-----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, HYGfJagqkDP0cYrfUnhu3BP4pRE7IFxTrgIAFr5roWifQOYy220dUedMAXJMEPa2 i1r67EmP0RV0Qer9lM0nWA== 0000950136-96-000799.txt : 19960924 0000950136-96-000799.hdr.sgml : 19960924 ACCESSION NUMBER: 0000950136-96-000799 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960906 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits ITEM INFORMATION: Change in fiscal year FILED AS OF DATE: 19960923 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONNKENNY INC CENTRAL INDEX KEY: 0000029693 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 510228891 STATE OF INCORPORATION: DE FISCAL YEAR END: 1204 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21940 FILM NUMBER: 96633323 BUSINESS ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 5402286181 MAIL ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 8-K 1 FORM 8-K - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): September 6, 1996 DONNKENNY, INC. - ------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 0-21940 51-022889 - ---------------- ---------------- ---------------- (State or other (Commission File (IRS Employer jurisdiction of Number) Identification incorporation No.) 1411 Broadway New York, New York 10018 ---------------------------------------- (Address of principal executive offices) Registrant's Telephone Number, including area code: (212) 730-7770 Not Applicable - ------------------------------------------------------------------------------- (Former Address, if changed since last report) - ------------------------------------------------------------------------------- This Current Report on Form 8-K contains forward-looking statements that involve certain risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Item 2. Acquisition or Disposition of Assets. On September 6, 1996, pursuant to a Stock Purchase Agreement dated as of September 3, 1996 (the "Stock Purchase Agreement"), Donnkenny Apparel, Inc. ("DKA"), a wholly-owned subsidiary of Donnkenny, Inc. (the "Company"), acquired all of the outstanding capital stock of Fashion Avenue Knits Inc. and related companies (collectively, the "Acquired Companies"). The following summaries of agreements are necessarily incomplete and selective and are qualified in their entirety by reference to the copies of the documents filed as Exhibits to this Form 8-K. The business of the Acquired Companies (the "Acquired Business") consists principally of the design and manufacture of junior's, ladies' and men's sweaters and knitwear, primarily for sale through department, specialty and chain stores. The assets of the Acquired Companies include (i) leased showroom facilities in New York, New York; and (ii) leased office and production facilities located in Ridgewood, New York; and (iii) equipment, - 1 - fixtures, furnishings and personal property used in connection with the conduct of the Acquired Business at the leased facilities. The Company intends to continue to use such assets in connection with the Acquired Business. The consideration for the acquisition of the capital stock of the Acquired Companies, to be paid to Mel Weiss, the stockholder of the Acquired Companies, consists of (i) an $8,000,000 promissory note, due January 13, 1997, with interest payable thereon at the rate of 6% per annum; and (ii) an aggregate of 170,213 shares of the common stock, par value $.01 per share, of the Company (the "Stock Consideration"), valued for purposes of the acquisition at $3,000,000. The Stock Consideration is payable in equal installments on each of the first, second and third anniversaries of the date of the acquisition. The purchase price was determined in arm's-length negotiations between DKA and the seller. The purchase price was based on an estimate of the value of the assets, projected business and goodwill of the Acquired Companies. In connection with the acquisition, DKA entered into an employment agreement dated as of September 3, 1996 with Mel Weiss (the "Employment Agreement"), pursuant to which he will be employed as President of the business unit conducting the Acquired Business. The term of employment expires in November 1999, subject to renewal, at the option of the Company, for an - 2 - additional two-year term. The Employment Agreement provides for an initial annual base salary of $350,000 with annual increases. The Employment Agreement also provides for bonus payments and stock option grants. The Employment Agreement contains certain confidentiality and non-competition provisions. The transactions undertaken pursuant to the Stock Purchase Agreement are to be financed out of funds available to the Company from its own resources and an existing Credit Agreement with The Chase Manhattan Bank and The Bank of New York. In connection with the acquisition, the Credit Agreement was amended to add the Acquired Companies as guarantors. In addition, the related Security Agreement and Security Agreement and Mortgage-Trademarks were amended to grant a security interest in favor of the lenders under the Credit Agreement in substantially all of the assets of the Acquired Companies, subject to existing factoring arrangements. Item 5. Other Events. As more fully described in Item 8, the Company is changing its fiscal year to one ending on December 31st of each year. The Quarterly Report on Form 10-Q for the third quarter ending September 30, 1996 will cover the transition period. At the same time or prior to the time that the Company files the foregoing third quarter report, it expects to file amended - 3 - quarterly reports for the 1995 fiscal year and the first two quarters of fiscal 1996. Such amendments, which will reflect adjustments to the timing of the recognition of sales revenues, will not affect the previously reported results for the year ended December 2, 1995. The Company also anticipates that, although results for the first two quarters will be adjusted, the results for the year ending December 31, 1996 will not be affected. Financial statements for the three and nine month periods ending September 30, 1996 and for the year ending December 31, 1996 will be prepared on the same basis as the amended quarterly reports. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Businesses Acquired In accordance with Item 7(a)(4) of Form 8-K, it is impracticable to file financial statements of the Acquired Companies at this time. The required financial statements will be filed under cover of Form 8-K within sixty (60) days of the date hereof. (b) Pro Forma Financial Information In accordance with Item 7(b)(2) of Form 8-K, it is impracticable to file pro forma financial information at this time. The required pro forma financial information will be filed under cover of Form 8-K within sixty (60) days of the date hereof. - 4 - (c) Exhibits 1. Stock Purchase Agreement dated as of September 3, 1996 between Donnkenny Apparel, Inc. and Mel Weiss. 2. Promissory Note dated as of September 3, 1996 made by Donnkenny Apparel, Inc. to Mel Weiss. 3. Employment Agreement dated as of September 3, 1996 between Donnkenny Apparel, Inc. and Mel Weiss. 4. Escrow Agreement dated as of September 3, 1996 among Donnkenny Apparel, Inc., Mel Weiss and Squadron, Ellenoff, Plesent & Sheinfeld, LLP. 5. Third Amendment Agreement dated as of September 10, 1996 to the Credit Agreement dated June 5, 1995 among Donnkenny Apparel, Inc., Beldoch Industries Corporation, the guarantors named therein, the lenders named in Schedule 2.01 thereto, and The Chase Manhattan Bank (formerly Chemical Bank) as agent for the lenders. 6. Second Amendment Agreement dated as of September 10, 1996 to the Security Agreement dated June 5, 1995 among Donnkenny Apparel, Inc., Beldoch Industries Corporation, MegaKnits, Inc. and The Chase Manhattan Bank (formerly Chemical Bank), as agent. - 5 - 7. Second Amendment Agreement dated as of September 10, 1996 to the Security Agreement and Mortgage-Trademarks dated June 5, 1995 among Donnkenny Apparel, Inc., Beldoch Industries Corporation, and The Chase Manhattan Bank (formerly Chemical Bank, as agent. 8. Assignment for Security (Trademarks) dated as of September 10, 1996 made by Fashion Avenue Knits Inc. to The Chase Manhattan Bank, as agent. Item 8. Change in Fiscal Year. The Company determined on September 11, 1996 to change its fiscal year from one ending on the first Saturday of each year on or after November 30 to a fiscal year ending on December 31st of each year. The Quarterly Report on Form 10-Q for the period ending September 30, 1996 will cover the transition period. - 6 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DONNKENNY, INC. By: /s/Richard Rubin ---------------------- Richard Rubin President Date: September 20, 1996 - 7 - EXHIBIT INDEX 1. Stock Purchase Agreement dated as of September 3, 1996 between Donnkenny Apparel, Inc. and Mel Weiss. 2. Promissory Note dated as of September 3, 1996 made by Donnkenny Apparel, Inc. to Mel Weiss. 3. Employment Agreement dated as of September 3, 1996 between Donnkenny Apparel, Inc. and Mel Weiss. 4. Escrow Agreement dated as of September 3, 1996 among Donnkenny Apparel, Inc., Mel Weiss and Squadron, Ellenoff, Plesent & Sheinfeld, LLP. 5. Third Amendment Agreement dated as of September 10, 1996 to the Credit Agreement dated June 5, 1995 among Donnkenny Apparel, Inc., Beldoch Industries Corporation, the guarantors named therein, the lenders named in Schedule 2.01 thereto, and The Chase Manhattan Bank (formerly Chemical Bank) as agent for the lenders. 6. Second Amendment Agreement dated as of September 10, 1996 to the Security Agreement dated June 5, 1995 among Donnkenny Apparel, Inc., Beldoch Industries Corporation, MegaKnits, Inc. and The Chase Manhattan Bank (formerly Chemical Bank), as agent. 7. Second Amendment Agreement dated as of September 10, 1996 to the Security Agreement and Mortgage-Trademarks dated June 5, 1995 among Donnkenny Apparel, Inc., Beldoch Industries Corporation, and The Chase Manhattan Bank (formerly Chemical Bank), as agent. 8. Assignment for Security (Trademarks) dated as of September 10, 1996 made by Fashion Avenue Knits Inc. to The Chase Manhattan Bank, as agent. - 9 - EX-1 2 STOCK PURCHASE AGREEMENT - ------------------------------------------------------------------------------- STOCK PURCHASE AGREEMENT BETWEEN MEL WEISS AND DONNKENNY APPAREL, INC. ---------------- AS OF SEPTEMBER 3, 1996 ---------------- - ------------------------------------------------------------------------------- STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT dated as of the 3rd day of September 1996 by and between MEL WEISS ("Seller") and DONNKENNY APPAREL, INC., a Delaware corporation ("Buyer"). WHEREAS, Seller is the beneficial and record owner of all of the issued and outstanding shares of capital stock of Fashion Avenue Knits Inc., a New York corporation ("Fashion"), and each of the corporations listed on Schedule 1 hereto (Fashion and such corporations are sometimes hereinafter referred to individually as a "Company" and collectively as the "Companies"); and WHEREAS, Seller wishes to sell to Buyer all of such shares of capital stock of each of the Companies, consisting of the numbers and classes of shares listed on Schedule 1 hereto (collectively, the "Seller Shares"); and WHEREAS, Buyer wishes to purchase the Seller Shares from Seller, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: - 1 - 1. Sale and Purchase of the Seller Shares. 1.1 Sale of the Seller Shares. Subject to the terms and conditions of this Agreement, at the closing provided for in Section 2 hereof (the "Closing") Seller shall sell, transfer, convey and assign to the Buyer all of the Seller Shares by delivery to Buyer of certificates representing the Seller Shares, duly endorsed in blank or with duly executed stock powers attached, in proper form for transfer, free and clear of any Liens (as hereinafter defined). 1.2 Purchase Price. In consideration for the sale by Seller to Purchaser of the Seller Shares, on the terms and subject to the conditions set forth in this Agreement, Buyer agrees to pay Seller the following consideration (the "Purchase Price"): (a) at the Closing, a promissory note in the principal amount of $8,000,000, due January 13, 1997, with interest thereon payable at the rate of 6% per annum (the "Note"); and (b) subject to Sections 1.5 and 1.6, on each of the first, second and third anniversaries of the Closing Date, the sum of $1,000,000 (for a total of $3,000,000) (the "Holdback Share Consideration"), payable by the issuance and delivery to Seller of certificates representing 56,738, 56,738 and 56,737 shares of the common stock, par value $.01 per share (the "Parent Common Stock") of Donnkenny, Inc., respectively (for a total of 170,213 shares) (the "Parent Shares"), in accordance with Section 1.3 hereof. 1.3 Parent Common Stock. The number of shares of Parent Common Stock required to be delivered pursuant to Section 1.2(b) hereof shall, subject to Sections 1.5 and 1.6 hereof, be determined by dividing the Holdback Share Consideration by the "Closing Market Price" of the Parent Common Stock, which shall be $17 5/8ths per share. No fractional Parent Shares shall be issued hereunder. If, at any time, Seller would otherwise be required to receive a - 2 - fractional number of Parent Shares, then the number of Parent Shares to be issued to Seller shall be rounded up or down to the nearest whole number of Parent Shares. 1.4 Sale of the Parent Shares. (a) The Parent Shares may not be transferred, sold, assigned or otherwise disposed of except as permitted under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws, pursuant to registration thereunder or exemption therefrom. Notwithstanding the following provisions of this Section 1.4, Buyer shall not be required to (i) take any action otherwise required to be taken by it pursuant to such Section or (ii) permit Seller to transfer any Parent Shares, in each case, if Buyer is advised by its counsel that any such action or transfer is in contravention of any applicable law, rule or regulation, order or judgment. (b) Seller acknowledges that each certificate representing any of the Parent Shares shall be stamped or otherwise imprinted with a legend substantially in the following form: "The securities represented hereby have not been registered under the Securities Act of 1933, as amended, or any state securities laws and neither the securities nor any interest therein may be offered, sold, transferred, pledged or otherwise disposed of except pursuant to an effective registration statement under such act or such laws or an exemption from such registration." (c) Subject to Section 1.4(a), Seller shall not during any twelve-month period beginning on each of the first, second, third, fourth and fifth anniversaries of the Closing Date, sell, assign, transfer or otherwise dispose of or subject to any Lien (as hereinafter defined) ("Transfer") a number of Parent Shares that, on a cumulative basis, together with (i) any Parent Shares Transferred pursuant to Sections 1.4(d) and (e) hereof and (ii) all such shares Transferred pursuant to this Section 1.4(c) and Sections 1.4(d) and (e) hereof since the first anniversary of - 3 - the date hereof, exceeds 20% of the aggregate number of Parent Shares issued and issuable to Buyer hereunder (calculated after giving effect to any then applicable reduction in the Holdback Share Consideration pursuant to Sections 1.5 and 1.6 hereof) multiplied by the number of complete 12-month periods since the Closing Date (the "Cap Number"); provided, further, that the foregoing restriction shall no longer be in effect following the third anniversary of the Closing Date, if Buyer declines to exercise its option, pursuant to the employment agreement between Buyer and Seller of even date herewith (the "Employment Agreement"), to extend the terms of the Employment Agreement. By way of example, during the twelve-month period following the second anniversary of the Closing Date, Seller may Transfer pursuant to this Section 1.4(c) and Sections 1.4(d) and (e) hereof a number of Parent Shares that, on a cumulative basis, together with all such shares Transferred pursuant to this Section 1.4(c) and Sections 1.4(d) and (e) hereof since the first anniversary of the date hereof, does not exceed 40% of the aggregate number of Parent Shares issued and issuable to Buyer hereunder (calculated after giving effect to any then applicable reduction in the Holdback Share Consideration pursuant to Sections 1.5 and 1.6 hereof). (d) If, during the twelve-month period following the first anniversary of the Closing Date, the Parent Shares issued to Seller on the first anniversary of the date hereof are not eligible for resale pursuant to Rule 144(k) or otherwise under Rule 144 under the Securities Act (or any successor rule), and Seller shall desire to sell a number of Parent Shares that does not exceed the Cap Number (reduced by the number of Parent Shares, if any, Transferred by Buyer during such period pursuant to Sections 1.4(c) and (e) hereof), Buyer shall, on one occasion during such period and upon 60 days' notice from Seller, at Buyer's option, either (i) arrange for the purchase of such Parent Shares in a private sale to a third party, or (ii) purchase - 4 - such Parent Shares from Buyer, in each case at a price equal to the then Current Market Price of such Parent Shares on the date of purchase. As used herein, the "Current Market Price" of the Parent Shares as of any date shall mean the average of the latest sale prices of the Parent Common Stock as reported on the principal exchange upon which the Parent Common Stock is then trading (including the Nasdaq National Market) for the 20 trading days immediately preceding the fifth trading day prior to such date, or in the event that no sale has taken place on any one or more of such 20 trading days, the average of the highest reported bid and lowest reported asked quotations on such exchange for such day shall be used; or if the Parent Common Stock is not then listed on an exchange or on the Nasdaq National Market, the Current Market Price shall mean the average of the highest reported bid and lowest reported asked prices for the Parent Common Stock as reported by Nasdaq for such 20 trading days. (e) If, during any twelve-month period beginning on each of the first, second, third, fourth and fifth anniversaries of the Closing Date, the Current Market Price of the Parent Common Stock shall be less than $9.79 for at least five consecutive days, then Seller shall have the right to require Buyer to purchase from Seller, upon 60 days' notice from Seller, a number of Parent Shares that does not exceed the Cap Number (reduced by the number of Parent Shares, if any, Transferred during such 12-month period pursuant to Sections 1.4(c) and (d) hereof) at a price of $9.79 per Parent Share. (f) If, at any time prior to the date that any of the Parent Shares may be sold pursuant to Rule 144 (or any successor rule), Buyer shall file a registration statement (other than on Form S-4, Form S-8 or any successor form) registering shares of the Parent Common Stock having gross proceeds of at least $30,000,000 with the Securities and Exchange Commission, then Buyer shall give Seller at least ten days' prior written notice of the filing of such - 5 - registration statement. If requested by Seller within ten days after receipt of any such notice, Buyer shall register pursuant to such registration statement a number of Parent Shares requested to be registered by Seller that does not exceed 50% of the number of shares issued and issuable to Seller hereunder, calculated after giving effect to any then applicable reduction in the Holdback Share Consideration, concurrently with the registration of the other securities being registered pursuant to such Registration Statements. The expenses of such registration shall be borne by Buyer; provided, that Seller shall pay any discounts and commissions due any underwriters, brokers and/or dealers in connection with the sale of any Parent Shares owned by him pursuant to such registration statement and the fees and expenses of counsel to Seller, if any. Notwithstanding the foregoing, if the managing underwriter of any such offering shall advise Buyer that, in its opinion, the distribution of all or a portion of the Parent Shares requested to be included in the registration statement concurrently with the other securities being registered could materially adversely affect the distribution of the Parent Shares or any such other securities, then Seller shall register only such number of Parent Shares, if any, as such underwriter determines would not materially adversely affect the distribution of the Securities being registered. In connection with any such registration, Buyer shall comply with the requirements of the Company or the managing underwriter, if any, with respect to such registration and related matters, including, without limitation, any "lock-up" requirements. Notwithstanding the foregoing provisions of this Section 1.4(f), Buyer shall not be required to effect any registration of the Parent Shares, to the extent such registration would conflict with other registration rights granted by Buyer. 