-----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, NicCm1SXext/MO7CKgFaQXEHzJI2wBUot7wVz6hj7VLZZeh6UVvMN2rxGFPTj5WT zI1EYRA7L3hFeflyXWOkQA== 0001005150-98-000901.txt : 19980901 0001005150-98-000901.hdr.sgml : 19980901 ACCESSION NUMBER: 0001005150-98-000901 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 29 FILED AS OF DATE: 19980831 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LONDON FOG INDUSTRIES INC CENTRAL INDEX KEY: 0001068676 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 363425294 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62499 FILM NUMBER: 98700957 BUSINESS ADDRESS: STREET 1: 1332 LONDONTOWN BLVD STREET 2: C/O LONDON FOG INDUSTRIES INC CITY: ELDERSBURG STATE: MD ZIP: 21784 BUSINESS PHONE: 4107955900 MAIL ADDRESS: STREET 1: LONDON FOG INDUSTRIES INC STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLIPPER MIST INC CENTRAL INDEX KEY: 0000848371 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 520910239 STATE OF INCORPORATION: MD FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62499-01 FILM NUMBER: 98700958 BUSINESS ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES INC STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 BUSINESS PHONE: 4017955900 MAIL ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES INC STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LONDON FOG SPORTSWEAR INC CENTRAL INDEX KEY: 0000848372 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 581148067 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62499-02 FILM NUMBER: 98700959 BUSINESS ADDRESS: STREET 1: C?O LONDON FOG INDUSTRIES INC STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 BUSINESS PHONE: 4107955900 MAIL ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES INC STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATTHEW MANUFACTURING CO INC CENTRAL INDEX KEY: 0000848373 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 520910348 STATE OF INCORPORATION: MD FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62499-03 FILM NUMBER: 98700960 BUSINESS ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 BUSINESS PHONE: 4107955900 MAIL ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCRANTON OUTLET CORP CENTRAL INDEX KEY: 0000848374 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 362956896 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62499-04 FILM NUMBER: 98700961 BUSINESS ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 BUSINESS PHONE: 4107955900 MAIL ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAR SPORTSWEAR MANUFACTURING CORP CENTRAL INDEX KEY: 0000848375 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 041865930 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62499-05 FILM NUMBER: 98700962 BUSINESS ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 BUSINESS PHONE: 4107955900 MAIL ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES INC STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASHINGTON HOLDING CO CENTRAL INDEX KEY: 0000848377 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 431141194 STATE OF INCORPORATION: GA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62499-06 FILM NUMBER: 98700963 BUSINESS ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 BUSINESS PHONE: 4107955900 MAIL ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PTI HOLDING CORP CENTRAL INDEX KEY: 0000898800 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 363857281 STATE OF INCORPORATION: NV FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62499-07 FILM NUMBER: 98700964 BUSINESS ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 BUSINESS PHONE: 4107955900 MAIL ADDRESS: STREET 1: C/O LONDON FOG INDUSTRIES STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC TRAIL INC CENTRAL INDEX KEY: 0001068677 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 910502298 STATE OF INCORPORATION: WA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62499-08 FILM NUMBER: 98700965 BUSINESS ADDRESS: STREET 1: 1332 LONDONTOWN BLVD STREET 2: C/O LONDON FOG INDUSTRIES INC CITY: ELDERSBURG STATE: MD ZIP: 21784 BUSINESS PHONE: 4107955900 MAIL ADDRESS: STREET 1: LONDON FOG INDUSTRIES INC STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PTI TOP CO INC CENTRAL INDEX KEY: 0001068678 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 363857280 STATE OF INCORPORATION: NV FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62499-09 FILM NUMBER: 98700966 BUSINESS ADDRESS: STREET 1: 1332 LONDONTOWN BLVD STREET 2: C/O LONDON FOG INDUSTRIES INC CITY: ELDERSBURG STATE: MD ZIP: 21784 BUSINESS PHONE: 4107955900 MAIL ADDRESS: STREET 1: LONDON FOG INDUSTRIES INC STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOUNGER CORP CENTRAL INDEX KEY: 0001068679 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 910992719 STATE OF INCORPORATION: WA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62499-10 FILM NUMBER: 98700967 BUSINESS ADDRESS: STREET 1: 1332 LONDONTOWN BLVD STREET 2: C/O LONDON FOG INDUSTRIES INC CITY: ELDERSBURG STATE: MD ZIP: 21784 BUSINESS PHONE: 4107955900 MAIL ADDRESS: STREET 1: LONDON FOG INDUSTRIES INC STREET 2: 1332 LONDONTOWN BLVD CITY: ELDERSBURG STATE: MD ZIP: 21784 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST __, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 LONDON FOG INDUSTRIES, INC. (Exact name of Registrant as specified in its charter) ---------------- DELAWARE 2385 36-3425294 (State or other jurisdiction of (Primary Standard Industrial Classification (I.R.S. Employer incorporation or organization) Code Number) Identification Number)
1332 LONDONTOWN BOULEVARD, ELDERSBURG, MARYLAND 21784, (410) 795-5900 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) EDWARD M. KRELL EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER LONDON FOG INDUSTRIES, INC. 1332 LONDONTOWN BOULEVARD ELDERSBURG, MARYLAND 21784 (410) 795-5900 (Name, address, including zip code, and telephone number, including area code, of agent for service) SUBSIDIARY GUARANTOR REGISTRANTS
EXACT NAME OF SUBSIDIARY GUARANTOR AS PRIMARY STANDARD INDUSTRIAL I.R.S. EMPLOYER SPECIFIED IN ITS CHARTER STATE OF INCORPORATION CLASSIFICATION CODE NUMBER IDENTIFICATION NUMBER - --------------------------------------- ------------------------ ----------------------------- ---------------------- Clipper Mist, Inc. Maryland 2385 52-0910239 London Fog Sportswear, Inc. Delaware 2385 58-1148067 Matthew Manufacturing Co. Inc. Maryland 2385 52-0910348 Pacific Trail, Inc. Washington 2385 91-0502298 PTI Holding Corp. Nevada 2385 36-3857281 PTI Top Company, Inc. Nevada 2385 36-3857280 Star Sportswear Manufacturing Corp. Delaware 2385 04-1865930 The Mounger Corporation Washington 2385 91-0992719 The Scranton Outlet Corporation Delaware 2385 36-2956896 Washington Holding Company Georgia 2385 43-1141194
---------------- Copies of Communications to: STUART B. FISHER, ESQ. LAWRENCE H. BUDISH, ESQ. SENIOR VICE PRESIDENT, GENERAL COUNSEL PROSKAUER ROSE LLP AND SECRETARY 1585 BROADWAY LONDON FOG INDUSTRIES, INC. NEW YORK, NEW YORK 10036 8 WEST 40TH ST. (212) 969-3000 NEW YORK, NEW YORK 10018 (212) 790-3000 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effectiveness of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.: [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] ____________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] ____________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
==================================================================================================================================== TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) OFFERING PRICE(1) AGGREGATE OFFERING PRICE REGISTRATION FEE Common Stock, par value $.01 per share ..... 8,614,525 shares $ 5.38 $ 46,346,144 $13,672 10% Senior Subordinated Notes due 2003 ..... $100,000,000 100% $100,000,000 $29,500 principal amount Total ...................................... $146,346,144 $43,172 ====================================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended. The Co-Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Co-Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ SUBJECT TO COMPLETION, DATED AUGUST 28, 1998 LONDON FOG INDUSTRIES, INC. [GRAPHIC OMITTED] [GRAPHIC OMITTED] 8,614,525 SHARES COMMON STOCK AND $100,000,000 10% SENIOR SUBORDINATED NOTES DUE 2003 This prospectus covers (i) up to 8,000,000 shares of common stock, par value $.01 per share (the "Common Stock"), of London Fog Industries, Inc., a Delaware corporation (the "Company"), that are being offered for resale by certain selling stockholders of the Company (the "Selling Securityholders"), (ii) up to 614,525 shares of Common Stock issuable upon the exercise of warrants to purchase shares of Common Stock (the "Warrants") and (iii) up to $100,000,000 principal amount of 10% Senior Subordinated Notes due 2003 (the "Notes") that are being offered for resale by the Selling Securityholders. The exercise price of the warrants is $15.72 per share. Therefore, if all of the Warrants are exercised, the Company will receive net proceeds of $9,660,333. The Company will not receive any of the proceeds from the sale of the shares of Common Stock or the Notes being offered by the Selling Securityholders. The Notes mature on February 27, 2003, unless previously redeemed. The Notes bear interest at the rate of 10% per annum from February 27, 1998, or from the most recent date to which interest has been paid or provided for, payable semi-annually to holders of record at the close of business on the February 15 or August 15 immediately preceding the interest payment date on March 1 and September 1 of each year, commencing September 1, 1998. The Notes are redeemable, in whole or in part, at the option of the Company at any time at the redemption prices set forth herein, plus accrued and unpaid interest, if any, thereon to the date of redemption. Upon the occurrence of a Change of Control (as defined), each holder of the Notes will have the right to require the Company to repurchase all or any part of such holder's Notes at a price in cash equal to 101% of the aggregate principal amount of the Notes plus accrued and unpaid interest, if any, thereon to the date of repurchase. The Notes are subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company pursuant to an Intercreditor and Subordination Agreement (the "Subordination Agreement"). The Notes are guaranteed (the "Subsidiary Guarantees"), jointly and severally, on a senior subordinated basis by the Company's subsidiaries representing substantially all of the assets, cash flow and operations of the Company (collectively, the "Subsidiary Guarantors"). The obligations under the Notes are secured, on a senior subordinated basis, by a pledge of the capital stock of each Subsidiary Guarantor and by a security interest in substantially all of the assets of the Company and each Subsidiary Guarantor. As of May 30, 1998, the aggregate principal amount of Senior Indebtedness of the Company was approximately $90.0 million and the aggregate amount of pari passu Indebtedness (as defined) was approximately $11.2 million. In addition, as of May 30, 1998, the Company had up to an additional $110.0 million of available borrowings under the Senior Credit Facility (as defined), which borrowings would rank senior in right of payment to the Notes. The Subsidiary Guarantees are subordinated in right of payment to all existing and future Senior Indebtedness of the Subsidiary Guarantors on the same basis as the Notes are subordinated to Senior Indebtedness of the Company. The security interests granted by the Company and the Subsidiary Guarantors for the benefit of the holders of the Notes are subordinate in priority to the security interests held by the lender under the Senior Credit Facility in accordance with the terms of the Subordination Agreement. Prior to this offering, there has been no public market for the Common Stock or the Notes and the Company does not intend to list the Common Stock or the Notes on any securities exchange. The Notes are currently eligible for trading in the Private Offerings, Resales and Trading through Automatic Linkages ("PORTAL") market. The Company intends to make the Common Stock eligible for trading in the PORTAL market after the registration statement relating to this Prospectus is declared effective. SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. This Prospectus covers the distribution of shares of Common Stock and Notes being offered by the Selling Securityholders and the shares of Common Stock issuable upon exercise of the Warrants. The Common Stock and the Notes being offered by the Selling Securityholders may be offered and sold from time to time by the Selling Securityholders through underwriters, dealers or agents or directly to one or more purchasers in fixed price offerings, in negotiated transactions, at prices prevailing at the time of sale or at prices related to such prices. The Common Stock and the Notes may be sold separately from each other. The Shares issued upon exercise of the Warrants will be freely tradeable upon issuance, and delivery of this Prospectus will not be required in connection with such sales. See "Plan of Distribution." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1998 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors". THE COMPANY The Company is a leading designer, marketer and distributor of quality men's and women's rainwear and outerwear in the United States. The Company designs, markets and distributes its products under the Company-owned LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) and related brand names, as well as under the DOCKERS(Reg. TM), LEVI'S(Reg. TM) and SPERRY(Reg. TM) labels pursuant to licenses from the owners thereof, and sells its products through most major channels of distribution in its markets. The Company believes it has a dominant share of the men's rainwear market in department stores and a significant share of the men's outerwear and women's rainwear and outerwear markets in department stores. The Company also distributes its products to specialty retailers (including sport specialty retailers), national and regional chain stores, and discount and off-price retailers. In addition, the Company generates a significant portion of its sales from distributing its products through Company-operated retail stores. As of May 30, 1998, the Company operated 134 factory outlet stores, eight superstores and three Weather Stores(TM). In Fiscal 1998, the Company had net sales of approximately $336 million. The Company's products marketed under the LONDON FOG(Reg. TM) and the related FOG(Reg. TM) and TOWNE(Reg. TM) brands and under the SPERRY(Reg. TM) brand (licensed to the Company by the owner thereof) are referred to as the "London Fog Products" and the products marketed under the PACIFIC TRAIL(Reg. TM), INSIDE EDGE(Reg. TM) and BLACK DOT(Reg. TM) brands, and under the DOCKERS(Reg. TM) and LEVI'S(Reg. TM) brands (licensed to the Company by the owner thereof) are referred to as "Pacific Trail Products". BUSINESS STRENGTHS Management believes that the Company has several competitive advantages which are important to its business, including the following: IMAGE AND CONSUMER RECOGNITION. The LONDON FOG(Reg. TM) brand name was introduced in 1954 and has become one of the most well known apparel brand names in the United States, with a strong reputation for quality and value. The LONDON FOG(Reg. TM) brand name ranked 6th in the 1997 Fairchild 100 Consumer Survey of the most recognizable apparel and accessory brands. In the same survey, the LONDON FOG(Reg. TM) brand name ranked 1st among the outerwear brands. The Company has capitalized on the strength of the LONDON FOG(Reg. TM) brand name by expanding from its initial roots in formal men's rainwear to a broad range of rainwear, outerwear and related products each providing consumers with the quality, functionality and value they expect from the LONDON FOG(Reg. TM) brand. In addition, the PACIFIC TRAIL(Reg. TM) brand has developed a strong and growing niche as a competitively priced brand which targets value-conscious consumers who seek authentic, quality outerwear for recreational activities and casual wearing occasions. Management believes that the Company will be able to continue to capitalize on the strength of its brands by expanding into additional product categories, such as sportswear, and utilizing a sub-branding strategy to enable product and distribution channel extensions while preserving the identity of the LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) brand names. BROAD AND DIVERSIFIED DISTRIBUTION CHANNELS. The Company sells its products through a varied array of distribution channels. The Company believes that its ability to distribute its products through varied wholesale distribution channels (including department stores, specialty retailers, sport specialty retailers, national and regional chain stores, and discount and off-price retailers) and through its own retail stores (factory outlet stores and new retail concept stores) places the Company at a competitive advantage by reducing the Company's dependency on any one distribution channel. 2 RETAILING AS A COMPETITIVE ADVANTAGE. For Fiscal 1998, approximately 42% of the Company's net sales were generated through its retail stores, predominantly through its factory outlet stores. The Company's factory outlet stores are located in many of the primary outlet malls throughout the United States and the Company expects to open 20-25 additional factory outlet stores this year. The Company believes that operating its own retail stores provides the Company with the following advantages: (i) mitigating the Company's inventory risk by providing a controlled channel for selling excess inventory; (ii) increasing the breadth and control of the distribution of its products; (iii) preventing the Company from being solely dependent on third party retailers; and (iv) enabling the testing of new products, new product categories and new merchandise concepts. The Company also believes that its experience in operating its own retail stores provides the Company with a better understanding of the needs of its wholesale customers and the ultimate consumers of the Company's products. To further capitalize on these advantages, the Company is seeking to expand the distribution of its products by testing new Company-operated retail concepts through its superstores, Weather Stores(TM) and other potential retail store concepts. VARIETY OF PRODUCTS AND TARGET CONSUMERS. Through its well-known LONDON FOG(Reg. TM), PACIFIC TRAIL(Reg. TM) and related brands, as well as under the DOCKERS(Reg. TM), LEVI'S(Reg. TM), AND SPERRY(Reg. TM) labels pursuant to licenses from the owners thereof, the Company provides consumers with a broad selection of quality products, including a full assortment of outerwear for the entire family, for different end uses and different lifestyles at a broad range of price points. The Company provides products for use in all weather conditions and for use in dress, casual, outdoor and active end-uses. The Company believes this segmentation of its product offerings, targeting specific products to meet specific consumer lifestyle and end use requirements, increases its ability to satisfy the product needs of a broad consumer base. The Company is continuing to increase the variety of products it offers through the development of its own focused men's and women's sportswear collections to be marketed solely through the Company's retail stores. In addition, the Company continues to pursue additional opportunities to develop and market products under other well known brand names through license arrangements, as evidenced by the Company's license to market outerwear under the FOSSIL(Reg. TM) and related labels beginning in the fall 1999 season. STABLE PRODUCT LINES. The Company believes that the stability and continuity of the Company's core product lines relative to the fashion industry generally, with a significant portion of annual revenues being generated by similar styles carried over from the previous year, makes the Company less sensitive to fashion risk. WORLDWIDE PRODUCT SOURCING. The Company's merchandise is produced worldwide by independent manufacturers selected, monitored and coordinated by local Company employees to assure conformity to strict quality, cost and delivery standards. The Company believes the use of independent manufacturers, together with the Company's dedicated sourcing personnel, increases its production flexibility and capacity and allows it to maintain control over all aspects of the sourcing process, while at the same time substantially reducing capital expenditures and avoiding the costs of managing a large production work force. INTEGRATED OPERATING STRUCTURE. The integration of the Company's design, product procurement, production planning, marketing and merchandising functions enables the Company to effectively distribute products to its wholesale and retail customers in a timely manner and to control inventory. BUSINESS STRATEGY The Company's mission is to be the international leader in the design, marketing and distribution of quality rainwear, outerwear and other related products that protect consumers in all weather conditions. To achieve this objective, the Company focuses on maximizing the market penetration of its brands by executing a life style/end-use segmentation approach to the design, merchandising and marketing of the Company's broad range of products. The Company aims to develop a clearer understanding of the target customer for each of the Company's brands and product lines, and to segment its 3 products by types of target customers, which are differentiated by gender, age group and lifestyle and end-use requirements. In implementing this strategy, the Company has adopted an approach that divides its product offerings and brands into "dress," "casual," "outdoor," and "active" categories, through which the Company offers a broad range of products to satisfy different customer preferences and end-use requirements, all of which provide a consistently high standard of quality and value at price points consistent with the positioning of each brand. In addition to increasing the penetration of its existing brands and product lines, the Company's business plan includes seeking to add new brands (both through licensing of well-known, third party brands and development of new brands) and new product offerings to increase the breadth of coverage of the Company's products in terms of price, distribution channels and target consumers. Such new brands and product offerings must adhere to the Company's stringent standards of product quality, value and design while being positioned appropriately in the marketplace within the Company's overall life style/end-use segmentation approach. The Company may, in the future, under appropriate circumstances, enter into complementary acquisition opportunities consistent with the foregoing strategy in order to expand its stable of brand names and augment its product lines. The Company's business plans are designed to build upon the steps the Company has taken to grow its outerwear businesses, continuing the Company's transformation from a significant rainwear designer, marketer and distributor to a market force in all aspects of rainwear, outerwear and related products. This continued transformation is extremely important to the Company's future growth since the market for traditional rainwear is significantly smaller than the markets for either outerwear or other apparel products, such as sportswear, and the market demand for traditional rainwear continues to be adversely affected by the growth of casual attire in the workplace. Of Fiscal 1998 total net sales of $335.6 million, outerwear comprised 68%, rainwear comprised 27% and sportswear, accessories and other (primarily consisting of sales of goods purchased from licensees and other companies for sale in the Company's retail stores, such as hats, umbrellas, gloves, scarves and luggage) comprised 5%. This compares with Fiscal 1994 total net sales of $356.6 million, of which outerwear comprised 40%, rainwear comprised 42%, and sportswear, accessories and other (primarily consisting of a wholesale sportswear line consisting primarily of men's sweaters and knit shirts, which was discontinued at the end of Fiscal 1994, and men's and women's sportswear lines marketed solely through the Company's retail stores, which were discontinued during Fiscal 1996) comprised 18%. The Company's strategy of augmenting its range of brands, product offerings and target consumers was advanced significantly by the acquisition of Pacific Trail in April 1994. Pacific Trail, headquartered in Seattle since 1945 and inspired by the rugged outdoor lifestyle of the Pacific Northwest, is a leading designer, marketer and distributor of authentic, moderate-priced casual, outdoor and active outerwear for men, women and children. Wholesale sales of Pacific Trail Products in Fiscal 1998 were $85.8 million. After having discontinued its sportswear product lines in Fiscal 1996 as part of the Company's strategy to recover from the significant deterioration of its financial condition and operating results during Fiscal 1995 by streamlining the Company's operations and refocusing its operational and financial resources on its core rainwear and outerwear product categories, the Company has decided to reenter the business of marketing sportswear. Management plans to market focused lines of men's and women's sportswear through its retail stores, and expects that sportswear will be a growing product category for the Company. Management believes that the new sportswear lines will help broaden the appeal of the Company's stores to both existing and new customers, increase store sales, reduce the seasonality of the Company's sales and provide a product base to support potential additional Company-operated retail store concepts. A central part of the Company's growth plan is to increase its sales through Company-operated retail stores. The Company is already the dominant provider of men's rainwear and a significant provider of women's rainwear and men's and women's outerwear to department stores. However, 4 department stores are becoming an increasingly competitive environment as a result of the increased emphasis on private label products at lower prices and lifestyle "collection" brands at higher prices. In addition, the consolidation of department store groups over the past several years has significantly reduced the number of potential customers for the Company's products. Also, delivery problems in fall 1994 and spring 1995 had an adverse effect on the Company's relations with some of its department store customers, which contributed to a significant decrease in wholesale sales of London Fog Products. Therefore, Company-operated retail stores are an increasingly important distribution channel to the Company. In Fiscal 1998, net sales at the Company's retail stores totaled $139.9 million (41.7% of total net sales), as compared to $96.5 million (35.2% of total net sales) in Fiscal 1996. Retail sales include sales at the Company's factory outlet stores, superstores and Weather Stores(TM). At May 30, 1998, the Company operated 134 factory outlet stores. A typical factory outlet store is approximately 4,700 square feet and is located in a manufacturers' outlet mall. Factory outlet stores appeal to the value-oriented consumer and sell excess inventory, out-of-season merchandise and seconds, as well as current season, first-quality products. As of May 30, 1998, the Company operated eight test superstores. The Company's superstores, the first of which was opened in May 1997 in North Canton, Ohio, were opened to test an alternative, larger format retail distribution channel for the Company's product offerings to supplement its traditional wholesale and factory outlet store retail distribution channels. A typical superstore is located in a suburban shopping mall or strip mall and offers a superior selection of current season, first quality product for the entire family at highly competitive prices. Based on initial sales results for these test retail superstores, management has determined that most of the existing superstores, many of which are larger than 25,000 square feet, are too large to generate acceptable profitability within an acceptable period of time. The Company is currently targeting 10,000 to 12,000 square feet as the optimal size to test for its larger format superstores. In connection with adopting a plan to restructure its superstores, during the quarter ended May 30, 1998, the Company recorded a restructuring charge of $3.5 million related to the planned closing or downsizing of five of the Company's eight superstores open as of May 30, 1998. The Company expects to open one additional large format superstore during the remainder of the current Fiscal year (other than potential relocations of existing superstores in connection with their downsizing pursuant to the Company's superstore restructuring plan), an approximately 11,000 square foot store expected to open in late fall 1998 in Columbus, Ohio. The Company will continue to evaluate the optimal size and the best locations for its future superstores. The Company's principal executive offices are located at 1332 Londontown Boulevard, Eldersburg, Maryland 21784. The telephone number of the Company is (410) 795-5900. RISK FACTORS See "Risk Factors" for a discussion of certain factors that should be considered by prospective purchasers of the Common Stock and the Notes. THE OFFERINGS COMMON STOCK - ------------ Shares of Common Stock Offered................. 8,614,525 shares, including 614,525 shares issuable upon exercise of the Warrants. Use of Proceeds........ The Company will not receive any of the proceeds from the sale of Shares by the Selling Securityholders. If all of the Warrants are exercised, the Company will receive net proceeds of $9,660,333. 5 NOTES - ----- Notes Offered........... $100,000,000 aggregate principal amount of 10% Senior Subordinated Notes due 2003. Maturity Date............ February 27, 2003. Interest Payment Dates.. Each March 1 and September 1, commencing September 1, 1998. Optional Redemption by the Company............ The Notes are redeemable, in whole or in part, at the option of the Company at any time at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. See "Description of Notes -- Terms of the Notes -- Optional Redemption." Change of Control Repurchase............. Upon a Change of Control, each of the holders of the Notes will have the right to require the Company to purchase all or any portion of such holder's Notes at a price equal to 101% of the aggregate principal amount thereon, plus accrued and unpaid interest, if any, to the date of repurchase. See "Description of Notes -- Change of Control" for a discussion of the circumstances in which the Company may be required to make such a repurchase. The Senior Credit Facility prohibits the Company from purchasing any of the Notes and also provides that certain change of control events with respect to the Company constitute a default thereunder. See "Risk Factors -- Possible Inability to Repurchase Notes upon Change of Control." Security................. The Notes are secured, on a senior subordinated basis, by a pledge of the capital stock of each Subsidiary Guarantor, and by a security interest in substantially all of the assets of the Company and the Subsidiary Guarantors. Subordination............ The Notes are subordinated in right of payment to all existing and future Senior Indebtedness of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of May 30, 1998, the aggregate principal amount of Senior Indebtedness of the Company was approximately $90.0 million and the aggregate amount of pari passu Indebtedness was $11.2 million. In addition, as of May 30, 1998, the Company had up to an additional $110.0 million of available borrowings under the Senior Credit Facility, which borrowings would rank senior in right of payment to the Notes. Subsidiary Guarantees... The Notes are guaranteed, jointly and severally, on a senior subordinated basis by the Company's subsidiaries representing substantially all of the assets, cash flow and operations of the Company. The Subsidiary Guarantees are subordinated in right of payment to all existing and future Senior Indebtedness of the Subsidiary Guarantors on the same basis as the Notes are subordinated to Senior Indebtedness of the Company. 6 Principal Covenants..... The Indenture for the Notes (the "Indenture") imposes certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, merge or consolidate with any other person or sell assign, transfer, lease, convey or otherwise dispose of, all or substantially all of the assets of the Company. Use of Proceeds........ The Company will not receive any of the proceeds from the sale of the Notes. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements that are intended to provide investors with meaningful and useful information. These forward-looking statements represent management's current expectations, estimates, beliefs and assumptions concerning future business conditions and the outlook for the Company based on currently available information. Whenever possible, the Company has identified these forward-looking statements by words such as "anticipates," "believes," "expects," "estimates," "intends," "will be," "planned," variations of such words and similar expressions. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties related to the Company's operations, some of which are beyond the Company's control. Certain factors that could cause the Company's actual results or performance to differ materially from those expressed in these forward-looking statements are described in "Risk Factors," including, but not limited to the following: significant competition in the Company's primary product markets; significant seasonality of sales and cash flow; high degree of sensitivity of sales to weather; uncertain ability to achieve growth strategy and risks associated with the Company's superstores and new retail initiatives; impact of changing consumer preferences; dependence on key personnel; risks associated with international production and dependence on independent manufacturers; risks associated with production lead times and advance purchase of products; and the Company's substantial indebtedness, related covenants, restrictions and events of default and continued availability of financing. Given these risks and uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. The Company undertakes no obligation to update publicly any such risks and uncertainties or to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 7 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS) The summary consolidated financial information for the fiscal years ended February 26, 1994, February 25, 1995, February 24, 1996, February 22, 1997 and February 28, 1998 has been derived from the Company's audited Consolidated Financial Statements. The Consolidated Financial Statements for the fiscal years ended February 24, 1996, February 22, 1997 and February 28, 1998 and the fourteen weeks ended May 31, 1997 and thirteen weeks ended May 30, 1998 are included elsewhere in this Propectus. The summary consolidated financial information for the fourteen weeks ended May 31, 1997 and the thirteen weeks ended May 30, 1998 and as of May 31, 1997 and May 30, 1998 has been derived from the Unaudited Condensed Consolidated Financial Statements of the Company, which, in the opinion of management, have been prepared on the same basis as the Consolidated Financial Statements included elsewhere in this Prospectus and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations of the Company. Results for the fourteen weeks ended May 31, 1997 and the thirteen weeks ended May 30, 1998 are not indicative of the results for a full year. The information set forth below should be read in conjunction with the historical Consolidated Financial Statements, Unaudited Condensed Consolidated Financial Statements and related notes thereto of the Company and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
FISCAL YEAR ENDED -------------------------------------------------------------------------- FEBRUARY 26, FEBRUARY 25, FEBRUARY 24, FEBRUARY 22, FEBRUARY 28, 1994 (A) 1995 (A) 1996 1997 1998 (B) -------------- -------------- -------------- -------------- -------------- STATEMENT OF OPERATIONS DATA: Net sales .................................. $ 356,632 $ 330,520 $ 274,394 $ 279,107 $ 335,621 Cost of goods sold ......................... 253,429 290,372 203,469 185,102 227,405 --------- ---------- ---------- ----------- --------- Gross profit .............................. 103,203 40,148 70,925 94,005 108,216 Licensing revenues ......................... 4,221 3,184 1,947 3,064 4,055 --------- ---------- ---------- ----------- --------- 107,424 43,332 72,872 97,069 112,271 Selling, general and administrative expenses .................................. 75,004 106,908 86,641 83,848 98,499 Restructuring and special charges (c) ...... 28,275 61,190 -- -- 7,535 Deferred compensation expense (d) .......... -- -- -- -- 2,735 Amortization of goodwill and licensing agreements ................................ 5,253 6,643 4,024 2,487 2,126 Write-off of goodwill and licensing agreements (e) ............................ 16,651 51,136 -- -- -- --------- ---------- ---------- ----------- --------- Operating income (loss) ................... (17,759) (182,545) (17,793) 10,734 1,376 Interest expense, net ...................... 24,624 29,506 16,790 12,530 14,664 Gain from sale of investment. .............. -- -- -- -- (2,260) --------- ---------- ---------- ----------- --------- Income (loss) before provision (benefit) for income taxes, extraordinary items and cumulative effect of accounting change .................................... $ (42,383) $ (212,051) $ (34,583) $ (1,796) $ (11,028) --------- ---------- ---------- ----------- --------- Income (loss) before extraordinary items and cumulative effect of accounting change .................................... $ (32,383) $ (212,251) $ (34,759) $ (1,954) $ (5,096) Extraordinary gain (loss) on extinguishment of debt, net of tax (f)..... (3,267) (11,877) -- -- 160,855 Net income (loss) ......................... (35,650) (225,436) (34,759) (1,954) 155,759 BALANCE SHEET DATA (AT END OF PERIOD): Working capital (g) ........................ $ 90,184 $ (22,898) $ 69,276 $ 72,694 $ 49,000 Total assets ............................... 270,998 259,296 210,713 206,345 215,091 Total debt (h). ............................ 162,706 316,579 329,533 330,325 179,498 Total stockholders' equity (deficit) ....... 32,907 (127,427) (160,813) (162,066) (4,589) OTHER DATA: EBITDA (i) ................................. 36,824 (59,343) (9,933) 18,647 20,799 Depreciation expense ....................... 4,404 4,233 3,836 5,426 7,027 Adjusted cash interest (j) ................. 22,811 26,971 11,461 9,210 12,211 Capital expenditures.. ..................... 5,157 11,526 4,696 7,703 11,844 Ratio of EBITDA to Adjusted cash interest (k) .............................. 1.6 x -- -- 2.0 x 1.7 x Retail stores open at end of period ........ 110 122 99 125 136
FOURTEEN THIRTEEN WEEKS ENDED WEEKS ENDED MAY 31, MAY 30, 1997 1998 ------------- ------------ (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales .................................. $ 41,678 $ 36,627 Cost of goods sold ......................... 27,022 22,753 ---------- --------- Gross profit .............................. 14,656 13,874 Licensing revenues ......................... 1,010 860 ---------- --------- 15,666 14,734 Selling, general and administrative expenses .................................. 20,039 21,754 Restructuring and special charges (c) ...... 3,500 3,500 Deferred compensation expense (d) .......... -- 684 Amortization of goodwill and licensing agreements ................................ 561 532 Write-off of goodwill and licensing agreements (e) ............................ -- -- ---------- --------- Operating income (loss) ................... (8,434) (11,736) Interest expense, net ...................... 4,011 1,455 Gain from sale of investment. .............. -- -- ---------- --------- Income (loss) before provision (benefit) for income taxes, extraordinary items and cumulative effect of accounting change .................................... $ (12,445) $ (13,191) ---------- --------- Income (loss) before extraordinary items and cumulative effect of accounting change .................................... $ (12,493) $ (13,242) Extraordinary gain (loss) on extinguishment of debt, net of tax (f)..... -- -- Net income (loss) ......................... (12,493) (13,242) BALANCE SHEET DATA (AT END OF PERIOD): Working capital (g) ........................ $ 60,718 $ 37,733 Total assets ............................... 218,728 246,232 Total debt (h). ............................ 356,845 224,413 Total stockholders' equity (deficit) ....... (174,562) (17,401) OTHER DATA: EBITDA (i) ................................. (2,697) (5,062) Depreciation expense ....................... 1,676 1,958 Adjusted cash interest (j) ................. 2,614 3,724 Capital expenditures.. ..................... 2,173 2,212 Ratio of EBITDA to Adjusted cash interest (k) .............................. -- -- Retail stores open at end of period ........ 126 145
8 NOTES TO SUMMARY CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS) (a) The Company acquired Pacific Trail, Inc. and affiliated entities in April 1994. The statement of operations data and other data presented for the period preceding the acquisition do not include amounts for the acquired entities and therefore are not comparable to subsequent periods. Additionally, the statement of operations data and other data presented for the year in which the acquisition occurred are not comparable to subsequent periods. (b) The statement of operations data and other data for the fiscal year ended February 28, 1998 are based on a 53-week year. (c) The restructuring charge in Fiscal 1994 relates to the restructuring of the Company's operations (including the closing of three production facilities), brand repositioning (including the discontinuation of its knitwear division) and relocation of certain Company office facilities. The restructuring charge in Fiscal 1995 includes charges related to the restructuring of the Company's manufacturing, distribution, retail store and other operations, changes in senior management, the restructuring of its debt and equity capitalization, and a writedown related to an investment in a joint venture. The Fiscal 1998 charges relate to the closing of the Company's rainwear manufacturing plant located in Baltimore, Maryland and special payments made to certain executives of the Company due to the triggering of contractual "change of control" payment rights in the employment agreements of such executives. The restructuring charge in the fourteen weeks ended May 31, 1997 relates to the closing of the Company's Baltimore, Maryland rainwear manufacturing facility. The restructuring charge in the thirteen weeks ended May 30, 1998 relates to the planned closing or downsizing of five of the Company's eight test retail superstores open as of May 30, 1998. See Note 16 of Notes to Consolidated Financial Statements and Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements. (d) Deferred compensation expense in Fiscal 1998 and the thirteen weeks ended May 30, 1998 consists of compensation expense related to stock-based compensation of approximately $1,718 and $430, respectively, and compensation expense related to non-cash accruals under a deferred compensation plan of approximately $1,017 and $254, respectively. See Note 11 of Notes to Consolidated Financial Statements. (e) The write-off of goodwill and licensing agreements in Fiscal 1994 represents a write-off of goodwill attributable to the Company's discontinued knitwear division and a write-off of intangible assets related to licensing agreements terminated or not renewed by the Company as part of the Company's brand repositioning. The Fiscal 1995 figure represents a write-off of goodwill recorded based on the Company's evaluation of the impairment of goodwill resulting from the significant declines in sales, profitability and cash flow experienced in Fiscal 1995. (f) The extraordinary losses recorded in Fiscal 1994 and Fiscal 1995 represent the cumulative catch-up of amortization of deferred financing costs and redemption premium paid in connection with refinancings of certain of the Company's debt. The extraordinary gain recorded in Fiscal 1998 relates to the extinguishment of debt in connection with the 1998 Recapitalization. See Notes 8 and 13 of Notes to Consolidated Financial Statements. (g) Working capital represents current assets less current liabilities. Current liabilities include future interest payments capitalized under the provisions of SFAS 15 of $10,000 at each of February 28, 1998 and May 30, 1998. See Note 8 of Notes to Consolidated Financial Statements. (h) Total debt represents long-term debt, including current portion, plus revolving credit borrowings. Total debt includes future interest payments capitalized under the provisions of SFAS 15 of $91,533, $77,383, $50,000, $73,448 and $50,000 at February 24, 1996, February 22, 1997, February 28, 1998, May 31, 1997 and May 30, 1998, respectively. See Note 8 of Notes to Consolidated Financial Statements. (i) EBITDA represents operating income (loss) plus write-off of goodwill and licensing agreements, depreciation and amortization, deferred compensation expense and restructuring and special charges. The Company believes that EBITDA, as presented, provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered a substitute for net income as an indicator of the Company's operating performance or cash flow as a measure of liquidity. In addition, the method of calculating EBITDA set forth above may be different from calculations of EBITDA employed by other companies and, accordingly, may not be directly comparable to such other calculations. (j) Adjusted cash interest represents interest expense less non-cash interest expense, including the accretion of principal and the amortization of deferred financing costs, plus cash interest accrued or paid during the period which was accounted for in accordance with the provisions of SFAS 15 and, therefore, is not included in interest expense. (k) EBITDA was not sufficient to cover Adjusted cash interest in the fiscal years ended February 25, 1995 and February 24, 1996 and the fourteen weeks ended May 31, 1997 and the thirteen weeks ended May 30, 1998 in the amount of $86,314, $21,394, $5,311 and $8,786, respectively. 9 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE COMMON STOCK AND NOTES OFFERED BY THIS PROSPECTUS. INDEBTEDNESS AND LEVERAGE The Company is highly leveraged. As of May 30, 1998, the Company had outstanding indebtedness of $224.4 million, including $50 million of future interest payments on the $100 million principal amount of Notes capitalized in accordance with the provisions of SFAS 15. See "Capitalization." In addition, the Company's earnings have historically been insufficient to cover fixed charges and were insufficient by $11.0 million and $13.2 million for Fiscal 1998 and the thirteen week period ended May 30, 1998, respectively. The ability of the Company to repay or refinance its debt obligations will be dependent upon the future performance of the Company, which in turn will be subject to prevailing economic and competitive conditions and to other factors, some of which are beyond the control of the Company. Due to the highly seasonal nature of the rainwear and outerwear business, the Company's inventory and accounts receivable levels, and the associated capital needs and debt service obligations, fluctuate significantly during the year. There is no assurance that the Company's operating results, cash flow and capital resources will be sufficient to meet its debt service obligations (including the principal amount owing on the Notes when due). If such operating results, cash flow and capital resources are insufficient to meet the Company's debt service obligations, the Company will have to adopt one or more alternatives, such as reducing or delaying capital expenditures, refinancing or restructuring its debt, or selling assets in order to satisfy its debt obligations. The Company expects to need to refinance the Notes to meet the obligation to repay the principal amount owing on the Notes upon maturity. There is no assurance that any such reduction or delay of capital expenditures, refinancing or restructuring of debt (prior to or at maturity), or sales of assets could be effected on satisfactory terms, would be permitted by the Senior Credit Facility or would generate sufficient cash flow to meet such debt service obligations. The degree to which the Company is leveraged could have important consequences to the holders of the Notes and the Shares, including: (i) the Company's vulnerability to adverse general economic and industry conditions; (ii) the Company's ability to obtain additional financing for future working capital, capital expenditures, acquisitions, general corporate purposes or other purposes; and (iii) the dedication of a substantial portion of the Company's cash flow from operations to the payment of principal and interest on indebtedness, thereby reducing the funds available for operations and future business opportunities. SUBORDINATION; EFFECT OF ASSET ENCUMBRANCES Principal of, premium, if any, and interest on the Notes will be subordinated to all existing and future Senior Indebtedness of the Company, including all indebtedness pursuant to the Senior Credit Facility. Therefore, in the event of the bankruptcy, liquidation, dissolution, reorganization or other winding up of the Company or upon the acceleration of the Notes or any indebtedness, the assets of the Company will be available to pay obligations on the Notes only after Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Notes. In addition, under certain circumstances, no payments may be made for a specified period with respect to the principal of, premium, if any, or interest on the Notes if a default exists with respect to certain Senior Indebtedness. See "Description of the Notes -- Subordination." As of May 30, 1998, the aggregate principal amount of Senior Indebtedness of the Company was approximately $90.0 million and the Company had up to an additional $110.0 million of available borrowings (assuming there was an adequate collateral borrowing base) under the Senior Credit Facility, which borrowings would rank senior in right of payment to the Notes. Further, the claims of holders of the Notes will be effectively subordinated to indebtedness of the Company's subsidiaries. Subject to certain exceptions and financial tests set forth in the Indenture and the Senior Credit Facility, the Company may also incur additional Senior Indebtedness, and the Company's subsidiaries may incur additional indebtedness, in the future. The Company's obligations under the Senior Credit Facility are secured by a pledge of substantially all of the assets of the Company and guaranteed by substantially all of the Company's subsidiaries, representing substantially all of the assets, cash flow and operations of the Company. The Company's indebtedness under the Notes is also 10 secured by a pledge of assets of the Company and guaranteed by the Company's subsidiaries to the same extent as the Senior Credit Facility, but on a subordinated basis to the Senior Credit Facility. Therefore, if an event of default occurs under the Senior Credit Facility, the lenders thereunder will have a claim on substantially all of the assets of the Company and its subsidiaries (including trademarks) prior to any claim of the holders of the Notes. There can be no assurance that the remaining assets, if any, will be sufficient to satisfy the Company's obligations on the Notes. See "Description of the Senior Credit Facility." RESTRICTIONS UNDER FINANCING AGREEMENTS; VARIABLE INTEREST RATE The Senior Credit Facility contains certain financial and other covenants, including covenants requiring the Company to maintain certain financial ratios and restricting the ability of the Company and its subsidiaries to incur indebtedness or to create or suffer to exist certain liens. The ability of the Company to comply with such provisions may be affected by events beyond its control. A failure to make any required payment under the Senior Credit Facility, or to comply with any of the financial and operating covenants included in the Senior Credit Facility, would result in an event of default thereunder, permitting the lender to accelerate the maturity of the indebtedness under the Senior Credit Facility and foreclose upon its collateral and, depending upon the action taken by such lender, delaying or precluding payment of principal of, premium, if any, or interest on the Notes. See "Description of the Senior Credit Facility." Such an acceleration could also result in the acceleration of the Company's and its subsidiaries' other indebtedness. The Indenture also has certain covenants which, if not complied with, would result in an event of default thereunder permitting holders of the Notes to accelerate the Notes. See "Description of the Notes -- Events of Default." Any such event of default or acceleration could also result in the acceleration of other indebtedness of the Company. If the lender under the Senior Credit Facility accelerates the maturity of the indebtedness thereunder, there can be no assurance that the Company will have sufficient assets to satisfy its obligations under the Notes, nor could there be any assurance that the Company would be able to repay in full such indebtedness and other indebtedness of the Company, and in such event the equity holders could lose their entire investment. The Company's right to borrow under the Senior Credit Facility is dependent on the Company having an adequate collateral borrowing base, which is determined by a formula based on the eligible accounts receivable and the eligible inventory of the Company plus certain amounts during certain periods of the year. The Company's indebtedness under the Senior Credit Facility bears interest at rates that will fluctuate with changes in certain prevailing interest rates. A substantial increase in interest rates could adversely affect the Company's ability to satisfy its debt service obligations. POSSIBLE INABILITY TO REPURCHASE NOTES UPON CHANGE OF CONTROL. The Senior Credit Facility prohibits the Company from purchasing any of the Notes and also provides that certain change of control events with respect to the Company constitute a default thereunder. Any future credit agreements or other agreements relating to debt which is senior to the Senior Indebtedness to which the Company becomes a party may contain similar restrictions and provisions. In the event a Change of Control occurs at a time when the Company is prohibited from purchasing the Notes, the Company could seek the consent of its lenders to the purchase of the Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such consent or repay such borrowings, the Company will remain prohibited from purchasing the Notes by the relevant Senior Indebtedness. In such case, the Company's failure to purchase the tendered Notes would constitute an event of default under the Indenture which would, in turn, constitute a default under the Senior Credit Facility and could constitute a default under other Senior Indebtedness. In such circumstances, the subordination provisions in the Subordination Agreement would restrict payments to the holders of the Notes. Furthermore, no assurance can be given that the Company, if permitted to repurchase the Notes, will have sufficient resources to satisfy its repurchase obligation with respect to the Notes following a Change of Control. See "Description of Notes" SUBSTANTIAL COMPETITION The apparel industry, in general, and the markets for rainwear and outerwear, in particular, are highly competitive. The Company must remain competitive in the areas of product functionality, style, quality, brand recognition, price and customer service. The Company faces significant competition from numerous branded apparel 11 companies, including those which market predominantly rainwear and/or outerwear, as well as those which market full line apparel "collections" including rainwear and/or outerwear. In addition, the Company faces significant competition from various retailers, including many of the Company's department store customers, which market rainwear and/or outerwear under their own "private" labels. These and other competitors pose significant challenges to the Company's market share in each of its product categories. Many of the Company's competitors are significantly larger and have substantially greater financial, distribution, marketing and other resources than the Company. There is no assurance that the Company will be able to compete successfully against present or future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company. See "Business Competition." CHANGING FASHION TRENDS Although the Company's rainwear and outerwear products have been historically less sensitive to fashion trends than other apparel products, the apparel industry is subject to rapidly changing consumer preferences, which may affect companies which misjudge such preferences. In addition, in recent years the Company has been adversely affected by the growth of casual attire in the workplace, which has decreased overall market demand for rainwear products used primarily with "dress" or formal attire. Furthermore, changes in fashion trends could have a greater impact as the Company expands its product offerings to include more sportswear. To compete successfully in the apparel industry, the Company must be able to anticipate, gauge and respond to changing consumer demand and tastes relatively far in advance of customer orders, as well as to operate within substantial production and delivery constraints. If the Company materially misjudges the market for a particular product or product group, the Company may be faced with a substantial amount of excess inventory. Although the Company attempts to mitigate its inventory risk by obtaining a significant portion of its wholesale orders in advance, production orders must generally be placed with manufacturers before all of a season's wholesale orders are received by the Company, and such wholesale customer orders are, in many instances, cancelable by the customer. In addition, although the Company is subject to the same risk of changing consumer demand and tastes in its own retail stores, the Company's factory outlet stores provide a controlled distribution channel for selling excess inventory. Nonetheless, failure to anticipate and respond to changes in consumer preferences and demands could lead to, among other things, lower sales, lower gross margins, excess inventories, and reduced future consumer acceptance of the Company's brand names and product lines, which could have a material adverse effect on the Company. SEASONALITY AND FLUCTUATIONS IN OPERATING RESULTS; WEATHER The Company's results of operations have fluctuated and will continue to fluctuate significantly from period to period. Most of the Company's products are marketed on a seasonal basis, with a product mix currently weighted substantially toward the fall season. Historically, the Company has realized its highest level of sales (approximately 40% of the full year's net sales) in its third fiscal quarter (September through November) and its lowest level of sales in its first fiscal quarter (March through May). Related to this seasonality of sales, the Company historically has generated significant operating losses in the first fiscal quarter and has generated significantly stronger operating income in the third fiscal quarter than in any of the other quarters. Thus, the Company's annual results are highly dependent upon its ability to deliver product and realize strong sales to the end-consumer during the key fall selling period. The impact of warm and dry weather in the fall and winter months can have a negative effect on sales during the crucial fall and winter retail season as well as the following spring and fall seasons. For example, the Company believes that unseasonably warm weather in many regions of the United States during fall 1997 and winter 1997/1998 adversely affected the Company's net sales, gross margin and operating income during its fiscal year ended February 28, 1998 ("Fiscal 1998") and contributed to the level of excess inventory held at the end of Fiscal 1998. Sustained periods of unseasonably warm and dry weather could have a material adverse effect on the Company. The seasonality of the Company's sales and the impact of weather on sales, along with other factors that are beyond the Company's control, including general economic conditions, changes in consumer behavior, availability of import quotas and currency exchange rate fluctuations, could adversely affect the Company and cause its results of operations to fluctuate. Results of operations in any period should not be considered indicative of the results to be expected in any future period. UNCERTAIN ABILITY TO ACHIEVE GROWTH STRATEGY As a primary focus of its growth strategy and in response to the increased competitive pressures faced by the Company in recent years in its traditional wholesale distribution channels, in Fiscal 1998 the Company began to open Company-operated retail superstores to test an alternative, larger format retail distribution channel for the 12 Company's product offerings to supplement the Company's existing wholesale and factory outlet store distribution channels. In Fiscal 1998, the Company opened seven test superstores in suburban locations in the northeast and midwest regions of the United States and the Company opened an eighth superstore in the first quarter of Fiscal 1999. The first superstore, opened in May 1997, was approximately 37,000 square feet and the average size of the first seven superstores was approximately 23,000 square feet, with four of the stores larger than 26,000 square feet. Each of the seven test superstores was unprofitable in Fiscal 1998 as a result of costs related to the start-up of these stores and lower than expected sales levels. The seven