article IV.D.2 and IV.E.1 hereof. On or before the Rights Expiration Date, any holder of the Rights or Oversubscription Options that desires to exercise the Rights or Oversubscription Options, as applicable, shall follow the procedure for exercise of the Rights and/or Oversubscription Options contained in section VIII of the Rights Plan. 2. On or before the Rights Expiration Date each holder that has exercised the Rights and/or Oversubscription Options held by such holder shall deliver Cash to the rights agent under the Rights Plan in an amount sufficient to exercise in full all of the Rights and Oversubscription Options exercised by such holder in accordance with the terms of the Rights Plan. B. ISSUANCE OF NEW SECURITIES. The issuance of the New Common Stock, Rights, Oversubscription Options and Warrants by DHA or Reorganized DHA, as the case may be, and the reservation by DHA or Reorganized DHA of 833,333 shares of New Common Stock in respect of the Series A Warrants, 277,777 shares of New Common Stock in respect of the 46 53 Series B Warrants and 1,444,444 shares of New Common Stock in respect of the shares to be issued under the Stock Incentive Plan is hereby authorized without the need for any further corporate action. C. CANCELLATION OF EXISTING SECURITIES AND AGREEMENTS. On the Effective Date, the Senior Notes, the Existing Common Stock, the Redeemable Preferred Stock, the certificates of designations for the Existing Common Stock and the Redeemable Preferred Stock, and any options, warrants, calls, subscriptions, or other similar rights or other agreements or commitments, contractual or otherwise, obligating any Debtor to issue, transfer, or sell any shares of Existing Common Stock or Redeemable Preferred Stock, or any other capital stock of any Debtor shall be cancelled. Except for purposes of effectuating the distributions under the Plan, on the Effective Date, the Indenture shall be cancelled. D. SURRENDER OF EXISTING SECURITIES. As a condition to receiving any distribution under the Plan, each holder of a promissory note, share certificate, or other instrument evidencing a Claim or Equity Interest must surrender such promissory note, share certificate or other instrument to Reorganized DHA or its designee. Reorganized DHA appoints the indenture trustee under the Indenture as its designee to receive the Senior Notes. Any holder of a Claim or Equity Interest that fails to (a) surrender such instrument or (b) execute and deliver an affidavit of loss and/or indemnity reasonably sat- 47 54 isfactory to Reorganized DHA and furnish a bond in form, substance, and amount reasonably satisfactory to Reorganized DHA before the later to occur of (i) the second anniversary of the Effective Date and (ii) six months following the date such holder's Claim or Equity Interest becomes an Allowed Claim or Allowed Equity Interest, shall be deemed to have forfeited all rights, Claims, and/or Equity Interests and may not participate in any distribution under the Plan. E. RETIREE BENEFITS. After the Effective Date, the payment of retiree benefits (as defined in section 1114 of the Bankruptcy Code), at the level established pursuant to section 1114 of the Bankruptcy Code, shall continue for the duration of the period that the applicable Debtor has obligated itself to provide such benefits. F. MANAGEMENT EMPLOYMENT AGREEMENTS. All employment, severance, and retention bonus agreements between any Debtor and Murphy L. Fontenot, Jay N. Baker and David M. Tracy shall be amended and restated in full as of the Effective Date in the forms of Exhibits M through O hereto, respectively, and as of the Effective Date are hereby assumed as amended. Such amended and restated agreements supercede all employment, severance, and retention bonus agreements between any Debtor and such individuals in effect prior to the Effective Date. On the Effective Date, all Claims of such individuals against any Debtor under their prepetition employment, severance, and retention bonus agreements will be governed by, and completely satisfied in accordance with, the terms and conditions of 48 55 their new employment agreements in the forms of Exhibits M through O hereto. Entry of the Confirmation Order by the Clerk of the Bankruptcy Court shall constitute approval of such assumptions pursuant to subsection 365(a) of the Bankruptcy Code, subject to the occurrence of the Effective Date. G. EMPLOYEE BENEFIT PLANS. Subject to the occurrence of the Effective Date, all employee benefit plans, policies and programs of the Debtors and the Debtor's obligations thereunder, shall survive confirmation of the Plan, remain unaffected thereby, and not be discharged. Employee benefit plans, policies, and programs shall include, without limitation, all savings plans, retirement pension plans, health care plans, disability plans, severance benefits plans, life, accidental death and dismemberment insurance plans (to the extent not executory contracts assumed under the Plan), but shall exclude all employee equity or equity-based incentive plans. H. STOCK INCENTIVE PLAN. The solicitation of votes on the Plan shall be deemed a solicitation of the holders of New Common Stock for approval of the Stock Incentive Plan. Entry of the Confirmation Order shall constitute such approval and the Confirmation Order shall so provide. Grants under the Stock Incentive Plan shall not be effective until after the Effective Date. In accordance therewith, on the Effective Date, Reorganized DHA shall reserve approximately 1,444,444 shares of the New Common Stock for issuance to non-employee directors of Reorganized DHA and salaried key employees of Reorganized DHA and its subsidiaries pursuant to benefits in 49 56 the form of stock options, stock appreciation rights, stock awards, performance awards, and stock units that may be granted by the compensation committee comprised of disinterested members of Reorganized DHA's Board of Directors. All employee equity or equity-based incentive plans for the Debtors in existence as of the Petition Date (other than the Stock Incentive Plan) shall be terminated as of the Effective Date. I. LISTING OF NEW COMMON STOCK; REGISTRATION OF SECURITIES. Reorganized DHA shall use its best efforts to (i) maintain its status as a reporting company under the Securities and Exchange Act of 1934, as amended (the "Exchange Act") and cause, on the Effective Date, the shares of New Common Stock issued hereunder to be listed on a national securities exchange or, as to the New Common Stock, quoted in the national market system of the National Association of Securities Dealers' Automated Quotation System, (ii) in accordance with the terms of the Registration Rights Agreement, file and have declared effective as soon as possible thereafter, on or prior to the Effective Date, a registration statement or registration statements under the Securities Act of 1933, as amended (the "Securities Act"), for the offering on a continuous or delayed basis in the future of the shares of New Common Stock (the "Shelf Registration"), (iii) cause to be filed with the Securities and Exchange Commission on or prior to the Effective Date a registration statement on Form 10 under the Exchange Act with respect to the New Common Stock, (iv) keep the Shelf Registration effective for a three- 50 57 year period, and (v) supplement or make amendments to the Shelf Registration, if required under the Securities Act or by the rules or regulations promulgated thereunder or in accordance with the terms of the Registration Rights Agreement, and have such supplements and amendments declared effective as soon as practicable after filing. In addition, on the Effective Date, Reorganized DHA shall enter into the Registration Rights Agreement in the form of Exhibit E hereto. J. NEW CERTIFICATES OF INCORPORATION AND BYLAWS. On the Effective Date or as soon thereafter as is practicable, Reorganized DHA shall file with the Secretary of State of the State of Delaware, in accordance with sections 103 and 303 of the Delaware General Corporation Law, the DHA Charter and such certificate shall be the certificate of incorporation for Reorganized DHA. The DHA Charter provides, among other things, for the authorization of 30,000,000 share of New Common Stock and a prohibition on the issuance of nonvoting equity securities. The DHA Bylaws provides, among other things, that the Board of Directors of Reorganized DHA shall initially consist of nine members and, on the Effective Date, the DHA Bylaws shall become the bylaws of Reorganized DHA. The Debtors shall file with the Bankruptcy Court prior to the Confirmation Hearing the certificate of incorporation and bylaws for each Reorganized Debtor other than Reorganized DHA. On the Effective Date or as soon thereafter as is practicable, each Reorganized Debtor shall file its certificate of incorporation and bylaws with the Secretary of State of 51 58 such entity's State of incorporation in accordance with such State's corporation law. K. REVESTING OF ASSETS. Except as otherwise provided in the Plan or the Confirmation Order, on the Effective Date, all property of the Estates shall revest in the Reorganized Debtors free and clear of all Claims, liens, encumbrances, and other interests of any person; and the Reorganized Debtors may operate their businesses and may use, acquire, and dispose of property and compromise or settle any Claims or Equity Interests without supervision or approval by the Bankruptcy Court, free of any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly imposed by the Plan or the Confirmation Order. From and after the Effective Date, the Reorganized Debtors may use, acquire, and dispose of property without supervision or approval by the Bankruptcy Court and free of any restrictions of the Bankruptcy Code or the Bankruptcy Rules, except as expressly provided by the Plan, agreements entered into in connection therewith, or the Confirmation Order. L. MANAGEMENT OF REORGANIZED DEBTORS. The Board of Directors of Reorganized DHA as of the Effective Date shall consist of the nine members listed on Exhibit P hereto. A list of the members of the boards of directors for the Reorganized Debtors other than Reorganized DHA shall be Filed prior to the Confirmation Hearing. 52 59 M. EXEMPTION FROM CERTAIN TRANSFER TAXES. Pursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer, shall not be subject to any stamp tax, real estate transfer tax, or similar tax. Transfers under the Plan that are exempt from taxation pursuant to section 1146(c) of the Bankruptcy Code include, but are not limited to, the issuance, transfer, assignment, or exchange of New Common Stock, the Rights Shares, Series A Warrants, Series B Warrants, Rights and Oversubscription Options; the creation of any mortgage, deed of trust, lien or other security interest; the making, revestment, or assignment of any lease or sublease; and the transfer of property or the making, revestment, or delivery of any deed or other instrument or transfer under, in furtherance of, or in connection with, the Plan, including any deeds, bills of sale, pledges, mortgages, deeds of trust, or assignments executed in connection with the Plan, agreements entered into in connection therewith, or the Confirmation Order. N. APPLICABILITY OF SECTIONS 1125 AND 1145 OF THE BANKRUPTCY CODE TO NEW COMMON STOCK AND OTHER SECURITIES ISSUED UNDER THE PLAN. Each of the Debtors have, and upon confirmation of the Plan shall be deemed to have, solicited acceptances of the Plan in good faith and in compliance with the applicable provisions of the Bankruptcy Code and each of the Debtors, Magten and each of the Term Lenders (and each of their respective affiliates, agents, directors, officers, employees, members, advisors and attorneys) have participated in good faith and in compliance with 53 60 the applicable provisions of the Bankruptcy Code in the offer, issuance, sale, and purchase of the securities offered and sold under the Plan, and therefore are not, and on account of such offer, issuance, sale, solicitation, and/or purchase will not be, liable at any time for the violation of any applicable law, rule or regulation governing the solicitation of acceptances or rejections of the Plan or the offer, issuance, sale, or purchase of the securities offered and sold under the Plan. In reliance upon the exemption provided pursuant to section 1145 of the Bankruptcy Code, the New Common Stock, the Series A Warrants, the Series B Warrants, the Rights, the Rights Shares and the Oversubscription Options to be issued on the Effective Date as provided in the Plan generally will be exempt from the registration requirements of the Securities Act of 1933, and state and local securities laws. Accordingly, such securities may be resold without registration under the Securities Act or other federal securities laws pursuant to the exemption provided by Section 4(1) of the Securities Act of 1933, unless the holder is an "underwriter" with respect to such securities, as that term is defined in the Bankruptcy Code. In addition, such securities generally may be resold without registration under state securities laws pursuant to various exemptions provided by the respective laws of the several states. O. OBJECTIONS TO CLAIMS. All objections to Claims shall be Filed and served on the holders of such Claims by the later of: (a) 180 days after the Effective Date, or (b) 180 days after the particular proof of 54 61 Claim has been Filed, except as extended by an agreement between the claimant and the Reorganized Debtors, or by order of the Bankruptcy Court on a motion filed by the Reorganized Debtors, with notice of such motion to be served on the Office of the United States Trustee and those holders of Disputed Claims directly affected by the motion. If an objection to a proof of claim that relates to a Disputed Claim has not been Filed by the objection bar dates established in this Section VII.O, the Claim to which the proof of claim relates shall be treated as an Allowed Claim for purposes of distribution under the Plan. P. DISCHARGE OF DEBTORS AND INJUNCTION. Except as otherwise provided in the Plan, subject to applicable case law and constitutional principles, and conditioned on the occurrence of the Effective Date, the rights afforded in the Plan and the treatment of all Claims herein shall be in exchange for, and in complete satisfaction, discharge, and release of, all Claims, including without limitation, all Administrative Claims, Secured Claims, Priority Tax Claims, other priority Claims, and Unsecured Claims, including any interest accrued on such Claims, whether before or after the Petition Date, against the Debtors, the Debtors' Estates, the Debtors in Possession and the Reorganized Debtors, or any of their respective assets or properties, and shall terminate all Equity Interests of any nature whatsoever in DHA. Except as otherwise provided in the Plan, (1) on the Effective Date, all substantive rights or obligations of the Debtors under any Equity Interests in DHA shall be terminated, and the Debtors shall be deemed discharged 55 62 and released to the fullest extent permitted by section 1141 of the Bankruptcy Code from all Claims that arose before the Confirmation Date, including without limitation all Administrative Claims, Secured Claims, Priority Tax Claims, other priority Claims, and Unsecured Claims, including any interest accrued on such Claims before and after the Petition Date against the Debtors and the Debtors in Possession, or any of their assets or properties, and all debts of the kind specified in sections 502(g), 502(h), or 502(i) of the Bankruptcy Code, in each case whether or not: (a) a proof of Claim or proof of Equity Interest based on such Claim, Administrative Claim, or Equity Interest is Filed or deemed Filed pursuant to sections 501 or 1111(a) of the Bankruptcy Code, (b) a Claim, Administrative Claim, or Equity Interest is allowed or deemed allowed pursuant to the Bankruptcy Code, or (c) the holder of a Claim, Administrative Claim, or Equity Interest has voted to accept the Plan; and (2) all entities shall be enjoined permanently by section 524 of the Bankruptcy Code from asserting against the Reorganized Debtors, its successors, or its assets or properties, any other or further Claims, Administrative Claims, or Equity Interests based upon any act or omission, transaction, or other activity of any kind or nature that occurred prior to the Confirmation Date, and such discharge shall void any judgment against the Debtors or the Reorganized Debtors at any time obtained to the extent that it relates to a Claim, Administrative Claim, or Equity Interest discharged or terminated. Notwithstanding the foregoing, any contingent Claims by all current and former directors or officers of the Debtors 56 63 for reimbursement, indemnity or contribution arising from their service as a director or officer of the Debtors in the absence of gross negligence, unlawful conduct or willful misconduct shall not be discharged by the Plan. Except as otherwise provided in the Plan and subject to applicable case law and constitutional principles, on and after the Effective Date, all entities who have held, currently hold, or may hold a Claim, Administrative Claim, or Equity Interest discharged or terminated pursuant to the terms of the Plan are enjoined permanently by section 524 of the Bankruptcy Code from taking any of the following actions on account of any such discharged Claim or terminated Equity Interest: (1) commencing or continuing in any manner any action or other proceeding against the Debtors, the Reorganized Debtors, their successors, or their assets or properties; (2) enforcing, attaching, collecting, or recovering in any manner any judgment, award, decree, or order against the Debtors, the Reorganized Debtors, their successors, or their assets or properties; (3) creating, perfecting, or enforcing any lien or encumbrance against the Debtors, the Reorganized Debtors, their successors, or their assets or properties; (4) asserting any setoff, right of subrogation, or recoupment of any kind against any obligation due to the Debtors, the Reorganized Debtors, their successors, or their assets or properties; and (5) commencing or continuing any action, in any manner, in any place, that does not comply with or is inconsistent with the provisions of the Plan or the Confirmation Order. Any person violating such injunction may be liable for actual damages, in- 57 64 cluding costs and attorneys' fees and, in appropriate circumstances, punitive damages. The provisions of this Plan shall be binding upon and govern the acts of all entities including, without limitation, all holders of Claims, Administrative Claims, and Equity Interests, all filing agents, filing officers, title agents, title companies, recorders of mortgages, recorders of deeds, registrars of deeds, administrative agencies, governmental departments, secretaries of state, federal, state, and local officials, and all other entities who may be required by operation of law, the duties of their office, or contract to accept, file, register, or otherwise record or release any documents or instruments, or who may be required to report or insure any title or state of title in or to any of the assets of the Debtors, the Debtors' Estates, or the Reorganized Debtors. Q. PRESERVATION OF RIGHTS OF ACTION. Except as provided herein or in any other contract, instrument, release, or other agreement entered into in connection with the Plan, in accordance with section 1123(b) of the Bankruptcy Code, the Reorganized Debtors shall be revested with, shall retain and may enforce any claims, rights, or causes of action, including rights or causes of action arising under the Bankruptcy Code, that the Debtors or their Estates may hold against any person. The Reorganized Debtors or their successors may pursue such retained claims, rights, or causes of action, as appropriate, in accordance with the best interests of the Reor- 58 65 ganized Debtors or their successors holding such rights of action. R. LIMITATION OF LIABILITY. The Debtors, the Reorganized Debtors, Congress, Magten, the Term Lenders, Cigna, and Fund V, and their respective officers, directors, employees, trustees, members, affiliates and agents (including any Professional Entities employed by one or more of them), shall have no liability to any holder of an Administrative Claim, Claim or Equity Interest, or any other person, for any act taken or omission made with respect to the Debtors prior to the Petition Date or in connection with, related to, or arising out of, the formulation, implementation, confirmation, or consummation of the Plan, the Disclosure Statement, or any other contract, instrument, release, agreement or document created in connection with the Plan, the pursuit of approval of the Disclosure Statement or the solicitation of votes for or confirmation of the Plan, or the administration of the Debtors' cases, the Plan or the property to be distributed under the Plan, except for willful misconduct or gross negligence as determined by Final Order of the Bankruptcy Court and, in all respects, shall be entitled to rely upon the advice of counsel with respect to their duties and responsibilities under the Plan. S. MAINTENANCE OF DIRECTORS' AND OFFICERS LIABILITY INSURANCE For a period of not less than two years following the Effective Date, Reorganized DHA shall maintain directors and officers liability insurance with coverage comparable to the direc- 59 66 tors and officers liability insurance in effect on the Petition Date; provided, that in the event the yearly premium for such insurance is in excess of $93,750, Reorganized DHA shall be obligated only to purchase such insurance as is available for a yearly premium of $93,750. T. ALLOCATION OF CONSIDERATION The aggregate consideration to be distributed to the holders of Allowed Claims in each class under the Plan shall be treated as first satisfying an amount equal to the stated principal amount of the Allowed Claim for such holders and any remaining consideration as satisfying accrued by unpaid interest, if any, with respect to such Allowed Claim. VIII. DISTRIBUTION A. GENERAL. 