1.5 Holdback of Parent Shares. The amount of the Holdback Share Consideration shall be subject to adjustment pursuant to Section 1.6 hereof and shall further be subject to - 6 - reduction in an amount, if any, equal to the amount set off from time to time by Buyer (the "Indemnity Holdback") against the Holdback Share Consideration in respect of any claims by Buyer or any other party entitled to indemnification pursuant to Sections 5.1 and 5.3 hereof (an "Indemnity Claim") and, in any such instance, Buyer shall deliver to Seller on each of the first, second and third anniversaries of the Closing Date a number of Parent Shares representing one-third of the aggregate Holdback Share Consideration paid or payable hereunder, as so adjusted and/or reduced. For purposes of determining the number of Parent Shares subject to the Indemnity Holdback, the Parent Shares shall be valued at the Closing Market Price. Notwithstanding the foregoing provisions of this Section 1.5, on one occasion during the twelve-month period following the second anniversary of the Closing Date, Seller may, upon 30 days' notice to Buyer, require Buyer to deliver to Seller any or all of the Parent Shares by payment to Buyer of an amount per each such Parent Share equal to the Closing Market Price. In such case, on the third anniversary of the Closing Date, Buyer shall pay Seller an amount in cash equal to the amount, if any, by which the amount paid by Seller pursuant to the preceding sentence exceeds the amount of all Indemnity Holdbacks at such date. If there are any Indemnity Claims, then upon the later of the first, second or third anniversary of the Closing Date, as the case may be Buyer shall deliver to Seller a number of Parent Shares determined in accordance with Section 1.2(b) hereof, with an aggregate Closing Market Price equal to the amount, if any, by which the Holdback Share Consideration then due Seller exceeds the amount of all Indemnity Holdbacks; provided that if the amount of all Indemnity Holdbacks exceeds the amount of outstanding Indemnity Claims on the date all such Indemnity Claims are finally resolved (as evidenced either by an agreement of Buyer and Seller or by the entry of a final, non-appealable order by a court of competent jurisdiction) then, within ten business days - 7 - following such final resolution, Buyer shall deliver to Seller a number of Parent Shares (calculated in accordance with the second sentence of this Section 1.5), representing the amount of the additional Holdback Share Consideration due Seller, which shall be equal to the excess of all Indemnity Holdbacks over the final amount of the Indemnity Claims. 1.6 Post-Closing Adjustment. (a) Within 120 days following the Closing Date, Buyer shall prepare or cause to be prepared and delivered to Seller a statement (the "Closing Statement") calculated, to the extent applicable, in accordance with generally accepted accounting principles consistently applied ("GAAP") of (i) the aggregate amount of open orders of the Companies; (ii) the aggregate value of the inventory of the Companies, net of reserves for damaged, obsolescent and excess inventory; (iii) the aggregate amount of the trade accounts payable of the Companies; and (iv) the aggregate net amount of the accounts receivable assigned to the Companies' factor, in each case, calculated as of the Closing Date. The Closing Statement shall become final and binding upon the parties unless Seller gives written notice of disagreement (a "Notice of Disagreement") to Buyer within ten days following receipt thereof. Any such Notice of Disagreement shall specify in reasonable detail the nature of any disagreement so asserted. During a period of 20 days following the aforesaid ten-day period, Buyer and Seller shall attempt to resolve in writing any Notice of Disagreement. If at the end of such 30-day period, Buyer and Seller have failed to reach written agreement with respect to all of such matters, then all such matters as specified in any Notice of Disagreement as to which such written agreement has not been reached (the "Disputed Matters") shall be arbitrated in New York, New York by a third party independent accounting firm mutually acceptable to Buyer and Seller or, if the parties do not agree on an accounting firm at the end of such 30-day period, an accounting firm selected by the American Arbitration Association (the "Arbitrator"). Costs and - 8 - fees of the Arbitrator shall be allocated between Seller and Buyer in the same proportion that the aggregate amount of the disputed items so submitted to the Arbitrator which is unsuccessfully disputed by each such party (as finally determined by the Arbitrator) bears to the total amount of such disputed items submitted to the Arbitrator. (b) In the event that (i) the aggregate amount of the open orders of the Companies, as set forth on the Closing Statement (or as finally determined by the Arbitrator) (the "Order Amount"), is less than $9,500,000 (the "Order Floor Amount"), then the Holdback Share Consideration shall be reduced by $.25 for each $1.00 by which the Order Floor Amount exceeds the Order Amount; (ii) the aggregate value of the inventory of the Companies, as set forth on the Closing Statement (or as finally determined by the Arbitrator) (the "Inventory Amount"), is less than $5,500,000, then the Holdback Share Consideration shall be reduced by the amount by which $5,500,000 exceeds the Inventory Amount; (iii) the aggregate amount of the trade accounts payable, as set forth on the Closing Statement (or as finally determined by the Arbitrator) (the "Payables Amount") exceeds $4,500,000, then the Holdback Share Consideration shall be reduced by an amount equal to such excess; and (iv) the aggregate net amount of the accounts receivable assigned to the Companies' factor, as set forth in the Closing Statement (or as finally determined by the Arbitrator) (the "Receivables Amount"), is less than $4,210,000, then the Holdback Share Consideration shall be reduced by the amount by which $4,210,000 exceeds the Receivables Amount; provided that any amounts otherwise due Buyer pursuant to this Section 1.6(b) shall be reduced by an amount up to the sum of (A) $.25 for each $1.00 (if any) by which the Order Amount exceeds the Order Floor Amount; (B) the amount, if any, by which the Inventory Amount exceeds $5,500,000; (C) the amount, if any, by which the Payables Amount is less than $4,500,000; and (D) the amount, if any, by which - 9 - the Receivables Amount exceeds $4,210,000; provided, further, that in no event shall there be an adjustment in favor of Seller pursuant to this Section 1.6, and the amount of the increase in the Holdback Share Consideration provided for in the preceding proviso shall be limited to the amount of the reduction in the Holdback Share Consideration that would be in favor of Buyer but for such proviso. 2. Closing. 2.1 Closing. The Closing shall take place at the offices of Squadron, Ellenoff, Plesent & Sheinfeld, LLP, 551 Fifth Avenue, New York, New York 10176, at 10:00 a.m. local time on September 6, 1996; provided that the Closing and the Closing Date shall be deemed to have occurred as of September 3, 1996. 2.2 Documents to Be Delivered by Seller to Buyer. At the Closing, Seller shall deliver to Buyer the following: (a) the Seller Shares, other than the Lonestar Shares (as hereinafter defined), duly endorsed or with stock powers attached, in accordance with Section 1.1 hereof; (b) the Employment Agreement, duly executed by Seller; (c) the opinion of Silverberg Stonehill & Goldsmith, P.C., in form and substance reasonably satisfactory to Buyer and its counsel; (d) good standing certificates of each of the Companies issued by their respective jurisdictions of incorporation and each jurisdiction in which any Company is qualified to do business as a foreign corporation; (e) the release contemplated by Section 6.1 hereof; and (f) any documents or instruments required to be delivered by Seller pursuant to Section 6.4 hereof. - 10 - 2.3 Documents to Be Delivered by Buyer to Seller. At the Closing, Buyer shall deliver to Seller the following: (a) the Note, in accordance with Section 1.2 hereof; (b) the Employment Agreement, duly executed on behalf of Seller; (c) the opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP, in form and substance reasonably acceptable to Seller and his counsel; and (d) any documents or instruments required to be delivered by Buyer pursuant to Section 6.4 hereof. 3. Representations and Warranties of Seller. Seller hereby represents and warrants to, and agrees with, Buyer as follows: 3.1 Organization and Authority. Each of the Companies is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and lawful authority and all necessary Permits (as hereinafter defined) to carry on its business as it is currently being conducted and as proposed to be conducted, and to own, operate and lease its assets. Each of the Companies is duly qualified or licensed to do business as a foreign corporation and is in good standing as a foreign corporation in each jurisdiction in which the ownership, operation or lease of its assets or the conduct of its business or location of its properties requires qualification or licensing to do business as a foreign corporation, except for such failures which, when taken together with all other such failures, would not have an effect that is materially adverse to the working capital, business, assets, properties, liabilities (whether absolute, accrued, contingent or otherwise), results of operations, reserves, prospects or condition (financial or otherwise) of any of the Companies (a "Material Adverse Effect"). - 11 - 3.2 Agreement Binding. This Agreement constitutes, and each document and instrument contemplated by this Agreement to be executed by Seller when executed and delivered in accordance with the provisions hereof shall constitute, the valid and legally binding obligation of Seller, enforceable against Seller in accordance with its terms. 3.3 Freedom to Contract. The execution, delivery and performance of this Agreement by Seller and the consummation by Seller of the transactions contemplated hereby will not: (a) violate or conflict with any provision of the certificate of incorporation or by-laws of any Company or any amendments thereto or restatements thereof; (b) violate any of the terms, conditions or provisions of any law, rule, statute regulation, order, writ, injunction, judgment or decree of any court, governmental authority or regulatory agency; or (c) to the best of Seller's knowledge and belief, conflict with or result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, indenture, debenture, security agreement, trust agreement, lien, mortgage, lease, agreement, license, franchise, permit, guaranty, joint venture agreement or other agreement, instrument or obligation, oral or written, to which Seller or any Company is a party (whether as an original party or as an assignee or successor) or by which Seller or any Company or any of their respective properties is bound. No governmental authorization, approval, order, license, Permit, franchise or consent, and no registration, declaration or filing with any court, governmental department, commission, authority, board, bureau, agency or other instrumentality, is required in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by Seller. - 12 - 3.4 Capitalization; Subsidiaries; Debt. (a) The authorized capital stock of each Company is as set forth on Schedule 3.4 hereto, and the Seller Shares represent all of the issued and outstanding shares of such capital stock. The Seller Shares are validly issued, fully paid and nonassessable, with no personal liability attached to the ownership thereof. (b) As of the date hereof, no shares of Common Stock are held in the treasury of any Company and there are no outstanding (i) securities convertible into or exchangeable for capital stock of any Company; (ii) options, warrants or other rights to purchase, redeem, repurchase or subscribe to capital stock of any Company or securities convertible into or exchangeable for capital stock of any Company; or (iii) contracts, commitments, agreements, understandings or arrangements of any kind, including, without limitation, any stock option plans, relating to the issuance of any capital stock of any Company, any such convertible or exchangeable securities or any such options, warrants or rights. (c) None of the Companies owns, directly or indirectly, any capital stock or other equity securities of any corporation or has any direct or indirect ownership interest in any business (other than the Business, as hereinafter defined) or entities, including, without limitation, any limited liability company, partnership, or joint venture. None of the Companies is or has engaged in or conducted at any time any business other than the business of manufacturing, marketing, and selling women's, men's and children's sweaters and knitwear and men's and women's cut and sewn garments (the "Business"). (d) Except as set forth on Schedule 3.4 hereto, none of the Companies has any debt, including without limitation, any long-term or funded debt or bank loans, other than trade payables incurred in the ordinary course of business. - 13 - 3.5 Financial Statements. (a) The combined balance sheets of Fashion and The Sweater Company, Inc. ("Sweater"; Sweater and Fashion are sometimes hereinafter referred to as the "Principal Companies") as at August 31, 1995 and the related statements of income, retained earnings and changes in financial position for the year then ended, including the footnotes thereto, certified by Rashba & Pokart, P.C., independent certified public accountants to the Principal Companies, which have been delivered to Buyer (the "Audited Financial Statements") and the combined statements of income for the Principal Companies for the nine-month period ended May 31, 1996, have been prepared on behalf of Seller and delivered to Buyer (the "Interim Income Statement"). The Interim Income Statement has been prepared by the Principal Companies based on their books and records and on an estimate of inventory. The Audited Financial Statements have been prepared in accordance with GAAP, and fairly present the financial condition, results of operations and cash flows of the Principal Companies as of the dates thereof and for the periods presented; provided, however, that any interim financial statements are and shall be subject to normal year-end adjustments. (b) The accounting and financial records of each of the Companies have been prepared and maintained in accordance with sound bookkeeping practices. Each of the Companies maintains systems of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. - 14 - 3.6 Absence of Undisclosed Liabilities. Except as set forth on Schedule 3.6, as at the date of the Audited Financial Statements, neither of the Principal Companies had any direct or indirect indebtedness, liability, claim, loss, damage, deficiency, obligation or responsibility, known or unknown, fixed or unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise, including, without limitation, liabilities on account of taxes, other governmental charges or lawsuits brought, liabilities in respect of employee matters (including, without limitation, and sick pay) whether or not of a kind required by GAAP to be set forth on a financial statement ("Liabilities"), which were not fully and adequately reflected on the Audited Financial Statements. Except as set forth on Schedule 3.6, none of the Companies has any Liabilities, other than (i) Liabilities fully and adequately accrued for on the books and records of such Company; and (ii) in the case of the Principal Companies, those incurred since May 31, 1996 in the ordinary course of business. To the best knowledge and belief of Seller, there are no circumstances, conditions, events or arrangements which may hereafter give rise to any Liabilities of any of the Companies except in the ordinary course of business. 3.7 No Material Adverse Change. Since August 31, 1995, there has been no change or changes that result in or cause, or have a reasonable likelihood of causing a Material Adverse Effect (a "Material Adverse Change") with respect to either of the Principal Companies, and to the best knowledge and belief of Seller, no Material Adverse Change is threatened with respect to any Company, nor has there been any damage, destruction or loss materially affecting the working capital, business, assets, properties, Liabilities, results of operations, reserves, prospects or condition (financial or otherwise) of any Company, whether or not covered by insurance. - 15 - 3.8 Real Estate. Schedule 5.8 hereto sets forth a list and summary description of all real property leased or used by any Company (the "Premises"). There are no (i) options held by any of the Companies or contractual obligations on the part of any of the Companies to purchase or acquire any interest in real property; or (ii) options granted by any of the Companies or contractual obligations on the part of any of the Companies to sell or dispose of any interest in real property. A true and complete copy of each lease, sublease or other agreement with respect to the Premises has been delivered by Buyer. Each such lease, sublease and other agreement is in full force and effect and no Company has received any notice of any default thereunder. The leasehold interests of the Companies are not subject to any Liens (as hereinafter defined). None of the Companies owns any real property. The Premises are used exclusively in connection with the Business. 3.9 Title to and Condition of Assets; Liens, etc. Except as set forth on Schedule 3.9, each of the Companies has good title to all of its assets and properties free and clear of any mortgage, pledge, security interest, title defect or objection, lien, charge or encumbrance of any kind, including without limitation, any lease, license or other right of occupancy, possession or use, or any conditional sales contract or other title or interest retention arrangement (collectively, "Liens"), except for Liens for current Taxes not yet due (such Liens being collectively referred to herein as the "Permitted Liens"). Except as set forth on Schedule 3.9, each of the Companies holds good and transferable leaseholds in all of the equipment and machinery leased by it, in each case under valid and enforceable leases. No default has been declared with respect to any lease with respect to any item of equipment and machinery leased by any Company, and, to the best of Seller's knowledge and belief, no event has occurred that constitutes or with due notice or lapse of time or both would constitute a default under any such lease. The equipment and - 16 - machinery owned and leased by each of the Companies are sufficient and adequate to carry on the Business as presently conducted by the Company, and all items thereof are in good operating condition and repair, ordinary wear and tear excepted. Schedule 3.9 hereto sets forth a true and complete listing of each of the assets and properties owned or leased by any Company having a net book value or annual lease cost, as the case may be, as of August 31, 1996 in excess of $5,000. Except for inventory in transit and at contractors, all of such assets and properties are located at the Premises. All such assets and properties are the property of the Companies, except as set forth on Schedule 3.9. No person or entity has any rights to purchase any of the assets or properties of any Company, or any interest therein or portion thereof, including rights of first offer or first refusal. The assets, properties and rights owned by the Companies comprise all of the assets, properties and rights of every type or description, real, personal and mixed, tangible and intangible, necessary to, or used by Sellers in, the operation of the Business as conducted by the Companies as of May 31, 1996 and as of the date hereof. 