superstores as a whole generated an operating loss of $4.1 million, before allocation of corporate overhead expenses, for Fiscal 1998. Based on the experience with these initial test superstores, the Company believes that most of the existing superstores are too large to generate acceptable profitability within an acceptable period of time. As a result, the Company has adopted a plan to restructure its larger format store strategy by closing or significantly downsizing five of the Company's eight current test superstores and shifting to a revised format which focuses on a store size significantly smaller than 25,000 square feet and includes the planned expansion of product offerings beyond rainwear and outerwear, such as sportswear and accessories. The Company is currently targeting 10,000 to 12,000 square feet as the optimal size to test for its larger format superstores. The Company believes that the planned reduction in store size and expansion of product offerings will help broaden the appeal of the stores to both existing and new customers, increase store sales, reduce the seasonality of the Company's sales and increase store profitability. There can be no assurance that the restructuring of the Company's superstores will result in improved financial results or that the Company's superstore growth strategy will be successful in increasing the sales or profitability of the Company. In connection with adopting a plan to restructure its superstores, during the quarter ended May 30, 1998, the Company recorded a restructuring charge of $3.5 million related to the planned closing or downsizing of five of the Company's eight superstores open as of May 30, 1998. Included in this charge is an accrual of $1.6 million for anticipated cash restructuring expenditures to cover costs associated with amending or terminating store leases and other related costs, and $1.9 million of non-cash charges related to anticipated write-offs of fixed assets, including fixtures and leasehold improvements, in the stores to be closed or downsized. As of May 30, 1998, the Company leased eight superstores, averaging approximately 23,000 square feet with an average remaining lease term of approximately nine years, excluding any renewal options exercisable at the election of the Company, and average annual base rent payments (excluding related common area maintenance, insurance and property taxes) of approximately $310,000 per year during their remaining lease terms. There can be no assurance that the Company will complete the closing or downsizing of the five targeted superstores as scheduled or that the costs involved will not significantly exceed those accrued for in the restructuring charge for the quarter ended May 30, 1998. In addition to its larger format superstores, the Company is currently analyzing other initiatives for growth, including additional Company-operated retail store concepts. Such retail initiatives typically require cash for store opening capital expenditures and initial working capital. There can be no assurance that these initiatives will be pursued and, if pursued, that they will be successful in increasing the sales or profitability of the Company. DEPENDENCE ON KEY PERSONNEL The Company's future success will depend in part on the continued service of certain key management and other personnel, including Robert E. Gregory, Jr., the Company's Chairman and Chief Executive Officer, and C. William Crain, the Company's President and Chief Operating Officer, and on the Company's ability to attract and retain qualified managerial, design, sales and marketing personnel. Competition for these employees is intense. The Company has employment agreements with Messrs. Gregory and Crain through February 2002. There is no assurance that the Company can retain its existing key personnel or that it can attract and retain sufficient numbers of qualified employees in the future. The loss of key employees or the inability to hire or retain qualified personnel in the future could have a material adverse effect on the Company. See "Management." DEPENDENCE ON INDEPENDENT MANUFACTURERS The Company's products are produced by approximately 90 independent manufacturers worldwide. For Fiscal 1998, over 99% (by dollar volume) of the Company's total production was produced by independent manufacturers located outside of the United States, principally in Asia. The Company's last Company-operated manufacturing facility, its rainwear manufacturing facility in Baltimore, Maryland, was closed in May 1997 and accounted for less than 1% (by dollar volume) of the Company's total Fiscal 1998 production. No manufacturer accounted for more than five percent of the Company's total production for Fiscal 1998. 13 The inability of a manufacturer to ship orders of the Company's products in a timely manner or to meet the Company's quality standards could cause the Company to miss the delivery requirements of its wholesale customers and Company-operated retail stores for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect on the Company. Although the Company enters into a number of purchase order commitments each season specifying a time frame for delivery, method of payment, design and quality specifications and other standard industry provisions, the Company does not have long-term contracts with any manufacturer. In addition, the Company competes with other companies for the production capacity of independent manufacturers and import quota availability. Certain of these competing companies have substantially greater financial and other resources than the Company and thus may have an advantage in the competition for production capacity and import quota availability. The Company requires its independent manufacturers to operate in compliance with applicable laws and regulations. Although the Company's internal and vendor operating guidelines promote ethical business practices and the Company's sourcing personnel periodically visit and monitor the operations of its independent manufacturers, the Company does not control these vendors or their labor practices. The violation of labor or other laws by an independent manufacturer of the Company, or the divergence of an independent manufacturer's labor practices from those generally accepted as ethical in the United States, could result in adverse publicity for the Company and could have a material adverse effect on the Company. ADVANCE PURCHASE OF PRODUCTS As a result of the lead time required for the offshore manufacture and transportation of the Company's products and related raw materials, as well as to minimize purchasing costs by reserving production capacity and avoiding costs related to expedited service, the time necessary to fill customer orders and the risk of non-delivery, the Company places orders for its products with its independent manufacturers prior to the time the Company has received all of its wholesale customers' orders and maintains an inventory of certain products that it anticipates will be in greater demand. There is no assurance, however, that the Company will be able to sell the products it has ordered from manufacturers or that it has in its inventory. Customer orders, moreover, are, in many instances, cancelable by the customer. Inventory levels in excess of customer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have a material adverse effect on the Company. As a result of lower than expected sales in fall 1997 and winter 1997/1998, the Company's inventory was approximately $21.6 million higher at February 28, 1998 than at February 22, 1997 and was approximately $28.2 million higher at May 30, 1998 than at May 31, 1997. This higher level of inventory may have an adverse effect on the Company's gross margin and profitability achieved on its sales during Fiscal 1999. As of May 30, 1998, the Company had $26.7 million of letters of credit outstanding related to open purchase orders with its manufacturers and $124.8 million of inventory at cost. DEPENDENCE ON RAW MATERIAL SUPPLIERS Certain of the raw materials (such as fabrics, linings and trim items) used by the Company are manufactured to its custom specifications to be shipped to its independent manufacturers and may be available in the short term from only one or a very limited number of vendors. While the Company believes it could find additional vendors to produce these raw materials, the interruption or delay of supply of these materials by existing vendors, for any reason, could have a material adverse effect on the Company. Four of the Company's raw material suppliers accounted for approximately 37% of the Company's raw material needs (excluding trim items) for the fall 1997 and spring 1998 seasons. South Korean-based suppliers account for a significant majority of the Company's fabric purchases. INTERNATIONAL OPERATIONS As indicated above, nearly all of the Company's products are sourced outside the United States through arrangements with approximately 90 manufacturers in approximately 15 countries, principally in Asia. As a result, the Company's business is subject to the risks generally associated with doing business abroad, such as foreign governmental regulations, political unrest, disruptions or delays in shipments, labor relations and changes in economic conditions in countries in which the Company manufactures its products, including the economic instability in recent months in several Asian countries. These factors, among others, could influence the Company's ability to 14 manufacture its products or procure certain materials. If any such factors were to render the conduct of business in a particular country undesirable or impractical, there could be a material adverse effect on the Company. The Company continues to monitor the political stability of the countries in which it conducts business and the financial condition of its independent manufacturers. In addition, the Company realizes international licensing revenues from licensing agreements with third parties which provide for the manufacture and marketing in certain foreign countries of various apparel and accessories under Company-owned trade names. For Fiscal 1998, the Company generated $2.1 million of licensing revenues with respect to its licensing activities outside of the United States. The Company's international licensing business is also subject to the risks generally associated with doing business abroad described above. IMPORTS AND IMPORT RESTRICTIONS Many of the Company's imports are subject to existing or potential duties, tariffs or quotas that may limit the quantity of certain types of goods that may be imported into the United States, including constraints imposed by bilateral textile agreements between the United States and a number of foreign countries. These agreements impose quotas on the amount and type of goods which can be imported into the United States from these countries. Changes in quota availability could force the Company to alter its production schedules, causing potential delivery delays. Such agreements also allow the United States to impose, at any time, restraints on the importation of categories of merchandise that, under the terms of the agreements, are not subject to specific limits. The Company's imported goods are also subject to United States customs duties which are a material portion of the Company's cost of goods. The United States and the countries in which the Company's products are manufactured may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adversely adjust presently prevailing quotas, duties or tariff levels. While the Company is unaware of any current impositions, adjustments or increased scrutiny which would materially adversely affect the Company or its ability to continue to import products at current or increased levels or the amount of the customs duties on those products, the Company cannot predict the likelihood or frequency of any such events occurring. A significant portion of the Company's products are produced in China. In June 1998 President Clinton extended to June 1999 "most favored nation" ("MFN") non-discriminatory trading status to China. Under U.S. law, MFN status for China is reviewed annually. The United States has extended MFN status to China each year since 1980. A revocation of MFN status for China would result in a substantial increase in tariff rates on goods imported from China and therefore could have a material adverse effect on the Company. CURRENCY EXCHANGE RATE FLUCTUATIONS The Company generally purchases its products in U.S. dollars. The Company, however, sources nearly all of its products overseas and the cost of these products may be affected by changes in the value of the relevant currencies. Price increases caused by currency exchange rate fluctuations could make the Company's products less competitive or have an adverse effect on the Company's profit margins. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce the Company's apparel by making their purchases of raw materials more expensive and adversely affecting their ability to obtain financing for raw materials. The Company does not engage in hedging activities with respect to such exchange rate risks. SIGNIFICANT MATERIALITY OF GOODWILL The Company's balance sheet as of May 30, 1998 includes $68.8 million of goodwill, which represents 27.9% of the Company's total assets. The Company's goodwill was recognized on its balance sheet in connection with: (i) the June 1990 acquisition of the equity of the Company (through the purchase of the common stock of a holding company ("Holdings") of which the Company was a wholly-owned subsidiary at the time) by an investor group; and (ii) the April 1994 acquisition of Pacific Trail, Inc. by Holdings. Goodwill arises when an acquirer pays more for a business than the fair value of the tangible and separately measurable intangible net assets. Generally accepted accounting principles require that this and all other intangible assets be amortized over the period benefitted. Management has determined that the period benefitted by the goodwill will be no less than 40 years. If management failed to separately recognize a material intangible asset having a benefit period less than 40 years or failed to give effect to shorter benefit periods of factors giving rise to a material portion of the goodwill, then earnings 15 reported in periods immediately following the acquisition would be overstated. In later years, the Company would be burdened by a continuing charge against earnings without the associated benefit to income valued by management in arriving at the consideration paid for the business. Earnings in later years also could be significantly affected if management determined that the remaining balance of goodwill was impaired. Management has reviewed all of the factors and related future cash flows which it considered in arriving at the amount incurred in each of the transactions which gave rise to recording goodwill. Management concluded that the anticipated future cash flows associated with intangible assets recognized in the acquisitions will continue indefinitely and there is no persuasive evidence that any material portion will dissipate over a period shorter than 40 years. The Company continually evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related business units' operating earnings over the remaining life of the goodwill in measuring whether the goodwill is recoverable. Consistent with this policy, the Company wrote off approximately $10.9 million in goodwill attributable to its knitwear division in Fiscal 1994 and $51.1 million in goodwill attributable to its other divisions in Fiscal 1995. ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE There has been no active public market for the Notes or the Common Stock and the Company does not intend to apply for listing of the Notes or the Common Stock on any securities exchange or for quotation on NASDAQ. The Notes are currently eligible for trading in the PORTAL market. The Company intends to make the Common Stock eligible for trading in the PORTAL market after the Registration Statement becomes effective. There can be no assurance as to the liquidity of the market for the Notes or the Common Stock or that an active market for the Notes or Common Stock will develop. If an active market does not develop, the price and liquidity of the Notes or the Shares, as the case may be, may be adversely affected. The Company believes quarterly fluctuations in its financial results and factors not directly related to the Company's operating performance, such as product or financial results announcements by other apparel companies, could contribute to the volatility of the prices of the Notes and the Common Stock, causing the prices of the Notes and the Common Stock to fluctuate significantly. These factors, as well as general economic conditions, such as recessions or high interest rates, may adversely affect the market prices of the Notes and the Common Stock. POTENTIAL ANTI-TAKEOVER EFFECT OF DELAWARE LAW Certain provisions of Delaware law could make a merger, tender offer or proxy contest involving the Company more difficult, even if such events could be beneficial to the interests of the stockholders. These provisions include Section 203 of the Delaware General Corporation Law, which prohibits certain business combinations with interested stockholders. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Common Stock. See "Description of Securities." SHARES ELIGIBLE FOR FUTURE SALE As of February 28, 1998, options to purchase a total of 1,925,334 shares had been granted (of which options to purchase 508,445 shares were exercisable as of February 28, 1998) under the 1998 Stock Option Plan and there remained available for future grant options to purchase 74,666 shares under the Plan. The Company intends to file promptly after the registration statement relating to this Prospectus is declared effective a registration statement on Form S-8 (the "S-8") under the Securities Act of 1933 (the "Securities Act") covering the 2,000,000 shares of Common Stock reserved for issuance under the 1998 Stock Option Plan. See "Management -- Stock-Based Compensation Plans." The S-8 is expected to become effective immediately upon filing, whereupon, subject to Rule 144 volume limitations applicable to "affiliates" of the Company (as that term is defined under the rules and regulations of the Securities Act) during the first 12 months after the effectiveness of the Prospectus, shares of Common Stock issued upon exercise of outstanding stock options granted pursuant to the 1998 Stock Option Plan will be available for immediate resale. 16 THE RECAPITALIZATION On February 27, 1998, the Company consummated a restructuring of its outstanding subordinated debt and equity capitalization (the "1998 Recapitalization"). The objectives of the 1998 Recapitalization were to improve the Company's financial condition and provide the Company with a capital structure to facilitate its continued growth through execution of its strategic business plan. In the 1998 Recapitalization, the aggregate principal amount outstanding under a term loan entered into by the Company on May 31, 1995 in the original principal amount of $175 million (the "1995 Term Loan") and under a note dated May 31, 1995 in the original principal amount of $36 million (the "1995 Note") which, together with deferred or accrued interest, aggregated approximately $257.2 million as of February 27, 1998 was restructured into: (i) the Notes in the aggregate principal amount of $100 million and (ii) 8,000,000 shares of newly issued common stock of the Company, representing 100% of the outstanding shares of common stock as of February 28, 1998, and representing 80% of the shares of Common Stock outstanding after giving pro forma effect to the potential issuance of 2,000,000 shares of Common Stock pursuant to the Company's 1998 Stock Option Plan, but not giving pro forma effect to the potential shares to be issued upon the exercise of the 1998 Recapitalization Warrants (as defined below) or the management warrants issued in connection with the Company's 1998 Stock Option Plan (the "1998 Management Warrants"). See "Management." Pursuant to the 1998 Recapitalization transactions, all of the aggregate outstanding shares of Series A and Series B Preferred Stock of the Company as of February 27, 1998 were converted into warrants to purchase an aggregate of 530,726 common shares of the Company (the "1998 Recapitalization Warrants"). Each of the 1998 Recapitalization Warrants represents the right to purchase one share of common stock of the Company at a price of $15.72 per share at any time through February 28, 2005. The options held by certain executive officers to purchase shares of Series C cumulative preferred stock at an exercise price of $13 per share were canceled as a result of the 1998 Recapitalization transactions. Also pursuant to the 1998 Recapitalization transactions, all of the shares of Common Stock outstanding immediately prior to giving effect to the 1998 Recapitalization were canceled and each share of Common Stock held by the holders of Series B Preferred Stock was converted into $.01 in cash per share. The 1998 Recapitalization Warrants together with the 1998 Management Warrants constitute the Warrants. THE COMPANY The Company is a leading designer, marketer and distributor of quality men's and women's rainwear and outerwear in the United States. The Company designs, markets and distributes its products under the Company-owned LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) and related brand names, as well as under the DOCKERS(Reg. TM), LEVI'S(Reg. TM) and SPERRY(Reg. TM) labels pursuant to licenses from the owners thereof, and sells its products through most major channels of distribution in its markets. The Company believes it has a dominant share of the men's rainwear market in department stores and a significant share of the men's outerwear and women's rainwear and outerwear markets in department stores. The Company also distributes its products to specialty retailers (including sport specialty retailers), national and regional chain stores, and discount and off-price retailers. In addition, the Company generates a significant portion of its sales from distributing its products through Company-operated retail stores. As of May 30, 1998, the Company operated 134 factory outlet stores, eight superstores and three Weather Stores(TM). In Fiscal 1998, the Company had net sales of approximately $336 million. The Company's products marketed under the LONDON FOG(Reg. TM) and the related FOG(Reg. TM) and TOWNE(Reg. TM) brands and under the SPERRY(Reg. TM) brand (licensed to the Company by the owner thereof) are referred to as the "London Fog Products" and the products marketed under the PACIFIC TRAIL(Reg. TM), INSIDE EDGE(Reg. TM) and BLACK DOT(Reg. TM) brands, and under the DOCKERS(Reg. TM) and LEVI'S(Reg. TM) brands (licensed to the Company by the owner thereof) are referred to as the "Pacific Trail Products". 17 The Company traces the origins of its business back over 70 years to a small manufacturer of fine men's clothing and topcoats. The nationally recognized LONDON FOG(Reg. TM) brand name was introduced in 1954. In 1976, the Company was purchased by INTERCO Incorporated ("Interco"). In 1988, Interco sold the Company to Holdings, which was formed by certain members of the Company's management and whose primary investor was General Electric Capital Corporation. In 1990, investment funds managed by Merrill Lynch Capital Partners purchased a significant majority of the equity of Holdings. In April 1994, the Company acquired all the outstanding shares of Pacific Trail, Inc. ("Pacific Trail"), a leading designer, marketer and distributor of authentic, moderate priced casual, outdoor and active outerwear for men, women and children. On May 31, 1995, the Company consummated a restructuring of its outstanding debt and equity capitalization (the "1995 Recapitalization"). On February 27, 1998, the Company consummated a further restructuring of its outstanding subordinated debt and equity capitalization. See "The Recapitalization." The Company's principal executive offices are located at 1332 Londontown Boulevard, Eldersburg, Maryland 21784. The telephone number of the Company is (410) 795-5900. USE OF PROCEEDS Up to a total of 614,525 shares of Common Stock that are covered by this Prospectus will be issued upon exercise of the Warrants. Specifically, up to 530,726 shares of Common Stock that are covered by this Prospectus will be issued upon exercise of the 1998 Recapitalization Warrants and up to 83,799 shares of Common Stock that are covered by this Prospectus will be issued upon exercise of the 1998 Management Warrants. Assuming that all of the 1998 Recapitalization Warrants and all of the 1998 Management Warrants are exercised, the maximum net proceeds to the Company will be $9,660,333. Any net proceeds received upon exercise of the 1998 Recapitalization Warrants or the 1998 Management Warrants will be used for general corporate purposes. The Company will not receive any of the proceeds from the sale of the shares of Common Stock or Notes or the shares issued upon exercise of the Warrants by the Selling Securityholders. DIVIDEND POLICY The Company does not anticipate paying cash dividends in the foreseeable future. The Company currently intends to retain any future earnings for use in the Company's business. Normally, the payment of dividends is within the discretion of the Company's Board of Directors and depends on the earnings, capital requirements and operating and financial condition of the Company, among other factors. However, the Senior Credit Facility prohibits, and the Indenture significantly restricts, the ability of the Company to pay dividends. See "Description of Notes", "Description of Certain Indebtedness - Senior Credit Facility" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." 18 CAPITALIZATION (DOLLARS IN THOUSANDS) The following table sets forth the actual short-term debt and capitalization of the Company as of February 28, 1998 and May 30, 1998. The information set forth below should be read in conjunction with the Consolidated Financial Statements and related notes thereto of the Company and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
FEBRUARY 28, MAY 30, 1998 1998 -------------- ------------ (UNAUDITED) Short-term debt: Revolving credit borrowings (a). .................................. $ 18,176 $ 63,213 Current portion of long-term debt: Principal. ...................................................... 512 526 Future interest capitalized per SFAS 15 (b) ..................... 10,000 10,000 ---------- ---------- Total short-term debt. ......................................... $ 28,688 $ 73,739 ========== ========== Long-term debt, net of current portion: Mortgage note payable ............................................. $ 10,810 $ 10,674 10% Senior Subordinated Notes due 2003 (b) Principal (b) ................................................... 100,000 100,000 Future interest capitalized per SFAS 15 (b). .................... 40,000 40,000 ---------- ---------- Total recorded amount (b) ....................................... 140,000 140,000 ---------- ---------- Total long-term debt, net of current portion (b) ............... 150,810 150,674 ---------- ---------- Stockholders' equity (deficit): Common Stock, 12,000,000 shares authorized; 8,000,000 shares issued and outstanding (c). ............................................ 80 80 Warrants outstanding. ............................................. 536 536 Additional paid-in-capital ........................................ 165,493 165,493 Unearned portion of stock options ................................. (4,789) (4,359) Accumulated deficit ............................................... (165,909) (179,151) ---------- ---------- Total stockholders' equity (deficit). .......................... (4,589) (17,401) ---------- ---------- Total capitalization ........................................... $ 146,221 $ 133,273 ========== ==========
- ---------- (a) Excludes outstanding letters of credit of $24.8 million as of February 28, 1998 and $26.7 million as of May 30, 1998. (b) The Notes were issued pursuant to the 1998 Recapitalization in an aggregate principal amount of $100 million. The Company has accounted for the 1998 Recapitalization in accordance with the provisions of SFAS 15. Since the Notes require total future payments of $150 million, including $50 million of interest payments over five years, SFAS 15 requires the Company to record $150 million of debt on its balance sheet related to the $100 million principal amount of the Notes. As a result, the Company will record all future payments on the Notes, including principal and $10 million per year of interest payments as a reduction of the recorded debt balance and no interest expense will be recorded on the Company's Consolidated Statements of Operations with respect to the Notes. Of the $150 million total recorded amount of the Notes as of February 28, 1998 and May 30, 1998, the scheduled interest payments of $10 million during the next twelve months are reflected in current portion of long-term debt with the remaining $140 million reflected in long-term debt, net of current portion. See Note 8 of Notes to Consolidated Financial Statements. (c) Excludes 2,000,000 shares reserved for issuance under the 1998 Stock Option Plan, of which 1,925,334 and 1,910,194 shares were subject to outstanding options at February 28, 1998 and May 30, 1998, respectively, at an exercise price of $2.00 per share. Also excludes 614,525 shares reserved for issuance upon the exercise of the 1998 Recapitalization Warrants and the 1998 Management Warrants, of which 611,393 and 610,758 shares were subject to outstanding warrants at February 28, 1998 and May 30, 1998, respectively, at an exercise price of $15.72 per share. See "The Recapitalization", "Management -- Stock Incentive Plans" and Notes 8 and 10 of Notes to Consolidated Financial Statements. 19 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following Unaudited Pro Forma Consolidated Financial Data is derived from the Company's consolidated statement of operations for the fiscal year ended February 28, 1998. The unaudited Pro Forma Consolidated Statement of Operations is adjusted to give effect to the 1998 Recapitalization as if the transaction had occurred at the beginning of the period. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. No pro forma consolidated balance sheet is presented since the historical Consolidated Balance Sheet of the Company as of February 28, 1998 reflects the balance sheet impact of the 1998 Recapitalization, which was consummated on February 27, 1998. The Unaudited Pro Forma Consolidated Financial Data should be read in conjunction with the Company's Consolidated Financial Statements as of and for the fiscal year ended February 28, 1998 and related notes thereto included elsewhere in this Prospectus. The Unaudited Pro Forma Consolidated Financial Data do not purport to represent what the Company's results of operations would have been had the above transaction occurred on the date specified or to project the Company's results of operations for or at any future period or date.
PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA ------------------- ------------------- ----------------- STATEMENT OF OPERATIONS DATA: Net sales .................................................... $ 335,621 $ -- $335,621 Cost of goods sold ........................................... 227,405 -- 227,405 ----------- ---------- ------------ Gross profit ................................................ 108,216 -- 108,216 Licensing revenues ........................................... 4,055 -- 4,055 ----------- ---------- ------------ 112,271 -- 112,271 Selling, general and administrative expenses ................. 98,499 -- 98,499 Restructuring and special charges ............................ 7,535 -- 7,535 Deferred compensation expense ................................ 2,735 2,735 (a) 5,470 (a) Amortization of goodwill and licensing agreements ............ 2,126 -- 2,126 ----------- ---------- ------------ Operating income (loss) ..................................... 1,376 (2,735) (1,359) Interest expense, net ........................................ 14,664 (6,285) (b) 8,379 (c) Gain from sale of investment ................................. (2,260) -- (2,260) ----------- ---------- ------------ Income (loss) before provision (benefit) for income taxes and extraordinary gain ........................................ (11,028) 3,550 (7,478) Provision (benefit) for income taxes ......................... (5,932) -- (5,932) ----------- ---------- ------------ Loss before extraordinary gain .............................. $ (5,096) $ 3,550 $ (1,546) =========== ========== ============ Basic and diluted earnings per share Income (loss) available to common stockholders before extraordinary gain ........................................ $ (4.12) (d) $ (0.19) =========== ============ Weighted average shares outstanding ......................... 8,000,000 8,000,000 =========== ============ OTHER DATA: EBITDA (e) ................................................... $ 20,799 $ 20,799 Adjusted cash interest (f) ................................... 12,211 16,848 Ratio of EBITDA to Adjusted cash interest .................... 1.7 x 1.2 x
- ---------- (a) To record the pro forma effect of a full year of vesting on the stock options and non-cash accrual under the Company's deferred compensation plan in addition to the actual expense recognized at the date of grant. (b) To record the pro forma effect on interest expense for the 1998 Recapitalization as follows: Interest on deferred compensation plan balances ......................... $ 218 Interest on 1995 Term Loan and 1995 Note ................................ (6,396) Amortization of deferred financing costs on 1995 Term Loan and 1995 Note (107) -------- Pro forma adjustment .................................................... $ (6,285) ========
(c) The Notes were issued pursuant to the 1998 Recapitalization in an aggregate principal amount of $100 million. The Company has accounted for the 1998 Recapitalization in accordance with the provisions of SFAS 15. Since the Notes require total future payments of $150 million, including $50 million of interest payments over five years, SFAS 15 requires the Company to record 20 $150 million of debt on its balance sheet related to the $100 million principal amount of the Notes. As a result, the Company will record all future payments on the Notes, including principal and $10 million per year of interest payments, as a reduction of the recorded debt balance and no interest expense will be recorded on the Company's Consolidated Statements of Operations with respect to the Notes. See Note 8 of Notes to Consolidated Financial Statements. (d) For the fiscal year ended February 28, 1998, dividends of $27,864 on the 17.5% cumulative voting preferred stock had accumulated and therefore are deducted from earnings in arriving at income (loss) available to common stockholders before extraordinary gain. However, given that such dividends had not been declared and that management believed there was a remote chance that such dividends would be declared, the Company has not recorded such dividends in its financial statements. (e) EBITDA represents operating income (loss) plus write-off of goodwill and licensing agreements, depreciation and amortization, deferred compensation expense and restructuring and special charges. The Company believes that EBITDA, as presented, provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance or cash flow as a measure of liquidity. In addition, the method of calculating EBITDA set forth above may be different from calculations of EBITDA employed by other companies and, accordingly, may not be directly comparable to such other calculations. (f) Adjusted cash interest represents interest expense less non-cash interest expense, including the accretion of principal and the amortization of deferred financing costs, plus cash interest accrued or paid during the period which was accounted for in accordance with the provisions of SFAS 15 and, therefore, is not included in interest expense. 21 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The selected consolidated financial information for the fiscal years ended February 26, 1994, February 25, 1995, February 24, 1996, February 22, 1997 and February 28, 1998 has been derived from the Company's audited Consolidated Financial Statements. The Consolidated Financial Statements for the fiscal years ended February 24, 1996, February 22, 1997 and February 28, 1998 and the fourteen weeks ended May 31, 1997 and the thirteen weeks ended May 30, 1998 are included elsewhere in this Prospectus. The selected consolidated financial information for the fourteen weeks ended May 31, 1997 and the thirteen weeks ended May 30, 1998 and as of May 31, 1997 and May 30, 1998 has been derived from the Unaudited Condensed Consolidated Financial Statements of the Company, which, in the opinion of management, have been prepared on the same basis as the Consolidated Financial Statements included elsewhere in this Prospectus and include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial position and the results of operations of the Company. Results for the fourteen weeks ended May 31, 1997 and the thirteen weeks ended May 30, 1998 are not indicative of the results for a full year. The information set forth below should be read in conjunction with the historical Consolidated Financial Statements, Unaudited Condensed Consolidated Financial Statements and related notes thereto of the Company and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
FISCAL YEAR ENDED -------------------------------------------------------------------------- FEBRUARY 26, FEBRUARY 25, FEBRUARY 24, FEBRUARY 22, FEBRUARY 28, 1994 (A) 1995 (A) 1996 1997 1998 (B) -------------- -------------- -------------- -------------- -------------- STATEMENT OF OPERATIONS DATA: Net sales ................................... $ 356,632 $ 330,520 $ 274,394 $ 279,107 $ 335,621 Cost of goods sold. ......................... 253,429 290,372 203,469 185,102 227,405 ---------- ---------- ---------- ---------- ---------- Gross profit. .............................. 103,203 40,148 70,925 94,005 108,216 Licensing revenues .......................... 4,221 3,184 1,947 3,064 4,055 ---------- ---------- ---------- ---------- ---------- 107,424 43,332 72,872 97,069 112,271 Selling, general and administrative expenses ................................... 75,004 106,908 86,641 83,848 98,499 Restructuring and special charges (c) ....... 28,275 61,190 -- -- 7,535 Deferred compensation expense (d) ........... -- -- -- -- 2,735 Amortization of goodwill and licensing agreements. ................................ 5,253 6,643 4,024 2,487 2,126 Write-off of goodwill and licensing agreements (e) ............................. 16,651 51,136 -- -- -- ---------- ---------- ---------- ---------- ---------- Operating income (loss).. .................. (17,759) (182,545) (17,793) 10,734 1,376 Interest expense, net. ...................... 24,624 29,506 16,790 12,530 14,664 Gain from sale of investment ................ -- -- -- -- (2,260) ---------- ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income taxes, extraordinary items and cumulative effect of accounting change ......................... (42,383) (212,051) (34,583) (1,796) (11,028) Provision (benefit) for income taxes ........ (10,000) 200 176 158 (5,932) ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary items and cumulative effect of accounting change ......................... (32,383) (212,251) (34,759) (1,954) (5,096) Extraordinary gain (loss) on extinguish- ments of debt, net of tax (f). ............. (3,267) (11,877) -- -- 160,855 Cumulative effect of accounting change....... -- (1,308) -- -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) ........................... $ (35,650) $ (225,436) $ (34,759) $ (1,954) $ 155,759 ========== ========== ========== ========== ========== Income (loss) available to common stockholders before extraordinary items and cumulative effect of accounting change (g) ................................. $ (35,631) $ (216,460) $ (52,812) $ (25,191) $ (32,960) ========== ========== ========== ========== ========== Basic and diluted earnings (loss) per share available to common stockholders: Income (loss) before extraordinary items and cumulative effect of accounting change (g) ................................ $ (4.45) $ (27.06) $ (6.60) $ (3.15) $ (4.12) ========== ========== ========== ========== ========== Weighted average shares outstanding (h) 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 ========== ========== ========== ========== ==========
FOURTEEN THIRTEEN WEEKS ENDED WEEKS ENDED MAY 31, MAY 30, 1997 1998 ------------- ------------ (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales ................................... $ 41,678 $ 36,627 Cost of goods sold. ......................... 27,022 22,753 ---------- ---------- Gross profit. .............................. 14,656 13,874 Licensing revenues .......................... 1,010 860 ---------- ---------- 15,666 14,734 Selling, general and administrative expenses ................................... 20,039 21,754 Restructuring and special charges (c) ....... 3,500 3,500 Deferred compensation expense (d) ........... -- 684 Amortization of goodwill and licensing agreements. ................................ 561 532 Write-off of goodwill and licensing agreements (e) ............................. -- -- ---------- ---------- Operating income (loss).. .................. (8,434) (11,736) Interest expense, net. ...................... 4,011 1,455 Gain from sale of investment ................ -- -- ---------- ---------- Income (loss) before provision (benefit) for income taxes, extraordinary items and cumulative effect of accounting change ......................... (12,445) (13,191) Provision (benefit) for income taxes ........ 48 51 ---------- ---------- Income (loss) before extraordinary items and cumulative effect of accounting change ......................... (12,493) (13,242) Extraordinary gain (loss) on extinguish- ments of debt, net of tax (f). ............. -- -- Cumulative effect of accounting change....... -- -- ---------- ---------- Net income (loss) ........................... $ (12,493) $ (13,242) ========== ========== Income (loss) available to common stockholders before extraordinary items and cumulative effect of accounting change (g) ................................. $ (19,446) $ (13,242) ========== ========== Basic and diluted earnings (loss) per share available to common stockholders: Income (loss) before extraordinary items and cumulative effect of accounting change (g) ................................ $ (2.43) $ (1.66) ========== ========== Weighted average shares outstanding (h) 8,000,000 8,000,000 ========== ==========
22
FISCAL YEAR ENDED -------------------------------------------------------------------------- FEBRUARY 26, FEBRUARY 25, FEBRUARY 24, FEBRUARY 22, FEBRUARY 28, 1994 (A) 1995 (A) 1996 1997 1998 (B) -------------- -------------- -------------- -------------- -------------- BALANCE SHEET DATA (AT END OF PERIOD): Working capital (i) ........................ $ 90,184 $ (22,898) $ 69,276 $ 72,694 $ 49,000 Total assets ............................... 270,998 259,296 210,713 206,345 215,091 Total debt (j) ............................. 162,706 316,579 329,533 330,325 179,498 Total stockholders' equity (deficit) ....... 32,907 (127,427) (160,813) (162,066) (4,589) OTHER DATA: EBITDA (k) ................................. $ 36,824 $ (59,343) $ (9,933) $ 18,647 $ 20,799 Depreciation expense ....................... 4,404 4,233 3,836 5,426 7,027 Adjusted cash interest (l) ................. 22,811 26,971 11,461 9,210 12,211 Capital expenditures ....................... 5,157 11,526 4,696 7,703 11,844 Ratio of earnings to fixed charges (m). -- -- -- -- -- Ratio of EBITDA to Adjusted cash interest (n) .............................. 1.6 x -- -- 2.0 x 1.7 x Retail stores open at end of period. ....... 110 122 99 125 136 FOURTEEN THIRTEEN WEEKS ENDED WEEKS ENDED MAY 31, MAY 30, 1997 1998 ------------- ------------ (UNAUDITED) BALANCE SHEET DATA (AT END OF PERIOD): Working capital (i) ........................ $ 60,718 $ 37,733 Total assets ............................... 218,728 246,232 Total debt (j) ............................. 356,845 224,413 Total stockholders' equity (deficit) ....... (174,562) (17,401) OTHER DATA: EBITDA (k) ................................. $ (2,697) $ (5,062) Depreciation expense ....................... 1,676 1,958 Adjusted cash interest (l) ................. 2,614 3,724 Capital expenditures ....................... 2,173 2,212 Ratio of earnings to fixed charges (m). -- -- Ratio of EBITDA to Adjusted cash interest (n) .............................. -- -- Retail stores open at end of period. ....... 126 145
- --------- (a) The Company acquired Pacific Trail, Inc. and affiliated entities in April 1994. The statement of operations data and other data presented for the period preceding the acquisition do not include amounts for the acquired entities and therefore are not comparable to subsequent periods. Additionally, the statement of operations data and other data presented for the year in which the acquisition occurred are not comparable to subsequent periods. (b) The statement of operations data and other data for the fiscal year ended February 28, 1998 are based on a 53-week year. (c) The restructuring charge in Fiscal 1994 relates to the restructuring of the Company's operations (including the closing of three production facilities), brand repositioning (including the discontinuation of its knitwear division) and relocation of certain Company office facilities. The restructuring charge in Fiscal 1995 includes charges related to the restructuring of the Company's manufacturing, distribution, retail store and other operations, changes in senior management, the restructuring of its debt and equity capitalization, and a writedown related to an investment in a joint venture. The Fiscal 1998 charges relate to the closing of the Company's rainwear manufacturing plant located in Baltimore, Maryland and special payments made to certain executives of the Company due to the triggering of contractual "change of control" payment rights in the employment agreements of such executives. The restructuring charge in the fourteen weeks ended May 31, 1997 relates to the closing of the Company's Baltimore, Maryland rainwear manufacturing facility. The restructuring charge in the thirteen weeks ended May 30, 1998 relates to the planned closing or downsizing of five of the Company's eight test retail superstores open as of May 30, 1998. See Note 16 of Notes to Consolidated Financial Statements and Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements. (d) Deferred compensation expense in Fiscal 1998 and the thirteen weeks ended May 30, 1998 consists of compensation expense related to stock-based compensation of approximately $1,718 and $430, respectively, and compensation expense related to non-cash accruals under a deferred compensation plan of approximately $1,017 and $254, respectively. See Note 11 of Notes to Consolidated Financial Statements. (e) The write-off of goodwill and licensing agreements in Fiscal 1994 represents a write-off of goodwill attributable to the Company's discontinued knitwear division and a write-off of intangible assets related to licensing agreements terminated or not renewed by the Company as part of the Company's brand repositioning. The Fiscal 1995 figure represents a write-off of goodwill recorded based on the Company's evaluation of the impairment of goodwill resulting from the significant declines in sales, profitability and cash flow experienced in Fiscal 1995. (f) The extraordinary losses recorded in Fiscal 1994 and Fiscal 1995 represent the cumulative catch-up of amortization of deferred financing costs and redemption premium paid in connection with refinancings of certain of the Company's debt. The extraordinary gain recorded in Fiscal 1998 relates to the extinguishment of debt in connection with the 1998 Recapitalization. See Notes 8 and 13 of Notes to Consolidated Financial Statements. (g) For the fiscal years ended February 26, 1994 and February 25, 1995, dividends and charges to accrete the carrying value of $3,248 and $4,209, respectively, on the 10% cumulative redeemable senior preferred stock had accumulated and therefore are deducted from earnings in arriving at income (loss) available to common stockholders before extraordinary items and cumulative effect of accounting change. For the fiscal years ended February 24, 1996, February 22, 1997 and February 28, 1998 and for the fourteen weeks ended May 31, 1997, dividends of $18,053, $23,237, $27,864 and $6,953, respectively, on the 17.5% cumulative voting preferred stock had accumulated and therefore are deducted from earnings in arriving at income (loss) available to common stockholders before extraordinary items and cumulative effect of accounting change. However, given that such dividends had not been declared and that management believed there was a remote chance that such dividends would be declared, the Company has not recorded such dividends in its financial statements. (h) Pursuant to the 1998 Recapitalization, the Company issued 8,000,000 shares of common stock. All shares and per share amounts have been restated for all periods to reflect the 1998 Recapitalization. (i) Working capital represents current assets less current liabilities. Current liabilities include future interest payments capitalized under the provisions of SFAS 15 of $10,000 at each of February 28, 1998 and May 30, 1998. See Note 8 of Notes to Consolidated Financial Statements. 23 (j) Total debt represents long-term debt, including current portion, plus revolving credit borrowings. Total debt includes future interest payments capitalized under the provisions of SFAS 15 of $91,533, $77,383, $50,000, $73,448 and $50,000 at February 24, 1996, February 22, 1997, February 28, 1998, May 31, 1997 and May 30, 1998, respectively. See Note 8 of Notes to Consolidated Financial Statements. (k) EBITDA represents operating income (loss) plus write-off of goodwill and licensing agreements, depreciation and amortization, deferred compensation expense and restructuring and special charges. The Company believes that EBITDA, as presented, provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flows from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income, as an indicator of the Company's operating performance or cash flow as a measure of liquidity. In addition, the method of calculating EBITDA set forth above may be different from calculations of EBITDA employed by other companies and, accordingly, may not be directly comparable to such other calculations. (l) Adjusted cash interest represents interest expense less non-cash interest expense, including the accretion of principal and the amortization of deferred financing costs, plus cash interest accrued or paid during the period which was accounted for in accordance with the provisions of SFAS 15 and therefore is not included in interest expense. (m) Earnings used in computing the ratio of earnings to fixed charges consist of income (loss) before provision (benefit) for income taxes, extraordinary items and cumulative effect of accounting change plus fixed charges. Fixed charges consist of interest expense (including amortization of deferred financing costs) and the portion of rental expense that is deemed representative of the interest factor. Earnings were not sufficient to cover fixed charges in the fiscal years ended February 26, 1994, February 25, 1995, February 24, 1996, February 22, 1997 and February 28, 1998 and the fourteen weeks ended May 31, 1997 and the thirteen weeks ended May 30, 1998 in the amount of $42,383, $212,051, $34,583, $1,796, $11,028, $12,445, and $13,191, respectively. (n) EBITDA was not sufficient to cover Adjusted cash interest in the fiscal years ended February 25, 1995 and February 24, 1996 and the fourteen weeks ended May 31, 1997 and the thirteen weeks ended May 30, 1998 in the amount of $86,314, $21,394, $5,311 and $8,786, respectively. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Selected Consolidated Financial Data and Consolidated Financial Statements and related notes thereto of the Company included elsewhere in this Prospectus. The Company's fiscal year ends on the last Saturday in February. Accordingly, all fiscal years for which financial information is included in this Prospectus consisted of 52 weeks, except for Fiscal 1998, which consisted of 53 weeks. The following sets forth, for the periods indicated, the percentage relationship to net sales of certain items in the Company's consolidated statements of operations for the fiscal periods shown below:
FISCAL YEAR ENDED FOURTEEN THIRTEEN -------------------------------------------- WEEKS WEEKS FEBRUARY 24, FEBRUARY 22, FEBRUARY 28, ENDED ENDED 1996 1997 1998 MAY 31, 1997 MAY 30, 1998 -------------- -------------- -------------- ------------- ------------- Net Sales ................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold ....................... 74.2 66.3 67.8 64.8 62.1 ----- ----- ----- ----- ----- Gross profit ............................ 25.8 33.7 32.2 35.2 37.9 Licensing revenues ....................... 0.7 1.1 1.2 2.4 2.3 ----- ----- ----- ----- ----- 26.6 34.8 33.5 37.6 40.2 Selling, general and administrative expenses ................................ 31.6 30.0 29.3 48.1 59.4 Restructuring and special charges ........ -- -- 2.2 8.4 9.6 Deferred compensation expense ............ -- -- 0.8 -- 1.9 Amortization of goodwill and licensing agreements .............................. 1.5 0.9 0.6 1.3 1.5 ----- ----- ----- ----- ----- Operating income (loss) ................. ( 6.5)% 3.8% 0.4% (20.2)% (32.0)% ===== ===== ===== ===== =====
RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED MAY 30, 1998 (FIRST QUARTER OF FISCAL 1999) COMPARED TO FOURTEEN WEEKS ENDED MAY 31, 1997 (FIRST QUARTER OF FISCAL 1998) Sales of rainwear and outerwear, the principal products of the Company, are highly seasonal. Historically, the Company has realized its highest level of sales in its third fiscal quarter (September through November) and its lowest level of sales in its first fiscal quarter (March through May). Related to this seasonality of sales, historically the Company has generated significant operating losses in its first fiscal quarter. Net Sales. Net sales decreased 12.1% to $36.6 million in the first quarter of Fiscal 1999 from $41.7 million in the first quarter of Fiscal 1998. This decrease resulted from decreased sales to wholesale customers, particularly sales of London Fog Products, driven by both lower full-price and off-price sales. Sales in the Company's retail stores increased slightly for the first quarter of Fiscal 1999 compared to the first quarter of Fiscal 1998, resulting from an increase in the average number of stores in operation compared to the prior year period, largely offset by a decrease in comparable store sales of approximately 8% and the detrimental impact of the current period consisting of one less week (13 weeks) compared to the prior year period (14 weeks). Comparable store sales were negatively impacted by unusually warm weather during this year's period compared to the prior year's period. Gross Profit. Gross profit decreased 5.3% to $13.9 million in the first quarter of Fiscal 1999 from $14.7 million in the comparable prior year period. Gross profit as a percentage of net sales (gross margin) increased to 37.9% in the current year first quarter from 35.2% in the comparable prior year period. The increase in gross margin resulted primarily from an increased percentage of consolidated sales coming from retail store sales, which typically generate a higher gross margin than wholesale sales. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 8.6% to $21.8 million in the current year first quarter from $20.0 million in the comparable prior year period. This increase resulted from increased retail store operating expenses related to the increased 25 number of stores in operation compared to the prior year period, including the impact of expenses related to the operation of the Company's retail superstores. As of May 30, 1998 the Company operated eight retail superstores compared to operating one retail superstore as of May 31, 1997. Restructuring and Special Charges. During the first quarter of Fiscal 1999, the Company recorded a restructuring charge of $3.5 million related to the planned closing or downsizing of five of the Company's eight retail test superstores open as of May 30, 1998. These superstores, the first of which was opened in May 1997, were opened to test an alternative, larger format retail distribution channel for the Company's product offerings to supplement the Company's traditional wholesale and factory outlet store retail distribution channels. Based on initial sales results for these test superstores, management has determined that most of the existing superstores, many of which are greater than 25,000 square feet in size, are too large to generate acceptable profitability within an acceptable period of time. As a result, the Company has adopted a plan to restructure its larger format store strategy by closing or significantly downsizing most of the Company's current superstores and shifting to a revised format which focuses on a store size significantly smaller than 25,000 square feet and includes the planned expansion of product offerings beyond rainwear and outerwear, such as sportswear and accessories. The Company is currently targeting 10,000 to 12,000 square feet as the optimal size to test for its larger format superstores. The Company believes that the planned reduction in store size and expansion of product offerings will help broaden the appeal of the stores to both existing and new customers, increase store sales, reduce the seasonality of the Company's sales and increase store profitability. The restructuring charge of $3.5 million included an accrual of $1.6 million for anticipated cash restructuring expenditures, to cover costs associated with amending or terminating store leases and other related costs, and $1.9 million of non-cash charges related to anticipated write-offs of fixed assets in the stores to be closed or downsized. During the first quarter of Fiscal 1998, the Company recorded a restructuring charge of $3.5 million related to the closing of the Company's Baltimore, Maryland rainwear manufacturing facility. In the fourth quarter of Fiscal 1998, the Company increased the restructuring charge related to the closing of the facility to $3.7 million. Deferred Compensation Expense. For the first quarter of Fiscal 1999, the Company recorded $684,000 of non-cash deferred compensation expense. This amount consisted of: (i) $430,000 of compensation expense related to stock options granted during Fiscal 1998; and (ii) $254,000 of compensation expense related to non-cash accruals under the Company's deferred compensation plan adopted during Fiscal 1998. Interest Expense, net. Interest expense, net decreased by approximately $2.5 million to $1.5 million in the first quarter of Fiscal 1999 from $4.0 million in the comparable prior year period. The decrease resulted both from the impact of the Company's February 1998 debt restructuring and recapitalization, which reduced the Company's debt obligations and related interest expense, and a reduction in amortization of deferred financing costs. Interest expense, net recorded for both the current year and prior year periods has been reduced as a result of the impact of accounting for both the Company's 1995 Recapitalization and its 1998 Recapitalization in accordance with SFAS 15. Using the provisions of SFAS 15, the Company recorded the debt issued pursuant to both the 1995 Recapitalization and the 1998 Recapitalization at figures significantly in excess of their respective principal amounts, with the difference effectively representing future interest payments and, thus, reducing interest expense in subsequent periods. FISCAL YEAR ENDED FEBRUARY 28, 1998 (FISCAL 1998) COMPARED TO FISCAL YEAR ENDED FEBRUARY 22, 1997 (FISCAL 1997) As previously indicated, Fiscal 1998 consisted of 53 weeks and Fiscal 1997 consisted of 52 weeks. Net Sales. Net sales increased 20.2% to $335.6 million in Fiscal 1998 from $279.1 million in Fiscal 1997. This increase resulted primarily from increased sales in the Company's retail stores and increased sales of Pacific Trail Products to wholesale customers. The growth in retail sales was primarily due to sales from stores opened during Fiscal 1998, increased sales from the full year impact of stores opened during Fiscal 1997, and an increase in comparable store sales of approximately 2%. The growth in 26 wholesale sales of Pacific Trail Products was primarily due to increased sales of fall 1997 outerwear through existing customers, particularly in the women's outerwear category, driven by extremely strong sales performance of Pacific Trail's fall 1996 merchandise. The increases in sales both from the Company's retail stores and from wholesale sales of Pacific Trail Products were due primarily to increased unit volume rather than price increases. The consolidated net sales increase from Fiscal 1997 to Fiscal 1998 also reflects the beneficial impact of Fiscal 1998 consisting of an extra week (53 weeks) compared to Fiscal 1997 (52 weeks). Gross Profit. Gross profit increased 15.1% to $108.2 million in Fiscal 1998 from $94.0 million in Fiscal 1997. Gross profit as a percentage of net sales (gross margin) decreased to 32.2% in Fiscal 1998 from 33.7% in Fiscal 1997. The decrease in gross margin resulted from decreased gross margin in the Company's retail stores and decreased gross margin obtained from wholesale sales of London Fog Products, driven primarily by increased markdowns in the Company's retail stores and increased off-price sales of excess inventory and steeper discounts provided on such off-price sales of London Fog Products. The increased markdowns and off-price sales were taken to help stimulate sales and reduce inventory levels in the face of lower than expected sales from the Company's retail stores and from wholesale sales of London Fog Products during the key September through December fall sales period, which was significantly adversely affected by unusually warm weather during this period. The lower than expected sales in the Company's retail stores reflected lower than expected sales in both the Company's factory outlet stores as well as its superstores, which commenced operations during Fiscal 1998. Licensing Revenues. Licensing revenues increased by $1.0 million to $4.1 million in Fiscal 1998 from $3.1 million in Fiscal 1997. This increase resulted from increased licensing revenues from both existing and new licensees. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 17.5% to $98.5 million in Fiscal 1998 from $83.8 million in Fiscal 1997. This increase resulted primarily from increased retail store operating expenses related to the increased number of stores, including the impact of expenses related to the opening and operation of the superstores opened in Fiscal 1998. Selling, general and administrative expenses as a percentage of net sales decreased to 29.3% in Fiscal 1998 from 30.0% in Fiscal 1997. The decrease resulted primarily from economies of scale associated with leveraging certain expenses over an increased sales volume. Restructuring and Special Charges. During Fiscal 1998, the Company recorded restructuring and special charges of $7.5 million. This charge consisted of a $3.7 million restructuring charge related to the closing of the Company's Baltimore, Maryland rainwear manufacturing facility and a $3.8 million charge reflecting special payments made to certain executives of the Company due to the triggering of contractual "change of control" payment rights in the employment agreements of such executives. The $3.7 million Baltimore plant closing charge included $1.2 million of cash expenditures, primarily related to employee severance and ongoing occupancy costs, and a $2.5 million charge related to the loss from sales of fixed assets as well as the increase in the Company's multiemployer pension liability resulting from the closure of the facility. Deferred Compensation Expense. During Fiscal 1998, the Company recorded $2.7 million of non-cash deferred compensation expense. This amount consisted of: (i) $1.7 million of compensation expense related to stock options granted and vested during Fiscal 1998; and (ii) $1.0 million of compensation expense related to non-cash accruals under a deferred compensation plan adopted during Fiscal 1998. Operating Income. Operating income decreased by $9.4 million, to $1.4 million in Fiscal 1998 from $10.7 million in Fiscal 1997. This decrease resulted from the $7.5 million of restructuring and special charges and $2.7 million of deferred compensation expense incurred in Fiscal 1998. Interest Expense, net. Interest expense, net increased by $2.1 million to $14.7 million in Fiscal 1998 from $12.5 million in Fiscal 1997. This increase resulted primarily from higher average revolving credit borrowings during Fiscal 1998 compared to Fiscal 1997. Interest expense, net recorded for both Fiscal 1998 and Fiscal 1997 has been reduced as a result of the impact of accounting for the Company's 1995 Recapitalization in accordance with SFAS 15. Using the provisions of SFAS 15, the Company recorded 27 the debt issued pursuant to the 1995 Recapitalization at a figure significantly in excess of its principal amount, with the difference effectively representing future interest payments and, thus, reducing interest expense in subsequent periods. Gain From Sale of Investment. During Fiscal 1998, the Company sold an equity investment for $2,260,000 which resulted in a gain of $2,260,000. Provision (Benefit) For Income Taxes. The provision (benefit) for income taxes was a benefit of $5.9 million for Fiscal 1998 compared to an expense of $158,000 for Fiscal 1997. The $5.9 million benefit for Fiscal 1998 reflects the utilization of net operating losses to offset tax liability resulting from cancellation of indebtedness income arising from the 1998 Recapitalization. Extraordinary Gain on Extinguishment of Debt, net. The extraordinary gain on extinguishment of debt, net, totaling $160.9 million, resulted from the 1998 Recapitalization. Pursuant to this transaction, the Company's subordinated debt obligations were reduced from an outstanding debt amount of $257.2 million (with a recorded value of $319.7 million in accordance with SFAS 15) to an outstanding debt amount of $100.0 million (with a recorded value of $150.0 million in accordance with SFAS 15). The extraordinary gain of $160.9 million equals the excess of the $319.7 million of debt previously recorded over the $150.0 million of new debt recorded as of February 27, 1998, or $169.7 million, less $2.7 million of transaction costs incurred and an income tax provision of $6.1 million. FISCAL YEAR ENDED FEBRUARY 22, 1997 (FISCAL 1997) COMPARED TO FISCAL YEAR ENDED FEBRUARY 24, 1996 (FISCAL 1996) Net Sales. Net sales increased 1.7% to $279.1 million in Fiscal 1997 from $274.4 million in Fiscal 1996. This increase resulted primarily from increased sales in the Company's retail stores which more than offset decreased sales to wholesale customers. The increase in sales in the Company's retail stores resulted from both the increased average number of stores in operation compared to the previous year, as well as an increase in comparable store sales of approximately 6%. The decrease in sales to wholesale customers resulted from a decrease in wholesale sales of London Fog Products, which more than offset an increase in wholesale sales of Pacific Trail Products. The decrease in wholesale sales of London Fog Products was due to continued competitive pressures both from within and outside of the primary department store wholesale customer base, as well as the adverse impact on unit and dollar sales of the Company's increased focus on improving the gross margin and profitability realized on its wholesale sales of London Fog Products, even at the expense of unit volume. The increase in wholesale sales of Pacific Trail Products resulted primarily from increased sales of PACIFIC TRAIL(Reg. TM) brand outerwear and increased sales of men's outerwear under the DOCKERS(Reg. TM) label pursuant to a license agreement. On a consolidated basis, the net sales increase of 1.7% resulted from increased average prices, primarily due to changes in product mix and lesser markdowns and discounts, rather than increased consolidated unit volume. Gross Profit. Gross profit increased 32.5% to $94.0 million in Fiscal 1997 from $70.9 million in Fiscal 1996, resulting from a strong increase in gross margin. Gross margin increased to 33.7% of net sales in Fiscal 1997 from 25.8% of net sales in Fiscal 1996. The increase in gross margin was broad based, with significant gross margin increases achieved on both sales through the Company's retail stores and sales to wholesale customers. The gross margin increase on sales through the Company's retail stores resulted from an improved inventory mix and resulting lower level of markdowns in Fiscal 1997. The inventory mix for the Company's retail stores in Fiscal 1996 was adversely affected by the Company's late production deliveries and poor sell-through results in fall 1994, which resulted in significant excess fall 1994 inventory being carried over to sell in the Company's retail stores in Fiscal 1996. The gross margin increase on sales to wholesale customers resulted primarily from the higher initial gross margins of the fall 1996 product lines compared to fall 1995 and improved sell-through results achieved by the Company's wholesale customers resulting in lesser merchandise returns and off-price sales. In addition, the gross margin on sales to wholesale customers for Fiscal 1996 was adversely affected by significant off-price sales of fall 1994 and spring 1995 product in early Fiscal 1996 to reduce excess inventory levels. 28 Licensing Revenues. Licensing revenues increased by $1,117,000 to $3,064,000 in Fiscal 1997 from $1,947,000 in Fiscal 1996. This increase resulted from increased licensing revenues from both existing and new licensees. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 3.2% to $83.8 million in Fiscal 1997 from $86.6 million in Fiscal 1996. This decrease resulted from the Company's continued expense reduction initiatives, including reductions in advertising expenditures. Selling, general and administrative expenses as a percentage of net sales decreased to 30.0% in Fiscal 1997 from 31.6% in Fiscal 1996. The decrease resulted from the Company's overall expense reduction initiatives as well as decreased expenses as a percentage of net sales for the Company's retail stores due to the favorable impact of closing certain poor performing stores during Fiscal 1996 and Fiscal 1997 and achieving an increase in comparable store sales of approximately 6%. Operating Income (Loss). Operating income increased by $28.5 million to income of $10.7 million in Fiscal 1997 from a loss of $17.8 million in Fiscal 1996, with the increase resulting primarily from the significant increase in gross profit and gross margin. Interest Expense, net. Interest expense, net decreased by $4.3 million to $12.5 million in Fiscal 1997 from $16.8 million in Fiscal 1996. The decrease resulted from the full year effect in Fiscal 1997 of the May 1995 debt restructuring and recapitalization, which reduced the Company's interest expense. Interest expense, net recorded for both Fiscal 1997 and Fiscal 1996 has been reduced as a result of the impact of accounting for the Company's 1995 Recapitalization in accordance with SFAS 15. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity to fund its operations are revolving credit borrowings and letters of credit under the Company's credit facility and cash flows from operations. The Company's working capital levels and associated borrowing needs fluctuate significantly during the year due to the highly seasonal nature of the rainwear and outerwear business. The Company begins to build inventory for the fall season starting in January, with aggregate inventory and accounts receivable levels usually peaking sometime between late August and early October. The Company's net cash used in operating activities was $39.7 million for the first quarter of Fiscal 1999 and $45.4 million for the first quarter of Fiscal 1998. The Company's net cash used in operating activities for each of the first quarter periods resulted primarily from the seasonal increase in inventories during the quarter, due to production required to satisfy anticipated sales demand for fall merchandise. Inventories increased by $55.1 million during the first quarter of Fiscal 1999 (from February 28, 1998 to May 30, 1998) and increased by $48.5 million during the first quarter of Fiscal 1998 (from February 22, 1997 to May 31, 1997). The decreased net cash used in operations for the first quarter of Fiscal 1999 versus the comparable prior year period, despite the increase in inventory, primarily reflects a decrease in accounts receivable and an increase in accounts payable. The Company's cash provided from (used in) operating activities was $(31.7) million in Fiscal 1998, $1.5 million in Fiscal 1997, and $8.2 million in Fiscal 1996. The Company's net cash used in operating activities of $31.7 million in Fiscal 1998 resulted primarily from an increase in inventory of $21.6 million and an increase in accounts receivable of $7.9 million during the year. The inventory increase of $21.6 million, to $69.7 million at February 28, 1998 from $48.1 million at February 22, 1997, resulted primarily from achieving lower than expected sales both from the Company's retail stores and from wholesale sales of London Fog Products during the key September through December fall sales period, which was significantly adversely affected by unusually warm weather during this period. The lower than expected sales in the Company's retail stores reflected lower than expected sales in both the Company's factory outlet stores as well as its test superstores, which commenced operations during Fiscal 1998. The increase in inventory also resulted partially from the increase in required inventory to support the Company's increased sales volume and increased number of retail stores in operation, including the superstores opened in Fiscal 1998. Due to the lead time associated with the Company's production, the Company must, to a significant extent, commit production in anticipation of sales and carry inventory levels to meet expected demand. Thus, in the event of lower than expected sales, the Company only has limited ability in the short term 29 to adjust production quantities, resulting in higher than desired inventory levels for a period of time. The Company reacts to this situation by reducing quantities for production orders not yet placed and taking measures to stimulate sales including, where appropriate, selling excess inventory at discounted prices. Such selling of excess inventory at discounted prices has the effect of reducing the Company's gross margin and profitability achieved on its sales. As a result of the lower than expected sales in fall 1997 and winter 1997/1998 and the resulting higher inventory levels as of February 28, 1998, the Company has reduced quantities for production orders for fall 1998 merchandise. Although inventory at May 30, 1998 was approximately $28.2 million higher than at May 31, 1997, the Company expects that, as a result of reducing its fall 1998 production, the level of inventory at the end of the second quarter of Fiscal 1999 (August 29, 1998) will not be significantly higher than the level of inventory at the end of the second quarter of Fiscal 1998 (August 30, 1997). Also, although the higher inventory level at February 28, 1998 and May 30, 1998 compared to the same times in the previous year may have an adverse effect on the Company's gross margin and profitability achieved on its sales during Fiscal 1999, the Company does not expect that the higher inventory level at these dates will have a material adverse effect on the Company. There can be no assurance that these expectations of the Company will be met. The accounts receivable increase of $7.9 million during Fiscal 1998, to $31.5 million at February 28, 1998 from $23.6 million at February 22, 1997, resulted primarily from the wholesale sales increase in Fiscal 1998 compared to Fiscal 1997 and the related increase in wholesale shipments occurring in January and February of Fiscal 1998 compared to Fiscal 1997. The Company's primary uses of cash have been for debt service requirements, working capital and capital expenditures. Net cash used in investing activities was $2.2 million for the first quarter of Fiscal 1999 and $1.8 million for the comparable prior year period. The net cash used in investing activities for each of the first quarter periods primarily reflects capital expenditures for opening new retail stores, refurbishing existing retail stores and enhancing the Company's management information systems. Net cash used in investing activities was $9.0 million for Fiscal 1998, $6.8 million for Fiscal 1997 and $4.4 million for Fiscal 1996. The net cash used in investing activities primarily reflects capital expenditures for opening new retail stores, refurbishing existing retail stores, expanding and reconfiguring distribution facilities, and enhancing the Company's management information systems. The increase in capital expenditures to $11.8 million in Fiscal 1998 from $7.7 million in Fiscal 1997 primarily reflects capital expenditures for the opening of the initial superstores in Fiscal 1998. The increase in capital expenditures to $7.7 million in Fiscal 1997 from $4.7 million in Fiscal 1996 primarily reflects the increased number of retail stores opened in Fiscal 1997 compared to Fiscal 1996 and, to a lesser extent, increased expenditures related to the expansion and reconfiguration of the Company's Maryland distribution facility. For the first quarter of Fiscal 1999, the Company's principal source of liquidity to fund its cash needed for operating activities and investing activities was borrowings under the Company's Senior Credit Facility, resulting in $63.2 million of outstanding revolving credit borrowings at May 30, 1998 compared to $18.2 million of borrowings at February 28, 1998 and $26.3 million at May 31, 1997. Net cash flow provided from financing activities was $44.1 million for the first quarter of Fiscal 1999 and $24.1 million for the comparable prior year period. The significant change reflected the Company's ability to fund a significant portion of its cash needed for operating activities and investing activities during the first quarter of Fiscal 1998 from the utilization of $23.1 million of existing cash balances. By comparison, the Company did not have significant existing cash balances to fund its cash needed for operating activities and investing activities during the first quarter of Fiscal 1999. The Company's $36.9 million higher level of outstanding revolving credit borrowings at May 30, 1998 compared to May 31, 1997 primarily reflects financing the $28.2 million higher level of inventory at May 30, 1998 as compared to May 31, 1997. For Fiscal 1998, the Company's principal sources of liquidity to fund its cash needed for operating activities and investing activities were utilization of existing cash balances, resulting in a decrease of cash and cash equivalents to $0.6 million at February 28, 1998 from $26.8 million at February 22, 1997, and 30 borrowings under the Company's credit facility, resulting in $18.2 million of outstanding revolving credit borrowings at February 28, 1998 compared to no outstanding revolving credit borrowings at February 22, 1997. The Company finances its working capital requirements with revolving credit borrowings and letters of credit under the Company's credit facility. The peak outstanding balance of revolving credit borrowings and letters of credit under the Company's credit facility was $131.5 million for Fiscal 1998 and $76.5 million for Fiscal 1997. The increase in peak usage of the Company's credit facility resulted primarily from higher seasonal working capital requirements to finance the $56.5 million increase in net sales realized in Fiscal 1998 compared to Fiscal 1997, as well as from capital expenditures and inventory requirements associated with opening additional retail stores, including the initial superstores. The Company's current credit facility (the Senior Credit Facility) was obtained on May 15, 1997, replacing a previous credit facility, and initially had a maximum line of credit of $140 million through April 30, 1998 and $150 million from May 1, 1998 through April 30, 2000. In connection with the February 1998 debt restructuring and recapitalization, on February 27, 1998 the Company amended certain terms and provisions of the Senior Credit Facility (the 1998 Amendment), including increasing the maximum line of credit to $200 million and extending the expiration date of the facility from April 30, 2000 to April 30, 2001. Within this $200 million limit, up to $90 million may be used for outstanding letters of credit. The obligations outstanding on the Senior Credit Facility are secured by substantially all of the assets of the Company and cannot exceed the aggregate of stipulated percentages of collateral values associated with the Company's eligible inventory, accounts receivable, letters of credit goods and, during certain portions of the year, trademarks. As of May 30, 1998, the Company had outstanding revolving credit borrowings of $63.2 million, outstanding letters of credit of $26.7 million and, based on collateral value restrictions, had additional borrowings available of approximately $37 million under the Senior Credit Facility. As of February 28, 1998, the Company had outstanding revolving credit borrowings of $18.2 million, outstanding letters of credit of $24.8 million, and, based on collateral value restrictions, had additional borrowings available of approximately $31 million under the Senior Credit Facility. The agreement governing the Senior Credit Facility contains customary covenants, restrictions and events of default. The Company expects that its primary uses of cash will be for debt service requirements, working capital and capital expenditures. The Company's debt service requirements include periodic interest payments and other fees related to the Company's Senior Credit Facility, its $100 million principal amount of Notes, and its mortgage note having a remaining principal amount of $11.2 million as of May 30, 1998. As described above, the Senior Credit Facility is a revolving credit facility with an expiration date of April 30, 2001. The Notes have a maturity of February 27, 2003 and contain provisions permitting early redemption by the Company, at its option, in whole or in part, at a defined redemption price. In addition, in the event of the occurrence of a Change Of Control Triggering Event (as defined), each holder of the Notes has the right to require that the Company purchase all or a portion of such holder's Notes at a purchase price of 101% of principal amount, plus accrued interest to the date of purchase. The mortgage note requires monthly principal and interest payments, with a final balloon payment of approximately $10.6 million due at the July 1999 maturity of the mortgage note. The Company intends to meet the required balloon payment by refinancing the mortgage note or obtaining other replacement financing prior to or upon the maturity of the mortgage note. The Company estimates that capital expenditures for Fiscal 1999 will be approximately $12-14 million. These capital expenditures will be primarily for opening new retail stores, refurbishing existing retail stores, and enhancing the Company's management information systems, including the planned replacement of the Company's financial and retail information systems. The Company believes cash flows from operations and borrowings under the Senior Credit Facility will be sufficient to satisfy the Company's liquidity requirements, including capital expenditures, over the next 12 months. The Company believes it will be able to meet its longer term liquidity requirements, including scheduled debt payments, through cash flows from operations, borrowings under the Company's credit facility, and refinancings of the Company's Senior Credit Facility and long-term indebtedness. 