1. DISBURSING AGENTS. Entities approved by the Debtors or the Reorganized Debtors, such as a stock transfer agent for the New Common Stock, a subscription agent under the Rights Plan or other entity for the distribution of other property, shall act as Disbursing Agents under the Plan. Any such Disbursing Agent may, with the prior approval of the Reorganized Debtors, employ or contract with other entities to assist in or to perform the distribution required. Each Disbursing Agent shall serve without bond, except as required by the Reorganized Debtors, and each third party 60 67 hired as a Disbursing Agent shall receive, without further Bankruptcy Court approval, reasonable compensation for distribution services rendered pursuant to the Plan and reimbursement of reasonable out-of-pocket expenses incurred in connection with such services from the Reorganized Debtors, on terms acceptable to the Reorganized Debtors. 2. TRANSMITTAL OF DISTRIBUTIONS TO PARTIES ENTITLED THERETO. Except in the case of the Allowed Secured Congress Claim, the Allowed Secured Term Loan Claims, Allowed Claims in Class 4, the Redeemable Preferred Stock or as otherwise provided in the Plan or as agreed to in writing by the Debtors and the applicable distributee prior to the Effective Date, any property to be distributed on account of an Allowed Claim, Allowed Administrative Claim, or Allowed Equity Interest shall be distributed by mail as follows: (a) except in the case of the holder of a share of stock for which there is a stock transfer agent, to (i) the latest mailing address Filed of record for the party entitled thereto or to a holder of a power of attorney designated by the holder of the Allowed Claim, Allowed Administrative Claim, allowed reclamation Claim or Allowed Equity Interest to receive such distributions, or (ii) if no such mailing address has been so Filed, the mailing address reflected on the Schedules of Assets and Liabilities or in Reorganized Debtor's books and records; or (b) in the case of the holder of a share of stock for which there is a stock transfer agent, in accordance with the terms of any agreements governing distributions with respect to 61 68 such share of stock, to the latest mailing address maintained of record by the pertinent stock transfer agent, or, if no mailing address is maintained of record, to the pertinent stock transfer agent. All distributions, if permitted to be mailed, shall be deemed made upon placing such distribution in the United States mail, postage prepaid. Cash distributions to the holders of the Allowed Secured Congress Claim and the Allowed Secured Term Loan Claims shall be made by wire transfer in accordance with instructions to be provided by such holders, on or immediately following the Effective Date. Distributions of shares of New Common Stock to holders of Allowed Claims in Class 4 shall be made to the indenture trustee under the Indenture who shall then distribute such shares to the holders of Allowed Claims in Class 4 at the addresses last known to such indenture trustee. Distributions of New Common Stock and Warrants to the holders of Allowed Equity Interests in Classes 5A and 5B shall be made by mail as set forth above or such other method as agreed upon between the holders of such Allowed Equity Interests and the Debtors or Reorganized DHA. 3. NO FRACTIONAL SHARES. Notwithstanding any other provision of the Plan, only whole numbers of shares of New Common Stock, Rights, Oversubscription Options, or Warrants shall be distributed. With regard to the initial and all subsequent distributions of New Common Stock, Rights, Oversubscription Options, or Warrants, all Allowed Claims or Allowed Equity Interests of a holder in a particular Class shall be aggregated and treated as one Allowed Claim or Allowed Equity Interest for purposes of distribution. If any cal- 62 69 culated distribution on account of such Allowed Claim or Allowed Equity Interest would otherwise result in the distribution of a number of shares of New Common Stock, Rights, Oversubscription Options, or Warrants that is not a whole number, then the actual distribution of shares of such stock or such warrants shall be rounded to the nearest whole number unless such rounding results in a Class of Allowed Claims or Allowed Equity Interests receiving more than the aggregate number of shares of New Common Stock, Rights, Oversubscription Options, or Warrants allotted for distribution to that Class. In such a case, the actual distribution of shares of New Common Stock, Rights, Oversubscription Options, and Warrants shall be rounded so that the total amount of shares of New Common Stock, Rights, Oversubscription Options, or Warrants distributed to the Class will be no more than the amount allotted for distribution in that Class. Holders of Allowed Claims or Allowed Equity Interests that would be entitled to fractional shares of New Common Stock or to fractional Rights, Oversubscription Options, or Warrants but for this provision shall receive no consideration therefor because such amount would be de minimis. 4. TIMING OF DISTRIBUTIONS. Except as otherwise provided herein, distributions of property to be made under the Plan on account of an Allowed Claim or Allowed Equity Interest will occur on or as soon as practicable after the later of (a) the date on which the Claim or Equity Interest becomes an Allowed Claim or Allowed Equity Interest and (b) the Effective Date. 63 70 5. COMPLIANCE WITH TAX REQUIREMENTS. In connection with the Plan, to the extent applicable, each Disbursing Agent shall comply with all tax withholding and reporting requirements imposed on it by any governmental unit, and all distributions pursuant to the Plan shall be subject to such applicable withholding and reporting requirements. The Disbursing Agent may withhold the distribution due to any holder of an Allowed Claim or Allowed Equity Interest until such time as such holder provides the necessary information to comply with any withholding requirements of any governmental unit, or provides to the Disbursing Agent the Cash necessary to comply with any applicable withholding requirements. Any property so withheld will then be paid by the Disbursing Agent to the appropriate taxing authority. 6. NO DISTRIBUTIONS ON ACCOUNT OF DISPUTED CLAIMS PENDING ALLOWANCE. Notwithstanding any other provision of the Plan, no payments or distributions shall be made on account of a Disputed Claim unless and until the Disputed Claim has become an Allowed Claim by way of (a) a Final Order allowing the Claim, to the extent Allowed, (b) listing of the Claim in a Filed supplement to the Allowed Claims List following (i) settlement of the Claim between the Debtors and the holder of the Claim (after notice to any Creditors' Committee and an opportunity to be heard) or (ii) determination by the Debtors that the objection should not be pursued, (c) lapse of the time within which an objection to the Claim could be Filed without any such objection being Filed, 64 71 or (d) withdrawal of an objection to the Claim by the Debtors after the deadline for objecting to such Claim, as set forth in Section VII.O, has passed. 7. TREATMENT OF CONTINGENT CLAIMS. No reserve shall be established for any contingent Claim unless a Final Order requires such reserve. If a contingent Claim becomes fixed and absolute, to the extent the Claim may be Allowed, the holder of such contingent Claim shall receive only distributions to which it may be entitled pursuant to section 502(j) of the Bankruptcy Code. In the event a contingent Claim is entitled to distributions pursuant to section 502(j) of the Bankruptcy Code, such Claim shall receive a Pro Rata distribution in the proportion it bears to all other Allowed Claims of the same Class. B. UNDELIVERABLE DISTRIBUTIONS. 1. HOLDING AND INVESTMENT OF UNDELIVERABLE DISTRIBUTIONS. If any distribution is returned to the Reorganized Debtors or a Disbursing Agent as undeliverable, no further distributions shall be made to the holder of the Allowed Claim or Allowed Equity Interest on account of which such distribution was made unless and until the Reorganized Debtors or the Disbursing Agent, as the case may be, is notified in writing of such holder's then-current address. Undeliverable distributions shall remain in the possession of the Reorganized Debtors or the Disbursing Agent, as the case may be, until such time as a distribution becomes deliverable. Undeliverable New Common Stock, War- 65 72 rants for the purchase of New Common Stock, and Cash shall be held in trust for the benefit of the potential claimants of such securities or Cash in an amount sufficient to fund the unclaimed amounts of such securities or Cash, and shall be accounted for separately. 2. FAILURE TO CLAIM UNDELIVERABLE DISTRIBUTIONS. The Allowed Claim or Allowed Equity Interest of any holder that does not present a demand for an undeliverable distribution within the later of (i) two (2) years from the Confirmation Date or (ii) six months after such Claim or Equity Interest was Allowed, shall be discharged; and the holder thereof shall be forever barred from asserting any such entitlement against the Disbursing Agent, the Debtors, the Reorganized Debtors, or their assets or properties. In such cases: (a) any Cash held for distribution on account of such Allowed Claim and any interest earned thereon shall be property of the Reorganized Debtors, free of any restrictions thereon; and (b) any New Common Stock or Warrants held for issuance on account of such Allowed Claim or Allowed Equity Interest shall be canceled. To the extent that such undeliverable Cash or New Common Stock is held by a Disbursing Agent, it shall return such Cash or securities to the Reorganized Debtors. Any securities returned pursuant to this provision shall be canceled. Except as provided in Article VIII.A.2, nothing contained in the Plan shall require the Reorganized Debtors or the Disbursing Agent to attempt to locate any holder of an Allowed Claim or Allowed Equity Interest, other than 66 73 to mail distributions to the Allowed Claim holder's or Equity Interest holder's last known address as provided in Section VIII.A.2. C. ESTIMATION OF UNLIQUIDATED AND DISPUTED CLAIMS. 1. As to any unliquidated Disputed Claim, including Claims based upon rejection of executory contracts or leases, or other Disputed Claims, the Bankruptcy Court, on motion by the Debtors, may estimate as provided herein the likely maximum amount of the Disputed Claims. In addition, the Bankruptcy Court, on motion by the Debtors and noticed to the holders of such Claims to be estimated, may determine an amount sufficient to reserve for such Claim. All such amounts shall be held by the Disbursing Agent in the Disputed Claims Reserve. 2. An estimation may be made for purposes of both allowance and voting. A person whose Claim is estimated shall not have any recourse against the holders of New Common Stock, holders of Existing Common Stock, any person receiving a distribution under the Plan, or any assets distributed on account of any Allowed Claims or Equity Interests, even if such person's Claim, as finally Allowed, exceeds the maximum estimated amount thereof. THUS, THE BANKRUPTCY COURT'S ESTIMATION FOR THE PURPOSE OF DISTRIBUTION ON ACCOUNT OF A DISPUTED CLAIM OR GROUP OF DISPUTED CLAIMS WILL LIMIT THE DISTRIBUTION TO BE MADE THEREON, REGARDLESS OF THE AMOUNT FINALLY DETERMINED TO BE DUE ON ACCOUNT OF SUCH DISPUTED CLAIM(S). 67 74 IX. CONFIRMATION REQUEST The Debtors reserve the right to request Confirmation of the Plan under section 1129(b) of the Bankruptcy Code if an impaired Class of Claims or Equity Interests votes to reject the Plan. If an impaired Class of Claims or Equity Interests votes to reject the Plan, the Plan may not be confirmed unless the requirements of section 1129(b) of the Bankruptcy Code are satisfied, as determined by the Bankruptcy Court at the Confirmation Hearing. X. RETENTION OF JURISDICTION A. RETAINED JURISDICTION. Following Confirmation, except as provided below, the Bankruptcy Court may retain such jurisdiction as is legally permissible after Confirmation, including, without limitation, for the following purposes: 1. To determine the allowability, classification, or priority of Claims and Equity Interests upon objection by the Reorganized Debtors or any other party in interest entitled to raise such objection; 2. To construe and to take any action to enforce and execute the Plan, the Confirmation Order, or any other order of the Bankruptcy Court, issue such orders as may be necessary for the implementation, execution, performance, and consummation of the Plan and all matters referred to herein, and determine all 68 75 matters that may be pending before the Bankruptcy Court in the Reorganization Cases on or before the Effective Date with respect to any person; 3. To protect the property of the Estates revesting in the Reorganized Debtors from Claims against, or interference with, such property, including actions to quiet or otherwise clear title to such property based upon the terms and provisions of this Plan, or to determine the Reorganized Debtors' exclusive ownership of claims and causes of action revested or retained under the Plan; 4. To determine any and all applications for allowance of compensation and expense reimbursement of Professional Entities for periods on or before the Confirmation Date; 5. To determine any other request for payment of Administrative Claims; 6. To resolve any dispute regarding the implementation, execution, consummation, or interpretation of the Plan; 7. To determine motions for the rejection, assumption, or assignment of executory contracts or unexpired leases, and to determine the allowance of any Claims resulting from the rejection of executory contracts and unexpired leases; 8. To determine all applications, motions, adversary proceedings, contested matters, and any other litigated matters instituted prior to the closing of these cases; 9. To determine such other matters, and for such other purposes, as may be provided in the Confirmation Order; 69 76 10. To modify the Plan under section 1127 of the Bankruptcy Code, to remedy any defect or omission in the Plan, or to reconcile any inconsistency in the Plan so as to carry out its intent and purposes; 11. To issue injunctions or take such other actions or make such other orders as may be necessary or appropriate to restrain interference with the Plan or its execution or implementation by any person; 12. To issue such orders in aid of consummation of the Plan and the Confirmation Order, notwithstanding any otherwise applicable nonbankruptcy law, with respect to any person, to the full extent authorized by the Bankruptcy Code; and 13. To resolve any dispute regarding the adequacy of disclosure regarding any securities issued under the Plan. B. JURISDICTION OVER THE NEW SECURITIES. Notwithstanding the jurisdiction retained in Section X.A. hereof, from and after the Effective Date, the Bankruptcy Court shall not have the power to issue any order which modifies or impairs the rights of the holders of the New Common Stock. XI. MISCELLANEOUS PROVISIONS A. AMENDMENT AND MODIFICATION OF THE PLAN. The Plan may be amended or modified before the Effective Date only by the Debtors with the prior written consent of the Required Parties or, following the Effective Date, only by the Reorganized Debtors with the prior written consent of the Re- 70 77 quired Parties, and only to the extent provided in section 1127 of the Bankruptcy Code. B. WITHDRAWAL OR REVOCATION OF THE PLAN. The Debtors reserve the right to revoke or withdraw the Plan prior to the Confirmation Date. If the Debtors revoke or withdraw the Plan, or if Confirmation of the Plan never occurs, then the Plan shall be null and void. Until the Plan is confirmed and the Effective Date occurs, nothing contained herein shall: (1) constitute a waiver or release of any Claims by or against, or any Equity Interests in, the Debtors; or (2) prejudice in any manner the rights of Debtors in any proceedings. C. SECTION 1111(b)(2) ELECTION. An election pursuant to section 1111(b)(2) of the Bankruptcy Code may be made, at the election of a class of Secured Claims, for purposes of this Plan only, without affecting the rights of such class to make an election with respect to any other plan of reorganization Filed or to be Filed in the Reorganization Cases. A class of Secured Claims that makes an election pursuant to section 1111(b)(2) for purposes of this Plan may revoke such election at any time during the 20 days immediately following the Filing with the Bankruptcy Court of any amendments to the Plan that materially alter the rights of such class, as determined by the Bankruptcy Court. Notice of any revocation permitted herein shall be Filed with the Bankruptcy Court and served on the Debtors, any Creditors' Committee and Magten during the time specified herein. 71 78 D. CREDITORS' COMMITTEE. On the Effective Date, any Creditors' Committee shall be dissolved and thereafter shall have no further participation in the Reorganization Cases. E. SUCCESSORS AND ASSIGNS. The rights, benefits, and obligations of any person named or referred to in the Plan shall be binding on, and shall inure to the benefit of and be binding on, the heirs, executors, administrators, successors, or assigns of such person. F. SEVERABILITY OF PROVISIONS OF THE PLAN. The provisions of this Plan shall not be severable unless such severance is agreed to in writing by the Debtors or the Reorganized Debtors and Magten and such severance constitutes a permissible modification of the Plan pursuant to section 1127 of the Bankruptcy Code. DECORATIVE HOME ACCENTS, INC., a Delaware Corporation, Debtor Dated: September __, 1997 By /s/ Jay N. Baker --------------------------------- Jay N. Baker, Chief Financial Officer 72 79 THE RUG BARN, INC., a South Carolina Corporation, Debtor Dated: September __, 1997 By /s/ Jay N. Baker ----------------------------------------- Jay N. Baker, Vice-President HOME INNOVATIONS, INC., a Delaware Corporation, Debtor Dated: September __, 1997 By /s/ Jay N. Baker ----------------------------------------- Jay N. Baker, Vice-President HOME INNOVATIONS, INC., a New York Corporation, Debtor Dated: September __, 1997 By /s/ Jay N. Baker ----------------------------------------- Jay N. Baker, Vice-President DHA HOME, INC., a Delaware Corpora- tion, Debtor Dated: September __, 1997 By /s/ Jay N. Baker ----------------------------------------- Jay N. Baker, Vice-President 73 80 R.A. BRIGGS AND COMPANY., an Illinois Corporation, Debtor Dated: September __, 1997 By /s/ Jay N. Baker ---------------------------------------- Jay N. Baker, Vice-President DRAYMORE MFG. CORP., a North Carolina corporation Dated: September __, 1997 By /s/ Jay N. Baker ---------------------------------------- Jay N. Baker, Vice-President Submitted by: /s/ Michael A. Morris - ---------------------------------------- MICHAEL A. MORRIS, a Member of STUTMAN, TREISTER & GLATT PROFESSIONAL CORPORATION Reorganization Counsel for Debtors 74 EX-10.1 3 CREDIT AGREEMENT 1 EXHIBIT 10.1 CREDIT AGREEMENT, dated as of October 1, 1997, among THE RUG BARN, INC., HOME INNOVATIONS, INC., DHA HOME, INC. AND R.A. BRIGGS AND COMPANY, AS BORROWERS, DECORATIVE HOME ACCENTS, INC., DRAYMORE MFG. CORP. AND HOME INNOVATIONS, INC., AS GUARANTORS, and THE LENDERS LISTED ON THE SIGNATURE PAGES HERETO, AS LENDERS 2 Table of Contents