3.10 Absence of Certain Changes. Except as set forth on Schedule 3.10 hereto, since August 31, 1995: (a) Each of the Companies has operated its business in the ordinary course consistent with past practice; (b) None of the Companies has entered into any transaction, commitment, contract or agreement, except in the ordinary course of business consistent with past practice; (c) There has not been any Material Adverse Change or any event that would materially impair Seller's ability to perform its obligations under this Agreement; (d) None of the Companies has entered into any transaction with (i) any director, officer or 5% shareholder of any Company or with any person or entity which controls, - 17 - is controlled by, or under common control with, any Company or such other person or entity ("Affiliate"); (ii) any person or entity that (A) was an Affiliate of any of the Companies within the past five years; (B) is or was related by blood or marriage to any Affiliate or such former Affiliate; or (C) is or was an Affiliate of any person described in clause (B) above; or (iii) any corporation, the capital stock of which is owned by an Affiliate of the Company (all such persons and entities described in clauses (ii) and/or (iii) above being collectively referred to as "Related Parties"); (e) None of the Companies has sold, assigned, leased or transferred any assets or properties, other than the sale of inventory in the ordinary course of business consistent with past practice; (f) None of the Companies has outside of the ordinary course of business (i) incurred any severance or termination pay liability to any employee; (ii) entered into any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) with any employee; or (iii) granted any increase in compensation, bonus or other benefits payable to any employee; (g) There has not been any damage, destruction or other casualty loss (whether or not covered by insurance) affecting any Company or its assets; (h) None of the Companies has waived or released any rights of substantial value, including cancellation of any material debt owed to, or accounts receivable of, any Company, other than in the ordinary course of business; (i) None of the Companies has written down the value of any tangible assets or written off as uncollectible any debt, notes or accounts receivable, or made any other write-downs or write-offs except write-downs and write-offs in the ordinary course of business in - 18 - accordance with GAAP, as reflected in the books and records of such Company, or made any change in its accounting methods or practices or made any change in depreciation or amortization policies or rates adopted by it; (j) None of the Companies has cancelled, waived or released any material right or claim; (k) None of the Companies has mortgaged, pledged, encumbered or otherwise created any Lien on any Asset; (l) None of the Companies has incurred any (i) obligation or liability (contingent or otherwise), except for normal trade or business obligations incurred in the ordinary course of business; or (ii) any indebtedness for borrowed money except for borrowings from factors in the ordinary course of business; (m) None of the Companies has materially changed any of its business policies, including without limitation, advertising, marketing, pricing, purchasing, personnel, sales, returns, budgets or product acquisition policies; (n) None of the Companies has incurred or committed to make any capital expenditure, except in the ordinary course of business and as reflected on the books and records of such Company; and (o) None of the Companies has agreed to do any of the foregoing. 3.11 Contracts, etc. (a) Schedule 3.11 hereto contains a complete and accurate list of all contracts, commitments, agreements or arrangements, leases, licenses, notes, purchase orders, letters of credit, instruments, obligations, commitments and options (whether any of the foregoing shall be written or oral, express or implied) to which any of the Companies is a party or pursuant to which any of its assets or properties is bound, except for purchase and sales - 19 - orders entered into in the ordinary course of business (collectively, "Contracts"), including, without limitation: (i) each Contract (or group of related Contracts) for the purchase or sale of goods or other personal, real or intangible property, or for the furnishing or receipt of services, involving more than $5,000 in the aggregate; (ii) each Contract relating to any indebtedness for borrowed money, including guarantees of or agreements to acquire any debt obligations of others; (iii) each Contract (or group of related Contracts) for the lease of any real property, and for lease of any personal property involving rental obligations in excess of $500 per month; (iv) each license agreement with third parties; (v) each Contract directly or indirectly restricting the ability of any Company to compete in any line of business with any person or entity; (vi) each Contract with directors, agents, salesmen and sales representatives or involving the payment of commissions or other consideration or discounts with respect to the sale of any Company's products; (vii) each Contract relating to joint ventures, partnerships and equity or debt investments; (viii) each Contract pursuant to which any business or entity was purchased or acquired; (ix) each Contract with any governmental agency; - 20 - (x) each Contract with an advertising or public relations agency, as well as any Contracts relating to marketing or co-marketing or tie-ins with other products or services; (xi) each standard form of purchase order or sales invoice; (xii) each Contract containing any exclusive arrangements which (A) are in favor of any or the Companies, or (B) restricting any of the Companies; (xiii) each Contract containing secrecy, non-competition or similar arrangements between any of the Companies and any of its current or former employees or consultants; (xiv) each Contract between any of the Companies and any Affiliate or Related Party; and (xv) each Contract with importers, customers or other brokers, warehouse operators, designers and manufacturers. Seller has heretofore delivered to Buyer true and complete copies of all written Contracts listed on Schedule 3.11, and a summary of the material terms of each oral Contract listed on such Schedule. (b) Except as set forth on Schedule 3.11 annexed hereto, and subject to Section 3.3 hereof, each of the Companies has complied with and performed all of its obligations required to be performed under all of the Contracts, and no default has been declared under any of them; and, to the best of Seller's knowledge and belief, no event has occurred which, with or without the giving of notice, lapse of time or both, would constitute a default thereunder in any material respect. None of the Companies has received written notice canceling, terminating or repudiating or exercising any option under any Contract and, to the - 21 - best knowledge and belief of Seller, no other party has failed to comply with or perform all of its obligations required to be performed under any Contract and no event has occurred which, with or without the giving of notice, lapse of time or both, would constitute a default by such party thereunder. In addition, except as disclosed on Schedule 3.11, Seller has (i) no reason to believe that the products and services called for by an unfinished contract having material value cannot be supplied by or to any Company that is a party to such contract in accordance with the time specifications of such Contract; and (ii) no knowledge of any facts or circumstances which make a default by any party to any Contract likely to occur subsequent to the date hereof. (c) All Contracts are currently enforceable and shall be enforceable after the Closing in accordance with their respective terms. 3.12 Employee Matters. (a) Except as set forth on Schedule 3.12(a) hereto, none of the Companies has any: (i) "employee benefit plans" ("Benefit Plans") within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); (ii) employment contracts (and any related agreements); (iii) severance arrangements, (iv) bonus or other incentive compensation arrangements; (v) fringe benefit or perquisite plans or arrangements; (vi) deferred compensation arrangements; (vii) non-competition arrangements; and (viii) other remunerative arrangement between any Company and current or former employees, and Seller has provided Buyer with a copy of any documents setting forth or otherwise related to any such matters. All benefit plans set forth on Schedule 5.12(a) are and have been maintained in full compliance with their terms and all requirements of applicable law. (b) There are no collective bargaining or other agreements between any Company and any union or other employee organizations, whether such agreements are with any - 22 - Company or with any independent contractor or management company providing employees to any Company. (c) None of the Companies nor any member of the Company Group has, at any time contributed to, or had an obligation to contribute to, any "employee pension benefit plan" within the meaning of Section 3(2) of ERISA which is subject to the requirements of Section 412 of the Code. As used in the preceding sentence, "Company Group" includes any person who is, or was at the relevant time, a member of the same "controlled group of corporations" as any Company (within the meaning of Section 414(b) of the Code), or under "common control" with any Company (within the meaning of Section 414(c) of the Code). None of the Companies has ever maintained or contributed to a multiemployer pension plan, as defined in Section 3(37) of ERISA, is liable for any withdrawal or partial withdrawal liability with respect to any multiemployer or pension plan and none of the Companies or Buyer will become liable therefor as a result of the transactions contemplated by this Agreement. (d) (i) Each of the Companies is in compliance in all material respects with all applicable laws, rules and regulations relating to the employment practices, terms and conditions of employment and wages and hours, including, without limitation, any laws, rules and regulations relating to the employment of illegal aliens or minors; (ii) there are no controversies pending or, to the best of the Seller's knowledge and belief, threatened, between any Company and any of its employees, prospective employees, former employees or retirees, except as set forth on Schedule 3.12(d) hereto; (iii) no unfair labor practice complaints have been filed against any Company or with the National Labor Relations Board (the "NLRB"), and none of the Companies has received any notice or communication reflecting an intention or a threat to file any such complaint; (iv) there is no labor strike, dispute, slow-down or stoppage - 23 - pending or threatened against any of the Companies; (v) no representation petition is pending or threatened with the NLRB against any of the Companies; (vi) each of the Companies has paid in full to all of its employees all wages, salaries, commissions, bonuses, benefits and other compensation due to such employees, including those arising under any policy, practice, agreement, program, statute or other law; and (vii) none of the Companies has closed any facility, effectuated any layoffs of employees or implemented any early retirement, separation or window program within its past three fiscal years, nor has any Company planned or announced any such action or program for the future. (e) Schedule 3.12(e) hereto contains a correct and complete list of (i) the names, job titles, current annual salary rates and bonus received or anticipated to be received in the 12-month period prior to, or following, the Closing Date of all of the employees of any of the Companies (the "Employees"); (ii) the names and amounts, if any, paid, accrued or to be paid to the Employees under any bonus, incentive or similar plans on and after January 1, 1996; and (iii) all vacation and sick pay accrued or anticipated to be accrued in respect of obligations of any Company to the Employees arising during calendar year 1996 and for any period thereafter. Except for the Benefit Plans, no Company has, by reason of past practices with respect to any Employees, established any rights on the part of any Employees to additional compensation with respect to any period after the Closing Date. Except as disclosed on Schedule 3.12(e) hereto, upon termination of the employment of any of the Employees, none of the Companies will incur any liability with respect to any of the Employees for severance pay or any other payments. To the best knowledge and belief of Seller, no Key Employee or group of employees has any plans to terminate employment with any Company. As used herein, the term "Key Employee" shall mean any employee that received in 1995, or will receive in 1996, - 24 - remuneration in excess of $50,000 from any of the Companies. Each of the Companies is in compliance with the requirements of the Worker Adjustment and Retraining Notification Act of 1988, as amended. 3.13 Litigation. Except as set forth in Schedule 3.13 hereto, there is no action, suit, inquiry, litigation, proceeding or investigation by or before any referee, mediator or arbitrator, or any court or governmental or other regulatory or administrative agency or commission, pending or, to the best of Seller's knowledge and belief, threatened, against any Company or relating to the assets of any Company or its business or any of its assets or properties nor, to the best of the Seller's knowledge and belief, are there any facts which would provide a basis for any such action, suit, inquiry, litigation, proceeding or investigation, which, in each case if adversely determined, could have a Material Adverse Effect or which in any manner challenges or seeks injunctive or other non-monetary relief or seeks to prevent, enjoin, alter or delay any transaction contemplated hereby. None of the Companies is subject to any judgment, order or decree entered in any lawsuit or proceeding which could have a Material Adverse Effect. 3.14 Permits. Each of the Companies has all necessary permits, licenses, franchises, approvals, consents, authorizations or orders of, and has made all required filings with, or notifications to, all governmental authorities, whether federal, state, local or foreign, or any other person (collectively "Permits"), including, without limitation, in connection with the Business as presently conducted or proposed to be conducted, the occupancy and use of the Premises and any other facilities at which the Business is conducted. Each such Permit is in full force and effect and none of the Companies has received notice that revocation is being considered with respect to any such Permit. - 25 - 3.15 Compliance with Law. None of the Companies is in violation of any applicable federal, state, local or foreign law, rule, regulation or ordinance, or any judgment, writ, decree, injunction, order or any other requirement of any court, administrative agency, bureau, board, commission, office, authority, department or other governmental or arbitral or other dispute resolution body or agency, and no notice has been received by any Company alleging any such violation. 3.16 Intellectual Property. Schedule 3.16 hereto lists or describes: (a) all United States and foreign copyright and patent registrations or pending applications and lists; (b) all United States and foreign trademarks, service marks, imprints, logos, trade dress, corporate, trade, assumed and other names, including those at common law and all registrations or applications to register the foregoing; and (c) all know-how, processes or trade secrets susceptible of legal protection, which (i) are owned by any Company; (ii) any person or entity has granted any Company the right to use (and all licenses, franchises and permits with respect thereto); or (iii) any Company has granted to any person or entity the right to use (and all licenses, franchises and permits with respect thereto) (collectively, the "Intellectual Property"). Except as set forth on Schedule 3.16 hereto, each of the Companies owns or, in the case of any Intellectual Property described in clause (ii) above, possesses adequate, enforceable and assignable licenses or other rights to use all of the Intellectual Property, free and clear of all Liens other than Permitted Liens, without any conflict with the rights of others. Except as set forth on Schedule 3.16, all registrations for the Intellectual Property are valid and subsisting and in full force and effect. There are no existing or, to the best of the Seller's knowledge and belief, threatened, claims of any third party for infringement of the copyrights, patents, trademarks or trade secrets or other Intellectual Property of others by any Company, or unfair - 26 - competition based on the use by, or challenging the ownership of or the right to use by, any Company of any of the Intellectual Property; none of the Intellectual Property has been abandoned by any Company or is subject to any outstanding order, decree, judgment, stipulation, injunction, written restriction or agreement restricting the scope or use thereof; and, to the best of the Seller's knowledge and belief, there are no infringing or diluting uses of the Intellectual Property. 3.17 Tax Matters. (a) For purposes of this Agreement, "Tax(es)" shall mean all taxes, assessments and other charges, including any interest, penalties, additions to tax or additional amounts that may become payable in respect thereof, imposed by any foreign, federal, state, local or other government or taxing authority, which taxes shall include, without limitation, all income taxes, payroll and employee withholding taxes, unemployment insurance, social security, sales and use taxes, excise taxes, franchise taxes, gross receipts taxes, occupation taxes, real and personal property taxes, stamp taxes, transfer taxes, workers' compensation and other obligations of the same or of a similar nature. (b) Each Company has timely filed with the appropriate taxing authorities all returns (including, without limitation, information returns and other information) in respect of Taxes required to be filed through the date hereof. The returns and other information filed are complete and accurate in all respects. None of the Companies has requested any extension of time within which to file returns (including, without limitation, information returns) in respect of any Taxes. Seller has delivered to the Purchaser complete and accurate copies of each Company's federal, state and local tax returns for the fiscal years ending August 31, 1992, 1993, 1994 and 1995. - 27 - (c) All Taxes for which any Company is or may be liable, in respect of periods beginning before the Closing Date, have been timely paid, or an adequate reserve (in conformity with generally accepted accounting principles) has been established therefor, as set forth in the Interim Financial Statements of the Principal Companies at the date thereof and on the books and records of each of the Companies on the date hereof, and none of the Companies has any liability for Taxes in excess of the amounts so paid or reserves so established. There are no Taxes for which any Company is or may become liable that will apply in a period or a portion thereof beginning on or after the Closing Date and that are attributable to income earned or activities of each Company occurring before the Closing Date. (d) No deficiencies for Taxes, have been claimed, proposed or assessed by any taxing or other governmental authority against any Company. There are no pending or, to the best knowledge and belief of Seller, threatened audits, investigations or claims for or relating to any liability in respect of Taxes, and there are no matters under discussion with any taxing or governmental authorities with respect to Taxes that in the reasonable judgement of any Company, or its counsel, is likely to result in additional liability for Taxes. There have been no audits of federal, state and local returns for Taxes by any taxing or governmental authorities and none of the Companies has been notified that any taxing or governmental authority intends to audit a return for any period. No extension of a statute of limitations relating to Taxes is in effect with respect to any Company. Except for a power of attorney in favor of Mahoney, Cohen, Rashba & Pokart, no power of attorney has been executed by any Company with respect to any matters relating to Tax which is currently in force. (e) There are no Liens for Taxes (other than for current Taxes not yet due and payable) on any Company's assets. - 28 - (f) None of the assets of any Company is property that is required to be treated as being owned by any other person pursuant to the so-called safe harbor lease provisions of former Section 168(f)(8) of the Code. (g) None of the Company's assets directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Code. (h) None of the Company's assets is "tax-exempt use property" within the meaning of Section 168(h) of the Code. (i) The transaction contemplated herein is not subject to the tax withholding provisions of Section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code or of any other provision of law. (j) All elections with respect to Taxes affecting the Company as of the date hereof are set forth on Schedule 3.16. The Company has not consented at any time under Section 341(f)(1) of the Code, to have the provisions of Section 341(f)(2) of the Code apply to any disposition of the Company's assets. The Company has not agreed to make, nor is required to make, any adjustments under Section 481(a) of the Code by reason of a change in the accounting method or otherwise. (k) There are no tax sharing agreements or similar arrangements with respect to or involving any Company. (l) None of the Companies is a party to any joint venture, partnership or other arrangement or contract which is treated as a partnership for federal income tax purposes. (m) Lonestar Sportswear Co., Inc. ("Lonestar") has properly elected to be, continues to be and has been since its date of incorporation, a corporation subject to Code Sections 1361 et seq., commonly referred to as a sub-chapter S corporation, and since that date - 29 - has always qualified and continues to qualify as a "small business corporation" as defined in Code Section 1361(b)(1) and under any corresponding provisions of applicable state, local or foreign law. Since Lonestar's date of incorporation, all past and current stockholders of Lonestar have reported on their personal income tax returns and have timely paid all of the income taxes with respect to all of the net taxable income of Lonestar that has been allocated to them in proportion to their stock holdings in Lonestar. Lonestar's election under Code Section 1362 has not been terminated. 