31 The Company's ability to fund its operations, to make capital expenditures, to meet scheduled debt payments, to refinance indebtedness and to remain in compliance with the various restrictions and financial covenants under its debt agreements depends on its future operating performance and cash flows which, in turn, are subject to prevailing economic conditions and other business and financial factors, some of which are beyond the Company's control. See "Risk Factors". YEAR 2000 ISSUE Currently, many existing computer programs use only two digits (rather than four) to identify a year in the date field. If not corrected, many computer system applications could fail or create erroneous results beginning at or before the year 2000 by recognizing a date coded as "00" as the year 1900 rather than the year 2000. If not adequately resolved, this problem, commonly referred to as the Year 2000 Issue, could have a material adverse effect on the Company's business, operations or financial condition in the future. The Company has assessed the impact that the Year 2000 Issue will have on its computer systems, with a primary focus on the Company's critical business and information systems. The Company has developed a project plan which includes an inventory of all critical systems, identification of those systems requiring modifications or replacement to address the Year 2000 Issue, and an action plan and time table for the completion and testing of required modifications and systems replacements. Based on the Company's project plan, the Company expects to have any required modifications to critical systems completed on a timely basis. However, if such modifications are not completed on a timely basis (which in certain cases is expected to be before the year 2000), the Year 2000 Issue could have a material adverse impact on the Company's business, operations, or financial condition. In addition, many of the third parties with which the Company conducts business will need to modify their computer systems to address the Year 2000 Issue and the failure of such third parties to address the problem on a timely basis could have a material adverse impact on the Company. Included in the Company's planned capital expenditures for Fiscal 1999 is approximately $3 million for the replacement of the Company's financial and retail information systems with systems which have greater functionality and are Year 2000 compliant. The Company believes the cost of making the required Year 2000 modifications to its other systems will not have a material impact on the Company's results of operations or financial condition. 32 BUSINESS GENERAL The Company is a leading designer, marketer and distributor of quality men's and women's rainwear and outerwear in the United States. The Company designs, markets and distributes its products under the Company-owned LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) and related brand names, as well as under the DOCKERS(Reg. TM), LEVI'S(Reg. TM) and SPERRY(Reg. TM) labels pursuant to licenses from the owners thereof, and sells its products through most major channels of distribution in its markets. The Company believes it has a dominant share of the men's rainwear market in department stores and a significant share of the men's outerwear and women's rainwear and outerwear markets in department stores. The Company also distributes its products to specialty retailers (including sport specialty retailers), national and regional chain stores, and discount and off-price retailers. In addition, the Company generates a significant portion of its sales from distributing its products through Company-operated retail stores. As of May 30, 1998, the Company operated 134 factory outlet stores, eight superstores and three Weather Stores(TM). In Fiscal 1998, the Company had net sales of approximately $336 million. BUSINESS STRENGTHS Management believes that the Company has several competitive advantages which are important to its business, including the following: IMAGE AND CONSUMER RECOGNITION. The LONDON FOG(Reg. TM) brand name was introduced in 1954 and has become one of the most well known apparel brand names in the United States, with a strong reputation for quality and value. The LONDON FOG(Reg. TM) brand name ranked 6th in the 1997 Fairchild 100 Consumer Survey of the most recognizable apparel and accessory brands. In the same survey, the LONDON FOG(Reg. TM) brand name ranked 1st among the outerwear brands. The Company has capitalized on the strength of the LONDON FOG(Reg. TM) brand name by expanding from its initial roots in formal men's rainwear to a broad range of rainwear, outerwear and related products each providing consumers with the quality, functionality and value they expect from the LONDON FOG(Reg. TM) brand. In addition, the PACIFIC TRAIL(Reg. TM) brand has developed a strong and growing niche as a competitively priced brand which targets value-conscious consumers who seek authentic, quality outerwear for recreational activities and casual wearing occasions. Management believes that the Company will be able to continue to capitalize on the strength of its brands by expanding into additional product categories, such as sportswear, and utilizing a sub-branding strategy to enable product and distribution channel extensions while preserving the identity of the LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) brand names. BROAD AND DIVERSIFIED DISTRIBUTION CHANNELS. The Company sells its products through a varied array of distribution channels. The Company believes that its ability to distribute its products through varied wholesale distribution channels (including department stores, specialty retailers, sport specialty retailers, national and regional chain stores, and discount and off-price retailers) and through its own retail stores (factory outlet stores and new retail concept stores) places the Company at a competitive advantage by reducing the Company's dependency on any one distribution channel. RETAILING AS A COMPETITIVE ADVANTAGE. For Fiscal 1998, approximately 42% of the Company's net sales were generated through its retail stores, predominantly through its factory outlet stores. The Company's factory outlet stores are located in many of the primary outlet malls throughout the United States and the Company expects to open 20-25 additional factory outlet stores this year. The Company believes that operating its own retail stores provides the Company with the following advantages: (i) mitigating the Company's inventory risk by providing a controlled channel for selling excess inventory; (ii) increasing the breadth and control of the distribution of its products; (iii) preventing the Company from being solely dependent on third party retailers; and (iv) enabling the testing of new products, new product categories and new merchandise concepts. The Company also believes that its experience in operating its own retail stores provides the Company with a better understanding of the needs of its wholesale customers and the ultimate consumers of the Company's products. To further capitalize on these advantages, the Company is seeking to expand the distribution of its products by testing new Company-operated retail concepts through its superstores, Weather Stores(TM) and other potential retail store concepts. 33 VARIETY OF PRODUCTS AND TARGET CONSUMERS. Through its well-known LONDON FOG(Reg. TM), PACIFIC TRAIL(Reg. TM) and related brands, as well as under the DOCKERS(Reg. TM), LEVI'S(Reg. TM), AND SPERRY(Reg. TM) labels pursuant to licenses from the owners thereof, the Company provides consumers with a broad selection of quality products, including a full assortment of outerwear for the entire family, for different end-uses and different lifestyles at a broad range of price points. The Company provides products for use in all weather conditions and for use in dress, casual, outdoor and active end uses. The Company believes this segmentation of its product offerings, targeting specific products to meet specific consumer lifestyle and end use requirements, increases its ability to satisfy the product needs of a broad consumer base. The Company is continuing to increase the variety of products it offers through the development of its own focused men's and women's sportswear collections to be marketed solely through the Company's retail stores. In addition, the Company continues to pursue additional opportunities to develop and market products under other well known brand names through license arrangements, as evidenced by the Company's license to market outerwear under the FOSSIL(Reg. TM) and related labels beginning in the fall 1999 season. STABLE PRODUCT LINES. The Company believes that the stability and continuity of the Company's core product lines relative to the fashion industry generally, with a significant portion of annual revenues being generated by similar styles carried over from the previous year, makes the Company less sensitive to fashion risk. WORLDWIDE PRODUCT SOURCING. The Company's merchandise is produced worldwide by independent manufacturers selected, monitored and coordinated by local Company employees to assure conformity to strict quality, cost and delivery standards. The Company believes the use of independent manufacturers, together with the Company's dedicated sourcing personnel, increases its production flexibility and capacity and allows it to maintain control over all aspects of the sourcing process, while at the same time substantially reducing capital expenditures and avoiding the costs of managing a large production work force. INTEGRATED OPERATING STRUCTURE. The integration of the Company's design, product procurement, production planning, marketing and merchandising functions enables the Company to effectively distribute products to its wholesale and retail customers in a timely manner and to control inventory. Management believes that these strengths provide a platform upon which management will continue to implement its business plans and maintain the Company's position as a leading branded apparel designer, marketer and distributor. BUSINESS STRATEGY The Company's mission is to be the international leader in the design, marketing and distribution of quality rainwear, outerwear and other related products that protect consumers in all weather conditions. To achieve this objective, the Company focuses on maximizing the market penetration of its brands by executing a life style/end-use segmentation approach to the design, merchandising and marketing of the Company's broad range of products. The Company aims to develop a clearer understanding of the target customer for each of the Company's brands and product lines, and to segment these products by types of target customers, which are differentiated by gender, age group and lifestyle and end-use requirements. In implementing this strategy, the Company has adopted an approach that divides its product offerings and brands into "dress," "casual," "outdoor," and "active" categories, through which the Company offers a broad range of products to satisfy different customer preferences and end-use requirements, all of which provide a consistently high standard of quality and value at price points consistent with the positioning of that brand. In addition to increasing the penetration of its existing brands and product lines, the Company's business plan includes seeking to add new brands (both through licensing of well-known, third party brands and development of new brands) and new product offerings to increase the breadth of coverage of the Company's products in terms of price, distribution channels and target consumers. Such new brands and product offerings must adhere to the Company's stringent standards of product quality, value and design while being positioned appropriately in the marketplace within the Company's overall 34 life style/end-use segmentation approach. The Company may, in the future, under appropriate circumstances, enter into complementary acquisition opportunities consistent with the foregoing strategy in order to expand its stable of brand names and augment its product lines. The Company's business plans are designed to build upon the steps the Company has taken to grow its outerwear businesses, continuing the Company's transformation from a significant rainwear designer, marketer and distributor to a market force in all aspects of rainwear, outerwear and related products. This continued transformation is extremely important to the Company's future growth since the market for traditional rainwear is significantly smaller than the markets for either outerwear or other apparel products, such as sportswear, and the market demand for traditional rainwear continues to be adversely affected by the growth of casual attire in the workplace. Of Fiscal 1998 total net sales of $335.6 million, outerwear comprised 68%, rainwear comprised 27% and sportswear, accessories and other (primarily consisting of sales of goods purchased from licensees and other companies for sale in the Company's retail stores, such as hats, umbrellas, gloves, scarves and luggage) comprised 5%. This compares with Fiscal 1994 total net sales of $356.6 million, of which outerwear comprised 40%, rainwear comprised 42%, and sportswear, accessories and other (primarily consisting of a wholesale sportswear line consisting primarily of men's sweaters and knit shirts, which was discontinued at the end of Fiscal 1994, and men's and women's sportswear lines marketed solely through the Company's retail stores, which were discontinued during Fiscal 1996) comprised 18%. The Company's strategy of augmenting its range of brands, product offerings and target consumers was advanced significantly by the acquisition of Pacific Trail in April 1994. Pacific Trail, headquartered in Seattle since 1945 and inspired by the rugged outdoor lifestyle of the Pacific Northwest, is a leading designer, marketer and distributor of authentic, moderate-priced casual, outdoor and active outerwear for men, women and children. Wholesale sales of Pacific Trail Products in Fiscal 1998 were $85.8 million. After having discontinued its sportswear product lines in Fiscal 1996 as part of the Company's strategy to recover from the significant deterioration of its financial condition and operating results during Fiscal 1995 by streamlining the Company's operations and refocusing its operational and financial resources on its core rainwear and outerwear product categories, the Company has decided to reenter the business of marketing sportswear. Management plans to market focused lines of men's and women's sportswear through its retail stores, and expects that sportswear will be a growing product category for the Company. Management believes that the new sportswear lines will help broaden the appeal of the Company's stores to both existing and new customers, increase store sales, reduce the seasonality of the Company's sales and provide a product base to support potential additional Company-operated retail store concepts. A central part of the Company's growth plan is to increase its sales through Company-operated retail stores. The Company is already the dominant provider of men's rainwear and a significant provider of women's rainwear and men's and women's outerwear to department stores. However, department stores are becoming an increasingly competitive environment as a result of the increased emphasis on private label products at lower prices and lifestyle "collection" brands at higher prices. In addition, the consolidation of department store groups over the past several years has significantly reduced the number of potential customers for the Company's products. Also, delivery problems in fall 1994 and spring 1995 had an adverse effect on the Company's relations with some of its department store customers, which contributed to a significant decrease in wholesale sales of London Fog Products. Therefore, Company-operated retail stores are an increasingly important distribution channel to the Company. In Fiscal 1998, net sales at the Company's retail stores totaled $139.9 million (41.7% of total net sales), as compared to $96.5 million (35.2% of total net sales) in Fiscal 1996. Retail sales include sales at the Company's factory outlet stores, superstores and Weather Stores(TM). As of May 30, 1998, the Company operated 134 factory outlet stores. A typical factory outlet store is approximately 4,700 square feet and is located in a manufacturers' outlet mall. Factory outlet stores appeal to the value-oriented consumer and sell excess inventory, out-of-season merchandise and seconds, as well as current season, first-quality products. As of May 30, 1998, the Company operated eight test superstores. The Company's superstores, the first of which was opened in May 1997 in North Canton, Ohio, were opened to test an alternative, larger format retail distribution channel for the Company's product offerings to supplement its tradi- 35 tional wholesale and factory outlet store retail distribution channels. A typical superstore is located in a suburban shopping mall or strip mall and offers a superior selection of current season, first quality product for the entire family at highly competitive prices. Based on initial sales results for these test superstores, management has determined that most of the existing superstores, many of which are larger than 25,000 square feet, are too large to generate acceptable profitability within an acceptable period of time. The Company is currently targeting 10,000 to 12,000 square feet as the optimal size to test for its larger format superstores. In connection with adopting a plan to restructure its superstores, during the quarter ended May 30, 1998, the Company recorded a restructuring charge of $3.5 million related to the planned closing or downsizing of five of the Company's eight superstores open as of May 30, 1998. The Company expects to open one additional large format superstore during the remainder of the current fiscal year (other than potential relocations of existing superstores in connection with their downsizing pursuant to the Company's superstore restructuring plan), an approximately 11,000 square foot store expected to open in late fall 1998 in Columbus, Ohio. The Company will continue to evaluate the optimal size and the best locations for its future superstores. MARKETING As part of the Company's marketing approach, the Company segments the markets for the Company's products by consumer lifestyle and end-use requirements, targeting particular product lines to specific consumer fashion preferences and price requirements. This approach involves segmenting the Company's product lines on the basis of targeted consumer end-use into "dress," "casual," "outdoor," and "active" categories. These categories are then marketed as follows: "dress" men's and women's rainwear and outerwear products are marketed primarily under the LONDON FOG(Reg. TM) and TOWNE(Reg. TM) labels. "Casual" men's and women's rainwear and outerwear products are marketed primarily under the LONDON FOG(Reg. TM), TOWNE(Reg. TM), FOG(Reg. TM) and DOCKERS(Reg. TM) labels. "Outdoor" men's and women's outerwear is marketed primarily under the PACIFIC TRAIL(Reg. TM), FOG(Reg. TM), SPERRY(Reg. TM) and LEVI'S(Reg. TM) labels, with children's "outdoor" outerwear marketed under the PACIFIC TRAIL(Reg. TM) label. "Active" men's, women's and children's outerwear is marketed primarily under the PACIFIC TRAIL(Reg. TM), INSIDE EDGE(Reg. TM) and BLACK DOT(Reg. TM) labels. Products are sold under the DOCKERS(Reg. TM), LEVI'S(Reg. TM) and SPERRY(Reg. TM) labels pursuant to licenses from the owners thereof. Commencing in fall 1999, pursuant to a license agreement, the Company will market a line of outerwear under the FOSSIL(Reg. TM) label. See "Business - -- Licenses and Trademarks"'. The LONDON FOG(Reg. TM) brand is positioned as the premium brand for the "dress" and "casual" categories. The FOG(Reg. TM) label is expected to become a premium brand for the "casual" and "outdoor" categories. Both the LONDON FOG(Reg. TM) and FOG(Reg. TM) brands are targeted to consumers who have traditional fashion tastes and demand premium quality, with the FOG(Reg. TM) brand expected to be aimed at the younger consumer. The PACIFIC TRAIL(Reg. TM) brand is positioned as a moderate-price brand in the "outdoor" and "active" categories, which targets value conscious consumers who seek a fashionable quality product. The TOWNE(Reg. TM) product line is the Company's moderate-price brand in the "dress" and "casual" categories. This brand was developed to compete with private label rainwear and outerwear retailing at lower prices. The SPERRY(Reg. TM) and LEVI'S(Reg. TM) product lines produced by the Company are positioned at market competitive prices in the "outdoor" category and cater to customers who want a quality product that is moderately priced and backed by a trusted brand name. The DOCKERS(Reg. TM) brand is positioned as a market competitive brand in the "casual" category. INSIDE EDGE(Reg. TM) and BLACK DOT(Reg. TM) brands are market competitive brands of the PACIFIC TRAIL(Reg. TM) product lines in the "active" category and are marketed to younger consumers who want a quality outerwear product that is sturdy enough for active outdoor use (such as skiing or snow-boarding), yet offered at a competitive price. Each product line is designed and sourced in accordance with the Company's product line structure which divides the product line into three profiles of products, "core basic," "basic fashion" and "fashion." Core Basic Products. Core basic products are products which have maintained substantially the same silhouette, fabric and color for three or more seasons. These products are the most familiar to consumers and account for approximately 55% to 60% of the Company's net sales, thereby making the Company less sensitive to fashion risk. 36 Basic Fashion Products. Basic fashion products are products that alter one of the following features of the product: silhouette, fabric or color. The Company believes that modest changes to its products adds freshness to its product lines and appeals to new customers without alienating its current customers with a product that is very unfamiliar to them. Basic fashion products account for approximately 30% to 35% of the Company's sales volume and over time often become core basic products. Fashion Products. Fashion products are products that alter previous silhouettes, fabric and color combinations and introduce new trends. They are products that consumers are least familiar with and account for the remaining approximately 5% to 10% of the Company's sales volume. Although many fashion products are only offered for a single season, certain fashion products create sufficient demand so that the Company will continue to offer such products. This product line structure enables the Company to offer its customers a balance of fresh but familiar products and reduces fashion risk. In addition to the utilization of the product line structure, each product line team maintains an operating line calendar and other operating disciplines that control and coordinate the number of products produced, the size of the product line, sales and production forecasts, costs and gross margins and delivery windows. PRODUCT LINES The Company produces a wide range of branded value-added products that are function driven, of outstanding quality and fashion correct. The following table compares historical net sales and percentage of net sales for the Company (including Pacific Trail figures in Fiscal 1998) by major product line (including wholesale and Company-operated retail store sales) for Fiscal 1994 and Fiscal 1998 (in millions of dollars).