Page ---- ARTICLE I DEFINITIONS; CONSTRUCTION 1 1.01. Certain Definitions 1 1.02. Construction 10 1.03. Accounting Principles 11 ARTICLE II THE TERM LOAN 11 2.01. Term Loan 11 2.02. Term Notes 11 2.03. Maturity Date 11 2.04. Joint and Several Liability 11 2.05. Post-Petition Closing Fee 12 2.06 Interest Rate 13 2.07 Interest Payment Dates 13 2.08. Payments 13 2.09. Use of Proceeds 13 2.10. Taxes 13 ARTICLE III CONDITIONS PRECEDENT TO TERM LOAN 14 3.01. Conditions Precedent to Term Loan 14 ARTICLE IV REPRESENTATIONS AND WARRANTIES 17 4.01. Corporate Existence, Power and Authority; Subsidiaries 17 4.02. Financial Statements; No Material Adverse Change 17 4.03. Chief Executive Office; Collateral Locations 18 4.04. Priority of Liens; Title to Properties 18 4.05. Maintenance of Equipment 18 4.06. Tax Returns 18 4.07. Litigation 18 4.08. Compliance with Other Agreements and Applicable Laws 19 4.09. Employee Benefits 19 4.10. Environmental Compliance 20 4.11. Accuracy and Completeness of Information 20 4.12. Survival of Warranties; Cumulative 21 4.13. Enforceability of Loan Documents 21
-i- 3 4.14. Nature of Business 21 4.15. Use of Proceeds 21 4.16. Registration and Transfer of Term Notes 21 4.17. Administrative Priority; Lien Priority. 22 4.18. Bankruptcy Court Orders 22 ARTICLE V COLLATERAL 22 5.01. Grant of Security Interest 22 5.02. Security for Secured Obligations 25 5.03. Proceeds of Collateral 26 5.04. Administrative Priority 26 5.05. Grants, Rights and Remedies Cumulative 26 5.06. No Filings Required 26 5.07. Survival 26 ARTICLE VI AFFIRMATIVE AND NEGATIVE COVENANTS 26 6.01. Covenants Under Congress Loan Agreement 26 6.02. Liens 27 6.03. Indebtedness 27 6.04. Interim Order; Final Order; Administrative Priority; Lien Priority; Payment of Claims 27 6.05. Overadvances; Budget; No Amendment; Financial Covenants 27 6.06. Replacement of Schedule VI 28 ARTICLE VII DEFAULTS 28 7.01. Events of Default 28 7.02. Consequences of an Event of Default 31 7.03. Certain Remedies 32 ARTICLE VIII GUARANTEE 32 8.01. Guarantee 32 8.02. Nature of Guarantee 32 8.03. Authorization 33 8.04. Right to Demand Full Performance 34 8.05. Certain Waivers 34 8.06. The Guarantors Remain Obligated in Event the Borrowers Are No Longer Obligated to Discharge Obligations 35 8.07. Severability of Void Obligations under Guarantee 35 8.08. Guarantee Is in Addition to Other Security 35
- ii - 4
8.09. Release of Security Interest 35 8.10. No Bar to Further Actions 35 8.11. Failure to Exercise Rights Shall Not Operate as a Waiver; No Suspension of Remedies. 36 8.12. Lenders' Duties; Notice to Lenders. 36 8.13. Successors and Assigns 36 8.14. Release of Guarantee 36 8.15. Execution of Guarantee 37 8.16. No Subrogation; Certain Agreements. 37 8.17. Bankruptcy; No Discharge 37 ARTICLE IX MISCELLANEOUS 38 9.01. Holidays 38 9.02. Amendments and Waivers 38 9.03. No Implied Waiver; Cumulative Remedies 38 9.04. Notices 39 9.05. Expenses; Taxes; Attorneys' Fees; Indemnification 39 9.06. Several and Not Joint; Limited Liability 41 9.07. Application 41 9.08. Severability 41 9.09. Governing Law 42 9.10. Prior Understandings 42 9.11. Duration; Survival 42 9.12. Counterparts 42 9.13. Successors and Assigns 42 9.14. Waiver of Jury Trial 42 9.15. Right of Setoff 43 9.16. Headings 43
Exhibits - -------- Exhibit A Congress' Interim Financing Order Exhibit B Congress' Final Financing Order Exhibit C Final Order Exhibit D Interim Order Exhibit E Amended and Restated Intercreditor Agreement Exhibit F Letter Agreement Exhibit G Form of Term Note - iii - 5 Schedules - --------- Schedule I Real Property Collateral Schedule II Terms of Repayment Schedule III Wire Transfer Instructions Schedule IV Subsidiaries Schedule V Locations of Collateral Schedule VI Congress Advance Limitations - iv - 6 CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of October 1, 1997, among THE RUG BARN, INC., a South Carolina corporation, HOME INNOVATIONS, INC., a Delaware corporation, DHA HOME, INC., a Delaware corporation, and R.A. BRIGGS AND COMPANY, an Illinois corporation (each a "Borrower" and collectively, the "Borrowers"), DECORATIVE HOME ACCENTS, INC., a Delaware Corporation, DRAYMORE MFG. CORP., a North Carolina corporation, and HOME INNOVATIONS, INC., a New York corporation (each a "Guarantor" and collectively, the "Guarantors") and the lenders listed on the signature pages hereto (each a "Lender" and collectively, the "Lenders"). BACKGROUND Each Borrower and Guarantor has filed separate petitions for relief under chapter 11 of title 11 of the United States Code with the United States Bankruptcy Court for the Southern District of New York and continues to operate its business as a debtor-in-possession. The Borrowers have requested the Lenders to provide the Borrowers with term loans having an aggregate principal amount equal to $3.75 million and, subject to the terms and conditions set forth herein, the Lenders have agreed to provide such loans. In consideration of the mutual covenants herein contained and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I DEFINITIONS; CONSTRUCTION 1.01. Certain Definitions. In addition to other words and terms defined elsewhere in this Agreement, as used herein the following words and terms shall have the following meanings, respectively, unless the context hereof otherwise clearly requires: "Accelerated Maturity Date" shall mean the date on which the Obligations (including, without limitation, the entire unpaid principal balance of the Loans and accrued but unpaid interest thereon) shall become due and payable pursuant to the terms of any of the Loan Documents, including, without limitation, by reason of the occurrence of an Event of Default. "Affiliate" of a Person shall mean any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, 7 directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Agreement" shall mean this Credit Agreement as amended, modified, supplemented or restated from time to time in accordance with the terms hereof. "Bankruptcy Code" shall mean Title 11, United States Code, 11 U.S.C. Section Section 101 et seq., or any similar United States federal or state law for the relief of debtors, as amended from time to time. "Bankruptcy Court" shall mean the United States Bankruptcy Court for the Southern District of New York or the United States District Court for the Southern District of New York. "Bankruptcy Rules" shall mean the Federal Rules of Bankruptcy Procedure, as amended from time to time. "Borrower" and "Borrowers" shall have the meanings given such terms in the introductory paragraph to this Agreement. "Budget" shall have the meaning given such term in the Congress Financing Order as such budget is in effect on the date hereof without further amendment or modification. "Business Day" shall mean any day other than a Saturday, Sunday or other day on which banking institutions are authorized or obligated to close in New York, New York. "Calvin Klein License" shall mean that certain License Agreement dated as of April 27, 1997, by and between Calvin Klein, Inc. and DHA Home, Inc., as the same may be amended or modified from time to time and any auxiliary agreement entered into in connection therewith. "Capitalized Lease" shall mean any lease which is required under GAAP to be capitalized on the balance sheet of the lessee. "Capitalized Lease Obligations" shall mean the aggregate amount which is required under GAAP to be reported as a liability on the balance sheet of a Person as lessee under a Capitalized Lease. "Case" shall mean, collectively, the voluntary chapter 11 cases of the Debtors under the Bankruptcy Code pending in the Bankruptcy Court. "Closing Date" shall mean the date on which the conditions set forth in Section 3.01 hereof shall be satisfied. - 2 - 8 "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. References to sections of the Code shall be construed also to refer to any successor sections. "Collateral" shall have the meaning given such term in Section 5.01 hereof. "Congress" shall mean Congress Financial Corporation, a California corporation. "Congress Debt Documents" shall mean the Congress Loan Agreement, the Congress Financing Order and all other instruments and documents that are in effect as of the date hereof and are executed in connection with or otherwise relating to any Congress Debt Document, without further amendment, waiver or modification. "Congress Financing Order" shall mean (i) that certain interim order in the form of Exhibit A hereto from and after the date such order is entered by the Bankruptcy Court until the date that the final order in the form of Exhibit B hereto is entered by the Bankruptcy Court and (ii) such final order from and after the date such order is entered by the Bankruptcy Court. "Congress Liens" shall mean the Liens granted to Congress pursuant to the Congress Loan Agreement and/or the Congress Financing Order. "Congress Loan Agreement" shall mean that certain Loan and Security Agreement, dated November 12, 1996, as amended as of the date hereof pursuant to the Congress Ratification Agreement, by and between Congress, the Borrowers and the Guarantors (but without further amendment, waiver or modification). "Congress Ratification Agreement" shall mean that certain Ratification and Amendment Agreement, dated October 1, 1997, by and between the Debtors and Congress. "Debtors" shall mean the Borrowers and the Guarantors. "Decorative Home" shall mean Decorative Home Accents, Inc., a Delaware corporation. "Designated Borrowing Officer" shall mean Murphy L. Fontenot or Jay N. Baker, or such other officer as shall be designated from time to time in writing by the Borrowers to Lenders. "Designated Financial Officer" of a Person shall mean the individual designated from time to time by the Board of Directors or governing body performing like functions of such Person to be the chief financial officer or treasurer of such Person (and individuals designated from time to time by the Board of Directors or governing body - 3 - 9 performing like functions of such Person **************************************************************** *************************************************************************** ******************** *************************************************************************** ******************************************************************************** * *************************************************************************** ******************************************************************************** ***************************************ty, the environment and natural resources. Environmental Laws include but are not limited to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.) ("CERCLA"); the Hazardous Material Transportation Act, as amended (49 U.S.C. Section 180 et seq.); the Resource Conservation and Recovery Act, as amended (42 U.S.C. Section 6901 et seq.) ("RCRA"); the Toxic Substance Control Act, as amended (15 U.S.C. Section 2601 et seq.); the Clean Air Act, as amended (42 U.S.C. Section 7401 et seq.); the Federal Water Pollution Control Act, as amended (33 U.S.C. Section 1251 et seq.); and their state and local counterparts or equivalents. "Environmental Liabilities and Costs" shall mean all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, expert and consulting and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand by any Governmental Authority or any third party, and which relate to any environmental condition or a Release of Hazardous Materials from or onto (i) any property presently or formerly owned by any of the Borrowers or any of the Guarantors or (ii) any facility which received Hazardous Materials generated by any of the Borrowers or any of the Guarantors. "Environmental Lien" shall mean any Lien in favor of any Governmental Authority or any other Person for Environmental Liabilities and Costs. "Equipment" shall have the meaning given such term in Section 5.01(a) hereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. - 4 - 10 "ERISA Affiliate" shall mean any (i) corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as any Borrower, (ii) partnership or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with any Borrower, or (iii) member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as any Borrower, any corporation described in clause (i) above or any partnership or trade or business described in clause (ii) above. "Event of Default" shall mean any of the Events of Default described in Section 7.01 hereof. "Final Order" shall mean the order of the Bankruptcy Court, in the form of Exhibit C hereto, entered after a final hearing under Bankruptcy Rule 4001(c)(2), approving this Agreement and the other Loan Documents and authorizing the Debtors to incur permanent post-petition secured and super-priority indebtedness in accordance with this Agreement, and which is in effect and is not stayed and as to which (a) the time to appeal or petition for certiorari has expired and as to which no appeal, petition for certiorari or other proceeding for reargument or rehearing shall then be pending, or (b) in the event that an appeal, writ of certiorari or reargument or rehearing thereof has been sought and is pending, such order of the Bankruptcy Court shall have been affirmed by the highest court to which the order was appealed or certiorari, reargument or rehearing has been denied, and the time to take any further appeal, petition for certiorari, or move for reargument or rehearing shall have expired. "GAAP" shall mean generally accepted accounting principles as such principles shall be in effect in the United States at the relevant date. "Governmental Authority" shall mean any nation or government, any federal, state, city, town, municipality, county, local or other political subdivision thereof or thereto and any department, commission, board, bureau, instrumentality, agency or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee" shall mean the guarantees granted by the Guarantors to Lenders pursuant to Article VIII hereof. "guarantee" of or by any Person shall mean any obligation of such Person guaranteeing any Indebtedness of any other Person (the "primary obligor"), directly or indirectly, through an agreement (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (ii) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness against loss, or (iii) to maintain working capital, equity capital or other - 5 - 11 financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided, however, that the term guarantee shall not include endorsements for collection or deposit, in either case in the ordinary course of business. "Guarantor" and "Guarantors" shall have the meanings given to such terms in the introductory paragraph to this Agreement. "Hazardous Materials" shall mean (i) any element, compound or chemical that is defined, listed or otherwise classified as a solid waste contaminant, pollutant, toxic pollutant, hazardous substance, extremely hazardous substance, toxic substance, hazardous waste, or special waste under any Environmental Law; (ii) petroleum and its refined fractions, (iii) any dielectric fluids containing more than 50 parts per polychlorinated biphenyls, (iv) any flammable, explosive or radioactive materials; and (v) any other materials used or stored by any Borrower, building, components (including but not limited to asbestos containing materials) and manufactured products containing Hazardous Materials. "Indebtedness" shall mean as to any Person (i) indebtedness for borrowed money; (ii) indebtedness for the deferred purchase price of property or services (other than current trade payables incurred in the ordinary course of business and payable in accordance with customary practices); (iii) indebtedness evidenced by bonds, debentures, notes or other similar instruments (other than performance, surety and appeal or other similar bonds arising in the ordinary course of business); (iv) obligations and liabilities secured by a Lien upon property owned by such Person, whether or not owing by such Person and even though such Person has not assumed or become liable for the payment thereof; (v) any guarantee, direct or indirect, by such Person of any obligations and liabilities; (vi) obligations or liabilities created or arising under any conditional sales contract or other title retention agreement with respect to property used and/or acquired by such Person, even though the rights and remedies of the lessor, seller and/or lender thereunder are limited to repossession of such property; (vii) Capitalized Lease Obligations; (viii) all liabilities in respect of letters of credit, acceptances and similar obligations created for the account of such Person; and (ix) net liabilities of such Person under interest rate cap agreements, interest rate swap agreements, foreign currency exchange agreements and other hedging agreements or arrangements calculated on a basis satisfactory to the Lenders and in accordance with accepted practice. "Indemnified Parties" shall have the meaning given such term in Section 9.05 hereof. "Interim Order" shall mean the order of the Bankruptcy Court, substantially in the form of Exhibit D hereto, entered after a hearing under Bankruptcy Rule 4001(c)(2), approving this Agreement and the other Loan Documents and authorizing the - 6 - 12 Debtors to incur interim post-petition secured and super-priority indebtedness in accordance with this Agreement. "Intercreditor Agreement" shall mean the Amended and Restated Intercreditor Agreement, substantially in the form of Exhibit E hereto, by and among the Lenders and Congress and acknowledged by the Borrowers and the Guarantors, dated the Closing Date hereof, as amended, modified and supplemented and in effect from time to time, regarding the relative priority of the Liens granted to the Lenders under this Agreement and the Congress Liens. "Interest Rate" shall have the meaning given such term in Section 2.06 hereof. "Inventory" shall mean all goods and merchandise of the Borrowers and the Guarantors including, but not limited to, all raw materials, work in process, finished goods, materials and supplies of every nature used or usable in connection with the shipping, storing, advertising or sale of such goods and merchandise, whether now owned or hereafter acquired and all such property, the sale or disposition of which would give rise to accounts receivable or cash. "Lender" and "Lenders" shall have the meanings given such terms in the introductory paragraph to this Agreement. "Letter Agreement" shall mean the letter agreement, dated as of May 15, 1997, among Decorative Home, TCW Special Credits Fund V - The Principal Fund, the entities listed on Schedule I thereto, and Magten, as agent on behalf of certain of its accounts, a copy of which Letter Agreement is attached hereto as Exhibit F. "Lien" shall mean any mortgage, deed of trust, pledge, lien, claim, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security. "Loan" or "Loans" shall mean any and all loans made by the Lenders to the Borrowers under this Agreement. "Loan Documents" shall mean this Agreement, the Term Notes, the Intercreditor Agreement, the Order and all other instruments, agreements and documents from time to time delivered in connection herewith or therewith. "Magten" shall mean Magten Asset Management Corp., as agent on behalf of certain of its accounts. - 7 - 13 "Material Adverse Effect" shall mean a material adverse effect upon (i) any Borrower's or Guarantor's assets, property, prospects, or condition, financial or otherwise, (ii) the Collateral or Lenders' security interest therein, (iii) any Borrower's or Guarantor's ability to pay or perform the Obligations, or (iv) any of the Lenders' rights and remedies under any Loan Document or applicable law or the Lenders' ability to enforce any such rights and remedies. "Maturity Date" shall mean the earlier to occur of (a) the Accelerated Maturity Date, (b) the Stated Maturity Date, and (c) the first anniversary of the Petition Date. "Note Register" shall have the meaning given such term in Section 4.17 hereof. "Note Registrar" shall have the meaning given such term in Section 4.17 hereof. "Obligations" shall mean any and all Loans