3.18 Plant and Equipment. The Premises and the fixtures, furnishings and equipment therein are structurally sound with no material defects, are in good operating condition and repair and are adequate and suitable for the uses to which they are being put. No condition exists with respect to the Premises or any fixtures, furnishings and equipment therein which would prevent, or require repair or modification thereof as a prerequisite to, any Company's continued use of the Premises or any such other property in the Business except with respect to ordinary wear and tear and scheduled maintenance and repair that are not in the aggregate material in nature or in cost. Neither the Premises, nor the use thereof by any Company, nor any of the fixtures, furnishings and equipment therein or otherwise used or owned by any Company or the operation or maintenance thereof, violates any restrictive covenant or encroaches on any property owned by others in any manner which, if enforced, would have a Material Adverse Effect. The Premises do not violate any provisions of any applicable building code, fire, health or safety regulations, or other governmental ordinances, orders or regulations. The zoning classification of the Premises is such that the Premises may be used as currently used in the Business. Each of the Companies has complied with all applicable laws, ordinances, regulations, statutes, rules and restrictions relating to the Premises, or any part thereof. Neither - 30 - the whole nor any portion of the Premises nor any other assets of any Company are subject to any governmental decree or order to be sold or are being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor has any such condemnation, expropriation or taking been proposed. 3.19 Brokers. Except for Sales and Design Corp. of America, whose compensation will be paid by Seller, subject to Section 4.4 hereof, neither Seller nor any of the Companies has, directly or indirectly, employed or utilized the services of any investment banker, broker, finder, consultant or other intermediary in connection with this Agreement or the transactions contemplated hereby. 3.20 Insurance. Each of the Companies maintains insurance coverage and performance bonds on its properties and assets and with respect to its employees and operations, covering risks which are customarily insured against by businesses similar to the Business. Schedule 5.20 hereto contains a correct and complete description of all such performance bonds, policies or binders of insurance held by or on behalf of any Company, or providing coverage for any of its properties or assets (in each case specifying the insurer, the amount of coverage, the type of insurance, the risks insured, the expiration date, and the policy number). Except as set forth on Schedule 3.20 hereto, to the best of the Seller's knowledge and belief, no state of fact exists and no event has occurred which reasonably might form the basis of any claim against any Company or relating to the Business which might substantially increase the insurance premiums payable under or result in the cancellation or nonrenewal of any of the policies or binders listed on Schedule 3.20 hereto. - 31 - 3.21 Advertising, etc. To the best of the Seller's knowledge and belief, neither the advertising nor the promotional material used at any time by any Company contained or contains any material untrue or misleading statements or claims. 3.22 Transactions with Affiliates, etc. Except as described in Schedule 3.22 hereto, none of the Companies or any of their Affiliates or Related Persons owns, directly or indirectly, or has an interest, either of record or beneficially, in any business, corporate or otherwise, which is a party to any agreement, business arrangement or course of dealing with any Company, or any property or asset which is the subject of any agreement, business arrangement or course of dealing with any Company. Except as described in Schedule 3.22, no Company has any Liability to any Affiliate or Related Party and no Affiliate or Related Party has any Liability to any Company. 3.23 Restrictions. Neither Seller nor any Affiliate of any Company is a party to any agreement, commitment or arrangement which would, following the Closing, directly or indirectly, restrict any Company from carrying on the Business or any aspect thereof anywhere in the world. 3.24 Full Disclosure. All documents and other papers delivered by or on behalf of Seller or any Company in connection with this Agreement and the transactions contemplated hereby are authentic and, in all material respects, true and complete; and all contracts and other agreements or instruments included thereunder are valid, subsisting and binding on the parties thereto in accordance with their terms. The information furnished by or on behalf of Seller or any Company to Buyer in connection with this Agreement and the transactions contemplated hereby does not contain any untrue statement of a material fact and does not omit to state any material fact necessary to make the statements made therein not false or misleading. There is - 32 - no fact which Seller has not disclosed to Buyer in writing which has, or so far as Seller can now foresee, could have, a Material Adverse Effect or which would materially impair the ability of Seller to perform its obligations under this Agreement. 3.25 Prohibited Payments. None of the Companies, nor any of the officers, directors, employees, agents or Affiliates of any Company, has, directly or indirectly, (a) offered, paid or given, or agreed to pay or to give, to any person or entity, including any governmental official, employee, or agent or solicited, received or agreed to receive from any such person or entity, directly or indirectly, any money or anything of value (however characterized) for the purpose of or with the intent of obtaining or maintaining business or otherwise affecting, or in any manner relating to, the business, assets, properties, liabilities, reserves, condition (financial or otherwise), operations or prospects of any Company; or (b) established or maintained any unrecorded fund or asset for any purpose or made any false entry on the books and records of any Company for any reason, made or agreed to make, a reimbursement of any political gift or contribution made by any other person, to any candidate for federal, state, local or foreign office, which is in violation of any or law, or any rule, regulation or ordinance thereunder of any federal, state local or foreign jurisdiction or not properly and correctly recorded or disclosed on the Financial Statements, if applicable, or on the books and records of the Companies. 3.26 Environment, Health, and Safety. (a) Each of the Companies and their respective predecessors and Affiliates has complied with all laws (including rules and regulations thereunder) of federal, state, local, and foreign governments (and all agencies thereof) concerning the environment, public health and safety, and employee health and safety, and no charge, complaint, action, suit, proceeding, hearing, investigation, claim, demand, or notice has - 33 - been filed or commenced against any of them alleging any failure to comply with any such law or regulation. (b) None of the Companies has any Liability (and there is no basis related to the past or present operations, properties, or facilities of any of the Companies and their respective predecessors and Affiliates for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim, or demand against any of the Companies giving rise to any Liability) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, the Federal Water Pollution Control Act of 1972, the Clean Air Act of 1970, the Safe Drinking Water Act of 1974, the Toxic Substances Control Act of 1976, the Refuse Act of 1899, or the Emergency Planning and Community Right-to-Know Act of 1986 (each as amended), or any other law (or rule or regulation thereunder) of any federal, state, local, or foreign government (or agency thereof), concerning release or threatened release of hazardous substances, public health and safety, or pollution or protection of the environment. (c) None of the Companies has any Liability (and none of the Companies, their respective predecessors or Affiliates has handled or disposed of any substance, arranged for the disposal of any substance, or owned or operated any property or facility in any manner that could form the basis for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim, or demand (under the common law or pursuant to any statute) against any Company giving rise to any Liability) for damage to any site, location, or body of water (surface or subsurface) or for illness or personal injury. (d) None of the Companies has any Liability (and there is no basis for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim, or - 34 - demand against any Company giving rise to any Liability) under the Occupational Safety and Health Act, as amended, or any other law (or rule or regulation thereunder) of any federal, state, local, or foreign government (or agency thereof) concerning employee health and safety. (e) Each Company has obtained and been in compliance with all of the terms and conditions of all Permits and other authorizations which are required under, and has complied with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules, and timetables which are contained in, all federal, state, local, and foreign laws (including rules, regulations, codes, plans, judgments, orders, decrees, stipulations, injunctions, and charges thereunder) relating to public health and safety, worker health and safety, and pollution or protection of the environment, including laws relating to emissions, discharges, releases, or threatened releases of pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials or wastes into ambient air, surface water, ground water, or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials or wastes. (f) All properties and equipment used in the business of any Company have been free of asbestos, PCB's, methylene chloride, trichloroethylene, 1,2 trans-dichloroethylene, dioxins, dibenzofurans, and Extremely Hazardous Substances, within the meaning of Section 302 of the Emergency Planning and Community Right-to-Know Act of 1986, as amended. (g) No pollutant, contaminant, or chemical, industrial, hazardous, or toxic material or waste ever has been buried, stored, spilled, leaked, discharged, emitted, or released on any real property that any Company owns or ever has owned or that any Company leases or ever has leased. - 35 - 3.27 Accounts Receivable, etc. The accounts receivable, and amounts due from factors, of each Company, all of which are appropriately reflected in each Company's books and records, including the Financial Statements, as appropriate, arose in the ordinary course of business, are (i) good, current and collectible at the aggregate recorded amounts thereof, within the period and to the extent described in Schedule 3.27 hereto; and (ii) not subject to any counterclaims or setoffs. Schedule 3.27 hereto accurately sets forth the aging of each Company's accounts receivable as of August 31, 1996. 3.28 Suppliers and Customers. (a) Schedule 3.28(a) hereto sets forth a list of the twenty largest customers and the twenty largest suppliers of the Companies by dollar volume of revenues for the fiscal years ended August 31, 1995 and 1996. Since August 31, 1995, there has not been any material adverse change in the business relationship of any Company with respect to any such customer or supplier. (b) Schedule 3.28(b) hereto sets forth a true and complete list of all suppliers and customers of the Companies. Except as set forth on Schedule 3.28(a), no single supplier or customer is of material importance to any Company. The relationships of each of the Companies with its suppliers and customers are good commercial working relationships and no such supplier or customer has cancelled or otherwise terminated, or threatened in writing to cancel or otherwise terminate, its relationship with any Company or has during the last 12 months decreased materially, or threatened to decrease or limit materially, its services, supplies or materials to any Company or its usage of any Company's services or products, as the case may be. None of the Companies has any notice that any such supplier or customer intends to cancel or otherwise modify its relationship with any Company or to decrease materially or limit its services, supplies or materials to any Company or its usage of the services or products of any - 36 - Company, and the consummation of the transactions contemplated hereby will not, to the best knowledge and belief of Seller, adversely affect the relationship of any Company with any such supplier or customer. 3.29 Open Orders. Schedule 3.29 hereto sets forth all open orders for the sale of merchandise. Following shipment and invoicing of goods subject to such orders, Buyer will have the legal, valid, binding and enforceable right to collect from its customers the aggregate amount invoiced pursuant to such orders. There is no merchandise in the hands of any customers of any Company under an understanding that such merchandise would be returnable. 3.30 Bank Accounts; Deposits. (a) Schedule 3.30(a) sets forth the names and locations of all banks or other financial institutions in which the Company has accounts or safe deposit boxes, the numbers and descriptions of such accounts or safe deposit boxes and the names of all persons authorized to draw thereon or to have access thereto. (b) Schedule 3.30(b) hereto sets forth a true, correct and complete list of all advance payments, security deposits, letters of credit, prepaid expense items and credits of any Company as of August 31, 1996, except for those that do not exceed $5,000 individually or $10,000 in the aggregate, and there have been no changes to such items between such date and the Closing Date, other than in the ordinary course of business. Schedule 3.30(b) hereto also sets forth the name, telephone number and address of a responsible person at each vendor or supplier which is the beneficiary of any such bond or letter of credit. 3.31 Investment. The acquisition of the Parent Shares by Seller is being made for investment purposes only and not with a view toward resale or distribution thereof. 3.32 No Dividends, etc. Except as set forth on Schedule 3.32 hereto, since August 31, 1995, none of the Companies has made any dividend or distribution, bonus payment or payment - 37 - outside of the ordinary course of business to, or for the benefit of, Seller or any other Affiliate or Related Party. 4. Representations and Warranties of Buyer. Buyer represents and warrants to, and covenants and agrees with, Seller as follows: 4.1 Organization and Authority. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the full corporate power and authority to enter into and to perform this Agreement. Buyer is an indirect, wholly-owned subsidiary of Donnkenny, Inc. and is the principal operating subsidiary of Donnkenny, Inc. 4.2 Authorization of Agreement. The execution, delivery and performance of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby have been duly authorized by all necessary corporate action by or on behalf of Buyer, and no other corporate, stockholder or other proceedings by or on behalf of Buyer is necessary to authorize the execution, delivery or performance of this Agreement or the performance of the transactions contemplated hereby. This Agreement constitutes, and each document and instrument contemplated by this Agreement to be executed by Buyer, when executed and delivered in accordance with the provisions hereof shall be, the valid and legally binding obligations of Buyer, enforceable against Buyer in accordance with its terms. 4.3 Freedom to Contract. The execution, delivery and performance of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby will not: (a) violate or conflict with any provision of the certificate of incorporation or by-laws of Buyer or any amendments thereto or restatements thereof; (b) to the best of Buyer's knowledge and belief, violate any of the terms, conditions or provisions of any law, rule, statute regulation, - 38 - order, writ, injunction, judgment or decree of any court, governmental authority or regulatory agency; or (c) conflict with or result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, indenture, debenture, security agreement, trust agreement, lien, mortgage, lease, agreement, license, franchise, permit, guaranty, joint venture agreement or other agreement, instrument or obligation, oral or written, to which Buyer is a party (whether as an original party or as an assignee or successor) or by which Buyer or any of its properties is bound. No governmental authorization, approval, order, license, permit, franchise or consent, and no registration, declaration or filing with any court, governmental department, commission, authority, board, bureau, agency or other instrumentality, is required in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by Buyer. 4.4 Brokers. Buyer has not, directly or indirectly, employed or utilized the services of any investment banker, broker, finder, consultant or other intermediary in connection with this Agreement or the transactions contemplated hereby for which Seller will incur any liability. Buyer will pay $100,000 of the compensation due Sales and Design Corp. of America. 4.5 Parent Shares. The Parent Shares have been duly and validly authorized, and when issued to Seller in accordance with the terms hereof, shall be fully paid and nonassessable, with no liability attaching to the ownership thereof, and free from any Liens of every kind and nature whatsoever, other than any Liens created by Seller. - 39 - 5. Indemnification. 5.1 Indemnification by Seller. Seller shall indemnify and hold Buyer and its Affiliates, directors, officers, employees, agents, consultants, representatives, shareholders, successors and permitted assigns hereunder harmless against and in respect of any and all damages, losses, claims, actions, suits, proceedings, demands, assessments, judgments, penalties, liabilities, costs and expenses (including all fines, interest, legal fees and expenses and amounts paid in settlement) (collectively, "Losses"), that are sustained or incurred by any of them and arise from or relate to any of the following (each of which shall be a separate and distinct indemnity obligation): (i) any actual or alleged misrepresentation or breach of any warranty of Seller set forth herein; and (ii) the non-fulfillment of any covenant or agreement to be performed on the part of Seller hereunder; provided that no claim for indemnification shall be made under this Section 5.1 and Section 5.3 hereof until the aggregate amount of claims for indemnification under this Section 5.1 and/or Section 5.3 hereof exceeds $50,000; thereafter all claims in excess of such $50,000 may be asserted. 