FISCAL YEAR ENDED FISCAL YEAR ENDED FEBRUARY 26, 1994 FEBRUARY 28, 1998 ------------------------ ------------------------ $ % $ % ----------- ---------- ----------- ---------- Men's Rainwear ................ $ 66.5 18.6% $ 48.5 14.5% Women's Rainwear .............. 84.6 23.7 41.1 12.2 -------- ----- -------- ----- Total Rainwear ............... 151.1 42.4 89.6 26.7 -------- ----- -------- ----- Men's Outerwear ............... 86.0 24.1 124.9 37.2 Women's Outerwear ............. 53.1 14.9 88.4 26.3 Children's Outerwear .......... 2.9 0.8 16.5 4.9 -------- ----- -------- ----- Total Outerwear .............. 142.0 39.8 229.8 68.5 -------- ----- -------- ----- Sportswear .................... 58.7 16.5 0.1 0.0 Accessories and Other ......... 4.8 1.3 16.1 4.8 -------- ----- -------- ----- TOTAL NET SALES .............. $ 356.6 100.0% $ 335.6 100.0% ======== ===== ======== =====
Rainwear. Men's rainwear products are made primarily of polyester and cotton blends, cotton, wear-resistant breathable fibers and micro fibers. The Company's most popular type of men's rainwear is the double-breasted trench coat. Women's rainwear fabrics are similar to those used in the men's rainwear products. The Company offers over 120 styles of women's rainwear featuring a wide range of fashion profiles, materials and tailoring. The significant decline in the Company's net sales of rainwear from Fiscal 1994 to Fiscal 1998 reflects the growth of casual attire in the workplace, which has decreased overall market demand for "dress" rainwear products, as well as competitive pressures faced by the Company in its traditional department store customer base. Outerwear. Men's and women's outerwear products are made of water-resistant fabrics similar to the Company's rainwear products. The Company offers nearly 300 styles of men's outerwear and nearly 300 styles of women's outerwear products in an assortment of lengths and colors. Linings for these outerwear garments include wool, down and synthetic linings, such as the Company's proprietary NRG 2000(TM) and Thermostat 37(TM). 37 As part of the Company's outerwear product category, the Company offers a variety of active outerwear products. Through Pacific Trail, the Company participates in the skiwear market by selling skiwear under the INSIDE EDGE(Reg. TM) brand name and related brand names. INSIDE EDGE(Reg. TM) is a moderate to value-priced line of skiwear for men, women and children which is sold through national and regional sporting goods chains, specialty stores and ski shops. Through Pacific Trail's BLACK DOT(Reg. TM) brand the Company is one of the leading sellers of snowboard apparel in the United States. Children's Outerwear. Pacific Trail offers a broad line of outerwear and skiwear primarily for boys, but also for girls and toddlers, which, in conjunction with its adult outerwear business, enables Pacific Trail to offer products targeted to the entire family. Management believes that Pacific Trail's strong presence in the children's outerwear market contributes to achieving the Company's strategic goal of increasing the breadth of market coverage for the Company's overall product offerings. The Company also sells LONDON FOG(Reg. TM) brand children's outerwear, which is purchased from a Company licensee, through its retail stores. Such licensee also sells these products in traditional wholesale channels. The significant increase in the Company's net sales of outerwear from Fiscal 1994 to Fiscal 1998 reflects the inclusion in the Fiscal 1998 figures (but not in the Fiscal 1994 figures) of sales of Pacific Trail Products, which have grown since the acquisition of Pacific Trail in early Fiscal 1995. Sportswear. The Company is developing its own men's and women's sportswear collections which will be marketed solely through the Company's retail stores. The Company believes there are significant growth opportunities for men's and women's sportswear, primarily in the Company's factory outlet stores and new retail concept stores, due to the high levels of consumer awareness and acceptance of the LONDON FOG(Reg. TM) and FOG(Reg. TM) names and established consumer traffic in the Company's retail stores. Management believes that the new sportswear lines will help broaden the appeal of the Company's stores to both existing and new customers, increase store sales, reduce the seasonality of the Company's sales and provide a product base to support potential additional Company-operated retail store concepts. The Fiscal 1994 net sales of sportswear consisted of: (i) sales of a wholesale sportswear line consisting primarily of men's sweaters and knit shirts, which was discontinued at the end of Fiscal 1994 as part of the Company's brand repositioning; and (ii) sales of men's and women's sportswear lines marketed solely through the Company's retail stores, which were discontinued during Fiscal 1996 as part of the Company's refocusing of operational and financial resources on its core rainwear and outerwear product categories. Accessories and Other. Through its retail stores, the Company sells accessories and other products bearing the LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) brand names which are manufactured by licensees for the Company pursuant to licensing agreements or other purchasing arrangements, as discussed below under "Licensing." Among these products are hats, umbrellas, gloves, scarves, luggage, and sunglasses. These products are marketed along the same lifestyle segments as the Company's core rainwear and outerwear product categories. DISTRIBUTION CHANNELS The Company markets its products through wholesale and retail distribution channels. Through its wholesale distribution channels, the Company markets its products through department stores and specialty retailers (including sport specialty retailers), national and regional chain stores, and discount and off-price retailers. In Fiscal 1998, the wholesale distribution channels accounted for approximately 58% of the Company's total net sales. Through its retail distribution channels, the Company markets its products through its own factory outlet stores, superstores and Weather Stores(TM). In Fiscal 1998, sales from Company-operated retail stores accounted for approximately 42% of the Company's total net sales with those net sales allocated as follows: factory outlet stores, approximately 39% of total net sales; superstores and Weather Stores(TM), approximately 3% of total net sales. In Fiscal 1998, no single outside customer accounted for more than 10% of the Company's total net sales. WHOLESALE DISTRIBUTION CHANNELS Department Stores. The Company offers its products under most of its brand names to moderate and better department stores. These customers include all the major department store groups, including Dayton Hudson Corporation, Dillard's, Inc., Federated Department Stores, Inc., May Department 38 Stores, Mercantile Stores Company, Inc., and Proffitts, Inc. and include substantially all the major department store chains in the United States, including Belks, Carson Pirie Scott, Dayton's, Dillard's, Filene's, Hecht's, Hudson's, Lord & Taylor, Macy's, Proffitt's and Younkers. Specialty Retailers and Sport Specialty Retailers. The Company offers its products under a variety of its brand names to a broad range of local and regional specialty retailers, including both specialty retail chains, such as Bob's Stores, Emporium, GI Joe's and Today's Man, and independent local specialty stores. The Company also offers its outdoor and active outerwear products, primarily under the PACIFIC TRAIL(Reg. TM), INSIDE EDGE(Reg. TM) and BLACK DOT(Reg. TM) brands, to a variety of sport specialty retailers, including chains such as Copelands and Gart Sports, and many independent sporting goods, outdoor and ski stores. National and Regional Chain Stores. The Company markets certain portions of its rainwear and outerwear product offerings under various Company-owned labels to national and regional chains such as JC Penney, Sears, Fred Meyer and Mervyn's. Discount and Off-Price Retailers. The Company also markets a variety of its products, including excess inventory of rainwear and outerwear, through discount and off-price retailers such as Burlington Coat Factory, Ross Stores and TJ Maxx. COMPANY-OPERATED RETAIL STORES Factory Outlet Stores To broaden the distribution of its products and to market the Company's products to consumers who favor value-oriented retailing formats, the Company has pursued a strategy of distributing its products through its own factory outlet stores. The Company's factory outlet stores average approximately 4,700 square feet in size and are located primarily in major outlet centers in locations such as tourist destination areas. As of May 30, 1998, the Company operated 134 factory outlet stores located in 40 states and Puerto Rico. The Company's factory outlet stores sell a broad range of rainwear and outerwear offered by the Company, as well as products purchased from licensees and outside vendors, at highly competitive prices. The primary role of the Company's factory outlet stores is to sell excess inventory, out-of-season merchandise and seconds, thus helping the Company to mitigate its inventory risk. However, to provide a satisfactory merchandise assortment, the factory outlet stores also sell current season, first-quality product. The Company is re-introducing sportswear as a test at its factory outlet stores and expects that sales of sportswear will become a more significant product category to the Company. Management believes that selling sportswear will reduce the seasonality of the Company's sales, increase the number of customers who will visit the stores, increase the frequency of visits among its customers and increase sales per customer. Sportswear products will include knit shirts, casual pants, woven shirts and shorts. The following table sets forth factory outlet store net sales for each of the last five fiscal years and the number of factory outlet stores operated at the end of each of those fiscal years:
FISCAL YEAR ENDED --------------------------------------------------------------- FEB. 26, FEB. 25, FEB. 24, FEB. 22, FEB. 28, 1994 1995 1996 1997 1998 ---------- ---------- ---------- ---------- ----------- Net sales (in millions of dollars) ................ $ 119.9 $ 122.8 $ 96.5 $ 108.5 $ 131.0 Total stores operated at fiscal year end ......... 110 122 99 123 126
The Company is focusing on increasing the productivity and profitability of its existing store base, as well as on growth through measured expansion in the number of stores. The Company expects to open 20-25 factory outlet stores this fiscal year. The Company employs real estate consultants expert in the field of factory outlet stores to aid the Company in determining new locations for its factory outlet stores. The Company also analyzes the performance and growth potential of each of its existing locations and has closed and may continue to close stores that do not meet the Company's performance objectives. 39 NEW RETAIL CONCEPT STORES Superstores. As a central part of its strategy to increase sales through Company-owned retail stores, beginning in May 1997, the Company began to open test superstores in which the Company offers to its customers a superior selection of its products and licensed products in an attractive shopping environment, at highly attractive prices and convenient locations. As of May 30, 1998, the Company operated eight superstores, all of which are located in the midwest or northeast United States. These eight superstores, open as of May 30, 1998, are an average of 22,625 square feet in size, have an average remaining lease term of approximately nine years (excluding renewal options exercisable at the election of the Company) and have average annual base rent payments (excluding related common area maintenance, insurance and property taxes) of approximately $310,000 per store during their remaining lease terms. For Fiscal 1998, the superstores generated sales of $7.5 million and an operating loss of $4.1 million, before allocation of corporate overhead expenses. Based on the experience with these initial test superstores, the Company believes that most of the existing superstores are too large to generate acceptable profitability within an acceptable period of time. As a result, the Company has adopted a plan to restructure its larger format retail store strategy by closing or significantly downsizing five of the Company's eight current superstores and shifting to a revised format which focuses on a store size significantly smaller than 25,000 square feet and includes the planned expansion of product offerings beyond rainwear and outerwear, such as sportswear and accessories. The Company is currently targeting 10,000 to 12,000 square feet as the optimal size to test for its larger format superstores. The Company believes that the planned reduction in store size and the expansion of product offerings will help broaden the appeal of the stores to both existing and new customers, increase store sales, reduce the seasonality of the Company's sales and increase store profitability. In connection with adopting a plan to restructure its superstores, during the quarter ended May 30, 1998, the Company recorded a restructuring charge of $3.5 million related to the planned closing or downsizing of five of the Company's eight test superstores open as of May 30, 1998. Included in this charge is an accrual of $1.6 million for anticipated cash restructuring expenditures to cover costs associated with amending or terminating store leases and other related costs, and $1.9 million of non-cash charges related to anticipated write-offs of fixed assets, including fixtures and leasehold improvements, in the stores to be closed or downsized. Weather Stores(TM). During the past two years, the Company has also tested a smaller concept store format offering a limited selection of the Company's products focused on weather protection for the traveler. These stores, operating under the name The Weather Store(TM), are located in high-traffic locations and present the Company's products in a weather-theme environment. As of May 30, 1998, the Company operated three Weather Stores(TM), one in the Pittsburgh International Airport, one in Union Station in Washington, D.C. and the third in a shopping mall in Waterbury, Connecticut. These stores, which average less than 2,000 square feet in size, generated net sales of $1.4 million and generated an operating loss of $0.1 million during Fiscal 1998, before allocation of corporate overhead expenses. Management believes that the Weather Stores(TM) serve to strengthen the image of the Company's brands and product offerings with consumers as high quality authentic weather protection apparel. While management believes that the Weather Stores(TM) are a promising concept, the Company is currently focusing its efforts on its superstores and other Company-operated retail store concepts. See "-- Business Strategy." INTERNATIONAL Although the Company has historically focused on marketing its products in the United States, the Company also offers its products in certain international markets. The Company's net sales outside the United States (which excludes licensing revenues derived from international licensing arrangements) consists of sales of rainwear and outerwear products in the United Kingdom. For Fiscal 1998, the Company generated net sales outside the United States of approximately $0.4 million. The Company has licensing arrangements with companies in certain other countries, including Canada, China, Japan, Australia, New Zealand and South Korea, to produce and market rainwear and outerwear products under the LONDON FOG(Reg. TM) and/or PACIFIC TRAIL(Reg. TM) brand names. The Company 40 continues to explore licensing opportunities in overseas markets. For Fiscal 1998, the Company generated licensing revenues from licensing activities outside of the United States of approximately $2.1 million. See "-- Licenses and Trademarks" MERCHANDISING AND DESIGN Both London Fog and Pacific Trail maintain their own dedicated design staffs. Approximately 85 people are employed by the Company in various aspects of product design and merchandising, including technical services, fabric selection and procurement. Each season, the Company develops product lines based upon previous and present season's market information gathered from both wholesale and retail sales staffs, fashion consultants and internal staff. The Company's design staffs explore fabrics and fashion ideas from Europe and Asia as well as the United States. Working closely with the Company's sales and marketing team, the design and merchandising team's goal is to assemble a collection that is directed to the customer's needs and lifestyle and, at the same time, provides fashionable products consistent with the Company's image. Each product line has a team of personnel assigned to it, which develops its products based on a sophisticated operating process which includes the gathering and analysis of market research (including direct feedback from consumers both through the Company's field retail marketers and consumer focus groups) and computer-aided design renderings, in addition to traditional pattern making, prototyping and test-marketing. In the development of all of the Company's product lines, the Company follows a detailed product development calendar which coordinates the creative and operational aspects of product development, sourcing and delivery, including controlling the size of product lines, setting sales and production forecasts, determining product costs, prices and gross margins, and setting raw material purchase and finished goods production timetables to meet required product delivery windows. SALES AND ADVERTISING Sales. The Company's wholesale division utilizes a customer-oriented sales process to sell its products. Each major customer is presented with a business plan for the sale of the Company's products and provided with a comprehensive product assortment which together provide the customer with a groundwork for selling and marketing the Company's products. In addition, the Company provides these wholesale customers with a "wholesale customer service plan," which has several attractive features, including pre-ticketing of the Company's products and quick reorder capabilities, including ordering through electronic data interchange. The Company employs approximately ten full-time field retail marketers who are responsible for working with employees of the Company's customers in designing and assembling in-store displays, providing training with respect to the Company's products and motivating the customers' employees through productivity contests. By being in the customers' stores on a regular basis, the retail marketers are able to gather market research data directly, which enables management to react more quickly to changes in consumer preferences. Advertising. The Company has a fully integrated advertising and marketing program, which includes campaigns that range from national initiatives to store specific initiatives. The Company's national advertising appears primarily in print ads in both consumer and trade magazines which are intended to reinforce and enhance the image and consumer awareness of the Company's brands and product lines and to advertise specific LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) products. The Company offers a cooperative advertising program for most of its product lines and all of its wholesale customers who purchase such products have access to it. The Company maintains control over all cooperative advertising by requiring the retailer to adhere to specified cooperative advertising guidelines set by the Company. Finally, the Company engages in store specific partnership marketing programs. Through the partnership marketing programs the Company's employees collaborate directly with employees of its customers. The partnership marketing programs utilize local ads, special events (e.g., "gift-with-purchase" promotions) and special displays to promote the Company's products. As a result of this "personalized" treatment, management believes that the partnership marketing program fosters loyalty among its trade customers and thereby increases the stability of its business. The Company's total advertising expenditures (including for the Company's retail stores) were approximately $9.9 million in Fiscal 1998. 41 MANUFACTURING AND SOURCING The Company's products are produced worldwide by independent manufacturers selected, monitored and coordinated by United States and foreign-based Company employees to assure conformity to the Company's strict quality standards. The Company does not own or operate any manufacturing facilities. The Company maintains contract manufacturing arrangements for rainwear and outerwear with approximately 90 contractors located in foreign countries, including China, Sri Lanka, Indonesia, Colombia, and the Philippines. The Company selects its contract manufacturers carefully, in some instances through local agents who are familiar with the local manufacturing industry, gradually phasing in production and closely monitoring these operations to ensure compliance with the Company's detailed contracting arrangements and strict quality standards. The Company maintains a staff of approximately 130 employees based in the United States and in three offshore sourcing and quality control offices, in South Korea, Sri Lanka and the Philippines, to direct and monitor the Company's manufacturing by its offshore contractors. This staff of Company employees includes on-site overseas quality specialists who monitor the quality control and delivery schedules of the Company's offshore contractors. These employees also search for, review and evaluate new manufacturing contractors and countries for the Company's products and perform other services, such as coordination of sending raw materials and manufacturing specifications to contractors, final product inspections, order placement, sample preparation, monitoring of quota and other import restrictions, and communications with the Company's sourcing, merchandising and design personnel in the United States. The Company strives to develop long-term relationships with its contractors and provides them with significant technical and administrative assistance. As part of management's continuing focus on controlling costs and maintaining quality control, the Company sources much of its products through "cut, make, and pack" ("CMP") sourcing arrangements, whereby the Company directly purchases raw materials, principally fabric and trim items, from suppliers, and ships the materials in a "kit," together with patterns, samples, and most other necessary items, to the independent manufacturer that has been selected by the Company to produce the finished product. While the CMP process advances the timing for inventory purchases and exposes the Company to certain additional risks before a garment is manufactured, the Company believes that this process controls quality consistency, further increases its manufacturing flexibility and provides it with a cost advantage over traditional "FOB" product sourcing arrangements, in which the independent manufacturer purchases the raw materials needed to produce the garment from sources approved by the Company, at prices negotiated between the independent manufacturer and fabric supplier. The Company sources approximately 75% (by dollar volume) of its production using CMP sourcing arrangements. Raw materials for rainwear and outerwear include polyester and cotton blends, polyester and nylon blends, cotton, micro fibers and polyester and wool blends. The Company has strict quality requirements for these materials. All of the fabrics are tested in accordance with United States safety standards. South Korean-based suppliers account for a significant majority of the Company's fabric purchases. The Company has no significant long-term contracts with its independent manufacturers or raw material suppliers. The Company has from time to time experienced difficulty in meeting its raw material and finished goods requirements on a timely basis, and any such future difficulties could have a material adverse impact on the Company. See "Risk Factors -- Dependence on Independent Manufacturers" and "-- Dependence on Raw Material Suppliers." INFORMATION SYSTEMS From Fiscal 1996 through Fiscal 1998, the Company incurred approximately $6.5 million in capital expenditures on software and hardware to modernize its management information systems. In addition, included in the Company's planned capital expenditures for Fiscal 1999 is approximately $3 million for the replacement of the Company's financial and retail store information systems with systems which have greater functionality and are Year 2000 compliant. The Company's management information systems provide, among other things, comprehensive production, order processing, sales, inventory, accounting and financial information for the management of the operations of the Company and for use for accounting and financial reporting purposes. 42 The Company has assessed the impact that the Year 2000 Issue will have on its computer systems, with a primary focus on the Company's critical business and information systems. The Year 2000 Issue is the concern that many computer systems are not capable of differentiating the year 1900 from the year 2000, because the system only identifies a given year by its final two digits. The lack of this capability could cause certain computer systems to not operate properly. The Company has developed a project plan which includes an inventory of all critical systems, identification of those systems requiring modifications or replacement to address the Year 2000 Issue, and an action plan and time table for the completion and testing of required modifications and systems replacements. Based on the Company's project plan, the Company expects to have any required modifications to critical systems completed on a timely basis. However, if such modifications are not completed on a timely basis (which in certain cases is expected to be before the year 2000), the Year 2000 Issue could have a material adverse impact on the Company's business, operations, or financial condition. In addition, many of the third parties with which the Company conducts business will need to modify their computer systems to address the Year 2000 Issue and the failure of such third parties to address the problem on a timely basis could have a material adverse impact on the Company. COMPETITION The apparel industry is highly competitive and fragmented. The Company competes on the basis of product functionality, style, quality, brand recognition, price and customer service. The Company sells its rainwear, outerwear and sportswear products throughout the United States and competes against a variety of other brand name and private label merchandise. LONDON FOG(Reg. TM) and related brand name rainwear products compete against a number of brands, including Chaps by Ralph Lauren, Fleet Street, Forecaster, Gallery and Jones New York. LONDON FOG(Reg. TM), PACIFIC TRAIL(Reg. TM) and related brand name outerwear products compete against a number of brands, including Bromley, Chaps by Ralph Lauren, Columbia, Fleet Street, Forecaster, Gallery, Jones New York, Members Only, Weatherproof and collection brands such as Nautica, Polo by Ralph Lauren and Tommy Hilfiger. Many of the Company's competitors are substantially larger and have substantially greater financial, distribution, marketing and other resources than the Company. See "Risk Factors -- Substantial Competition." LICENSES AND TRADEMARKS The Company has registered its major trademarks, LONDON FOG(Reg. TM), FOG(Reg. TM), TOWNE(Reg. TM), and PACIFIC TRAIL(Reg. TM), and other marks used in its business with the United States Patent and Trademark Office and in many foreign countries. The Company considers its trademarks, especially its LONDON FOG(Reg. TM) and PACIFIC TRAIL (Reg. TM) trademarks, to be among its most valuable assets. The Company vigorously defends its trademarks against infringement and, when necessary, initiates litigation to protect such trademarks. The Company also vigorously enforces its license agreements and its trademark rights under such agreements. The Company strategically extends the Company's product lines and broadens the distribution, domestically and internationally, of such products by licensing its trademarks to other manufacturers pursuant to various license agreements. These license agreements permit the Company to enter new markets without a significant capital investment and to benefit from the local licensee's knowledge of and relationships within the local foreign market. The Company currently licenses its trademarks to other manufacturers for children's outerwear, luggage and umbrellas, wool coats and leather outerwear, gloves and sunglasses in the United States; rainwear and outerwear, men's slacks, men's knit tops, men's tailored clothing and women's sportswear in Canada; and rainwear and outerwear in certain other countries, including China, Japan, Australia, New Zealand and South Korea. The Company currently has licensing agreements for Company-owned trademarks with approximately 15 licensees, primarily in the United States and Canada. Licensing revenues were approximately $4.1 million for Fiscal 1998, of which 47%, 31%, 16%, and 6% were derived from the Company's licensing arrangements in the United States, Canada, Japan, and all other countries, respectively. 