and all other indebtedness, obligations, indemnities and liabilities of every kind, nature and description owing by any one or more Borrowers to Lenders and/or their respective Affiliates including, without limitation, the Post-Petition Closing Fee and all principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser or otherwise, whether arising under this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to a Borrower under the Bankruptcy Code or any similar statute (including, without limitation, the payment of interest and other amounts which would accrue and become due but for the commencement of such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Lenders. "Order" shall mean (i) the Interim Order until the date that the final order in respect of the Interim Order becomes the Final Order and (ii) the Final Order from and after the date the Final Order is in existence. "Other Taxes" shall have the meaning given to such term in Section 2.10(a) hereof. "Percentage Interest" shall mean, with respect to each Lender, the percentage interest of each Term Loan made by such Lender as set forth next to such Lender's name on the signature pages hereto. - 8 - 14 "Permitted Liens" shall mean, collectively, the (i) Congress Liens, (ii) Liens granted pursuant to the Loan Documents, (iii) Liens permitted under the Congress Loan Agreement but only to the extent such Liens exist as of the date hereof and (iv) Liens granted pursuant to the Prior Credit Agreement or any other "Loan Document" as such term is defined in the Prior Credit Agreement. "Person" shall mean an individual, corporation, partnership, limited liability company, limited liability partnership, trust, unincorporated association, joint venture, joint-stock company, government (including political subdivisions), Governmental Authority or agency, or any other entity. "Petition Date" shall mean the date of the commencement of the Case. "Post-Petition Closing Fee" shall have the meaning given such term in Section 2.05 hereof. "Potential Default" shall mean any event or condition which, with notice or passage of time, or any combination of the foregoing, would constitute an Event of Default. "Prior Credit Agreement" shall mean that certain Credit Agreement, dated as of May 23, 1997, as amended from time to time, by and among the Borrowers, the Guarantors and the Lenders. "Real Property Collateral" shall mean the parcels of real property and the related improvements thereto identified on Schedule I hereto. "Receivables" shall have the meaning given such term in Section 5.01(c) hereof. "Related Contracts" shall have the meaning given such term in Section 5.01(c) hereof. "Release" shall mean any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration of a Hazardous Material into the indoor or outdoor environment or onto or from any property presently or formerly owned or operated by any of the Borrowers or any of the Guarantors, or at any disposed facility that received Hazardous Materials generated by any of the Borrowers or any of the Guarantors including the movement of Hazardous Materials through or in the air, soil, surface water, groundwater or property. "Remedial Action" shall mean all actions necessary to monitor, assess, evaluate, investigate, clean up, remove or treat any Release or threatened Release of Hazardous Materials or to prevent, mitigate or minimize any Release or threatened Release so that the Release or threatened - 9 - 15 Release does not migrate or endanger or threaten to endanger public health or welfare or the environment. "Restructuring" shall have the meaning given such term in the Letter Agreement. "Secured Obligations" has the meaning given to such term in Section 5.02 hereof. "Stated Maturity Date" shall mean the Effective Date. "Subsidiary" shall mean, with respect to any Person, any corporation, limited or general partnership, limited liability company, limited liability partnership, trust, association or other business entity of which an aggregate of 30% or more of the outstanding stock or other interests entitled to vote in the election of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency), managers, trustees or other controlling persons, or an equivalent controlling interest therein, of such Person is, at the time, directly or indirectly, owned or controlled by such Person and/or one or more Subsidiaries of such Person. "Taxes" shall have the meaning given such term in Section 2.10(a) hereof. "Term Loan" shall have the meaning given such term in Section 2.01 hereof. "Term Notes" shall have the meaning given such term in Section 2.02 hereof. "Trademarks" shall have the meaning given such term in Section 5.01(d) hereof. "Trademark Licenses" shall have the meaning given such term in Section 5.01(d) hereof. 1.02. Construction tc \l 1 "1.02. Construction". Unless the context of this Agreement otherwise clearly requires, references to the plural include the singular, the singular the plural and the part the whole and "or" has the inclusive meaning represented by the phrase "and/or." References in this Agreement to "determination" by the Lenders include good faith estimates by the Lenders (in the case of quantitative determinations) and good faith beliefs by the Lenders (in the case of qualitative determinations). The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this - 10 - 16 Agreement as a whole and not to any particular provision of this Agreement. The section and other headings contained in this Agreement and the Table of Contents preceding this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation thereof in any respect. Section, subsection and exhibit references are to this Agreement unless otherwise specified. 1.03. Accounting Principles . Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters and all financial statements to be delivered pursuant to this Agreement (other than the Budget) shall be made and prepared in accordance with GAAP (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP. Notwithstanding the definition of GAAP contained in this Agreement, no change in GAAP that would affect the method or calculation o******************************************************************************* ******************************************************************************** ******************************************************************************** ******************************************************************************** *************************************************************************** ******************************************************************************** ************************************ Hundred and Fifty Thousand Dollars ($3,750,000) on the Closing Date (collectively, the "Term Loan"). 2.02. Term Notes. The Borrowers agree that in order to evidence the Term Loan, the Borrowers will execute and deliver to each Lender on the Closing Date a promissory note, dated the Closing Date, substantially in the form of Exhibit G (collectively, the "Term Notes"), payable to the order of such Lender in the principal amount of its respective Percentage Interest in the Term Loan. 2.03. Maturity Date. On the Maturity Date, all Obligations (including, without limitation all outstanding amounts under the Term Notes and the Post-Petition Closing Fee and all accrued and unpaid interest on the Obligations) shall become immediately due and payable without notice or demand. 2.04. Joint and Several Liability. (a) Each of the Borrowers shall be jointly and severally liable with the other Borrowers for the Obligations, and each of the Obligations shall be secured by all of the Collateral. Each of the Borrowers acknowledges that it is a co-borrower hereunder and is jointly and severally liable under this Agreement and - 11 - 17 the other Loan Documents. All financial accommodations extended to any of the Borrowers or requested by any of the Borrowers shall be deemed to be financial accommodations extended for each of the Borrowers, and each of the Borrowers hereby authorizes each other of the Borrowers to effectuate borrowings on its behalf. Notwithstanding anything to the contrary contained in this Agreement or any of the other Loan Documents, the Lenders shall be entitled to rely upon any request, notice or other communication received by them from any of the Borrowers on behalf of all Borrowers, and shall be entitled to treat their giving of any notice hereunder to any of the Borrowers as notice to each and all Borrowers. (b) Each of the Borrowers agrees that the joint and several liability of the Borrowers provided for in this Section 2.04 shall not be impaired or affected by any modification, supplement, extension or amendment or any contract or agreement to which the other Borrowers may hereafter agree (other than an agreement signed by the Lenders specifically releasing such liability), nor by any delay, extension of time, renewal, compromise or other indulgence granted by any Lender with respect to any of the Obligations, nor by any other agreements or arrangements whatsoever with the other Borrowers or with any other person, each of the Borrowers hereby waiving all notice of such delay, extension, release, substitution, renewal, compromise or other indulgence, and hereby consenting to be bound thereby as fully and effectually as if it had expressly agreed thereto in advance. The liability of each of the Borrowers is direct and unconditional as to all of the Obligations, and may be enforced without requiring any Lender first to resort to any other right, remedy or security. Each of the Borrowers hereby expressly waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Obligations, the Term Notes, the Post-Petition Closing Fee, this Agreement or any other Loan Document and any requirement that the Lenders protect, secure, perfect or insure any Lien or any property subject thereto or exhaust any right or take any action against any of the Borrowers or any other person or any Collateral. (c) Each of the Borrowers hereby irrevocably waives and releases each other of the Borrowers from all "claims" (as defined in Section 101(5) of the Bankruptcy Code) to which such Borrowers are or would be entitled by virtue of the provisions of the subsection 2.04(b) hereof or the performance of such Borrower's obligations thereunder including, without limitation, any right of subrogation (whether contractual, under Section 509 of the Bankruptcy Code or otherwise), reimbursement, contribution, exoneration or similar right, or indemnity, or any right of recourse to security for any of the Obligations. 2.05. Post-Petition Closing Fee. On the Closing Date, a closing fee of $937,500 (the "Post-Petition Closing Fee") shall be for all purposes fully earned and non-refundable by Lenders (it being agreed that, as of the Closing Date, the Post-Petition Closing Fee shall be deemed to be a portion of the Obligations by the Borrowers to Lenders hereunder); provided, however, that Lenders shall be deemed to have waived Borrowers' obligation to pay the Post-Petition Closing Fee if either (i) the Restructuring is not consummated consistent with the terms and conditions described in the Letter Agreement solely by reason of Magten's breach of its commitments described in the Letter Agreement or - 13 - 18 (ii) the Restructuring is consummated and on the Effective Date all outstanding Obligations are repaid in full from the proceeds of a secured term loan on the terms and conditions set forth in Schedule II hereto and on such other terms and conditions acceptable to the Term Lenders in their sole discretion. 2.06 Interest Rate. The Obligations shall bear interest at a rate (the "Interest Rate") per annum equal to the greater of (i) the highest per annum interest rate for "Loans" (as such term is used in the Congress Loan Agreement) in effect from time to time under the Congress Loan Agreement plus 3% and (ii) 12%. 2.07 Interest Payment Dates. The Borrowers shall pay interest on the unpaid principal amount of each Loan and the Post-Petition Closing Fee from the Closing Date until such principal amount shall be paid in full, which interest shall be payable monthly in arrears on the first Business Day of each month, commencing October 1, 1997. 2.08. Payments. (a) Time, Place and Manner. All payments to be made in respect of the Obligations or other amounts due hereunder, under the Term Notes or any other Loan Document shall be payable at or before 12:00 Noon, New York City time, on the day when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived. Such payments shall be made in Dollars by wire transfer in funds immediately available to each Lender in its Percentage Interest of such payments according to the wire instructions set forth on Schedule III hereto (or at any other address at which such Lender shall notify the Borrowers in writing), without setoff, counterclaim or other deduction or defense of any nature or kind whatsoever. Interest on all Obligations and all fees that accrue on a per annum basis shall be computed on the basis of the actual number of days elapsed in the period during which interest or such fee accrues and a year of 360 days. In computing interest on any Loan, the date of the making of such Loan shall be included and the date of payment shall be excluded. (b) Interest Upon Events of Default. To the extent permitted by law, after there shall have occurred and so long as there is continuing an Event of Default pursuant to Section 7.01, all principal, interest, fees, indemnities or any other Obligations of the Borrowers hereunder, or under any Term Note or any other Loan Document (and including, without limitation, interest accrued under this subsection 2.08(b)) shall compound on a daily basis as provided in this subsection 2.08(b) and shall bear interest for each day until paid (before and after judgment), payable on demand, at a rate per annum of 2% above the Interest Rate for such day. 2.09. Use of Proceeds. The Borrowers hereby covenant, represent and warrant that the proceeds of the Term Loan made to them will be used for the purposes set forth in the Budget through the Effective Date. 2.10. Taxes. (a) All payments made by any Borrower or Guarantor hereunder, under the Term Notes or under any other Loan Document will be made without - 13 - 19 setoff, counterclaim or other deduction or defense of any nature or kind whatsoever. All such payments shall be made free and clear of, and without deduction for, any present or future income, franchise, sales, use, excise, stamp or other taxes, levies, imposts, deductions, charges, fees, withholdings, restrictions or conditions of any nature now or hereafter imposed, levied, collected, withheld or assessed by any jurisdiction (whether pursuant to United States Federal, state, local or foreign law) or by any political subdivision or taxing authority thereof or therein, and all interest, penalties or similar liabilities, excluding taxes on the overall net income of any Lender (such nonexcluded taxes are hereinafter collectively referred to as the "Taxes"). If any Borrower or Guarantor shall be required by law to deduct or to withhold any Taxes from or in respect of any amount payable hereunder, (i) the amount so payable shall be increased to the extent necessary so that after making all required deductions and withholdings (including Taxes on amounts payable to the Lenders pursuant to this sentence) the Lenders receive an amount equal to the sum they would have received had no such deductions or withholdings been made, (ii) such Borrower or Guarantor shall make such deductions or withholdings, and (iii) such Borrower or Guarantor shall pay the full amount deducted or withheld to the relevant taxation authority in accordance with applicable law. Whenever any Taxes are payable by any Borrower, as promptly as possible thereafter, such Borrower or Guarantor shall send the Lenders an official receipt showing payment. In addition, the Borrowers and Guarantors agree to pay any present or future taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery, performance, recordation or filing of, or otherwise with respect to, this Agreement, the Term Notes or any other Loan Document (hereinafter referred to as "Other Taxes"). (b) The Borrowers will indemnify each Lender for the amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.10) paid by such Lender and any liability (including penalties, interest and expenses for nonpayment, late payment or otherwise) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be paid immediately following the date on which such Lender makes written demand. (c) If any Borrower or Guarantor fails to perform its obligations under this Section 2.10, the Borrowers shall indemnify the Lenders for any incremental taxes, interest or penalties that may become payable as a result of any such failure. ARTICLE III CONDITIONS PRECEDENT TO TERM LOAN 3.01. Conditions Precedent to Term Loan. This Agreement shall become effective as of the Business Day when each of the following conditions precedent shall have been satisfied and the obligation of Lenders to make the Term Loan hereunder shall be subject to the satisfaction of the following conditions precedent: - 14 - 20 (a) Payment of Expenses, Etc. The Borrowers shall have paid all amounts then owing to the Lenders by the Borrowers or Guarantors hereunder, or under any other Loan Document, including, without limitation, those amounts due and payable on the Closing Date pursuant to Section 9.05 hereof. The Borrowers shall have paid to counsel to the Lenders all fees and other client charges due to such counsel on the Closing Date. (b) Representations and Warranties; No Event of Default. The representations and warranties contained in Article IV of this Agreement and in each other Loan Document and certificate or other writing delivered to the Lenders pursuant hereto or thereto or prior to the Closing Date shall be correct on and as of the Closing Date as though made on and as of such date; and no Potential Default or Event of Default shall have occurred and be continuing on the Closing Date or would result from (i) this Agreement becoming effective in accordance with its terms or (ii) the Loans being made on the Closing Date. (c) Legality. The making of the Loans shall not contravene any law, rule or regulation applicable to the Lenders. (d) Delivery of Documents. Lenders shall have received on or before the Closing Date the following, each in form and substance satisfactory to the Lenders and their counsel and, unless indicated otherwise, dated the Closing Date: (i) Each Lender shall have received its respective Term Note payable to the order of such Lender and duly executed by each Borrower; (ii) the Intercreditor Agreement duly executed by Congress and duly acknowledged by the Borrowers and the Guarantors; (iii) a copy of the resolutions adopted by the Board of Directors of each of the Borrowers and the Guarantors, certified as of the Closing Date by authorized officers thereof, authorizing (A) in the case of the Borrowers, the borrowings hereunder and the transactions contemplated by the Loan Documents to which each Borrower is or will be a party, and (B) the execution, delivery and performance by such Person of each Loan Document and the execution and delivery of the other documents to be delivered by such Person in connection therewith; (iv) a certificate of an authorized officer of each Borrower and the Guarantors, certifying the names and true signatures of the officers of such Person authorized to sign each Loan Document to which such Person is or will be a party and the other documents to be executed and delivered by such Person in connection therewith, together with evidence of the incumbency of such authorized officers; (v) a certificate of the Designated Financial Officer of each of the Borrowers, certifying as to the matters set forth in Section 3.01(b); - 15 - 21 (vi) a certificate of an authorized officer of the Borrowers certifying the names and true signatures of those officers of the Borrowers that are authorized to provide all notices under this Agreement and the Loan Documents; and (vii) such other agreements, instruments, approvals, opinions and other documents as the Lenders may reasonably request. (e) Lien Priority. The Liens in favor of the Lenders pursuant to the Loan Documents shall be valid and perfected, first priority Liens on the Collateral, subject only to the Permitted Liens. (f) Legal Restraints/Litigation. Except as set forth in any public filings made by any Borrower or Guarantor with the Securities and Exchange Commission, there shall be no (1) litigation, investigation