5.2 Indemnification by Buyer. Buyer shall indemnify and hold Seller and its Affiliates, heirs, devisees, personal representatives and permitted assigns hereunder harmless against and in respect of any and all Losses that are sustained or incurred by them and arise from or relate to any of the following (each of which shall be a separate and distinct indemnity obligation): (i) any actual or alleged misrepresentation or breach of any warranty of Buyer herein; and (ii) the nonfulfillment of any covenant or agreement to be performed on the part of Buyer hereunder. - 40 - 5.3 Tax Indemnification and Other Tax Matters. (a) Seller shall indemnify and hold harmless Buyer and each other party required to be indemnified pursuant to Section 5.1 hereof from and against any and all Taxes (i) with respect to all periods ending on or prior to the Closing Date; and (ii) with respect to any period beginning before the Closing Date and ending after the Closing Date, but only with respect to the portion of such period up to and including the Closing Date (such portion shall be referred to herein as the "Pre-Closing Partial Period" and the portion of such period after the Closing Date shall be referred to herein as the "Post-Closing Partial Period"). Notwithstanding the foregoing, Seller shall not be required to indemnify the Purchaser for Taxes to the extent of the reserves set forth on the books and records of the Companies are of August 31, 1996. (b) Any Taxes for a period including a Pre-Closing Partial Period and a Post- Closing Partial Period shall be apportioned between such Pre-Closing Partial Period and such Post-Closing Partial Period, based, in the case of real and personal property Taxes, on a per diem basis and, in the case of other Taxes, on the actual activities, taxable income or taxable loss of the Company during such Pre-Closing Partial Period and Post-Closing Partial Period. (c) Each Company shall prepare and file all returns in respect of Taxes, for periods ending prior to or on the Closing Date (if the return is not filed before the Closing Date). Promptly after Buyer acquires actual knowledge of an amount of any Taxes payable by any Company with respect to any period ending on or before the Closing Date or a Pre-Closing Partial Period (except to the extent accrued on the books and records of the Companies prior to the Closing Date), Buyer shall give notice thereof to Seller. Seller shall pay the amount of such Taxes to Buyer within 30 days after the receipt of such notice. Seller and Buyer agree to give prompt notice to each other of any proposed adjustment to Taxes for periods ending on or prior to the Closing Date or any Pre-Closing Partial Period. - 41 - 5.4 Survival; Period of Indemnity. The representations, warranties, covenants and agreements of the parties contained in this Agreement, including the indemnification obligations, shall survive for a period of three years following the Closing; provided that the representations, warranties, covenants and agreements relating to Tax matters (including, without limitation, the provisions of Section 5.3) shall survive for ninety (90) days following the expiration of relevant statute of limitations with respect to any claims that could be asserted by any taxing authority. If any claim for indemnification has been asserted but not fully determined at a time when such indemnification would otherwise be time-barred, the period for indemnification in respect of such claim shall be extended until it is finally determined. 5.5 Notice to the Indemnitor. Promptly after the assertion of any claim by a third party or occurrence of any event which may give rise to a claim for indemnification from an indemnitor (the "Indemnitor") under this Section, an indemnified party (the "Indemnified Party") shall notify the Indemnitor in writing of such claim and, with respect to claims by third parties, advise the Indemnitor whether the Indemnified Party intends to contest same. 5.6 Rights of Parties to Settle or Defend. If the Indemnified Party determines not to contest such claim, the Indemnitor shall have the right, at its own expense, to contest and defend against such claim. If the Indemnified Party determines to contest such claim, the Indemnitor shall have the right to be represented, at its own expense by its own counsel and accountants, their participation to be subject to the reasonable direction of the Indemnified Party. In either case, the Indemnified Party shall make available to the Indemnitor and its attorneys and accountants, at all reasonable times during normal business hours, all books, records, and other documents in its possession relating to such claim. The party contesting any such claim shall be furnished all reasonable assistance in connection therewith by the other party. If the - 42 - Indemnitor fails to undertake the defense of or settle or pay any third party claim within ten days after the Indemnified Party has given written notice to the Indemnitor advising that the Indemnified Party does not intend to contest such claim, or if the Indemnitor, after having given such notification to the Indemnified Party, fails forthwith to defend, settle or pay such claim, then the Indemnified Party may take any and all necessary action to dispose of such claim including, without limitation, the settlement or full payment thereof upon such terms as it shall deem appropriate, in its sole discretion, subject to the following with respect to any proposed settlement thereof. 5.7 Settlement Proposals. (a) In the event the Indemnified Party desires to settle any such third-party claim (whether or not contested by the Indemnitor), the Indemnified Party shall advise the Indemnitor in writing of the amount it proposes to pay in settlement thereof (the "Proposed Settlement"). If such Proposed Settlement is unsatisfactory to the Indemnitor, it shall have the right, at its expense, to contest such claim by giving written notice of such election to the Indemnified Party within ten days after the Indemnitor's receipt of the advice of the Proposed Settlement. If the Indemnitor does not deliver such written notice within ten days after receipt of such advice, the Indemnified Party may offer the Proposed Settlement to the third party making such claim. If the Proposed Settlement is not accepted by the party making such claim, any new Proposed Settlement figure which the Indemnified Party may wish to present to the party making such claim shall first be presented to the Indemnitor who shall have the right, subject to the conditions hereinabove set forth in this Section, to contest such claim. In all such events, the Indemnitor shall indemnify the Indemnified Party and hold it harmless against and from any and all costs of defense, payment of settlement, including reasonable attorneys' fees and expenses, incurred in connection therewith. - 43 - (b) The Indemnitor may settle any third-party claim only if it has agreed to contest the claim in accordance with Section 5.7(a) above. If any Indemnitor desires to settle any third-party claim, the Indemnitor shall not, without the Indemnified Party's prior written consent, (i) settle or compromise such proceeding, claim or demand, or consent to the entry of any judgment which does not include as an unconditional term thereof the delivery by the claimant or plaintiff to the Indemnified Party of a written release from all liability in respect of such proceeding, claim or demand; or (ii) settle or compromise any such proceeding, claim or demand, in any manner that may adversely affect the Indemnified Party other than as a result of money damages or other money payments which are fully indemnified against by the Indemnitor. 5.8 Reimbursement. At the time that the Indemnified Party shall suffer a loss because of a breach of warranty, representation or covenant by the Indemnitor or at the time the amount of any liability on the part of the Indemnitor under this Section is determined (which in the case of payments to third persons shall be the earlier of (i) the date of such payments or (ii) the date that a court of competent jurisdiction shall enter a final judgment, order or decree (after exhaustion of appeal rights establishing such liability), the Indemnitor shall forthwith, upon notice from the Indemnified Party, pay to the Indemnified Party the amount of the indemnity claim; provided, that if Buyer (or any other party required to be indemnified pursuant to Section 5.1 or 5.3) is the Indemnified Party, the Buyer may, in its sole discretion and without limitation as to its other rights under this Agreement, elect to offset any such amount against the amount, if any, of the then unpaid Holdback Share Consideration. If any amount due pursuant to the preceding sentence is not paid forthwith, the Indemnified Party may, at its option, take legal action against the Indemnitor for reimbursement in the amount of its - 44 - indemnity claim. For purposes hereof the indemnity claim shall include the amounts so paid (or determined to be owing) by the Indemnified Party together with costs and reasonable attorney's fees and interest on the foregoing items at the rate of 6% per annum from the date the indemnity claim is due from the Indemnified Party to the Indemnitor, as hereinabove provided, until the indemnity claim shall be paid. 5.9 Characterization as Price Adjustment. The parties agree that any payment made under this Section 10 shall be treated by such parties as an adjustment to the Purchase Price. 5.10 Expenses; Transfer Taxes. Seller and Buyer shall, except as otherwise specifically provided herein, bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of agents, representatives, counsel and accountants. All sales, transfer or other similar Taxes or charges incurred in connection with the purchase and sale of the Seller Shares shall be borne by Seller. 6. Miscellaneous. 6.1 Release by Seller. Effective immediately after the Closing, Seller fully and unconditionally releases and discharges all claims and causes of action which he or his heirs, devisees, personal representatives, or assigns ever had, now have, or hereafter may have against Buyer and any Company arising out of any facts or circumstances existing prior to the Closing, and, when acting as such, their respective officers, directors, employees, counsel, agents, and stockholders, in each case past, present, or as they may exist at any time after the date of this Agreement, and each person, if any, who controls, controlled, or will control any of them within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, except - 45 - claims and causes of action arising out of, based upon, or in connection with this Agreement or the Employment Agreement. 6.2 Affiliate Obligations. From and after the Closing, Seller shall use his best efforts to obtain the release or discharge prior to January 13, 1997, at no cost to Buyer or the Companies, of any and all Liabilities of any Company to any Affiliates or Related Parties (collectively, "Affiliate Liabilities"). If any Affiliate Liabilities have not been so released or discharged on or prior to January 13, 1997, the principal amount of the Note shall be reduced by, and Buyer shall deposit in an escrow account to be maintained by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, pursuant to an Escrow Agreement of even date herewith, an amount of funds equal to the aggregate amount of such Affiliate Liabilities. Interest in respect of any such escrowed principal amount shall be payable in accordance with such Escrow Agreement. For purposes of such escrow, any unliquidated or contingent Affiliate Liabilities shall be deemed to be in an amount equal to the maximum amount of such Affiliate Liabilities upon such liquidation or the happening of any such contingency. Such escrowed funds shall be applied to pay or discharge any and all such Affiliate Liabilities, and any such funds deposited in escrow in respect of any Affiliate Liability shall be released to Seller from time to time upon the release of such Affiliate Liability in accordance with the terms of the Escrow Agreement. In addition, Seller shall use its best efforts on behalf of Fashion as promptly as practicable following the Closing Date, to buy out the partners to the partnership related to the menswear operations of Fashion or to sell the assets owned by the partnership to such other partners upon terms that are commercially reasonable to Fashion. 6.3 Lonestar Shares. Buyer and Seller agree that all of the shares of stock of Lonestar, duly endorsed for transfer or with stock powers attached (collectively, the "Lonestar Shares") - 46 - shall be held in escrow by Seller from the Closing Date until January 13, 1997. If, on such date, Buyer is satisfied that each of the following conditions have been met as to Lonestar: (i) each of the representations and warranties contained herein as to Lonestar is true and correct in all material respects as of the date hereof and as of such date; (ii) there is no action, suit, inquiry, litigation, proceeding or investigation by or before any referee, mediator or arbitrator, or any court or governmental or other regulatory or administrative agency or commission, pending or threatened against or in respect of Lonestar; (iii) the shares of capital stock of Lonestar shall be wholly owned by Weiss or his spouse; and (iv) there has been no Material Adverse Charge with respect to Lonestar since the Closing Date, then the Lonestar Shares shall be released from escrow to Buyer upon such date. If Buyer determines in good faith that such conditions have been met and so notifies Seller, then the Lonestar Shares shall not be transferred to Buyer, the principal amount of the Note shall be reduced by an amount (the "Lonestar Reduction") equal to the lesser of (A) $500,000 and (B) the cost to the Companies of acquiring, constructing, equipping and furnishing facilities substantially comparable to Lonestar's current facilities. No interest shall be payable to Seller in respect of the Lonestar Reduction. From and after the Closing Date, Seller shall use its best efforts to satisfy the conditions set forth in the second sentence of this Section 6.3. 6.4 Further Assurances. (a) From and after the Closing, Seller and Buyer agree to execute and deliver such further documents and instruments and to do such other acts and things as Buyer or Seller, as the case may be, may reasonably request in order to effectuate the transactions contemplated by this Agreement. Subject to Section 5, in the event any party shall be involved in litigation, threatened litigation or government inquiries with respect to a matter involving (i) any - 47 - transaction contemplated under this Agreement; or (ii) any fact, situation, circumstance, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction involving any Company, including, without limitation, any Tax audit, the other parties shall also make available to such party, at reasonable times and subject to the reasonable requirements of its or his own business, such of its or his information as may be relevant to such matter; provided the party requesting such information shall reimburse the providing party for its or his reasonable costs for employee time incurred in connection therewith if more than one business day is required. Following the Closing, the parties will cooperate with each other and their respective counsel in connection with Tax audits and in the defense of any legal proceedings, and each party shall provide such testimony and access to its books and records to the party involved in any such audit or proceedings as may be necessary in connection with the contest or defense, consistent with the other provisions for defense of claims provided in Section 10, to the extent such cooperation does not cause unreasonable expense, unless such expense is borne by the requesting party. (b) Buyer intends to engage Mahoney, Cohen, Rashba & Pokart to audit the financial statements of the Companies as of the Closing Date. Seller shall cooperate with Buyer, as may be necessary or appropriate, in connection with such audit. 6.5 Notices of Certain Events. Following the Closing, the Seller shall promptly notify Buyer of: (a) any notice or other communication of which Seller has knowledge from any person alleging that the consent of such person is or may be required in connection with the transactions contemplated by this Agreement; - 48 - (b) any notice or other communication of which Seller has knowledge from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement; (c) any actions, suits, charges, complaints, claims, investigations or proceedings commenced or, to the Seller's best knowledge and belief, threatened against, relating to, involving or otherwise affecting, any Company, its properties or assets which, if pending on the date of this Agreement, would have been required to be disclosed pursuant to Section 3 hereof or which relates to the consummation of the transactions contemplated by this Agreement; (d) any Material Adverse Change or any event that would materially impair Seller's ability to perform its obligations under this Agreement; (e) any notice of termination, voiding or reduction of any insurance policy, of any Company, or any written notice regarding any material insurance claim; or (f) any information concerning any event subsequent to the date of this Agreement which is necessary to supplement the information contained in or made a part of the representatives and warranties contained herein, including the Schedules hereto, or delivered by Seller or any Company pursuant to any of the covenants contained herein, it being understood and agreed that the delivery of such information shall not in any manner constitute a modification of the representations, warranties and covenants originally made hereunder. 6.6 Consent to Jurisdiction and Service of Process. Any legal action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby may be instituted in any state or federal court location in New York County, State of New York, and each party agrees not to assert, by way of motion, as a defense, or otherwise, in any such - 49 - action, suit or proceeding, any claim that it is not subject personally to the jurisdiction of such courts, that its property is exempt or immune from attachment or execution, that the action, suit or proceeding is brought in an inconvenient forum, that the venue of the action, suit or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court, and hereby waives any offsets or counterclaims in any such action, suit or proceeding. Each party further irrevocably submits to the jurisdiction of any such court in any such action, suit or proceeding. Any and all service of process and any other notice in any such action, suit or proceeding shall be effective against any party if given personally or by registered or certified mail, return receipt requested, or by any other means of mail that requires a signed receipt, postage prepaid, mailed to such party as herein provided, or by personal service on such party with a copy of such process mailed to such party by first class mail or registered or certified mail, return receipt requested, postage prepaid. Nothing herein contained shall be deemed to affect the right of any party to serve process in any manner permitted by law or to commence legal proceedings or otherwise proceed against any other party in any jurisdiction other than New York. 6.7 Entire Agreement. This Agreement (together with the Schedules and Exhibits hereto) contains, and is intended as, a complete statement of all of the terms of the arrangements between the parties with respect to the matters provided for, and supersedes any previous agreements and understandings between the parties with respect to those matters. 6.8 Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with the laws of the State of New York, without regard to its principles of conflicts of law. - 50 - 6.9 Headings. The section headings of this Agreement are for reference purposes only and are to be given no effect in the construction or interpretation of this Agreement. 6.10 Notices. All notices and other communications under this Agreement shall be in writing and shall be either delivered personally, mailed by certified mail, return receipt requested, sent by recognized overnight delivery service or, to the extent receipt is confirmed, by telecopy, telefax, or other electronic transmission service to the parties at the following addresses (or to such other address as a party may have specified by notice given to the other party pursuant to this provision). Notice shall be deemed given upon receipt.: If to Seller, to: Mel Weiss c/o Fashion Avenue Knits, Inc. 1710 Flushing Avenue Ridgewood, New York 11385 Telecopy No.: (718) 456-9001 Confirmation No.: (718) 456-9000 with a copy to: Silverberg Stonehill & Goldsmith, P.C. 11 West 40th Street New York, New York 10018 Attention: Sheldon Silverberg, Esq. Telecopy No.: (212) 391-4556 Confirmation No.: (212) 730-1900 If to Buyer, to: Donnkenny Apparel, Inc. 1411 Broadway New York, New York 10018 Attention: Richard Rubin Telecopy No.: (212) 768-3974 Confirmation No.: (212) 730-7770 - 51 - with a copy to: Squadron, Ellenoff, Plesent & Sheinfeld, LLP 551 Fifth Avenue New York, New York 10176 Telecopy No.: (212) 697-6686 Confirmation No.: (212) 661-6500 6.11 Separability. If at any time any of the covenants or the provisions contained herein shall be deemed invalid or unenforceable by the laws of the jurisdiction wherein it is to be enforced or for any reason, such covenants or provisions in such jurisdiction shall be considered divisible as to such portion and such covenants or provisions shall become and be immediately amended and reformed to include only such covenants or provisions as are enforceable by the court or other body having jurisdiction of this Agreement in such jurisdiction and the parties agree that such covenants or provisions, as so amended and reformed, shall be valid and binding in such jurisdiction as though the invalid or unenforceable portion had not been included herein. 