or proceeding (judicial or administrative) pending or threatened against the Borrowers or the Guarantors or their respective assets or properties (other than the Case), by any Person relating in any way to the transactions contemplated by this Agreement and the other Loan Documents or the consummation of the Restructuring, (2) injunction, writ or restraining order restraining or prohibiting the transactions contemplated by this Agreement and the other Loan Documents or the consummation of the Restructuring, or (3) suit, action, investigation or proceeding (judicial or administrative) pending or threatened against the Borrowers or the Guarantors, or their assets, which, in the opinion of the Lenders, if adversely determined could have a Material Adverse Effect. (g) Indebtedness. The Borrowers and the Guarantors shall have no Indebtedness or other liabilities other than (1) Indebtedness to Congress under the Congress Loan Agreement, (2) Indebtedness permitted under the Congress Loan Agreement but only to the extent such Indebtedness exists as of the date hereof, and (3) Indebtedness permitted under the Loan Documents. (h) Material Adverse Effect. Since April 25, 1997, no situation, event or circumstance shall have occurred (other than the commencement of the Case) which could have a Material Adverse Effect which has not been fully and accurately disclosed to Lenders in writing. (i) Information. Debtors shall furnish Lender with all financial information, projections, budgets, business plans, cash flows and such other information as Lenders shall have requested. (j) No Trustee or Examiner, etc. No trustee, examiner, receiver or the like shall have been appointed or designated in the case with respect to any debtor, as debtor or debtor-in-possession, or its business, property or assets, and no motion or proceeding shall be pending seeking such relief. - 16 - 22 (k) Intercreditor Agreement. The Intercreditor Agreement shall be in full force and effect with respect to the security interests and liens securing the Obligations and the indebtedness under the Loan Documents. (l) Entry of Interim Order. The Interim Order shall have been entered by the Bankruptcy Court and such Interim Order shall be in full force and effect and shall not have been vacated, reversed, modified, amended or stayed in any respect and, in the event that such order is the subject of any pending appeal, the performance of any obligation hereunder of any party hereto shall not be the subject of a stay pending appeal. (m) Compliance with Bankruptcy Laws. The Debtors shall have complied in full with the notice and other requirements of the Bankruptcy Code and any applicable Bankruptcy Rule or requirement of the Bankruptcy Court with respect to the Interim Order and/or the Final Order in a manner acceptable to Lenders and their counsel. ARTICLE IV REPRESENTATIONS AND WARRANTIES Each Borrower and Guarantor hereby represents and warrants to Lenders the following (which shall survive the execution and delivery of this Agreement): 4.01. Corporate Existence, Power and Authority; Subsidiaries. Each Borrower and Guarantor is a corporation duly organized and in good standing under the laws of its state of incorporation and is duly qualified as a foreign corporation and in good standing in all states or other jurisdictions where the nature and extent of the business transacted by it or the ownership of assets makes such qualification necessary, except for those jurisdictions in which the failure to so qualify has not had and could not reasonably be expected to have a Material Adverse Effect. After giving effect to the Order, the execution, delivery and performance of this Agreement, the other Loan Documents and the transactions contemplated hereunder and thereunder are all within each Borrower's and Guarantor's corporate powers, have been duly authorized and are not in contravention of law or the terms of such Borrower's or Guarantor's certificate of incorporation, by-laws, or other organizational documentation, or any indenture, agreement or undertaking to which such Borrower or Guarantor is a party or by which such Borrower or Guarantor or its property are bound. After giving effect to the Order, this Agreement and the other Loan Documents constitute legal, valid and binding obligations of each Borrower and Guarantor enforceable in accordance with their respective terms. No Borrower or Guarantor has any Subsidiaries except as set forth on Schedule IV hereto. 4.02. Financial Statements; No Material Adverse Change. All financial statements relating to the Borrowers and Guarantors which have been delivered by any Borrower or Guarantor to Lenders on or prior to any date that this representation and warranty is made or deemed to be made have been prepared in accordance with GAAP and - 17 - 23 fairly present the financial condition and the results of operation of such of the Borrowers and Guarantors as are included therein as at the dates and for the periods set forth therein. There has been no situation, event or circumstance that has occurred since the Petition Date which could have a Material Adverse Effect. 4.03. Chief Executive Office; Collateral Locations. The chief executive office of each Borrower and Guarantor and each Borrower's and Guarantor's records concerning Receivables are located only at the address set forth on the signature pages to this Agreement and its only other places of business and the only other locations of Collateral, if any, are the addresses set forth in Schedule V hereto, subject to the right of a Borrower or Guarantor to establish new locations in accordance with Section 6.01 below. Schedule V correctly identifies any of such locations which are not owned by a Borrower or Guarantor and sets forth the owners and/or operators thereof and to the best of the applicable Borrower's and Guarantor's knowledge, the holders of any mortgages on such locations. 4.04. Priority of Liens; Title to Properties. The security interests and liens granted to Lenders under this Agreement and the other Loan Documents constitute valid and perfected first priority liens and security interests in and upon the Collateral, subject only to the Permitted Liens. Each Borrower and Guarantor has good and 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 Lenders and the Permitted Liens. 4.05. Maintenance of Equipment. The Equipment is, and will be kept by the Borrowers and Guarantors, in good operating condition and repair (ordinary wear and tear excepted). 4.06. Tax Returns. Each Borrower and Guarantor has filed, or caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it (without requests for extension except as previously disclosed in writing to Lenders). All information in such tax returns, reports and declarations is complete and accurate in all material respects. Each Borrower and Guarantor has paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by it, except (a) certain taxes with respect to periods prior to the Petition Date and (b) taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to such Borrower or Guarantor and 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 unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. 4.07. Litigation. Except as set forth in any public filings made by any Borrower or Guarantor with the Securities and Exchange Commission, there is no present investigation by any governmental agency pending, or to the best of any Borrower's and Guarantor's knowledge threatened, against or affecting any Borrower or Guarantor, its assets - 18 - 24 or business and there is no action, suit, proceeding or claim by any Person pending, or to the best of any Borrower's or Guarantor's knowledge threatened, against any Borrower or Guarantor or its assets or goodwill, or against or affecting any transactions contemplated by this Agreement or the other Loan Documents, which has resulted, or if adversely determined against a Borrower or Guarantor could reasonably be expected to result, in any Material Adverse Effect. 4.08. Compliance with Other Agreements and Applicable Laws. No Borrower or Guarantor is in default under, or in violation of any of the terms of, any agreement, contract, instrument, lease or other commitment to which it is a party or by which it or any of its assets are bound (except for defaults or violations which have resulted from (a) the commencement or continuation of the Case, provided that any payments required to be made by any Debtor as a result thereof are currently stayed under applicable provisions of the Bankruptcy Code or (b) any rejection by a Debtor of any such agreement, contract, instrument, lease, or commitment pursuant to or in accordance with the Bankruptcy Code and as approved or confirmed by the Bankruptcy Court in the Case) and each Borrower and Guarantor is in compliance with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders of any foreign, Federal, State or local governmental authority. No "Event of Default" (as defined in the Congress Loan Agreement) has occurred under the Congress Loan Agreement which has not been either waived by Congress prior to the Closing Date or cured prior to the Closing Date. 4.09. Employee Benefits. (a) No Borrower or Guarantor or any of their ERISA Affiliates maintains or is required to contribute to, and no Borrower or Guarantor or any of their ERISA Affiliates previously maintained or was previously required to contribute to, any employee pension benefit plan subject to Title IV of ERISA. (b) No Borrower or Guarantor or any of their ERISA Affiliates has engaged in any transaction in connection with which a Borrower or Guarantor or any of their ERISA Affiliates could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code in an aggregate amount in excess of $500,000. (c) Full payment has been made of all amounts which any Borrower or Guarantor or any of their ERISA Affiliates is required to have contributed under the terms of each employee pension benefit plan as contributions to such plan as of the last day of the most recent fiscal year of such plan ended prior to the date hereof and where nonpayment could result in a liability to any Borrower or Guarantor or any of their ERISA Affiliates in an aggregate amount in excess of $500,000, and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any employee pension benefit plan that is subject to Title IV of ERISA. - 19 - 25 (d) None of the Borrowers or Guarantors or their ERISA Affiliates is or has ever been obligated to contribute to any "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA. 4.10. Environmental Compliance. (a) No Borrower or Guarantor has generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in any manner which at any time violates any applicable Environmental Law or any license, permit, certificate, approval or similar authorization thereunder, where such violation has had or could reasonably be expected to have a Material Adverse Effect. The operations of each Borrower and Guarantor comply in all material respects with all Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder. (b) There has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any Governmental Authority or any other person nor is any pending or to the best of any Borrower's or Guarantor's knowledge threatened, with respect to any non-compliance with or violation of the requirements of any Environmental Law by any Borrower or Guarantor or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which affects any Borrower or Guarantor or its business, operations or assets or any properties at which any Borrower or Guarantor has transported, stored or disposed of any Hazardous Materials. (c) No Borrower or Guarantor has any material liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials. (d) Each Borrower and Guarantor has all licenses, permits, certificates, approvals or similar authorizations required to be obtained or filed in connection with the operations of such Borrower or Guarantor under any Environmental Law and all of such licenses, permits, certificates, approvals or similar authorizations are valid and in full force and effect. 4.11. Accuracy and Completeness of Information. All information furnished by or on behalf of any Borrower or Guarantor in writing to Lenders in connection with this Agreement or any of the other Loan Documents or any transaction contemplated hereby or thereby, including, without limitation, all information on the Schedules attached hereto, is true and correct in all material respects on the date as of which such information is dated or certified and does not omit any material fact necessary in order to make such information not misleading. No event or circumstance has occurred which has had or could reasonably be expected to have a Material Adverse Effect, which has not been fully and accurately disclosed to Lenders in writing. - 20 - 26 4.12. Survival of Warranties; Cumulative. All representations and warranties contained in this Agreement or any of the other Loan Documents shall survive the execution and delivery of this Agreement and shall be deemed to have been made again to Lenders on the date of each additional borrowing or other credit accommodation hereunder and shall be conclusively presumed to have been relied on by Lenders regardless of any investigation made or information possessed by Lenders. The representations and warranties set forth herein shall be cumulative and in addition to any other representations or warranties which any Borrower or Guarantor shall now or hereafter give, or cause to be given, to Lenders. 4.13. Enforceability of Loan Documents. This Agreement is, and each other Loan Document to which each Borrower and each Guarantor is or will be a party, when delivered hereunder, will be, a legal, valid and binding obligation of the Borrowers and the Guarantors, enforceable against the Borrowers and the Guarantors in accordance with its terms. 4.14. Nature of Business. The Borrowers and the Guarantors are primarily engaged in the business of designing, manufacturing and marketing an extensive line of decorative home accessories. 4.15. Use of Proceeds. The proceeds of the Term Loan shall be used for general working capital through the Effective Date in the ordinary course of business of the Borrowers and the Guarantors. 4.16. Registration and Transfer of Term Notes. (a) The Borrowers shall cause to be kept at the principal executive office of The Rug Barn, Inc. a register (the register maintained in such office being herein referred to as the "Note Register") in which the Borrowers shall provide for the registration of the Term Notes and of transfers of Term Notes. The name and address of each registered holder of a Term Note, each transfer thereof made pursuant to paragraph (b) of this Section 4.16, and the name and address of each transferee of the Term Notes shall be registered in the Note Register. The Note Register shall be in written form or any other form capable of being converted into written form within a reasonable time. The Borrowers hereby appoint The Rug Barn, Inc. as security registrar (the "Note Registrar") for the purpose of registering Term Notes and transfers of Term Notes as herein provided. (b) Upon surrender for registration of transfer of any Term Note at the principal executive office of The Rug Barn, Inc., the Borrowers and the Guarantors shall execute and deliver, in the name of the designated transferee or transferees, one or more new Term Notes of denominations of a like aggregate principal amount. All Term Notes issued upon any registration of transfer of Term Notes shall be the valid obligations of the Borrowers and the Guarantors, evidencing the same debt (including, without limitation, the Guarantee), and entitled to the same benefits under this Agreement and the other Loan Documents, as the Term Notes surrendered upon such registration of transfer. Every Term - 21 - 27 Note presented or surrendered for registration of transfer shall (if so required by the Borrowers) be duly endorsed, or be accompanied by a written instrument of transfer, in form reasonably satisfactory to the Borrowers duly executed by the registered holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer of Term Notes. 4.17. Administrative Priority; Lien Priority. (a) After the entry of the Interim Order, the Secured Obligations will constitute allowed administrative expenses in the Case having priority over all administrative expenses and unsecured claims against the Borrowers and the Guarantors now existing or hereafter arising, of any kind or nature whatsoever (including, without limitation, all administrative expenses of the kind specified in Sections 503(b) and 507(b) of the Bankruptcy Code), subject to the terms and conditions of the Order. (b) The Liens on the Collateral granted hereby shall be valid and perfected first priority Liens to the extent provided in the Order. 4.18. Bankruptcy Court Orders. The Order is in full force and effect, and has not been reversed, stayed, modified or amended absent the joinder and consent of the Lenders. ARTICLE V COLLATERAL 5.01. Grant of Security Interest. As collateral security for all of the Secured Obligations, each Borrower and each Guarantor hereby pledges and assigns to the Lenders, their successors and assigns, and hereby grants to the Lenders an undivided continuing senior, first priority security interest in and to all of such Borrower's or Guarantor's right, title and interest in and to the following, whether acquired prior to, on or after the Petition Date (the "Collateral"): (a) all equipment of any kind and in all of its forms, wherever located and whether now or hereafter existing and whether now owned or hereafter acquired (including, but not limited to, all machinery, apparatus, furniture, fixtures, excluding fixtures bearing or identified by the Calvin Klein Intellectual Property (unless removed or as approved by Calvin Klein, Inc.), conveyors, tools, attachments, materials, storage and handling equipment, motor vehicles, boats, trucks, trailers, vessels, aircraft and rolling stock and all parts thereof), together with all substitutes, replacements, accessions and additions thereto, and all tools, parts, accessories and attachments used in connection therewith (hereinafter collectively referred to as the "Equipment"); - 22 - 28 (b) all Inventory of any kind and in all of its forms, wherever located and whether now or hereafter existing and whether now owned or hereafter acquired; (c) (i) all accounts, contract rights, chattel paper, instruments, deposit accounts, general intangibles and other obligations of any kind (including, but not limited to, any obligations of a Borrower or Guarantor to another Borrower or Guarantor) whether now or hereafter existing, whether now owned or hereafter acquired, and whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, and (ii) all rights now or hereafter existing in and to all credit insurance, guaranties, letters of credit, security agreements, leases and other contracts now or hereafter existing and securing or otherwise relating to any such accounts, contract rights, chattel paper, instruments, deposit accounts, general intangibles or obligations (any and all such accounts, contract rights, chattel paper, instruments, deposit accounts, general intangibles and obligations being hereinafter referred to collectively as the "Receivables", and any and all such credit insurance, guaranties, letters of credit, leases, security agreements and other contracts, specifically excluding the Calvin Klein License, being hereinafter referred to collectively as the "Related Contracts"); (d) (i) all trademarks, service marks, trade names, business names, trade styles, designs, logos, other source or business identifiers, copyrights and all general intangibles of like nature, now or hereafter owned, adopted, acquired or used by any Borrower or Guarantor, all applications, registrations and recordings thereof (including, without limitation, applications, registrations and recordings in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state thereof or any other country or any political subdivision thereof), and all reissues, extensions or renewals thereof, together with all goodwill of the business symbolized by such marks and all customer lists, formulae and other records of any Borrower or Guarantor relating to the distribution of products and services in connection with which any of such marks are used, and all income, royalties, damages and payments now or hereafter due and/or payable under and with respect thereto, including, without limitation, payments under all licenses entered