6.12 Amendment; Waiver. No provision of this Agreement may be amended or modified except by an instrument or instruments in writing signed by the parties hereto. Any party may waive compliance by another with any of the provisions of this Agreement. No waiver of any provision hereof shall be construed as a waiver of any other provision. Any waiver must be in writing. 6.13 Publicity. Seller and its Affiliates shall not issue any press release or public announcement of any kind concerning the transactions contemplated by this Agreement without the prior written consent Buyer. 6.14 Assignment and Binding Effect. None of the parties hereto may assign any of its or his rights or delegate any of its or his duties under this Agreement without the prior - 52 - written consent of the others; provided, that Buyer may assign any of its rights or delegate any of its duties (other than those relating to the issuance and registration of the Parent Shares) to any entity controlled by Buyer or to Donnkenny, Inc. All of the terms and provisions of this Agreement shall be binding on, and shall inure to the benefit of, the respective successors and permitted assigns of the parties. 6.15 No Benefit to Others. The representations, warranties, covenants and agreements contained in this Agreement are for the sole benefit of the parties hereto and their respective successors and assigns and they shall not be construed as conferring and are not intended to confer any rights on any other persons. 6.16 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and each party thereto may become a party hereto by executing a counterpart hereof. This Agreement and any counterpart so executed shall be deemed to be one and the same instrument. 6.17 Interpretation. Article titles, headings to sections and any table of contents are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation hereof. The Schedules and Exhibits referred to herein shall be construed with and as an integral part of this Agreement to the same extent as if they were set forth verbatim herein. The specification of any dollar amount in the representations and warranties contained in this Agreement or the inclusion of any specific item in any Schedule hereto is not intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and no party hereto shall use the fact of the setting of such amounts or the inclusion of any such item in any dispute or controversy between the parties as to whether any obligation, item or matter not described herein or included in a - 53 - Schedule is or is not material for purposes hereof. All references to the "knowledge" of any party shall mean actual knowledge following due inquiry and investigation. As used herein, "include", "includes" and "including" are deemed to be followed by "without limitation" whether or not they are in fact followed by such words or words of like import; "writing", "written" and comparable terms refer to printing, typing, lithography and other means of reproducing words in a visible form; references to a person are also to its successors and assigns; except as the context may otherwise require, "hereof", "herein", "hereunder" and comparable terms refer to the entirety hereof and not to any particular article, section or other subdivision hereof or attachment hereto; references to any gender include the other; except as the context may otherwise require, the singular includes the plural and vice versa; references to any agreement or other document are to such agreement or document as amended and supplemented from time to time; references to "Article", "Section" or another subdivision or to an "Exhibit" or "Schedule" are to an article, section or subdivision hereof or an "Exhibit" or "Schedule" hereto; and references to "generally accepted accounting principles" shall mean generally accepted accounting principles in the United States. Information disclosed in any Schedule to this Agreement shall be deemed disclosed in any other Schedule in which such information is required to be disclosed. - 54 - IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. /s/ Mel Weiss ------------------------------- Mel Weiss DONNKENNY APPAREL, INC. By: /s/ Richard Rubin ---------------------------- Name: Richard Rubin Title: President and Chief Executive Officer - 55 - EX-2 3 PROMISSORY NOTE PROMISSORY NOTE $8,000,000.00 As of September 3, 1996 FOR VALUE RECEIVED, DONNKENNY APPAREL, INC., a Delaware corporation with an address at 1411 Broadway, New York, New York 10018 ("Maker"), hereby promises to pay to the order of Mel Weiss ("Holder"), on January 13, 1996 (the "Maturity Date"), at such place as Holder may direct, in lawful money of the United States, the principal amount of EIGHT MILLION DOLLARS ($8,000,000.00), which principal amount shall be subject to reduction in accordance with paragraph 1 below, with interest payable on such principal amount at the rate of six percent (6%) per annum. This Note is being issued pursuant to the Stock Purchase Agreement of even date between Maker and Holder. Capitalized Terms used herein but not defined herein shall have the respective meanings set forth in the Stock Purchase Agreement. 1. The principal amount of this Note shall be reduced on the Maturity date in the amount, if any (the "Reduction Amount"), equal to the sum of (i) any and all Affiliate Liabilities that have not been released or discharged at no cost to Maker or the Companies on or prior to such date; and (ii) the Lonestar Reduction, if the Lonestar Shares have not been purchased by Maker on or prior to such date. No interest shall be payable on the Reduction Amount. Additionally the principal amount of this Note shall be reduced by the amount listed on the books of the Companies which are the subject of the Stock Purchase Agreement as owing to Holder or his family as of August 31, 1996 and which are not paid prior to the Maturity Date, with such reduction taking effect when determined. 2. In the event this Note is not timely paid in full, or in the event the Maker shall become insolvent or become unable to pay its debts as they mature, or shall file, or have filed against it, a petition in bankruptcy, then the outstanding balance then due hereunder (including principal and accrued interest) shall accelerate and become immediately due and payable, and shall thereafter accrue interest at the rate of twelve (12%) percent per annum, payable on demand. 3. Maker waives presentment, demand for payment, protest, notice of protest, notice of dishonor and all other notices under this Note. 4. This Note may not be assigned by Maker or Holder. 5. This Note shall be governed by the laws of the State of New York, without regard to its principles of conflicts of laws. This Note supersedes all prior agreements and understandings between the parties with respect to the subject matter hereof. This Note may not be changed or terminated orally. No modification, termination or attempted waiver of any of the provisions of this Note shall be valid unless in a writing signed by the party against whom the same is sought to be enforced. In the event of a conflict between the terms of this Note and the terms of the Stock Purchase Agreement, the terms of the Stock Purchase Agreement shall govern. [The balance of this page has been intentionally left blank.] - 2 - IN WITNESS WHEREOF, Maker has executed this Note as of the date written above. DONNKENNY APPAREL, INC. By: /s/ Richard Rubin ---------------------------------- Name: Richard Rubin Title: President and Chief Executive Officer - 3 - EX-3 4 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT AGREEMENT made and entered into as of September 3, 1996 between Donnkenny Apparel Inc., a Delaware corporation (the "Company"), and Mel Weiss ("Employee"). W I T N E S E T H : WHEREAS, pursuant to a Stock Purchase Agreement of even date herewith (the "Stock Purchase Agreement"), Employee is selling to the Company all of the outstanding shares of capital stock (the "Seller Shares") of Fashion Avenue Knits, Inc. ("Fashion"), The Sweater Company, Inc., Lonestar Sportswear Co., Inc. and Sitazi, Ltd. (Fashion and such other corporations (and any other subsidiaries or affiliates thereof sold to the Company) are collectively referred to herein as the "Fashion Companies"); and WHEREAS, Employee is currently employed by Fashion and has confidential knowledge of the business and affairs of the Fashion Companies; and WHEREAS, pursuant to the terms of the Stock Purchase Agreement, the execution and delivery of this Employment Agreement by Employee is a condition precedent to the obligation of the Company to acquire the Seller Shares; and WHEREAS, the Company desires to enter into this Employment Agreement with Employee, and Employee desires to be employed by the Company on the terms and conditions set forth in this Employment Agreement. NOW, THEREFORE, the parties hereto, in consideration of the premises and the mutual covenants herein contained, hereby agree as follows: 1. Term of Employment. Subject to the terms and conditions hereinafter set forth, the Company shall employ Employee and Employee shall be employed by the Company, or any subsidiary or affiliate of the Company as the Company shall from time to time select in accordance with Paragraph 2 hereof, for an employment term commencing as of September 3, 1996 and terminating at the end of the Company's fiscal year in November 1999 (the "Initial Term"); provided that, the Company may elect, by notice to Employee at least ninety (90) days prior to the expiration of the Initial Term, to extend this Agreement for an additional two-year term terminating at the end of the Company's fiscal year in November 2001 (the "Renewal Term"). The Initial Term (and the Renewal Term, if applicable) or such shorter period as may be contemplated by this Employment Agreement during which Employee shall be employed pursuant to this Employment Agreement is hereinafter called the "Term of Employment." 2. Scope of Employment. During the Term of Employment, Employee shall be employed as the President of Fashion or any subsidiary, affiliate or division of the Company that is a direct or indirect successor to the business of the Fashion Companies. In addition, Employee shall well and faithfully render and perform such other reasonable executive and managerial services commensurate with his position as may be assigned to him, from time to time, by or under the sole authority of the Board of Directors and Richard Rubin or his successor as the President of the Company. Employee will devote his full working time and efforts to the business and affairs of the Company, as now or hereafter conducted, and shall be at all times subject solely to the direction and control of the Board of Directors and Richard Rubin or his successor as the President of the Company. Employee shall render such services to the best of his ability and shall use his best efforts to promote the interests of the Company. Employee will not engage in any capacity or activity which is, or may be, contrary to the welfare, interest or benefit of the business now or hereafter conducted by the - 2 - Company. Notwithstanding the foregoing, Employee may continue the business of American Fashion Design as currently conducted; provided that Employee does not devote any significant time to such activities and that such activities do not conflict with or impede the performance by Employee of his obligations hereunder. Employee may also attend six Board meetings of Cyberform in each calendar year. 3. Location of Employment. Employee shall render his services primarily within the greater New York City metropolitan area. Notwithstanding the foregoing, Employee acknowledges and agrees that Employee's duties hereunder from time to time may include domestic and foreign travel outside such New York City area as the performance of Employee's duties may require of a nature as to locations consistent with past practice, but such travel will be at the Company's expense in accordance with the Company's travel policy. 4. Compensation. (a) As compensation for all services provided for herein, the Company will pay, or cause to be paid, to Employee, and Employee will accept, a salary (the "Salary") during the Term of Employment to be paid in regular installments in accordance with the Company's usual paying practices, but not less frequently than monthly, as follows: (i) commencing on the date hereof, the Salary shall be at the rate of $350,000 per annum; (ii) commencing on September 1, 1997, the Salary shall be at the rate of $400,000 per annum; (iii) commencing on September 1, 1998, the Salary shall be at the rate of $450,000 per annum; and (iv) commencing on September 1, 1999, the Salary shall be at the rate of $500,000 per annum. - 3 - (b) If for the fiscal year of the Company ending in November 1997 and for each fiscal year thereafter during the Term of Employment, Gross Profits (as hereinafter defined) equal or exceed the Target Number (as hereinafter defined), then Employee shall be entitled to a bonus in an amount equal to Employee's Salary per annum (as in effect prior to September 1 during such fiscal year), plus an amount equal to 20% of Gross Profits in excess of the Target Number (the "Bonus"). The Company shall determine the amount of Gross Profits and any Bonus due Employee, notify Employee of such determinations, and pay any Bonus within 120 days following the close of any fiscal year of the Company. If Employee terminates his employment with the Company or if his employment is terminated by the Company for cause (as hereinafter defined), no Bonus shall be due or payable to Employee for the balance of the Term of Employment. If this Employment Agreement is terminated by reason of death or disability, the Company shall pay to Employee the Bonus for the fiscal year during which such termination occurs, as determined herein, prorated by multiplying the Gross Profits for such fiscal year by a fraction, the numerator of which is the number of days of actual employment pursuant to this Employment Agreement and the denominator of which is 365, and thereafter Employee shall not be entitled to receive any Bonus with respect to any subsequent periods. (c) The "Target Number" shall be $11,000,000 for the fiscal year of the Company ending in November 1997, $11,500,000 for the fiscal year of the Company ending in November 1998, and $12,000,000 for each subsequent year during the Term of Employment. "Gross Profits" shall mean the net sales minus cost of sales from the operations of the Fashion Companies for a respective full fiscal year of the Company, as - 4 - determined by the Company's internal accounting department in accordance with the Company's accounting practice on a Company-wide basis. (d) In addition to the Salary and the Bonus described above, Employee may be eligible to receive merit or other discretionary bonuses, in the sole discretion of the Board of Directors of the Company. (e) The Salary, the Bonus and any other bonuses will be subject to such deductions by the Company as the Company is from time to time required to make pursuant to law, government regulations or order or by agreement with, or consent of, Employee. Such payments may be made by check or checks of the Company or any of its parent, subsidiaries or affiliates as the Company may, from time to time, find proper and appropriate. (f) (i) In each year during the Term of Employment, at or about the date of the Annual Meeting of the Company's parent, Donnkenny, Inc. (the "Parent Company"), which has historically been held in April of each year, and at the same time as stock options are granted on a Company-wide basis, Employee shall be granted options to purchase not less than 10,000 shares of the Common Stock of the Parent Company pursuant to the Parent Company's Employee Stock Option Plan, as such plan may exist from time to time; provided that no such grant shall be made at a time when Employee is not an employee of the Company. (ii) In addition, Employee shall be granted, within 15 days following the date hereof, options to purchase 50,000 shares of Common Stock of the Parent Company, at $17.625 per share. Thirty percent of such shares shall vest on the last day of the Initial Term and, 35% of such shares shall vest on the last day of each of the first and second years - 5 - of the Renewal Term; provided that no shares shall vest on any date on which Employee is no longer employed by the Company. Vested shares may be exercised during the Term of Employment and within ninety (90) days following the end of Employee's employment. 5. Expenses. (a) Employee shall be entitled to reimbursement by the Company for all reasonable legitimate business expenses actually incurred by him on its behalf in the course of his employment by the Company and which have been submitted in accordance with the rules and regulations promulgated under the Internal Revenue Code of 1986, as amended, upon the presentation by Employee, from time to time, of an itemized account of such expenditures together with such vouchers and other receipts as the Company may request in accordance with Company policy and Internal Revenue Service regulations. (b) In addition to the above, the Company shall provide Employee with two cars and a driver and all expenses related to such cars and life insurance coverage, all on a basis substantially equivalent to those provided to Employee by the Fashion Companies. 6. Vacation. Employee shall be entitled to vacations in accordance with the Company's prevailing policy for its senior operating executives. 7. Termination. (a) Disability. If, during the Term of Employment, Employee shall be unable, for a period of more than three (3) consecutive months or for periods aggregating more than twenty (20) weeks in any fifty-two (52) consecutive weeks to perform the services provided for herein as a result of illness, incapacity or a physical or other disability of any nature, the Company may, upon not less than thirty (30) days notice, terminate Employee's employment hereunder. The Company shall pay the Salary to Employee, or his legal - 6 - representatives, to the end of the month in which such termination occurs. Employee shall be considered unable to perform the services provided for herein if he is unable to attend to the normal duties required of him. Upon completion of the termination payments provided for in this paragraph, all of the Company's obligations to pay compensation under this Employment Agreement shall cease. (b) Death. If Employee shall die during the Term of Employment, this Employment Agreement shall terminate at the end of the month in which Employee's death takes place, Employee's estate shall continue to receive the Salary until the end of such month and Employee's family's coverage under the Company's medical and hospitalization plan will continue for a period of six (6) months thereafter. (c) For Cause. In addition to the provisions for the cancellation and/or termination hereof hereinabove provided, the Company may, at any time, terminate and/or cancel this Employment Agreement and the Term of Employment for cause (as hereinafter defined) by sending notice to the Employee of its intention to so cancel and/or terminate. Cancellation and/or termination under this paragraph shall become effective within forty-eight (48) hours of the date of receipt of notice under this paragraph, without Employee having any recourse against the Company for damages. For purposes of this Employment Agreement, "cause" shall be defined to mean (i) fraud, dishonesty or similar malfeasance, (ii) substantial refusal to comply or default in complying with the Company's reasonable directions and/or failure to comply or perform any of the material terms and/or obligations of this Employment Agreement, if such refusal, default or failure continues for a period of more than ten (10) days after receipt by Employee of notice from the Company setting forth in reasonable detail the activity by the - 7 - Employee which the Company deems to be cause for termination of this Employment Agreement, or (iii) Employee's alcohol or drug abuse. 8. Benefits. (a) Employee shall be entitled to participate in all group life insurance, group disability insurance, medical and hospitalization plans, and pension and profit sharing plans as are presently being offered by the Company or which may hereafter, during the Term of Employment, be offered to its operating executives on a Company-wide basis. (b) From and after the date of this Employment Agreement, the term "compensation" as used in any pension or profit sharing plan maintained by Fashion or the Company shall include only the Salary payable hereunder. 9. Key-Man Life Insurance . Employee agrees to fully cooperate with the Company in the Company's obtaining key-man life and stroke or disability insurance under which the Company shall be the beneficiary. Such cooperation shall include, but not be limited to, Employee's submitting to insurance health examinations. 10. Disclosure. Employee will not at any time, directly or indirectly, disclose or furnish to any other person, firm or corporation: (a) any information concerning the methods of conducting or obtaining business, of manufacturing or advertising products, or of obtaining customers; (b) any confidential information acquired by him during the course of his employment by the Company, including, without limiting the generality of the foregoing, the names of any customers or prospective customers of, or any person, firm or corporation who or which have or shall have traded or dealt with, the Company (whether such customers have been obtained by Employee or otherwise); and/or - 8 - (c) any confidential information relating to the products, designs, styles, processes, discoveries, materials, ideas, creations, inventions or properties of the Company. 11. Covenants Not to Compete or Solicit. In consideration of the Company's covenants contained herein and in the Stock Purchase Agreement, including, in particular, the Company's covenant to pay the Purchase Price (as defined in the Stock Purchase Agreement), Employee agrees that Employee shall not, in the United States, directly or indirectly: (i) during the Term of Employment and for a period of two (2) years following termination of the Term of Employment, engage or participate in (whether as employee, lender, investor, shareholder, consultant or partner or in any other manner or capacity), or lend his name (or any part or variant thereof) to any business which is, or as a result of Employee's engagement or participation would become, competitive with any aspect of the business conducted by the Company during the Term of Employment; (ii) during the Term of Employment and for a period of two (2) years following termination of the Term of Employment, solicit or otherwise deal in competition with the Company with respect to any customers doing business with the Company; or (iii) during the Term of Employment and for a period of three (3) years following termination of the Term of Employment, employ, hire, solicit, be associated with or otherwise interfere with or endeavor to entice away any officer, director, employee or agent of the Company. - 9 - Notwithstanding the foregoing, Employee may engage in the activities described in Paragraph 2 above and the foregoing shall not prohibit Employee from owning less than 5% of a public company engaged in an activity that would otherwise be prohibited by this Agreement; provided that such ownership is solely a passive investment. Employee shall not at any time, during or after the termination of this Agreement, engage in any business which uses as its name, in whole or in part, any name used by the Company or any of its subsidiaries during the Term of Employment. 12. Inventions. As between Employee and the Company, all products, designs, styles, processes, discoveries, materials, ideas, creations, inventions and properties, whether or not furnished by Employee, created, developed, invented or used in connection with Employee's employment hereunder or prior to this Employment Agreement, will be the sole and absolute property of the Company for any and all purposes whatever in perpetuity, whether or not conceived, discovered and/or developed during regular working hours. Employee will not have, and will not claim to have, under this Employment Agreement or otherwise, any right, title or interest of any kind or nature whatsoever in or to any such products, designs, styles, processes, discoveries, materials, ideas, creations, inventions and properties. 13. Injunctive Relief. The parties hereto recognize that irreparable damage may result to the Company and its business and properties if Employee fails or refuses to perform his obligations under this Employment Agreement and that the remedy at law for any such failure or refusal may be inadequate. Accordingly, it is understood that the Company has not waived its rights to seek any provisional remedies (including, without limitation, injunctive relief) and damages. - 10 - 14. Absence of Restrictions. Employee represents and warrants that he is not a party to any agreement or contract pursuant to which there is any restriction or limitation upon his entering into this Employment Agreement or performing the services called for by this Employment Agreement. 15. Further Instruments. Employee will execute and deliver all such other further instruments and documents as may be necessary, in the opinion of the Company, to carry out the purposes of this Employment Agreement, or to confirm, assign or convey to the Company any products, designs, styles, processes, discoveries, materials, ideas, creations, inventions or properties referred to in Paragraph 12 hereof, including the execution of all patent, design patent, copyright, trademark or trade name applications. 16. Invalidity and Severability. If any provisions of this Employment Agreement are held invalid or unenforceable, such invalidity or unenforceability shall not affect the other provisions of this Employment Agreement, and, to that extent, the provisions of this Employment Agreement are intended to be and shall be deemed severable. In particular and without limiting the foregoing sentence, if any provision of Paragraph 11 of this Employment Agreement shall be held to be invalid or unenforceable by reason of geographic or business scope or the duration thereof, such invalidity or unenforceability shall attach only to such provisions and shall not affect or render invalid or unenforceable any other provisions of this Employment Agreement, and any such provisions of this Employment Agreement shall be construed as if the geographic or business scope or the duration of such provision had been more narrowly drawn so as not to be invalid or unenforceable. 17. Notices. All notices and other communications under this Agreement shall be in writing and shall be either delivered personally, mailed by certified mail, return receipt - 11 - requested, sent by recognized overnight delivery service or, to the extent receipt is confirmed, by telecopy, telefax, or other electronic transmission service to the parties at the following addresses (or to such other address as a party may have specified by notice given to the other party pursuant to this provision). Notice shall be deemed given upon receipt. As to Employee: Mel Weiss c/o Fashion Avenue Knits 1710 Flushing Avenue Ridgewood, New York 11385 with a copy to: Silverberg, Stonehill & Goldsmith, P.C. 111 West 40th Street New York, New York 10018 As to the Company: Donnkenny Apparel, Inc. 1411 Broadway New York, New York 10018 Attn: Richard Rubin, President and Chief Executive Officer with a copy to: Squadron, Ellenoff, Plesent & Sheinfeld, LLP 551 Fifth Avenue New York, New York 10176 18. Assignment. A party hereto may not assign this Employment Agreement or any rights or obligations hereunder without the consent of the other party hereto; provided, however, that upon the sale or transfer of all or substantially all of the assets of the Company, or upon the merger by the Company into, or the combination with, another corporation, this Employment Agreement will inure to the benefit of and be binding upon the person, firm or corporation purchasing such assets, or the corporation surviving such merger or consolidation, as the case may be. The provisions of this Employment Agreement - 12 - where applicable are binding upon the heirs of Employee and upon the successors and assigns of the parties hereto. 19. Waiver of Breach. Waiver by either party of a breach of any provision of this Employment Agreement by the other shall not operate or be construed as a waiver of any subsequent breach by such other party. 20. Entire Employment Agreement. This instrument contains the entire agreement of the parties as to the subject matter hereof and supersedes and replaces all prior oral or written agreements between the parties. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 21. Applicable Law. This Employment Agreement shall be construed in accordance with the laws of the State of New York, without regard to its principles of conflicts of laws. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the day and year first above written. DONNKENNY APPAREL, INC. By: /s/ Richard Rubin -------------------------------------------- Richard Rubin, President and Chief Executive Officer /s/ Mel Weiss -------------------------------------------- Mel Weiss - 13 - EX-4 5 ESCROW AGREEMENT ESCROW AGREEMENT ESCROW AGREEMENT, dated as of September 3, 1996, among Mel Weiss ("Weiss"), Donnkenny Apparel, Inc., a Delaware corporation ("Donnkenny"), and Squadron, Ellenoff, Plesent & Sheinfeld, LLP, a New York limited liability partnership ("Escrow Agent"). This Agreement is being entered into by the parties pursuant to Section 6.02 of the Stock Purchase Agreement of even date herewith between Weiss and Donnkenny (the "Stock Purchase Agreement"). 1. Escrow 1.1 Appointment and Acknowledgment of Escrow Agent Weiss and Donnkenny hereby appoint Escrow Agent, and Escrow Agent hereby agrees to serve, as the Escrow Agent pursuant to the terms of this Agreement. Donnkenny shall deposit into escrow with Escrow Agent on or before January 13, 1997 cash in an amount if any, determined in accordance with Section 6.2 of the Stock Purchase Agreement (the "Escrowed Funds"). If no funds are to be paid to the Escrow Agent pursuant to said Stock Purchase Agreement by said date, this Agreement shall thereupon terminate. 1.2 Operation of Escrow The Escrow Agent shall hold the Escrowed Funds in escrow pursuant to this Agreement (the "Escrow") in an interest bearing account approved by Weiss. The Escrow Agent shall (i) release the Escrowed Funds from the Escrow and (ii) pay such funds to Weiss or Donnkenny, as the case may be, from time to time, in whole or in part, within twenty (20) business days following receipt of a notice from Donnkenny (a "Payment Notice") that: (i) a specified amount of the Escrowed Funds that is equal to the amount placed in the Escrow in respect of any Affiliate Liability (as defined in the Stock Purchase Agreement) is to be released from the Escrow and paid to Weiss following the release of such Affiliate Liability; and (ii) a specified amount of the Escrowed Funds that is equal to an amount paid or to be paid in respect of any Affiliate Liability is to be released from the Escrow and paid to Donnkenny to be applied to the payment of such Affiliate Liability or the reimbursement of Donnkenny for the payment of such Affiliate Liability. All payments hereunder shall be made by check payable in United States Dollars. Interest earned on the Escrow shall be paid to the parties in proportion to the portion of the Escrowed Funds paid to the parties. Any Payment Notice shall be furnished to Weiss on or prior to the date of the furnishing of such Payment Notice to the Escrow Agent. If the Escrow Agent has not received notice from Weiss or his counsel (a "Dispute Notice") that he objects to any payment described in any Payment Notice within 15 days following the Escrow Agent's receipt of such Payment Notice, then the Escrow Agent shall make the payments described in the Payment Notice. If the Escrow Agent receives a Dispute Notice within such 15-day period, then any payments that are disputed, as described in such Dispute Notice, shall not be made by the Escrow Agent, unless and until the Escrow Agent receives joint instructions from Weiss and Donnkenny with respect to such payment or until such payment is ordered by a court pursuant to Section 1.3(b) hereof. - 2 - 1.3 Further Provisions Relating to the Escrow (a) Escrow Agent shall have no duties or responsibilities except those expressly set forth herein. The Escrow Agent may disregard and shall not be required to refer to, or examine, any notice, instruction, instrument or document except as specifically provided herein. The Escrow Agent may rely upon, and shall be protected in acting or refraining from acting upon, any written notice furnished to it hereunder and believed by it to be genuine. Escrow Agent shall not be liable for any mistake of fact or of law or any error of judgment, or for any act or any omission, except as a result of Escrow Agent's own willful misconduct or gross negligence. (b) Weiss and Donnkenny authorize Escrow Agent, if Escrow Agent is uncertain as to its rights or duties hereunder or is threatened with litigation or is sued, (i) to refrain from taking any action until it shall be directed otherwise in a joint written instruction by Weiss and Donnkenny or by an order of a court of competent jurisdiction, and (ii) to interplead all interested parties or to initiate any other proceedings with like effect in any court of competent jurisdiction and to deposit the Escrowed Funds with the clerk of that court. (c) Escrow Agent's responsibilities and liabilities hereunder will terminate upon payment by Escrow Agent of all the Escrowed Funds under this Agreement. 2. Resignation of the Escrow Agent The Escrow Agent may resign at any time by giving thirty (30) days' notice of such resignation to the other parties. Thereafter, the Escrow Agent shall have no further obligation hereunder except to hold the Escrowed Funds as depositary. In such event, the Escrow Agent shall not take any action until the Parties have jointly appointed a successor - 3 - Escrow Agent. On receipt of notice signed by or on behalf of Weiss and Donnkenny, the Escrow Agent shall promptly turn over the Escrowed Funds to the successor Escrow Agent. The Escrow Agent shall thereafter have no further obligations hereunder. 3. Indemnity Each of Weiss and Donnkenny hereby jointly and severally agree to indemnify and hold harmless the Escrow Agent from and against any and all losses, expenses (including, without limitation, reasonable fees and disbursements of counsel, including fees and disbursements of Escrow Agent in its capacity as legal counsel to the Escrow Agent), assessments, liabilities, claims, damages, actions, or other charges incurred by or assessed against it for anything done or omitted by it in the performance of its duties hereunder, except as a result of its own willful misconduct or gross negligence. The agreements contained in this Section 3 shall survive any termination of this Escrow Agreement or the Escrow Agent's duties hereunder. 4. Miscellaneous 4.1 Modification; Conflicts This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements among them concerning such subject matter and may be modified only by a written instrument duly executed by each party. 4.2 Notices All notices and other communications under this Agreement shall be in writing and shall be either delivered personally, mailed by certified mail, return receipt requested, sent by recognized overnight delivery service or, to the extent receipt is confirmed, by telecopy, - 4 - telefax, or other electronic transmission service to the parties at the following addresses (or to such other address as a party may have specified by notice given to the other party pursuant to this provision). Notice shall be deemed given upon receipt. If to Weiss, to: Mel Weiss c/o Fashion Avenue Knits, Inc. 1710 Flushing Avenue Ridgewood, New York 11385 Telecopy No.: (718) 456-9001 Confirmation No.: (718) 456-9000 with a copy to: Silverberg Stonehill & Goldsmith, P.C. 11 West 40th Street New York, New York 10018 Attention: Sheldon Silverberg, Esq. Telecopy No.: (212) 391-4556 Confirmation No.: (212) 730-1900 If to Donnkenny, to: Donnkenny Apparel, Inc. 1411 Broadway New York, New York 10018 Attention: Richard Rubin Telecopy No.: (212) 768-3974 Confirmation No.: (212) 730-7770 with a copy to Squadron, Ellenoff, Plesent & Sheinfeld, LLP 551 Fifth Avenue New York, New York 10176 Telecopy No.: (212) 697-6686 Confirmation No.: (212) 661-6500 - 5 - If to Escrow Agent, to Squadron, Ellenoff, Plesent & Sheinfeld, LLP 551 Fifth Avenue New York, New York 10176 Telecopy No.: (212) 697-6686 Confirmation No.: (212) 661-6500 4.3 Counterparts; Governing Law This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to its principles of conflicts of laws. - 6 - IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above. /s/ Mel Weiss ---------------------------------- Mel Weiss DONNKENNY APPAREL, INC. By: /s/ Richard Rubin ----------------------------- Name: Richard Rubin Title: President and Chief Executive Officer SQUADRON ELLENOFF PLESENT & SHEINFELD, LLP By: /s/ Harvey Horowitz ----------------------------- Name: Harvey Horowitz Title: Partner - 7 - EX-5 6 THIRD AMENDMENT AGREEMENT TO CREDIT AGREEMENT Exhibit 5 THIRD AMENDMENT AGREEMENT ------------------------- THIRD AMENDMENT AGREEMENT, dated as of September 10, 1996, to the Credit Agreement, dated as of June 5, 1995 (as the same has been heretofore, and may be further, amended, supplemented or modified from time to time in accordance with its terms, the "Credit Agreement"), among Donnkenny Apparel, Inc., a Delaware corporation ("DKA"), and Beldoch Industries Corporation, a Delaware corporation (collectively with DKA, the "Borrowers"), the Guarantors named therein and signatories thereto, the lenders named in Schedules 2.01(a) and (b) to the Credit Agreement (collectively, the "Lenders"), and The Chase Manhattan Bank (formerly known as Chemical Bank) as agent for the Lenders (in such capacity, the "Agent"). Capitalized terms used herein but not otherwise defined herein shall have the meanings attributed thereto in the Credit Agreement. WHEREAS, DKA desires to acquire all of the outstanding capital stock of Fashion Avenue Knits Inc., a New York corporation ("Fashion"), The Sweater Company, Inc., a New York corporation ("Sweater Company"), Sitazi, Ltd., a New York corporation ("Sitazi"), and Lonestar Sportswear Co., Inc., a New York corporation ("Lonestar"), pursuant to the Stock Purchase Agreement dated as of September 3, 1996 among DKA and Mel Weiss (the "Stock Purchase Agreement"); and WHEREAS, the Borrowers have requested, and the Lenders and Agent have agreed to, certain amendments in and waivers to the Credit Agreement. NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and subject to the fulfillment of the conditions set forth below, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT 1.1 Each of Fashion and Sweater Company (collectively, the "New Guarantors") shall be added to the Credit Agreement as a "Guarantor" as such term is defined in the Credit Agreement. Each of the New Guarantors, by its execution and delivery of this Amendment Agreement (this "Agreement"), agrees to be bound by all of the terms and provisions of the Credit Agreement applicable to Guarantors. 1.2 Schedule 4.01 to the Credit Agreement is hereby amended and restated in its entirety to read as Schedule 4.01 annexed hereto. 1.3 Schedule 4.15 to the Credit Agreement is hereby amended and restated in its entirety to read as Schedule 4.15 annexed hereto. 1.4. Schedule 7.01(f) to the Credit Agreement is hereby amended by adding the information set forth on the supplement to Schedule 7.01 annexed hereto. 1.5 Schedule 7.03 to the Credit Agreement is hereby amended and restated in its entirety to read as Schedule 7.03 annexed hereto. 1.6 Section 7.04 of the Credit Agreement is hereby amended by deleting the period at the end thereof and adding the following: ", except as set forth on Schedule 7.04 annexed hereto." 1.7 A new Schedule 7.04, which reads as Schedule 7.04 annexed hereto, is hereby added to and made a part of the Credit Agreement. 1.8 Section 7.05 of the Credit Agreement is hereby amended by deleting the period at the end thereof and adding the following: ", except as set forth on Schedule 7.05 annexed hereto." 1.9 A new Schedule 7.05, which reads as Schedule 7.05 annexed hereto, is hereby added to and made a part of the Credit Agreement. 1.10 Section 7.06 of the Credit Agreement is hereby amended as follows: (a) by amending and restating clause (f) thereof in its entirety to read as follows: "(f) loans and advances to Affiliates (other than the Parent and other than the subsidiaries listed on Schedule 7.06 annexed hereto) arising in the ordinary course of business not to exceed $500,000 in the aggregate at any one time outstanding;"; and (b) by (i) deleting the word "and" at the end of clause (h) thereof, (ii) deleting the period at the end of clause (i) thereof and adding a semicolon followed by the word "and", and (iii) adding a new clause (j) thereof which reads as follows: "(j) as set forth on Schedule 7.06 annexed hereto." 1.11 A new Schedule 7.06, which reads as Schedule 7.06 annexed hereto, is hereby added to and made a part of the Credit Agreement. 