into in connection therewith and damages and payments for past and future infringements or dilutions thereof and the right to sue for past, present and future infringements and dilutions thereof (hereinafter referred to collectively as the "Trademarks"); provided, however, that Trademarks excludes any and all interests and/or rights to use the trademark "Calvin Klein" (or "CK/Calvin Klein" or other derivative thereof) deriving from the Calvin Klein License or otherwise including any and all copyrights, copyrightable material or other intellectual property or proprietorial data or information which may exist or arise in connection therewith or relating thereto (collectively, the "Calvin Klein Intellectual Property"), and (ii) all licenses (other than the Calvin Klein License and any sublicenses thereunder), contracts or other agreements, whether written or oral, naming any Borrower or Guarantor as licensor or licensee and providing for the grant of any right to use any Trademark, together with any goodwill connected with and symbolized by any such trademark licenses or agreements and the right to prepare for sale and sell any and all Inventory now or hereafter owned by any - 23 - 29 Borrower or Guarantor and now or hereafter covered by such licenses (hereinafter referred to collectively as the "Trademark Licenses"); (e) (i) all moneys, securities and other property, and the proceeds thereof, now or hereafter held or received by, or in transit to, the Lenders from or for any Borrower or Guarantor, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of the Borrowers' and Guarantors' claims against any Lender at any time existing; (ii) all rights relating to the sale or other transfer of property to, or the construction, renovation or other improvement of property by or for, any Borrower or Guarantor; (iii) all rights, interests, choses in action, causes of actions, claims and all other intangible property of every kind and nature, in each instance whether now owned or hereafter acquired by any Borrower or Guarantor, including, without limitation, all corporate and other business records, all loans, royalties, and all other forms of obligations receivable whatsoever (other than Receivables); (iv) all customer and supplier contracts, sale orders, rights under license and franchise agreements, and other contracts and contract rights (other than the Calvin Klein License); (v) all interests (including, without limitation, profit participations) in partnerships, joint ventures, corporations, limited liability companies or other Persons, and all other equity or debt securities issued by any Persons, including all moneys due from time to time in respect thereof; (vi) all federal, state and local tax refunds and federal, state and local tax refund claims; (vii) all right, title and interest under leases, subleases, licenses and concessions and other agreements relating to personal property, including all moneys due from time to time in respect thereof; (viii) all payments due or made to any Borrower or Guarantor in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any property by any Person, Governmental Authority or regulatory body; (ix) all deposit accounts (general or special) with any bank or other financial institution and all funds on deposit therein, and all certificates and instruments, if any, from time to time representing or evidencing any of such accounts; (x) all credits with and other claims against third parties (including carriers and shippers) (other than Receivables); (xi) all rights to indemnification; (xii) all reversionary interests in pension and profit sharing plans and reversionary, beneficial and residual interests in trusts; (xiii) all letters of credit, guaranties, liens, security interests and other security held by or granted to any Borrower or Guarantor; (xiv) all instruments, files, records, ledger sheets and documents covering or relating to any of the Collateral; (xv) all other intangible property, whether or not similar to the foregoing, in each instance, however and wherever arising (other than the Calvin Klein Intellectual Property); (xvi) all notes, certificates of deposit, deposit accounts, checks and other instruments from time to time hereafter delivered to or otherwise possessed by any Lender for or on behalf of any Borrower or Guarantor, in substitution for or in addition to any or all of the foregoing; and (xvii) all interest, dividends, cash, instruments and other property and assets from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing; (f) the books and records of the Borrowers and the Guarantors relating to any of the Collateral, including, without limitation, all customer contracts, sale orders, minute books, ledgers, records, computer programs, software, printouts and other computer - 24 - 30 materials, customer lists, credit files, correspondence and advertising materials, in each case indicating, summarizing or evidencing any of the Collateral; (g) all of the shares of capital stock of each of the Borrowers and each of the Guarantors (other than Decorative Home); (h) the Real Property Collateral and any estates or interests in real property now owned and hereafter acquired by any Borrower or Guarantor (including, without limitation, leasehold estates or interests); (i) any such other property not included under paragraphs (a) through (h) above that would otherwise be deemed to constitute "Collateral" as defined in the Congress Loan Agreement, as such agreement may be amended, modified or replaced from time to time, or in any other Congress Debt Document (including, without limitation, the Congress Financing Order); (j) any and all other assets or property of any kind and in all of its forms, wherever located and whether now or hereafter existing and whether now owned or hereafter acquired, not included under paragraphs (a) through (i) above; and (k) all proceeds (in whatever form, whether cash, securities or any other type of property) of any and all of the foregoing Collateral (including, without limitation, (A) damages and payments for past or future infringements of the Trademarks and (B) the right to sue for past, present and future infringements of the Trademarks) and, to the extent not otherwise included, all payments under insurance (whether or not the Lenders are the loss payees thereof), any indemnity, warranty or guaranty payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral; in each case howsoever any Borrower's or any Guarantor's interest therein may arise or appear (whether by ownership, security interest, claim or otherwise). Notwithstanding the foregoing, the senior, first priority security interest granted to the Lenders in the Collateral shall be subject to Permitted Liens. 5.02. Security for Secured Obligations. The security interest created hereby in the Collateral constitutes continuing collateral security for the payment of all of the Obligations and all obligations of each Borrower and Guarantor now or hereafter arising under or with respect to this Agreement, the Guarantee, the Term Notes or any other Loan Document, whether for principal, premium, interest, fees, expenses or otherwise, including, without limitation, the obligations to pay the Term Loan and the Post-Petition Closing Fee and to perform each and every obligation set forth in this Agreement (including, without limitation, the Guarantee), the Term Notes and the other Loan Documents (all such obligations being hereinafter collectively referred to as the "Secured Obligations"). - 25 - 31 5.03. Proceeds of Collateral. The proceeds of any sale or other disposition of Collateral by any Lender permitted under this Agreement or any other Loan Document shall be distributed by such Lender to each Lender based upon each Lender's Percentage Interest. 5.04. Administrative Priority. The Borrowers and the Guarantors hereby agree that the Secured Obligations shall constitute allowed administrative expenses in the Case having priority over all administrative expenses and unsecured claims against the Borrowers and the Guarantors now existing or hereafter arising, of any kind or nature whatsoever (including, without limitation, all administrative expenses of the kind specified in sections 503(b) and 507(b) of the Bankruptcy Code), subject to the terms and conditions of the Order. 5.05. Grants, Rights and Remedies Cumulative. The Liens and security interests granted pursuant to Section 5.01 hereof and administrative priority granted pursuant to Section 5.04 hereof may be independently granted by the Loan Documents and by other Loan Documents hereafter entered into. This Agreement, the Interim Order, the Final Order and such other Loan Documents supplement each other, and the grants, priorities, rights and remedies of the Lenders hereunder and thereunder are cumulative. 5.06. No Filings Required. The Liens and security interests referred to in Section 5.01 hereof and in the other Loan Documents shall be deemed valid and perfected upon entry of the Interim Order and entry of the Interim Order shall have occurred on or before the Closing Date. The Lenders shall not be required to file any financing statements, notices of lien or similar instruments in any jurisdiction or filing office or to take any other action in order to validate or perfect the Liens and security interests granted by or pursuant to this Agreement, the Interim Order, the Final Order or any other Loan Document. 5.07. Survival. The Liens, lien priority, administrative priorities and other rights and remedies granted to the Lenders pursuant to this Agreement, the Order and the other Loan Documents (specifically including, but not limited to, the existence, perfection and priority of the Liens and security interests provided herein and therein, and the administrative priority provided herein and therein) shall not be modified, altered or impaired in any manner by any other financing or extension of credit or incurrence of debt by any Borrower or Guarantor (pursuant to section 364 of the Bankruptcy Code or otherwise), or by any dismissal or conversion of the Case, or by any other act or omission whatever, except in accordance with the Order. ARTICLE VI AFFIRMATIVE AND NEGATIVE COVENANTS 6.01. Covenants Under Congress Loan Agreement. Section 9 of the Congress Loan Agreement and any definitions of any capitalized terms set forth in such - 26 - 32 section which are set forth in the Congress Loan Agreement (as in effect on the date of this Agreement) shall be incorporated by reference in this Agreement (without regard to any amendment, supplement, modification or waiver relating thereto or the termination or expiration thereof) to the same extent as if set forth at length herein, except that all references to the term "Lender" shall mean the Lenders, and the Borrowers and Guarantors jointly and severally agree to cause the Borrowers and Guarantors to perform and observe their covenants, agreements and obligations under said Section 9, so long as the Obligations (whether or not due) remain unpaid in full in cash, including without limitation all principal of and accrued and unpaid interest on the Loans. 6.02. Liens. No Borrower or Guarantor shall create, incur, assume or suffer to exist any Lien on any of its assets or properties including, without limitation, the Collateral, except the Permitted Liens. 6.03. Indebtedness. No Borrower or Guarantor shall incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any obligation or Indebtedness, except (a) Indebtedness to Congress under the Congress Loan Agreement or any other Congress Debt Document, (b) Indebtedness permitted under the Congress Loan Agreement but only to the extent such Indebtedness exists as of the date hereof, and (c) Indebtedness permitted under the Loan Documents. 6.04. Interim Order; Final Order; Administrative Priority; Lien Priority; Payment of Claims. (a) Without the prior written consent of the Lenders, no Borrower or Guarantor shall at any time seek, consent to or suffer to exist any modification, stay, vacation or amendment of the Interim Order, the Final Order or the Congress Financing Order. (b) No Borrower or Guarantor shall at any time suffer to exist a priority for any administrative expense or unsecured claim (including, without limitation, any reclamation claim) against any Borrower or Guarantor now existing or hereafter arising of any kind or nature whatsoever (including, without limitation, any administrative expenses of the kind specified in Sections 503(b) and 507(b) of the Bankruptcy Code) equal or superior to the priority of the Lenders in respect of the Obligations, except as set forth in the Order. (c) No Borrower or Guarantor shall at any time suffer to exist any Lien on the Collateral having a priority equal or superior to the Liens in respect of the Collateral granted to the Lenders hereby, except for Permitted Liens. 6.05. Overadvances; Budget; No Amendment; Financial Covenants. (a) Without the prior written consent of the Lenders, (i) no Borrower or Guarantor shall request, incur, create, assume, become or be liable in any manner with respect to, or permit to exist any advance under the Congress Loan Agreement or other Congress Debt Documents (whether by means of a revolving credit loan, issuance of a letter of credit or other form of Indebtedness) that (A) is not expressly contemplated by, consistent with, and permitted - 27 - 33 under, the Budget, or (B) would, after giving effect thereto, cause all such advances under the Congress Loan Agreement or other Congress Debt Documents to exceed the aggregate amount of advances permitted under the borrowing base formula in effect under the Congress Loan Agreement as of the Closing Date (the "Existing Formula") and (ii) no Borrower or Guarantor shall request, permit or consent to any waiver, modification or amendment to the Budget, the Existing Formula or any other provision of the Congress Loan Agreement or the other Congress Debt Documents. (b) Without limiting the generality of Section 6.05(a), without the prior written consent of the Lenders, the aggregate outstanding amount of any and all advances under the Congress Loan Agreement and the other Congress Debt Documents (whether by means of a revolving credit loan, issuance of a letter of credit or other form of Indebtedness), as of each day set forth on Schedule VI to this Agreement, shall not exceed the amount set forth opposite such day as set forth on Schedule VI. Not later than 5 days following each date set forth on Schedule VI hereto, Borrowers and Guarantors shall deliver to the Lenders a certificate of the Designated Financial Officer setting forth the balance of all outstanding advances under the Congress Loan Agreement and the other Congress Debt Documents as of such date. 6.06. Replacement of Schedule VI. Not later than 30 days prior to the end of the period covered by Schedule VI hereto, Borrowers and Guarantors shall deliver to the Lenders a proposed replacement Schedule VI for the 60-day period following the last date set forth on the then current Schedule VI to this Agreement, which shall be in form and substance acceptable to the Lenders. Upon the written approval by the Lenders of any such proposed replacement Schedule VI, such replacement Schedule VI shall, for all purposes hereof, be deemed to be a part of this Agreement. ARTICLE VII DEFAULTS 7.01. Events of Default. An Event of Default shall mean the occurrence or existence of one or more of the following events or conditions (whatever the reason for such Event of Default and whether voluntary, involuntary or effected by operation of law): (a) The Borrowers shall fail to pay when due any of the Obligations; or (b) Any representation or warranty made by the Borrowers or Guarantors under this Agreement or any other Loan Document or any statement made by the Borrowers or Guarantors in any financial statement, certificate, report or document furnished to any Lender pursuant to or in connection with this Agreement or any other Loan Document, shall prove to have been false or misleading in any material respect as of the time when made (including by omission of material - 28 - 34 information necessary to make such representation, warranty or statement, in light of the circumstances under which it was made, not misleading), or any of the Borrowers or Guarantors shall fail to observe or perform any of the covenants or provisions contained in this Agreement or any of the other Loan Documents; or (c) Any "Event of Default" shall have occurred under the Congress Loan Agreement; or (d) Any Congress Debt Document shall be amended, waived, modified or supplemented subsequent to the date hereof without the prior written consent of the Lenders; or (e) The Calvin Klein License shall cease to be in effect or shall be terminated; or (f) Except for the Case, any Borrower or any Guarantor (i) shall institute any proceeding or voluntary case seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for any Borrower or any Guarantor or for any substantial part of its property, (ii) shall be generally not paying its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, (iii) shall make a general assignment for the benefit of creditors, or (iv) shall take any action to authorize or effect any of the actions set forth above in this subsection (f); or (g) Except for the Case, any proceeding shall be instituted against any Borrower or any Guarantor seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, liquidation, winding up, reorganization, arrangement, adjustment, protection, relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for any Borrower or any Guarantor or for any substantial part of its property, and either such proceeding shall remain undismissed or unstayed for a period of 45 days or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against it or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property) shall occur; or (h) Any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by any Borrower or any Guarantor, or a proceeding shall be commenced by any of the Borrowers, or by any Governmental Authority or other regulatory body having jurisdiction over any Borrower or any Guarantor, seeking to establish the invalidity or unenforceability thereof, or any Borrower or any Guarantor shall deny in - 29 - 35 writing that such Borrower or any Guarantor has any liability or obligation purported to be created under any Loan Document; or (i) The security interests purported to be created by this Agreement, the Order and/or any other Loan Document shall cease to be, or shall be asserted by any Borrower or any of the Guarantors not to be, a valid, perfected, first priority security interest in the Collateral covered thereby, subordinate to no other Lien except for Permitted Liens; or (j) The Guarantee shall cease to be, or shall be asserted by any Borrower or any Guarantor not to be, in full force and effect and enforceable in accordance with its terms, or any of the Borrowers or the Guarantors shall contest or deny in writing the validity or enforceability of any of the Obligations; (k) Any Borrower or Guarantor shall, without the prior written consent of the Lenders, (i) request, incur, create, assume, become or be liable in any manner with respect to, or permit to exist any advance under the Congress Loan Agreement or other Congress Debt Documents (whether by means of a revolving credit loan, issuance of a letter of credit or other form of Indebtedness) that would, after giving effect thereto, cause all such advances under the Congress Loan Agreement or other Congress Debt Documents to exceed the aggregate amount of advances permitted under the Existing Formula or (ii) request, permit or consent to any waiver, modification or amendment to the Existing Formula or any other provision of the Congress Loan Agreement or the other Congress Debt Documents; (l) Any Debtor shall fail to comply or shall default in the performance of any term of the Order; (m) The Bankruptcy Court shall enter an order appointing a trustee, an examiner with enlarged powers, or any other fiduciary for any Debtor or any property of any Debtor's estate; (n) The Bankruptcy Court or any other court with jurisdiction in the matter shall enter an order modifying, reversing, revoking, staying, rescinding, vacating, or amending the Order or any of the other Loan Documents, without Lenders' express prior written consent (and no such consent shall be implied from any other action, inaction, or acquiescence of Lenders) or any Debtor shall make a motion or application to do so (except following Lenders' prior written request); (o) Any person shall file a plan of reorganization in the Case which does not provide for the full and final repayment of all Obligations upon the effectiveness of such plan, unless Lenders have joined in or consented to such plan in writing; - 30 - 36 (p) Any motion or application is filed in the Case which seeks approval for or allowance of any claim, lien, security interest ranking equal or senior in priority to the claims, liens and security interests of Lenders under the Order or the other Loan Documents (and in the case of such motion or application filed by any Person other than Debtors, such motion or application is not dismissed by order of the Bankruptcy Court within 10 days after it is filed), or any such equal or prior claim, lien, or security interest shall be established in any manner, except, in either case, as expressly permitted under the Order, the other Loan Documents, the Congress Financing Order, the other Congress Debt Documents and the Intercreditor Agreement; (q) Except for expiration or termination in accordance with the Order or the terms of the other Loan Documents, any of the Loan Documents or any lien or security interest of Lenders created thereunder shall cease for any reason to be in full force and effect or to have the priority provided in the Order, or any motion or application shall be filed or adversary proceeding commenced in the Case to challenge the validity, enforceability, perfection, or priority of any of the Loan Documents or any of such liens and security interests (and in the case of any such motion, application, or proceeding filed or commenced by any Person other than Debtors, such motion, application, or proceeding is not dismissed by order of the Bankruptcy Court within 10 days after it is filed or commenced); (r) The automatic stay under section 362 of the Bankruptcy Code as to any Debtor or its estate shall be modified or vacated for any secured claim or claims to the extent that as a result thereof enforcement of such claim against property of any Debtor would be permitted; (s) The Bankruptcy Court enters an order dismissing the Case or converting the Case to a case under Chapter 7 of the Bankruptcy Code; (t) The Interim Order shall cease to be in full force and effect and the Final Order shall not have been entered by the Bankruptcy Court prior to such cessation; or (u) The Bankruptcy Court shall not have entered the Final Order on or before October 27, 1997, or the Final Order shall cease to be in full force and effect from and after the date of entry thereof by the Bankruptcy Court. 7.02. Consequences of an Event of Default. If an Event of Default shall occur and be continuing or shall exist, the Lenders may by notice to the Borrowers, (a) declare all Obligations, including, without limitation the Loans, all interest thereon and all other amounts, to be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrowers, and an action therefor shall immediately accrue; or - 31 - 37 (b) give notice to the Borrowers of the occurrence and continuance of an Event of Default; provided, however, that upon the occurrence of any Event of Default described in subsections (f) or (g) of Section 7.01, all Obligations, including, without limitation, the Loans, all interest thereon and all other amounts, shall immediately become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrowers. 7.03. Certain Remedies. If an Event of Default occurs, the Lenders may exercise all rights and remedies which they may have hereunder or under any other Loan Document or at law or in equity or otherwise. All such remedies shall be cumulative and not exclusive. ARTICLE VIII GUARANTEE 8.01. Guarantee. Each of the Guarantors, for consideration received, jointly and severally unconditionally and irrevocably guarantees to the Lenders the due and punctual payment of the Obligations, whether or not allowed or allowable as a claim in any proceeding commenced under any Bankruptcy Law, and whether or not recovery of any such obligation or liability may be barred by a statute of limitations or such obligation or liability may otherwise be unenforceable. All Obligations shall be conclusively presumed to have been created in reliance on the Guarantee. The Guarantee is a continuing guaranty of the Obligations and may not be revoked and shall not otherwise terminate unless and until any and all Obligations have been indefeasibly paid and performed in full, in cash. Nothing contained in this Article VIII shall be deemed to limit in any way the terms of the Order. 8.02. Nature of Guarantee. The liability of each Guarantor under the Guarantee is independent of and not in consideration of or contingent upon the liability of the Borrowers or any other Guarantor and a separate action or actions may be brought and prosecuted against any Guarantor, whether or not any action is brought or prosecuted against the Borrowers or any other Guarantor or whether any Borrower or any other Guarantor is joined in any such action or actions. The Guarantee given by each Guarantor shall be construed as a continuing, absolute and unconditional guaranty of payment (and not merely of collection) without regard to: (a) the legality, validity or enforceability of the Term Notes, this Agreement or any other Loan Document, any of the Obligations, any Lien on Collateral, the security interest granted under this Agreement or any Loan Document or the Guarantee given by any other Guarantor; - 32 - 38 (b) any defense (other than payment), set-off or counterclaim that may at any time be available to the Borrowers or any other Guarantor against, and any right of setoff at any time held by, the Lenders; or (c) any other circumstance whatsoever (with or without notice to or knowledge of any Guarantor or any Borrower), whether or not similar to any of the foregoing, that constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrowers or any other Guarantor, in bankruptcy or in any other instance. Any payment by any Borrower or any Guarantor or other circumstance that operates to toll any statute of limitations applicable to such Persons shall also operate to toll the statute of limitations applicable to each Guarantor. 8.03. Authorization. Each Guarantor authorizes the Lenders, without notice to or further assent by such Guarantor, and without affecting any Guarantor's liability hereunder (regardless of whether any subrogation or similar right that such Guarantor may have or any other right or remedy of such Guarantor is extinguished or impaired), from time to time to do any or all of the following: (a) permit the Borrowers to increase or create Obligations, or terminate, release, compromise, subordinate, extend, accelerate or otherwise change the amount or time, manner or place of payment of, or rescind any demand for payment or acceleration of, the Obligations or any part thereof, consent or enter into supplemental loan agreements or otherwise amend the terms and conditions of the Loan Documents or any provision thereof; (b) take and hold Collateral from the Borrowers or any other Person, perfect or refrain from perfecting a Lien on such Collateral, and exchange, enforce, subordinate, release (whether intentionally or unintentionally), or take or fail to take any other action in respect of, any such Collateral or Lien or any part thereof; (c) exercise in such manner and order as they elect in their sole discretion, fail to exercise, waive, suspend, terminate or suffer expiration of, any of the remedies or rights of the Lenders against the Borrowers or any Guarantor in respect of any Obligation or any Collateral; (d) release, add or settle with any Guarantor or any Borrower in respect of the Guarantee or the Obligations; (e) accept partial payments on the Obligations and apply any and all payments or recoveries from any Guarantor or any Borrower or Collateral to such of the Obligations as Lenders may elect in their sole discretion, whether or not such Obligations are secured or guaranteed; (f) refund at any time, at Lenders' sole discretion, any payments or recoveries received by Lenders in respect of any Obligations or Collateral; and - 33 - 39 (g) otherwise deal with any Borrower, any Guarantor and any Collateral as Lenders may elect in their sole discretion. 8.04. Right to Demand Full Performance. In the event of any demand for payment or performance by Lenders from any Guarantor hereunder, Lenders shall have the right to demand their full claims and to receive all dividends or other payments in respect thereof until the Obligations have been paid in full, and the Guarantors shall continue to be jointly and severally liable hereunder for any balance which may be owing to Lenders by the Borrowers under this Agreement, the Term Notes or any other Loan Document. The retention by the Lenders of any security, prior to the realization by the Lenders of their rights to such security upon foreclosure thereon, shall not, as between the Lenders and any Guarantor, be considered as a purchase of such security, or as payment, satisfaction or reduction of the Obligations due to the Lenders by the Borrowers or any part thereof. Without limiting Section 9.05 or any other provision of this Agreement, each Guarantor, promptly after demand, will reimburse the Lenders for all costs and expenses of collecting such amount under, or enforcing this Guarantee, including, without limitation, the reasonable fees and expenses of counsel. 8.05. Certain Waivers. Each Guarantor waives: (a) the right to require the Lenders to proceed against the Borrowers or any other Guarantor, to proceed against or exhaust any Collateral or to pursue any other remedy in Lenders' power whatsoever and the right to have the property of any Borrower or any other Guarantor first applied to the discharge of the Obligations; (b) all rights and benefits under applicable law purporting to reduce a guarantor's obligations in proportion to the obligation of the principal or providing that the obligation of a surety or guarantor must neither be larger nor in other respects more burdensome than that of the principal; (c) the benefit of any statute of limitations affecting the Obligations or any Guarantor's liability hereunder; (d) any requirement of marshaling or any other principle of election of remedies; (e) any right to assert against the Lenders any defense (legal or equitable), set-off, counterclaim and other right that any Guarantor may now or any time hereafter have against any Borrower or any other Guarantor; (f) presentment, demand for payment or performance (including diligence in making demands hereunder), notice of dishonor or nonperformance, protest, acceptance and notice of acceptance of this Guarantee, and, except to the extent expressly required by the Loan Documents, all other notices of any kind, including (i) notice of any action taken or omitted by the Lenders in reliance hereon, (ii) notice of any default by the Borrowers or any - 34 - 40 other Guarantor, (iii) notice that any portion of the Obligations is due, (iv) notice of any action against the Borrowers or any other Guarantor, or any enforcement of other action with respect to any Collateral, or the assertion of any right of the Lenders hereunder; and (g) all defenses that at any time may be available to any Guarantor by virtue of any valuation, stay, moratorium or other law now or hereafter in effect. 8.06. The Guarantors Remain Obligated in Event the Borrowers Are No Longer Obligated to Discharge Obligations. It is the express intention of the Lenders and the Guarantors that if for any reason any Borrower has no legal existence, is or becomes under no legal obligation to discharge the Obligations owing to the Lenders by the Borrowers or if any of the Obligations owing by the Borrowers to the Lenders becomes irrecoverable from any Borrower by operation of law or for any reason whatsoever, this Guarantee and the covenants, agreements and obligations of the Guarantors contained in this Article VIII shall nevertheless be binding upon the Guarantors, as principal debtor, until such time as all such Obligations have been paid in full in cash to the Lenders and all Obligations owing to the Lenders by the Borrowers have been discharged, and the Guarantors shall be responsible for the payment thereof to the Lenders upon demand. 8.07. Severability of Void Obligations under Guarantee. The obligations of any Guarantor hereunder shall be limited to the maximum amount that would not render its obligations hereunder subject to avoidance under Section 548 of the Bankruptcy Code or any applicable provisions of comparable state law. 8.08. Guarantee Is in Addition to Other Security. This Guarantee shall be in addition to and not in substitution for any other guarantees or other security which the Lenders may now or hereafter hold in respect of the Obligations owing to the Lenders by the Borrowers and (except as may be required by law) the Lenders shall be under no obligation to marshal in favor of each of the Guarantors any other guarantees or other security or any moneys or other assets which the Lenders may be entitled to receive or upon which any Lender may have a claim. 8.09. Release of Security Interest. Without limiting the generality of the foregoing, each Guarantor hereby consents and agrees, to the fullest extent permitted by applicable law, that the rights of the Lenders hereunder, and the liability of the Guarantors hereunder, shall not be affected by any and all releases for any purpose of any Collateral from the security interest created by any Loan Document and that this Guarantee shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by any Lender upon the insolvency, bankruptcy or reorganization of any Borrower or otherwise, all as though such payment had not been made. 8.10. No Bar to Further Actions. Except as provided by law, no action or proceeding brought or instituted under this Article VIII and the Guarantee and no recovery or - 35 - 41 judgment in pursuance thereof shall be a bar or defense to any further action or proceeding which may be brought under this Article VIII and the Guarantee by reason of any further default or defaults under this Article VIII and the Guarantee or in the payment of any of the Obligations owing by the Borrowers. 8.11. Failure to Exercise Rights Shall Not Operate as a Waiver; No Suspension of Remedies. (a) No failure to exercise and no delay in exercising, on the part of the Lenders, any right, power, privilege or remedy under this Article VIII and the Guarantee shall operate as a waiver thereof, nor shall any single or partial exercise of any rights, power, privilege or remedy preclude any other or further exercise thereof, or the exercise of any other rights, powers, privileges or remedies. The rights and remedies herein provided for are cumulative and not exclusive of any rights or remedies provided in law or equity. (b) Nothing contained in this Article VIII shall limit the right of the Lenders to take any action to accelerate the maturity of the Obligations pursuant to Article VII and as set forth in this Agreement or the other Loan Documents or to pursue any rights or remedies hereunder or thereunder or under applicable law. 8.12. Lenders' Duties; Notice to Lenders. (a) Any provision in this Article VIII or elsewhere in this Agreement or any other Loan Document allowing the Lenders to request any information or to take any action authorized by, or on behalf of any Guarantor, shall be permissive and shall not be obligatory on the Lenders. (b) The Lenders shall not be required to inquire into the existence, powers or capacities of any Borrower, any Guarantor or the officers, directors or agents acting or purporting to act on their respective behalf. 8.13. Successors and Assigns. All terms, agreements and conditions of this Article VIII shall extend to and be binding upon each Guarantor and its successors and permitted assigns and shall inure to the benefit of and may be enforced by the Lenders and their respective successors and assigns. 8.14. Release of Guarantee. Concurrently with the payment in full in cash of all of the Obligations, the Guarantors shall be released from and relieved of their obligations under this Article VIII. If any of the Obligations are revived and reinstated after the termination of this Guarantee, then all of the obligations of the Guarantors under this Guarantee shall be revived and reinstated as if this Guarantee had not been terminated until such time as the Obligations are paid in full, in cash, and each Guarantor shall enter into an amendment to this Guarantee, reasonably satisfactory to the Lenders, evidencing such revival and reinstatement. - 36 - 42 8.15. Execution of Guarantee. To evidence the Guarantee, each Guarantor hereby agrees to execute a notation relating to the Guarantee to be endorsed on each Term Note. Each Guarantor agrees that this Agreement shall be executed on behalf of each Guarantor by its Chairman of the Board, its President, its Chief Executive Officer, Chief Operating Officer or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. 8.16. No Subrogation; Certain Agreements. (a) EACH GUARANTOR WAIVES ANY AND ALL RIGHTS OF SUBROGATION, INDEMNITY OR REIMBURSEMENT, AND ANY AND ALL BENEFITS OF AND RIGHTS TO ENFORCE ANY POWER, RIGHT OR REMEDY THAT THE LENDERS MAY NOW OR HEREAFTER HAVE IN RESPECT OF THE OBLIGATIONS AGAINST THE BORROWERS OR ANY OTHER GUARANTOR, ANY AND ALL BENEFITS OF AND RIGHTS TO PARTICIPATE IN ANY COLLATERAL, WHETHER REAL OR PERSONAL PROPERTY, NOW OR HEREAFTER HELD BY THE LENDERS, AND ANY AND ALL OTHER RIGHTS AND CLAIMS (AS DEFINED IN THE BANKRUPTCY CODE) ANY GUARANTOR MAY HAVE AGAINST ANY BORROWER OR ANY OTHER GUARANTOR, UNDER APPLICABLE LAW OR OTHERWISE, AT LAW OR IN EQUITY, BY REASON OF ANY PAYMENT UNDER THE GUARANTEE, UNLESS AND UNTIL THE OBLIGATIONS SHALL HAVE BEEN PAID IN FULL IN CASH. (b) Each Guarantor assumes the responsibility for being and keeping itself informed of the financial condition of each other Guarantor and of all other circumstances bearing upon the risk of nonpayment of the Obligations or the Guarantee of any other Guarantor that diligent inquiry would reveal, and agrees that the Lenders shall have no duty to advise any Guarantor of information regarding such condition or any such circumstances. 8.17. Bankruptcy; No Discharge. (a) Without limiting Section 8.02 or any other provision of this Article VIII, the Guarantee shall not be discharged or otherwise affected by any bankruptcy, reorganization or similar proceeding commenced by or against any Borrower or any other Guarantor, including (i) any discharge of, or bar or stay against collecting, all or any part of the Obligations in or as a result of any such proceeding, whether or not assented to by the Lenders, (ii) any disallowance of all or any portion of any claim for repayment of the Obligations, (iii) any use of cash or other collateral in any such proceeding, (iv) any agreement or stipulation as to adequate protection in any such proceeding, (v) any failure by any Lender to file or enforce a claim against any Borrower or any other Guarantor or its estate in any bankruptcy or reorganization case, (vi) any amendment, modification, stay or cure of any Lender's rights that may occur in any such proceeding, (vii) any election by any Lender under Section 1112(b)(2) of the Bankruptcy Code, or (viii) any borrowing or grant of a Lien under Section 364 of the Bankruptcy Code. Each Guarantor understands and acknowledges that by virtue of this Guarantee, it has specifically assumed any and all risks of any such proceeding with respect to the Borrowers and each other Guarantor. - 37 - 43 (b) Notwithstanding anything in this Article VIII to the contrary, any Event of Default under Section 7.01(f) or (g) of this Agreement shall render all Obligations automatically due and payable for purposes of the Guarantee, without demand on the part of the Lenders. (c) Notwithstanding anything to the contrary herein contained, the Guarantee (and any Lien on the Collateral securing the Guarantee or the Obligations) shall continue to be effective or be reinstated, as the case may be, if at any time any payment, or any part thereof, of any or all of the Obligations is rescinded, invalidated, declared to be fraudulent or preferential or otherwise required to be restored or returned by any Lender in connection with any bankruptcy, reorganization or similar proceeding involving any Borrower, any other Guarantor or otherwise, if the proceeds of any Collateral are required to be returned by any Lender under any such circumstances, or if any Lender elects to return any such payment or proceeds or any part thereof in its sole discretion, all as though such payment had not been made or such proceeds not been received. ARTICLE IX MISCELLANEOUS 9.01. Holidays. Except as otherwise provided herein, whenever any payment or action to be made or taken hereunder or under the Notes, or the other Loan Documents shall be stated to be due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day and such extension of time shall be included in computing interest or fees, if any, in connection with such payment or action. 