1.12 Section 7.14 of the Credit Agreement is hereby amended by (a) deleting the word "or" on the seventh line immediately before clause (iii) thereof, (b) deleting the period at the end thereof and adding a comma and the word "or", and (c) adding a new clause (iv) thereof which reads as follows: 2 "(iv) as set forth on Schedule 7.14 annexed hereto." 1.13 A new Schedule 7.14, which reads as Schedule 7.14 annexed hereto, is hereby added to and made a part of the Credit Agreement. SECTION 2. WAIVER Notwithstanding Section 6.12 of the Credit Agreement, neither Fashion nor Sweater Company must pledge, pursuant to the Security Agreement, its finished inventory and wrapping, packing and shipping materials; provided, however, that upon the respective terminations of the Factoring Agreement dated May 18, 1987 between Fashion and Rosenthal & Rosenthal, Inc. and the Factoring Agreement dated May 12, 1994 between Sweater Company and Rosenthal & Rosenthal, Inc., each of Fashion and Sweater Company, respectively, shall pledge its finished inventory and wrapping, packing and shipping materials which are financed through the issuance of Letters of Credit pursuant to the Security Agreement. SECTION 3. CONDITIONS PRECEDENT Upon the execution and delivery of counterparts of this Agreement by the parties listed below and, except as specifically provided below, the fulfillment of the following conditions, this Agreement shall be deemed to have become effective as of the date hereof: 3.1 All representations and warranties contained in this Agreement, the Credit Agreement or otherwise made in writing to the Agent or any Lender in connection herewith shall be true and correct in all material respects (except that for the period through September 20, 1996, only the representations and warranties set forth in Section 4.3 shall be applicable to the New Guarantors and thereafter all representations and warranties shall be applicable subject to such modifications as may be proposed by the Borrowers and agreed to by the Lenders.). 3.2 No unwaived event shall have occurred and be continuing which constitutes a Default or an Event of Default. 3.3 No later than October 10, 1996, the Agent and the Lenders shall have received the favorable written opinion of counsel for each of the New Guarantors, addressed to the Lenders and satisfactory to the Agent. 3.4 The Agent shall have received (i) a copy of the certificate or articles of incorporation or constitutive documents of each of the New Guarantors, certified as of a recent date by the Secretary of State or other appropriate official of the state of its organization, and a certificate as to the good standing of each from such Secretary of State or other official, in each case dated as of a recent date; (ii) a certificate of the Secretary of each of the New Guarantors certifying as to such person's By-laws, authorizing resolutions 3 adopted by such person's Board of Directors, no further amendments to such person's certificate or articles of incorporation or constitutive documents, and the incumbency and specimen signature of each of such person's officers executing this Agreement; (iii) a certificate of another of such person's officers as to incumbency and signature of its Secretary; and (iv) such other documents as the Agent or any Lender may reasonably request. 3.5 The fees described in Section 4.8 hereof shall have been paid in full to the persons entitled thereto in immediately available funds. SECTION 4. MISCELLANEOUS 4.1 DKA hereby agrees that, if and when its acquisition of all of the outstanding capital stock of each of Sitazi and Lonestar is confirmed or consummated pursuant to the Stock Purchase Agreement, it shall cause each of Sitazi and Lonestar, concurrently therewith, to enter into a Guarantee in form and substance satisfactory to the Agent and to execute the Security Documents, as applicable, as a Grantor, and to pledge each of Sitazi's and Lonestar's accounts receivable and all other assets pursuant to the Security Agreement. 4.2 Each of the Borrowers reaffirms and restates the representations and warranties set forth in the Credit Agreement, as applicable, and all such representations and warranties, after giving effect to the amendments set forth in this Agreement, shall be true and correct on the date hereof with the same force and effect as if made on such date. 4.3 Each of the Borrowers jointly and severally represents and warrants as of the date hereof as follows: (a) each of the Borrowers and the New Guarantors has the power, and has taken all necessary corporate action to authorize it, to execute, deliver and carry out the terms and provisions of this Agreement; and (b) this Agreement has been duly executed and delivered and constitutes the legal, valid and binding obligation of each of the Borrowers and the New Guarantors, and is enforceable in accordance with its terms. 4.4 The term "Agreement", "hereof", "herein" and similar terms as used in the Credit Agreement, and references to the Credit Agreement in the other documents executed and delivered in connection therewith, shall mean and refer to, from and after the effective date of this Agreement as determined in accordance with Section 3 hereof, the Credit Agreement as amended by this Agreement. 4.5 Except as herein expressly amended, the Credit Agreement and the other documents executed and delivered in connection therewith are each ratified and 4 confirmed in all respects and shall remain in full force and effect in accordance with their respective terms. 4.6 Except as specifically set forth herein, nothing herein contained shall constitute a waiver or be deemed to be a waiver, of any existing Defaults or Events of Default, and the Lenders and Agent reserve all rights and remedies granted to them by the Credit Agreement, the other documents executed and delivered in connection therewith, by law and otherwise. 4.7 This Agreement may be executed by the parties hereto individually or in combination, in one or more counterparts, each of which shall be an original and all of which shall constitute one and the same agreement. A facsimile signature page shall constitute an original for the purposes hereof. 4.8 The Borrowers shall pay to the Agent for the account of the Lenders a fee of $50,000, to be distributed to the Lenders in proportion to their Commitments, with respect to this Agreement. 4.9 THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. DONNKENNY APPAREL, INC. By: /s/ Richard Rubin ----------------------------------- Name: Richard Rubin Title: Chief Executive Officer BELDOCH INDUSTRIES CORPORATION By: /s/ Richard Rubin ----------------------------------- Name: Richard Rubin Title: Chief Executive Officer FASHION AVENUE KNITS INC. By: /s/ Richard Rubin ----------------------------------- Name: Richard Rubin Title: Chief Executive Officer THE SWEATER COMPANY, INC. By: /s/ Richard Rubin ----------------------------------- Name: Richard Rubin Title: Chief Executive Officer 6 THE CHASE MANHATTAN BANK (formerly known as Chemical Bank) By: /s/ Jay Linde ----------------------------------- Name: Jay Linde Title: Vice President THE BANK OF NEW YORK By: /s/ Joanne M. Collett ----------------------------------- Name: Joanne M. Collett Title: Vice President 7 EX-6 7 SECOND AMENDMENT AGREEMENT TO SECURITY AGREEMENT Exhibit 6 SECOND AMENDMENT AGREEMENT -------------------------- SECOND AMENDMENT AGREEMENT, dated as of September 10, 1996, to the Security Agreement, dated as of June 5, 1995 (as the same has been heretofore, and may be further, amended, supplemented or modified from time to time in accordance with its terms, the "Security Agreement"), between Donnkenny Apparel, Inc., a Delaware corporation ("DKA"), Beldoch Industries Corporation, a Delaware corporation (collectively with DKA, the "Borrowers"), MegaKnits, Inc., a New York corporation, and The Chase Manhattan Bank (formerly known as Chemical Bank) as agent (in such capacity, the "Agent") for the lenders (the "Lenders") named in Schedules 2.01(a) and (b) of the Credit Agreement dated as of June 5, 1995 (as amended, modified or supplemented from time to time in accordance with its terms, the "Credit Agreement") among the Borrowers, the guarantors named therein and signatory thereto, the Lenders and the Agent. Capitalized terms used herein but not otherwise defined herein shall have the meanings attributed thereto in the Security Agreement or the Credit Agreement. WHEREAS, DKA desires to acquire all of the outstanding capital stock of Fashion Avenue Knits Inc., a New York corporation ("Fashion") and The Sweater Company, Inc., a New York corporation ("Sweater Company"), pursuant to the Stock Purchase Agreement dated as of September 3, 1996 among DKA and Mel Weiss; and WHEREAS, the parties hereto desire to amend certain provisions of the Security Agreement. NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and subject to the fulfillment of the conditions set forth below, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE SECURITY AGREEMENT 1.1 Each of Fashion and Sweater Company shall be added to the Security Agreement as a "Grantor" as such term is defined in the Security Agreement. Each of Fashion and Sweater Company, by its execution and delivery of this Amendment Agreement (this "Agreement"), agrees to be bound by all of the terms and provisions of the Security Agreement. 1.2 Section 1(b) of the Security Agreement is hereby amended and restated in its entirety as follows: "(b) "Collateral" shall mean all (i) Accounts Receivable, (ii) Documents, (iii) Equipment, (iv) General Intangibles, (v) Inventory, (vi) Factor Payments and (vii) Proceeds." 1.3 Section 1(f) of the Security Agreement is hereby amended by deleting the period at the end thereof and adding the following: "; provided, however, that "Inventory" shall not include (i) Fashion's finished goods and wrapping, packaging and shipping materials so long as Fashion is a party to the Factoring Agreement with Rosenthal & Rosenthal, Inc. (the "Factor") dated May 18, 1987, as amended as of May 3, 1996 (the "Fashion Factoring Agreement"), or (ii) Sweater Company's finished goods and wrapping, packaging and shipping materials so long as Sweater Company is a party to the Factoring Agreement with the Factor dated May 12, 1994, as amended as of May 3, 1996 (the "Sweater Company Factoring Agreement")." 1.4 Section 1 of the Security Agreement is hereby amended by adding a new clause (h) which reads as follows: "(h) "Factor Payments" shall mean any and all sums which the Factor is obligated to or may pay from time to time to (i) Fashion pursuant to the Fashion Factoring Agreement and (ii) Sweater Company pursuant to the Sweater Company Factoring Agreement." 1.5 Schedule I to the Security Agreement is hereby amended by adding the information set forth on Schedule I annexed hereto. SECTION 2. MISCELLANEOUS 2.1 Each of the Grantors reaffirms and restates, and each of Fashion and Sweater Company makes, the representations and warranties set forth in the Security Agreement, and all such representations and warranties, after giving effect to the amendments set forth herein, shall be true and correct on the date hereof with the same force and effect as if made on such date. 2.2 Except as herein expressly amended, the Security Agreement and the other documents executed and delivered in connection therewith are each ratified and confirmed in all respects and shall remain in full force and effect in accordance with their respective terms. 2.3 From and after the date hereof, (a) all references in the Security Agreement to "this Agreement", "hereof", "herein", or similar terms and (b) all references to the Security Agreement in each agreement, instrument and other documents executed or delivered in connection with the Security Agreement, shall mean and refer to the Security Agreement, as amended by this Agreement. 2 2.4 This Agreement may be executed by the parties hereto individually or in combination, in one or more counterparts, each of which shall be an original and all of which shall constitute one and the same agreement. A facsimile signature page shall constitute an original for the purposes hereof. 2.5 THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. 3 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. DONNKENNY APPAREL, INC. By: /s/ Richard Rubin ----------------------------------- Name: Richard Rubin Title: Chief Executive Officer BELDOCH INDUSTRIES CORPORATION By: /s/ Richard Rubin ----------------------------------- Name: Richard Rubin Title: Chief Executive Officer MEGAKNITS, INC. By: /s/ Richard Rubin ----------------------------------- Name: Richard Rubin Title: Chief Executive Officer FASHION AVENUE KNITS INC. By: /s/ Richard Rubin ----------------------------------- Name: Richard Rubin Title: Chief Executive Officer 4 THE SWEATER COMPANY, INC. By: /s/ Richard Rubin ----------------------------------- Name: Richard Rubin Title: Chief Executive Officer THE CHASE MANHATTAN BANK (formerly known as Chemical Bank By: /s/ Jay Linde ----------------------------------- Name: Jay Linde Title: Vice President 5 EX-7 8 2ND AMEND. AGR. TO SECU. AGR. & MORTGAGE-TRADEMARKS Exhibit 7 SECOND AMENDMENT AGREEMENT -------------------------- SECOND AMENDMENT AGREEMENT, dated as of September 10, 1996, to the Security Agreement and Mortgage - Trademarks, dated as of June 5, 1995 (as the same has been heretofore, and may be further, amended, supplemented or modified from time to time in accordance with its terms, the "Trademark Security Agreement"), between Donnkenny Apparel, Inc., a Delaware corporation ("DKA"), and Beldoch Industries Corporation, a Delaware corporation (collectively with DKA, the "Borrowers"), and The Chase Manhattan Bank (formerly known as Chemical Bank) as agent (in such capacity, the "Agent") for the lenders (the "Lenders") named in Schedules 2.01(a) and (b) of the Credit Agreement dated as of June 5, 1995 (as amended, modified or supplemented from time to time in accordance with its terms, the "Credit Agreement") among the Borrowers, the guarantors named therein and signatory thereto, the Lenders and the Agent. Capitalized terms used herein but not otherwise defined herein shall have the meanings attributed thereto in the Trademark Security Agreement or the Credit Agreement. WHEREAS, DKA desires to acquire all of the outstanding capital stock of Fashion Avenue Knits Inc., a New York corporation ("Fashion"), and certain other corporations pursuant to the Stock Purchase Agreement dated as of September 3, 1996 among DKA and Mel Weiss; and WHEREAS, the parties hereto desire to amend certain provisions of the Trademark Security Agreement. NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and subject to the fulfillment of the conditions set forth below, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE TRADEMARK SECURITY AGREEMENT 1.1 Fashion shall be added to the Trademark Security Agreement as a "Debtor" as such term is defined in the Trademark Security Agreement. Fashion, by its execution and delivery of this Amendment Agreement (this "Agreement"), agrees to be bound by all of the terms and provisions of the Trademark Security Agreement. 1.2 Schedule A to the Trademark Security Agreement is hereby supplemented by adding the Trademarks set forth on Schedule A annexed hereto. SECTION 2. MISCELLANEOUS 2.1 Each of the Debtors reaffirms and restates, and Fashion makes, the representations and warranties set forth in the Trademark Security Agreement, and all such representations and warranties, after giving effect to the amendments set forth herein, shall be true and correct on the date hereof with the same force and effect as if made on such date. 2.2 Except as herein expressly amended, the Trademark Security Agreement and the other documents executed and delivered in connection therewith are each ratified and confirmed in all respects and shall remain in full force and effect in accordance with their respective terms. 2.3 From and after the date hereof, (a) all references in the Trademark Security Agreement to "this Agreement", "hereof", "herein", or similar terms and (b) all references to the Trademark Security Agreement in each agreement, instrument and other documents executed or delivered in connection with the Trademark Security Agreement, shall mean and refer to the Trademark Security Agreement, as amended by this Agreement. 2.4 This Agreement may be executed by the parties hereto individually or in combination, in one or more counterparts, each of which shall be an original and all of which shall constitute one and the same agreement. A facsimile signature page shall constitute an original for the purposes hereof. 2.5 THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. 2 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. DONNKENNY APPAREL, INC. By: /s/ Richard Rubin ------------------------------------ Name: Richard Rubin Title: Chief Executive Officer BELDOCH INDUSTRIES CORPORATION By: /s/ Richard Rubin ------------------------------------ Name: Richard Rubin Title: Chief Executive Officer FASHION AVENUE KNITS INC. By: /s/ Richard Rubin ------------------------------------ Name: Richard Rubin Title: Chief Executive Officer THE CHASE MANHATTAN BANK (formerly known as Chemical Bank By: /s/ Jay Linde ------------------------------------ Name: Jay Linde Title: Vice President 3 REGISTERED U.S. TRADEMARKS OF FASHION AVENUE KNITS INC. ------------------------------------------------------- Trademark Reg. Date Reg. No. --------- --------- -------- IT'S OUR TIME 3-9-93 1,756,986 EX-8 9 ASSIGNMENT FOR SECURITY (TRADEMARKS) Exhibit 8 ASSIGNMENT FOR SECURITY ----------------------- (TRADEMARKS) ---------- WHEREAS, Fashion Avenue Knits Inc., a New York corporation (herein referred to as "Assignor"), owns the trademarks and trademark applications listed on the annexed Schedule 1-A, which trademarks are registered in, and which trademark applications have been filed with, the United States Patent and Trademark Office (the "Trademarks"); WHEREAS, Assignor is obligated to THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), a New York banking corporation, as agent (referred to herein as the "Assignee") for the lenders (the "Lenders") named in Schedules 2.01(a) and (b) of the Credit Agreement dated as of June 5, 1995, among Donnkenny Apparel, Inc., a Delaware corporation, Beldoch Industries Corporation, a Delaware corporation, the Assignor, the other Loan Parties named therein and signatory thereto, the Lenders and the Assignee (as amended, modified or supplemented from time to time in accordance with its terms, the "Credit Agreement"), and Assignor has entered into a Security Agreement and Mortgage-Trademarks dated as of June 5, 1995, as amended by a letter agreement dated as of July 24, 1995 and a Second Amendment Agreement dated as of the date hereof (the "Agreement"), in favor of Assign ee; and WHEREAS, pursuant to the Agreement, Assignor has assigned to Assignee and granted to Assignee a security interest in, and mortgage on, all right, title and interest of Assignor in and to the Trademarks, together with the goodwill of the business symbolized by the Trademarks and registrations thereof, and all proceeds thereof, including, without limitation, any and all causes of action which may exist by reason of infringement thereof (the "Collateral"), to secure the payment, performance and observance of the Obligations, as defined in the Credit Agreement; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, Assignor does hereby further assign unto Assignee and grant to Assignee a security interest in, and mortgage on, the Collateral to secure the prompt payment, performance and observance of the Obligations. Assignor does hereby further acknowledge and affirm that the rights and remedies of Assignee with respect to the assignment of, security interest in and mortgage on the Collateral made and granted hereby are more fully set forth in the Agreement, the terms and provisions of which are hereby incorporated herein by reference as if fully set forth herein. Assignee's address is 111 West 40th Street, 10th Floor, New York, New York 10018. 1 IN WITNESS WHEREOF, Assignor has caused this Assignment to be duly executed by its officer thereunto duly authorized as of the 10th day of September, 1996. FASHION AVENUE KNITS INC. By /s/ Richard Rubin Name: Richard Rubin Title: President and Chief Executive Officer 2 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On this day of September, 1996, before me personally appeared , to me known, who, being by me duly sworn, did depose and say that he resides at and that he is of Fashion Avenue Knits Inc., the New York corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was affixed pursuant to authority of the Board of Directors of said corporation, and that he signed his name thereto pursuant to such authority. -------------------------- Notary Public 3 SCHEDULE 1-A TO ASSIGNMENT FOR SECURITY --------------------------------------- TRADEMARKS ---------- Trademark Reg. Date Reg. No. --------- --------- -------- IT'S OUR TIME 3-9-93 1,756,986 -----END PRIVACY-ENHANCED MESSAGE-----