9.02. Amendments and Waivers. No amendment or modification of any provision of this Agreement or of any of the Notes or of any other Loan Document shall be effective without the prior written agreement of the Lenders and the Borrowers and Guarantors and no termination or waiver of any provision of this Agreement (including, without limitation, Section 2.05 hereof) or of any of the Term Notes or consent to any departure by the Borrowers and Guarantors therefrom, shall in any event be effective without the written concurrence of the Lenders, which the Lenders shall have the right to grant or withhold at their sole discretion. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on the Borrowers or the Guarantors in any case shall entitle the Borrowers or Guarantors to any other or further notice or demand in similar or other circumstances. 9.03. No Implied Waiver; Cumulative Remedies. No course of dealing and no delay or failure of the Lenders in exercising any right, power or privilege under this Agreement, the Notes or any other Loan Document shall affect any other or future exercise thereof or exercise of any other right, power or privilege; nor shall any single or partial - 38 - 44 exercise of any such right, power or privilege or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies of the Lenders under this Agreement, the Term Notes and the other Loan Documents are cumulative and not exclusive of any rights or remedies which the Lenders have hereunder or thereunder or at law or in equity or otherwise. The Lenders may exercise their rights and remedies against the Borrowers, the Guarantors and the Collateral as the Lenders may elect, and regardless of the existence or adequacy of any other right or remedy. 9.04. Notices. (a) Unless otherwise provided herein, all notices, requests, demands, directions and other communications (collectively "notices") under the provisions of this Agreement, the Term Notes or any other Loan Document shall be in writing and shall be mailed (by certified mail, postage prepaid and return receipt requested), telecopied, or delivered and shall be effective (i) if mailed, three days after being deposited in the mails, (ii) if telecopied, when sent, confirmation received and (iii) if delivered, upon delivery. All notices shall be sent to the applicable party at the address stated on the signature page hereof or in accordance with the last unrevoked written direction from such party to the other parties hereto. (b) Without limiting Section 9.06 or any other provision of this Agreement, the Lenders may rely, and shall be fully protected in relying, on any notice purportedly made by or on behalf of the Borrowers or the Guarantors and the Lenders shall have no duty to verify the identity or authority of any Person giving such notice. The preceding sentence shall apply to all notices whether or not made in a manner authorized or required by this Agreement or any other Loan Document. 9.05. Expenses; Taxes; Attorneys' Fees; Indemnification. The Borrowers agree to pay or cause to be paid, on demand, and to save the Lenders harmless against liability for the payment of, all reasonable out-of-pocket expenses, regardless of whether the transactions contemplated hereby are consummated, including but not limited to reasonable fees and expenses of counsel for the Lenders, accounting, due diligence, periodic field audits, investigation, monitoring of assets, miscellaneous disbursements, examination, travel, lodging and meals, incurred by the Lenders from time to time arising from or relating to: (a) the negotiation, preparation, execution, delivery, performance and administration of this Agreement and the other Loan Documents, (b) any requested amendments, waivers or consents to this Agreement or the other Loan Documents whether or not such documents become effective or are given, (c) the preservation and protection of any of the Lenders' rights under this Agreement or the other Loan Documents, (d) the defense of any claim or action asserted or brought against any Lender by any Person that arises from or relates to this Agreement, any other Loan Document, such Lender's claims against the Borrowers or the Guarantors, or any and all matters in connection therewith, (e) the commencement or defense of, or intervention in, any court proceeding arising from or related to this Agreement or any - 39 - 45 other Loan Document, (f) the filing of any petition, complaint, answer, motion or other pleading by any Lender, or the taking of any action in respect of the Collateral or other security, in connection with this Agreement or any other Loan Document, (g) the protection, collection, lease, sale, taking possession of or liquidation of, any Collateral or other security in connection with this Agreement or any other Loan Document, (h) any attempt to enforce any lien or security interest in any Collateral or other security in connection with this Agreement or any other Loan Document, (i) any attempt to collect from the Borrowers or the Guarantors, (j) the receipt of any advice with respect to any of the foregoing, (k) all Environmental Liabilities and Costs arising from or in connection with the past, present or future operations of any of the Borrowers or any of the Guarantors involving any damage to real or personal property or natural resources or harm or injury alleged to have resulted from any Release of Hazardous Materials on, upon or into such property, (l) any costs or liabilities incurred in connection with the investigation, removal, cleanup and/or remediation of any Hazardous Materials present or arising out of the operations of any facility of the Borrowers, the Guarantors or their respective Subsidiaries, or (m) any costs or liabilities incurred in connection with any Environmental Lien. Without limitation of the foregoing or any other provision of any Loan Document: (x) the Borrowers agree to pay all stamp, document, transfer, recording or filing taxes or fees (including, without limitation, mortgage recording taxes) and similar impositions now or hereafter determined by the Lenders to be payable in connection with this Agreement or any other Loan Document, and the Borrowers agree to indemnify and hold the Lenders harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such taxes, fees or impositions, and (y) if the Borrowers or the Guarantors fail to perform any covenant or agreement contained herein or in any other Loan Document, any Lender may itself perform or cause performance of such covenant or agreement, and the expenses of such Lender incurred in connection therewith shall be reimbursed on demand by the Borrowers. The Borrowers agree to indemnify and defend the Lenders and their directors, officers, employees, affiliates, partners, shareholders, counsel and agents and any affiliate of any of the foregoing (collectively, the "Indemnified Parties") from, and hold each of them harmless against, any and all losses, liabilities, claims, damages, costs or expenses of any nature whatsoever (including, without limitation, fees, expenses and disbursements of counsel and amounts paid in settlement) incurred by, imposed upon or asserted against any of them arising out of or by reason of any investigation, litigation or other proceeding brought or threatened relating to, or otherwise arising out of or relating to, the execution of this Agreement, the Letter Agreement or any other Loan Document, the transactions contemplated hereby or thereby or any Loan or proposed Loan hereunder (including, but without limitation, any use made or proposed to be made by the Borrowers, the Guarantors or any of their Affiliates of the proceeds of any thereof, or the delivery or use or transfer of or the payment or failure to pay under any Loan) but excluding any such losses, liabilities, claims, damages, costs or expenses to the extent finally judicially determined, by a final and non-appealable order of a court of competent jurisdiction, to have directly resulted directly from the gross negligence or willful misconduct of the Indemnified Party. - 40 - 46 9.06. Several and Not Joint; Limited Liability. (a) Notwithstanding anything herein or in any other Loan Document to the contrary, or any document or instrument executed and delivered in connection herewith, the parties hereto agree that the obligations, liabilities and indemnities of each Lender hereunder shall be several and not joint, and no Lender shall have any liability hereunder for any breach by any other Lender of any obligation of such Lender set forth herein or in any other Loan Document. (b) The Borrowers and Guarantors hereby acknowledge and agree that neither this Agreement nor any other Loan Document is being executed on behalf of the partners of any Lender that is a limited partnership as individuals and the obligations of this Agreement are not binding upon any of the partners, officers, employees or beneficiaries of such Lender individually but are binding only upon the assets and property of such Lender, and the Borrowers and Guarantors agrees that no beneficiary, partner, employee or officer of such Lender may be held personally liable or responsible for any obligations of such Lender arising out of this Agreement or any other Loan Document. With respect to obligations of each Lender arising out of this Agreement or any other Loan Document, the Borrowers and Guarantors shall look for payment or satisfaction of any claim solely to the assets and property of such Lender. (c) Magten represents and warrants to the Borrowers and Guarantors that it has full power and authority to execute and deliver this Agreement and each other Loan Document as agent or as general partner, as applicable, for the Lenders on whose behalf Magten is executing this Agreement as set forth on the signature pages hereto. Except for the foregoing representations and warranties, the Borrowers and Guarantors hereby acknowledge and agree that Magten shall not have any personal obligation or liability to the Borrowers and Guarantors under this Agreement or any other Loan Document but that it is acting solely for and on behalf of the aforementioned Lenders, and without limiting the generality of the foregoing, the Borrowers and Guarantors shall have no recourse against Magten for the performance or satisfaction of any obligation under this Agreement or any other Loan Document, but shall look for payment or satisfaction of any claim arising under this Agreement or any other Loan Document solely to the assets and properties of the Lenders. 9.07. Application. Except to the extent, if any, expressly set forth in this Agreement or in the Loan Documents, each Lender shall have the right to apply any payment received or applied by it in connection with the Obligations to such of the Obligations then due and payable as it may elect. 9.08. Severability. The provisions of this Agreement are intended to be severable. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. - 41 - 47 9.09. Governing Law. This Agreement and the Term Notes shall be deemed to be contracts under the laws of the State of New York, without regard to choice of law principles, and for all purposes shall be governed by and construed and enforced in accordance with the laws of said State. 9.10. Prior Understandings. This Agreement supersedes all prior understandings and agreements, whether written or oral, among the parties hereto relating to the transactions provided for herein, other than the Interim Order and the Final Order. 9.11. Duration; Survival. All representations and warranties of the Borrowers and Guarantors contained herein or made in connection herewith shall survive the making of the Loans and shall not be waived by the execution and delivery of this Agreement, the Term Notes or any other Loan Document, any investigation by or knowledge of the Lenders, the making of any Loan hereunder, or any other event whatsoever. All covenants and agreements of the Borrowers and the Guarantors contained herein shall continue in full force and effect from and after the date hereof so long as the Borrowers may borrow hereunder and until the Obligations have been paid in full in cash. Without limitation, it is understood that all obligations of the Borrowers and the Guarantors to make payments to or indemnify the Lenders (including, without limitation, obligations arising under Section 9.05 hereof) shall survive the payment in full of the Term Notes and all Obligations and of all other obligations of the Borrowers and the Guarantors thereunder and hereunder, termination of this Agreement and all other events whatsoever and whether or not any Loans are made hereunder. 9.12. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. 9.13. Successors and Assigns. This Agreement and the other Loan Documents shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns except that the Borrowers and the Guarantors may not assign or transfer any of their rights hereunder or thereunder without the prior written consent of the Lenders. 9.14. Waiver of Jury Trial. BY ITS EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE BORROWERS AND THE GUARANTORS, AND THE LENDERS HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS AGREEMENT, THE TERM NOTES OR ANY OTHER LOAN DOCUMENT, ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE LENDERS OR ANY - 42 - 48 BORROWER OR GUARANTOR IN CONNECTION HEREWITH OR THEREWITH. THIS PROVISION IS A MATERIAL INDUCEMENT FOR EACH PARTY HERETO TO ENTER INTO THIS AGREEMENT. 9.15. Right of Setoff. Upon the occurrence and during the continuance of any Event of Default, each Lender may, and is hereby authorized to, at any time from time to time, without notice to the Borrowers or the Guarantors (any such notice being expressly waived by the Borrowers and the Guarantors) and to the fullest extent permitted by law, set off and apply any and all deposits (general or special, time or demand, provision or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrowers and the Guarantors against any and all Obligations of the Borrowers or the Guarantors now or hereafter existing under the Loan Documents, irrespective of whether or not such Lender shall have made any demand hereunder or thereunder and although such Obligations may be contingent or unmatured. Each Lender agrees promptly to notify the Borrowers and the Guarantors after any such setoff and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application. The rights of the Lenders under this Section 9.15 are in addition to the other rights and remedies (including, without limitation, other rights of setoff under applicable law or otherwise) which the Lenders may have. 9.16. Headings. Section headings herein are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. - 43 - 49 IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed and delivered this Agreement as of the date first above written. BORROWERS: THE RUG BARN, INC. By: -------------------------------- Name: Jay Baker Title: Chief Financial Officer Address for Notices: -------------------- Highway 28 Bypass Industrial Park Road Abbeville, SC 29620 HOME INNOVATIONS, INC. By: ------------------- Name: Jay Baker Title: Chief Financial Officer Address for Notices: -------------------- 346 East Plaza Drive P.O. Box 297 Mooresville, NC 28115 - 44 - 50 DHA HOME, INC. By: ------------------ Name: Jay Baker Title: Chief Financial Officer Address for Notices: -------------------- 346 East Plaza Drive P.O. Box 297 Mooresville, NC 28115 R.A. BRIGGS AND COMPANY By: ------------------ Name: Jay Baker Title: Chief Financial Officer Address for Notices: 143 Main Street Lake Zurich, IL 60047 With a copy to: Katten, Muchin & Zavis 525 West Monroe Street Suite 1600 Chicago, IL 60661 Attention: David R. Shevitz Telephone: (312) 902-5200 Telecopier: (312) 902-1061 - 45 - 51 GUARANTORS: DECORATIVE HOME ACCENTS, INC. By: ------------------------- Name: Jay Baker Title: Chief Financial Officer Address for Notices: -------------------- Highway 28 Bypass Industrial Park Road Abbeville, SC 29620 DRAYMORE MFG. CORP. By: ------------------------ Name: Jay Baker Title: Chief Financial Officer Address for Notices: -------------------- 346 East Plaza Drive Mooresville, NC 28115 HOME INNOVATIONS, INC. By: ------------------------- Name: Jay Baker Title: Chief Financial Officer Address for Notices: -------------------- 346 East Plaza Drive Mooresville, NC 28115 With a copy to: Katten, Muchin & Zavis 525 West Monroe Street Suite 1600 Chicago, IL 60661 Attention: David R. Shevitz Telephone: (312) 902-5200 Telecopier: (312) 902-1061 - 46 - 52 LENDERS: MELLON BANK, N.A., solely in its capacity as Percentage Interest: 37.25% Trustee for GENERAL MOTORS EMPLOYEES DOMESTIC GROUP PENSION TRUST (as directed by Magten Asset Management Corp. and not in its individual capacity) By: -------------------------- Name: Title: Address for Notices: - -------------------- c/o Magten Asset Management 35 East 21st Street New York, NY 10010 Attention: Robert Capozzi Telephone: (212) 529-6600 Telecopier: (212) 505-0484 with a copy to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, NY 10004 Attention: Brad Eric Scheler Lawrence A. First Telephone: (212) 859-8000 Telecopier: (212) 859-4000 - 47 - 53 HUGHES MASTER RETIREMENT TRUST Percentage Interest: 17.00% By: MAGTEN ASSET MANAGEMENT CORP., as its attorney-in-fact By: ---------------------- Robert Capozzi Managing Director Address for Notices: - -------------------- c/o Magten Asset Management Corp. 35 East 21st Street New York, New York 10010 Attention: Robert Capozzi Telephone: (212) 529-6600 Telecopier: (212) 505-0484 with a copy to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Attention: Brad Eric Scheler Lawrence A. First Telephone: (212) 859-8000 Telecopier: (212) 859-4000 - 48 - 54 DEPARTMENT OF PENSIONS - CITY OF Percentage Interest: 21.40% LOS ANGELES By: MAGTEN ASSET MANAGEMENT CORP., as its attorney-in-fact By: Robert Capozzi ----------------- Managing Director Address for Notices: - -------------------- Use same address as for HUGHES MASTER RETIREMENT TRUST. MAGTEN OFFSHORE FUND LTD. Percentage Interest: 3.50% By: MAGTEN ASSET MANAGEMENT CORP., as its attorney-in-fact By: ----------------- Robert Capozzi Managing Director Address for Notices: - -------------------- Use same address as for HUGHES MASTER RETIREMENT TRUST. MAGTEN PARTNERS, L.P. Percentage Interest: 3.67% By: MAGTEN ASSET MANAGEMENT CORP., its General Partner By: ------------------- Robert Capozzi Managing Director Address for Notices: - -------------------- Use same address as for HUGHES MASTER RETIREMENT TRUST. - 49 - 55 MAGTEN GROUP TRUST Percentage Interest: 2.37% By: MAGTEN ASSET MANAGEMENT CORP., as its attorney-in-fact By: ------------------- Robert Capozzi Managing Director CUSTODIAL TRUST COMPANY By: -------------------- Name: Title: Address for Notices: - -------------------- Use same address as for HUGHES MASTER RETIREMENT TRUST. NAVY EXCHANGE SERVICE Percentage Interest: 6.93% COMMAND RETIREMENT TRUST By: MAGTEN ASSET MANAGEMENT CORP., as its attorney-in-fact By: Robert Capozzi ---------------- Managing Director Address for Notices: - -------------------- Use same address as for HUGHES MASTER RETIREMENT TRUST. - 50 - 56 WESTERN UNION PENSION TRUST Percentage Interest: 5.38% By: MAGTEN ASSET MANAGEMENT CORP., as its attorney-in-fact By: --------------- Robert Capozzi Managing Director Address for Notices: - -------------------- Use same address as for HUGHES MASTER RETIREMENT TRUST. SATURN FUND LTD. Percentage Interest: 2.50% By: MAGTEN ASSET MANAGEMENT CORP., as its attorney-in-fact By: --------------- Robert Capozzi Managing Director Address for Notices: - -------------------- Use same address as for HUGHES MASTER RETIREMENT TRUST. - 51 - EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DECORATIVE HOME ACCENTS, INC. FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 3-MOS DEC-31-1997 DEC-31-1996 MAR-31-1997 1,453 0 32,254 5,194 35,599 66,106 40,677 (8,771) 119,185 141,369 118,100 51,453 0 9 (116,963) 119,185 35,897 35,897 27,826 27,826 9,390 0 (5,196) 789 0 789 0 3,556 0 789 0 0
-----END PRIVACY-ENHANCED MESSAGE-----