43 The Company continues to pursue international licensing opportunities. For example, in Fiscal 1997 the Company, pursuant to a license agreement, licensed its PACIFIC TRAIL(Reg. TM) brand to a Japanese trading company for the production of "head-to-toe" products bearing the PACIFIC TRAIL(Reg. TM) brand to be marketed in Japan. This Japanese licensee markets these products as a collection in specially designated areas in over 150 Ito-Yokado department stores in Japan. The Company has recently become a licensee of the FOSSIL(Reg. TM) brand from Fossil, Inc. for the production of outerwear beginning in fall 1999, and the exclusive outerwear licensee of the SPERRY(Reg. TM) brand from S. R. Holdings, Inc. for the production of nautically-inspired outerwear. In addition, the Company (through Pacific Trail) is the exclusive licensee in the United States of the LEVI'S(Reg. TM) brand for men's, women's and children's (non-jean and non-leather) outerwear and of the DOCKERS(Reg. TM) brand for men's (non-jean and non-dress) outerwear. PROPERTIES The Company's headquarters and largest distribution facility is located in Eldersburg, Maryland and consists of two connected buildings containing 645,000 square feet, situated on approximately 36 acres of land. This facility is owned by the Company, and approximately 550,000 square feet of it are devoted to the warehousing of finished products. The Eldersburg facility is the Company's corporate headquarters and also houses the Company's distribution operations and many of its administrative operations, including finance and accounting, human resources, information systems, technical design, retail division support and manufacturing support. The Company distributes PACIFIC TRAIL (Reg. TM) and related products through a distribution facility in Martinsville, Virginia pursuant to an operating agreement, under which the Company can utilize up to 250,000 square feet of this facility. The Company leases approximately 39,000 square feet of office and showroom space in New York, New York, which is used for design of LONDON FOG(Reg. TM), FOG(Reg. TM) and certain licensed products, for sales and marketing offices, for retail store operations, for the showrooms for LONDON FOG (Reg. TM) and PACIFIC TRAIL (Reg. TM) products and for certain executive offices. The Company leases space in Seattle, Washington for Pacific Trail's divisional headquarters, including executive and design offices. In Greensboro, North Carolina, the Company leases office space for the employees of the Company who are overseeing the product development and sourcing of the Company's sportswear product lines. As of May 30, 1998, the Company leased 133 of its 134 factory outlet stores. The other factory outlet store is operated out of the Company's Eldersburg, Maryland distribution and headquarters facility. The 134 factory outlet stores have, in the aggregate, over 626,000 square feet of space. The average size per store is approximately 4,700 square feet, with an average remaining lease term of approximately 3.2 years, excluding renewal options exercisable at the election of the Company. The remaining terms of the Company's factory outlet store leases from May 30, 1998 (including renewal options exercisable at the Company's option) are summarized as follows: FACTORY OUTLET STORE LEASES NUMBER LEASES EXPIRING WITHIN OF STORES -------------------------------- ---------- 1 year ......................... 15 2 years ........................ 11 3 years ........................ 16 4 years ........................ 11 5 years ........................ 13 6 years or more ................ 67 As of May 30, 1998, the Company leased eight test superstores aggregating approximately 181,000 square feet of space. The average size per store is approximately 22,625 square feet with an average remaining lease term of approximately nine years, excluding renewal options exercisable at the election of the Company. See "Business -- Distribution Channels -- Company-Operated Retail Stores." 44 As of May 30, 1998, the Company leased three Weather Stores(TM) aggregating approximately 5,600 square feet of space. The average store size is approximately 1,860 square feet with an average remaining lease term of between five and six years. Management considers existing distribution and administrative facilities to be sufficient to support the Company's near-term growth requirements. BACKLOG The Company's backlog of unshipped orders was approximately $162 million at May 30, 1998 and approximately $173 million at May 31, 1997. The Company's backlog generally peaks in the late spring, as the Company prepares to ship orders for the fall retail season. Based upon industry practice and past experience, the Company believes that the backlog of unshipped orders provides some useful information regarding expected future shipments. The backlog, however, is dependent upon various factors, such as timing of meetings between salespeople and major accounts and the speed with which orders are received from such major accounts. Historically, the Company has shipped the significant majority of its backlog. However, in many instances, customers may cancel all or a portion of their unshipped orders, as the Company has experienced in the past, including in the fall of 1997. As a result of these factors, as well as the changes from year to year in the timing of shipments and the magnitude of in-season orders and reorders, backlog may not be indicative of eventual wholesale shipments. Furthermore, a significant percentage (42% for Fiscal 1998) of the Company's consolidated net sales are derived from sales in the Company's retail stores, which are not represented in backlog figures. Accordingly, the backlog at May 30, 1998 as compared with May 31, 1997 may not be indicative of what net sales will be in Fiscal 1999 as compared with Fiscal 1998. EMPLOYEES As of May 30, 1998, the Company employed approximately 1,465 people, including 420 part-time employees primarily employed in the Company's retail stores. The Company has not experienced a material work stoppage for over ten years. Approximately 125 employees working in the Company's Eldersburg, Maryland distribution center are represented by the Union of Needletrades, Industrial and Textile Employees ("UNITE") pursuant to a contract that expires in February 1999. LEGAL PROCEEDINGS The Company is a party to various claims, complaints and other legal actions that have arisen in the normal course of business from time to time. The Company believes that the outcome of all pending legal proceedings will not have a material adverse effect on its financial condition. 45 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS. The names, ages and positions of the directors and executive officers of the Company are set forth below:
NAME AGE TITLE - ------------------------ ----- ----------------------------------------------------- Robert E. Gregory, Jr. 56 Chairman and Chief Executive Officer and Director C. William Crain 57 President and Chief Operating Officer Edward M. Krell 35 Executive Vice President and Chief Financial Officer Lynne Y. MacFarlane 45 Executive Vice President--Human Resources and Ad- ministration Stuart B. Fisher 55 Senior Vice President, General Counsel and Secretary James J. Gaffney 57 Director Walker Lewis 53 Director Christopher H. Smith 59 Director Michael J. Starshak 57 Director
Directors are elected annually and serve for a one-year term. Executive officers serve at the pleasure of the Board of Directors. Set forth below is a description of the business experience of each director and executive officer of the Company. Robert E. Gregory, Jr. has served as Chairman of the Board and Chief Executive Officer and a director of the Company since joining the Company in January 1995. From 1993 to 1994 Mr. Gregory served as Chairman and Chief Executive Officer and was a member of the Board of Directors of The Gitano Group, an apparel supplier. From 1982 to 1991 Mr. Gregory served as President, Chief Operating Officer and was a member of the Board of Directors of VF Corporation, an apparel manufacturer and distributor. Mr. Gregory left VF Corporation in 1991 to establish a private investment company prior to joining The Gitano Group in 1993. C. William Crain has served as President and Chief Operating Officer since joining the Company in January 1995. From 1993 to 1994, Mr. Crain served as Vice Chairman and Chief Operating Officer and a director of The Gitano Group, Inc. From 1991 to 1992, Mr. Crain served as Executive Vice President of Crystal Brands, Inc., a men's and women's apparel and jewelry products company. Edward M. Krell serves as Executive Vice President and Chief Financial Officer. Mr. Krell was appointed to this position in November 1995. Mr. Krell joined the Company in June of 1991 as Controller for the Factory Store Division. He was promoted to Vice President and Corporate Controller in May 1993. From January 1995 until November 1995, Mr. Krell was Senior Vice President of Finance. Lynne Y. MacFarlane serves as Executive Vice President--Human Resources and Administration. Ms. MacFarlane joined the Company in January 1994, and has full responsibility for all Human Resource functions including staffing, compensation, and benefits. Ms. MacFarlane joined Heublein Inc. in 1985 as Director, Human Resource Development. She was appointed Director, Human Resource Development/North America for Grand Metropolitan PLC, the parent company of Heublein, in 1987. Stuart B. Fisher has served as Senior Vice President, General Counsel and Secretary since joining the Company in October 1994. From October 1985 to June 1992 Mr. Fisher was Senior Vice President, General Counsel and Secretary of Laura Ashley (USA) Inc. From June 1992 to October 1994, Mr. Fisher was General Counsel to Revman Industries, Inc. and from November 1993 to October 1994, Mr. Fisher was also Associate Counsel to Uniforce Services, Inc. 46 James J. Gaffney became a director of the Company in May 1998. Mr. Gaffney has been the Chairman of the Board of Maine Investments, a New Zealand holding company involved in mining, retail, manufacturing and distribution, since 1997. From 1995 to 1997 Mr. Gaffney served as Chairman of the Board and Chief Executive Officer of General Aquatics, Inc., a manufacturer of swimming pool equipment. From 1993 to 1995 Mr. Gaffney was the President and Chief Executive Officer of KDI Corporation, which was the predecessor corporation to General Aquatics, Inc. He also is a director of Advantica Restaurant Group, Inc. and Insilco Corp. Walker Lewis became a director of the Company in May 1998. Mr. Lewis has been the Chairman of Devon Value Advisers, a financial consulting firm, since 1997. From January 1994 to December 1994, Mr. Lewis was a Managing Director of Kidder, Peabody & Co. Incorporated. From January 1995 to 1997, Mr. Lewis was a Senior Advisor to Dillon, Read & Co. Christopher H. Smith became a director of the Company in May 1998. In 1993 Mr. Smith became International Counsel to the Managing Board of Escada AG, Munich, Germany. Currently, Mr. Smith serves as Vice Chairman and Chief Operating Officer, Director, Secretary and General Counsel of Escada (USA) Inc. and its affiliates. Michael J. Starshak became a Director of the Company in May 1995. Mr. Starshak, a certified public accountant, heads his own firm, Starshak and Associates, Inc., in Chicago, Illinois, where he has worked for more than the past five years. Starshak and Associates, Inc. is a crisis management organization dedicated to enhancing the value of businesses and providing turnaround expertise. BOARD OF DIRECTORS The non-executive directors receive $25,000 per year in cash, payable quarterly, plus $1,000 for each Board and committee meeting attended. In addition, the Company is obligated to attempt to purchase $40,000 of its stock in the open market per year for each non-executive director. The non-executive directors are also reimbursed for their out-of-pocket expenses for attending Board and committee meetings. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors of the Company has two standing committees: (i) the Compensation Committee and (ii) the Finance Committee. The Compensation Committee approves the compensation for senior executives of the Company, makes recommendations to the Board of Directors with respect to compensation levels and administers the Company's Stock Option Plan. The members of the Compensation Committee are Messrs. Lewis and Smith. The Finance Committee has general responsibility for surveillance of financial controls, as well as for accounting and audit activities of the Company. The Finance Committee annually reviews the qualifications of the Company's independent certified accountants, makes recommendations to the Board of Directors as to their selection and reviews the plan, fees and results of their audit. The members of the Finance Committee are Messrs. Starshak and Gaffney. 47 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table shows the compensation for the fiscal year ended February 28, 1998 (which consisted of 53 weeks) of the Chief Executive Officer of the Company and each of the other four most highly compensated executive officers of the Company. SUMMARY COMPENSATION TABLE FISCAL YEAR 1998
ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------------------------------- ------------------------- OTHER ANNUAL ALL OTHER SALARY BONUS COMPENSATION OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION ($) ($)(A) ($)(B) (#) ($)(C) - -------------------------------------- ----------- --------- -------------- --------- ------------- Robert E. Gregory, Jr. ............... 1,348,173 919,680 6,471 694,599 2,400,000 Chairman and Chief Executive Officer C. William Crain ..................... 758,358 613,120 6,855 347,299 1,350,000 President and Chief Operating Officer Edward M. Krell ...................... 234,615 102,500 5,020 93,031 -- Executive Vice President and Chief Financial Officer Stuart B. Fisher ..................... 193,750 52,500 5,579 49,490 -- Senior Vice President, General Counsel and Secretary Lynne Y. MacFarlane .................. 161,154 39,500 5,056 41,155 -- Executive Vice President -- Human Resources and Administration
- ---------- (a) The Company has a Management Bonus Plan to provide bonus awards to certain executives and key employees. (b) Represents the sum of amounts (i) paid as a matching contribution to the Company's 401(k) Plan, (ii) reimbursed under the Company's Executive Medical Reimbursement Plan and (iii) paid as premiums for excess life insurance. (c) Pursuant to the terms of their employment agreements (the "Employment Agreements"), a change in control of the Company (as defined in the Employment Agreements) occurred in Fiscal 1998, which entitled Mr. Gregory and Mr. Crain to receive payments of two times their original base salaries ($2,400,000 for Mr. Gregory and $1,350,000 for Mr. Crain) under letters of credit established pursuant to the Employment Agreements. 48 OPTIONS GRANTED IN LAST FISCAL YEAR The following table summarizes option grants to the named executive officers during the fiscal year ended February 28, 1998. OPTION GRANT TABLE FISCAL 1998
INDIVIDUAL GRANTS --------------------------------------------------- POTENTIAL REALIZABLE VALUE % OF TOTAL AT ASSUMED ANNUAL RATES NUMBER OF OPTIONS OF STOCK PRICE SECURITIES GRANTED TO APPRECIATION FOR OPTION UNDERLYING EMPLOYEES EXERCISE TERM(A) OPTIONS IN PRICE PER EXPIRATION ---------------------------------- NAME GRANTED (#) FISCAL YEAR SHARE ($) DATE 5%($) 10%($) - -------------------------------- ------------- ------------- ----------- ----------- -------- -------- Robert E. Gregory, Jr. ......... 666,666 33.2% $ 2.00 2/27/08 $4,508,964 $7,969,548 27,933 1.4 15.72 2/28/05 0 0 C. William Crain ............... 333,333 16.6 2.00 2/27/08 2,254,482 3,984,774 13,966 0.7 15.72 2/28/05 0 0 Edward M. Krell ................ 89,290 4.5 2.00 2/27/08 603,909 1,067,403 3,741 0.2 15.72 2/28/05 0 0 Stuart B. Fisher ............... 47,500 2.4 2.00 2/27/08 321,264 567,831 1,990 0.1 15.72 2/28/05 0 0 Lynne Y. MacFarlane ............ 39,500 2.0 2.00 2/27/08 267,156 472,196 1,655 0.1 15.72 2/28/05 0 0
- ---------- (a) The Common Stock is not publicly traded. The calculation of the potential realizable value assumes a fair market value of the Common Stock of $5.38 per share on February 27, 1998, the date of the grants, which represents the appraised fair value (including valuation discounts for minority interest and lack of marketability) of the Company's Common Stock at that date based on an independent appraisal. These estimates of values were developed solely for the purpose of comparative disclosure in accordance with the rules and regulations of the Securities and Exchange Commission and are not intended to predict the future values of the Common Stock. AGGREGATED OPTION EXERCISES AND OPTION VALUES No stock options were exercised in Fiscal 1998. The following table provides information on the number and value of unexercised stock options for the fiscal year ended February 28, 1998 for the named executive officers. AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FEB. 28, 1998 OPTIONS AT FEB. 28, 1998 ($)(A) ------------------------------- ------------------------------- NAME EXERCISABLE UNEXERCISABLE EXCERCISABLE UNEXERCISABLE - -------------------------------- ------------- --------------- -------------- -------------- Robert E. Gregory, Jr. ......... 133,333 561,266 $ 450,666 $ 1,802,665 C. William Crain ............... 66,667 280,632 225,333 901,332 Edward M. Krell ................ 29,763 63,268 100,600 201,200 Stuart B. Fisher ............... 15,833 33,657 53,516 107,034 Lynne Y. MacFarlane ............ 13,167 27,988 44,503 89,007
- ---------- (a) The fair market value of the Common Stock at February 28, 1998 is assumed to be $5.38 per share, which represents the appraised fair value (including valuation discounts for minority interest and lack of marketability) of the Common Stock at that date based on an independent appraisal. The Common Stock is not publicly traded. 49 STOCK-BASED COMPENSATION PLANS STOCK OPTIONS. On February 27, 1998, the Board of Directors adopted, and the shareholders approved, the 1998 Stock Option Plan, which provides for the grant to eligible participants of options to purchase up to a total of 2,000,000 shares of the Company's common stock, subject to adjustment for future stock dividends, stock splits, reorganizations and other events. The 1998 Stock Option Plan authorizes the Compensation Committee of the Board of Directors to administer the plan and to grant to eligible participants stock options under the plan. Pursuant to the provisions of the 1998 Stock Option Plan, options granted under the plan expire ten years from the date of grant and have an exercise price equal to at least 25% of the fair value of the Company's common stock at the date of grant. As of February 28, 1998, options to purchase a total of 1,925,334 shares had been granted under the 1998 Stock Option Plan and there remained available for future grant options to purchase 74,666 shares under the Plan. The options granted under the plan have an exercise price of $2.00 per share, expire on February 27, 2008, and vest in equal annual installments, with the first installment vesting on the date of grant and the remainder vesting on the first two anniversaries of the date of grant (or the first four anniversaries of the date of grant in the cases of Messrs. Gregory and Crain), subject to accelerated vesting provisions under certain circumstances as described in the plan. 1998 MANAGEMENT WARRANTS. On February 27, 1998, as part of the 1998 Recapitalization transactions and pursuant to the 1998 Stock Option Plan, the Company's shareholders and Board of Directors approved the issuance to the participants in the 1998 Stock Option Plan of the 1998 Management Warrants to purchase up to an aggregate of 83,799 shares of the Company's common stock at a purchase price of $15.72 per share. The 1998 Management Warrants expire on February 28, 2005 (subject to adjustment as specified in the Warrant Agreement) and vest in proportional installments as the options which are held by such participant under the 1998 Stock Option Plan vest. In addition, the 1998 Management Warrants are only exercisable after the first date on which any of the 1998 Recapitalization Warrants are exercised. As of February 28, 1998, the Company had issued 1998 Management Warrants to purchase an aggregate of 80,667 shares to participants under the 1998 Stock Option Plan. DEFINED BENEFIT AND ACTUARIAL PLANS RETIREMENT PLAN. The Company has a non-contributory defined benefit "account balance" retirement plan, the London Fog Retirement Plan, in which the named executives participate. Prior to January 1, 1996, Plan participant account balances were credited annually with 4% of compensation up to 62.5% of the social security taxable wage base plus 4.75% of the excess, subject to maximum compensation limits established by IRS Code Section 401(a)(17), as amended by the Omnibus Budget Reconciliation Act of 1993. As of January 1, 1996, all future annual credits based on compensation have been frozen. Accounts of active participants are credited with interest at a variable rate equal to the 5-year Treasury constant maturity rate, compounded annually to retirement. Accounts of terminated participants are credited annually with interest at 4%. However, there is a minimum benefit equal to the participant's January 1, 1994 account balance, compounded annually with 7.5% interest to retirement. Participants are 100% vested in their account balances after five years of credited service. As of January 1, 1998, the account balances of the named executives were as follows: Mr. Gregory -- $0; Mr. Crain -- $0; Mr. Krell -- $24,810; Mr. Fisher -- $0; and Ms. MacFarlane -- $7,101. SAVINGS PLAN. The Company has a defined contribution 401(k) savings plan (the "Savings Plan") covering all non-union employees except retail store hourly wage employees. Participants can elect to make pre-tax contributions between 1% and 15% of their salary to the Savings Plan subject to legal limitations. The Company's contribution is a 50% match of each participant's pre-tax contribution up to a maximum Company contribution of 1.5% of the employee's base salary. EMPLOYMENT CONTRACTS Mr. Gregory and Mr. Crain entered into employment agreements dated December 31, 1994 when they joined the Company. In connection with the 1998 Recapitalization, their employment agreements were amended and restated by new employment agreements dated February 27, 1998 (the "Employment Agreements") that, among other things, extended the term of their employment agreements to February 28, 2002. 50 Mr. Gregory is the Chairman and Chief Executive Officer of the Company and Mr. Crain is the President and Chief Operating Officer of the Company. Mr. Gregory's current base salary is $1,389,150 and Mr. Crain's is $781,397. Their base salaries are subject to annual increases of 5% or such higher amount as approved by the Board. Through Fiscal 1999, Mr. Gregory and Mr. Crain are entitled to a bonus, respectively, of 6% and 4% of the Company's Consolidated EBITA (as defined in the Employment Agreements). For the balance of the term of their Employment Agreements, Mr. Gregory's and Mr. Crain's bonus will be determined by the Board of Directors. If either Mr. Gregory or Mr. Crain is terminated without cause or terminates his employment for Good Reason (as defined in the Employment Agreements), such individual is entitled to a severance payment equal to the sum of two times his current base salary plus the highest annual bonus paid in the two prior years, together with a prorated bonus for the year in which the termination occurs. Good Reason includes a breach of the employment agreement by the Company, an entity that was not a stockholder of the Company as of February 28, 1998 becoming the holder of 50% or more of the Company's voting stock by way of purchase, transfer, merger or the like or the sale of 80% or more of the assets of the Company to an entity that does not own or control 50% or more of the Company's voting stock. Each of Mr. Gregory and Mr. Crain is entitled to participate in the employee benefit programs maintained by the Company for its employees. For a period of one year after the end of the term of their contracts, Mr. Gregory and Mr. Crain are precluded from working for, advising or investing in (except for investments of up to 1% of the equity of a publicly traded company) a company whose outerwear/rainwear sales exceed 37.5% of its total business. If a payment by the Company under the Employment Agreements is subject to an excise tax under Section 4999 of the Internal Revenue Code of 1986, the Company is required to gross-up the payment for such taxes. Each of Messrs. Krell and Fisher and Ms. MacFarlane have severance agreements with the Company which provide for the payment of one year's salary upon the termination (other than for cause) of such employee. 51 PRINCIPAL AND SELLING SECURITYHOLDERS The following table sets forth as of July 16, 1998 the number of shares of Common Stock and as of July 8, 1998 the principal amount of Notes owned by (i) each Director of the Company, (ii) each executive officer named in the Summary Compensation Table above, (iii) all of the Company's Directors and executive officers as a group, and (iv) each Selling Securityholder. Unless otherwise indicated, each holder has sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares of Common Stock owned by such holder.
SHARES OF PERCENTAGE OF PRINCIPAL COMMON STOCK COMMON AMOUNT OF NAME BENEFICIALLY OWNED(A) STOCK NOTES - ------------------------------------------------------------------- ----------------------- --------------- ------------- DIRECTORS AND NAMED EXECUTIVE OFFICERS - -------------------------------------- Robert E. Gregory, Jr. ........................................... 133,333 1.6% $ 0 C. William Crain ................................................. 66,667 * 0 Edward M. Krell .................................................. 29,763 * 0 Stuart B. Fisher ................................................. 15,833 * 0 Lynne Y. MacFarlane .............................................. 13,167 * 0 James Gaffney .................................................... 0(b) -- 0 Walker Lewis ..................................................... 0(b) -- 0 Christopher H. Smith ............................................. 0(b) -- 0 Michael J. Starshak .............................................. 0(b) -- 0 ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP .................. 258,763 3.1 0 SELLING SECURITYHOLDERS - ----------------------- Baker Nye Special Credits, Inc. .................................. 75,258 * 0 Bank of America Personal Trust, as Custodian ..................... 0 -- 2,888,418 BankAmerica Investment Corporation ............................... 359,690 4.5 1,607,717 Bear, Stearns & Co. Inc. ......................................... 418,332 5.2 0 Bear, Stearns Securities Corp. as Custodian for Contrarian Capital Fund I LP and Contrarian Capital Fund II LP ..................... 247,514 3.1 6,699,803 Beneficial Standard Life Insurance Company ....................... 128,749 1.6 0 B III Capital Partners, L.P. ..................................... 622,715 7.8 7,783,942 BOST & Company ................................................... 116,200 1.5 0 Boston Safe Deposit and Trust Company, as Custodian .............. 0 -- 8,578,189 The Chase Manhattan Bank ......................................... 154,937 1.9 0 Chase Securities Inc. ............................................ 0 -- 4,960,506 Chase Manhattan Bank/Municipal Dealer ............................ 0 -- 3,000,000 CIBC Oppenheimer Corporation ..................................... 655,005 8.2 0 CIBC Oppenheimer Corporation, as Agent ........................... 0 -- 6,002,249 Citibank ......................................................... 46,454 * 0 Citibank, N.A., as Custodian ..................................... 0 -- 9,419,906 Cobra LDC ........................................................ 76,961 * 0 Contrarian Capital Fund I LLP .................................... 45,016 * 0 Contrarian Capital Offshore Fund Limited ......................... 6,431 * 0 Daystar LLC ...................................................... 77,170 * 0 Daystar LLC As Agent ............................................. 334,234 4.2 0 Daystar Special Situations Fund, LP .............................. 1,116,968 14.0 0 DLJ Capital Funding, Inc. ........................................ 128,382 1.6 0 Donaldson Lufkin & Jenrette Securities Corporation ............... 63,824 * 1,852,466 Foothill Capital Corp. ........................................... 398,871 5.0 0 Goldman Sachs & Co., as Custodian ................................ 0 -- ,2,935,207 Mellon, Bank N.A. as Trustee for First Plaza Group Trust ......... 294,371 3.7 3,679,633 Morgan Stanley & Co. Incorporated ................................ 116,228 1.5 0 Morgan Stanley & Co. Incorporated, as Agent ...................... 0 -- 14,666,485 MWV Separate Account Alpha, LLC .................................. 61,855 * 773,185 Prime Income Trust ............................................... 129,050 1.6 1,613,131 Smith Barney Inc., as Custodian .................................. 0 -- 9,997,899 Tribeca Investments LLC .......................................... 77,099 * 0 Van Kampen American Capital PRIT ................................. 1,083,301 13.5 13,541,264 Restart Partners, L.P. ........................................... 150,755 1.9 0 Restart Partners II, L.P. ........................................ 498,013 6.2 0 Restart Partners IV, L.P. ........................................ 171,549 2.1 0 Restart Partners V, L.P. ......................................... 47,825 * 0 Morgens Waterfall Income Partners ................................ 46,786 * 0 Endowment Restart, L.L.C. ........................................ 200,755 2.5 0 Morgens Waterfall Domestic Partners, L.L.C. ...................... 49,702 * 0
- ---------- * Less than 1.0% (a) For purposes of this table, a person is deemed to have "beneficial ownership" of any shares that such person has the right to acquire within 60 days after the date of this Prospectus. Does not include any of the 1998 Recapitalization Warrants or 1998 Management Warrants since the exercise price of these Warrants significantly exceeds the marked value of the shares. Shares that the person has the right to acquire within 60 days after the date of this Prospectus are deemed to be outstanding in calculating the percentage ownership of the person or group but are not deemed to be outstanding as to any other person or group. (b) Does not include shares of Common Stock which the Company is obligated to attempt to purchase in the open market in the amount of $40,000 per year for each non-executive director. 52 PLAN OF DISTRIBUTION This Prospectus relates to 8,000,000 shares of Common Stock and the issuance of up to 614,525 shares of Common Stock issuable upon exercise of the Warrants (together, the "Resale Shares") and the Notes being offered for resale by the Selling Securityholders. The Common Stock and Notes may be sold independently. The exercise price for the Warrants is $15.72 per share. Therefore, if all of the Warrants are exercised, the Company will receive net proceeds of $9,660,333. The Company will not receive any of the proceeds from the sale of the Common Stock or the Notes being offered by the Selling Securityholders. The Company has been advised by the Selling Securityholders that the Resale Shares and the Notes may be sold or distributed from time to time by the Selling Securityholders directly to or through one or more purchasers (including pledgees), in transactions in the over the counter market, through the writing of options, or through brokers, dealers or underwriters who may act solely as agents or may acquire Resale Shares or Notes as principals or a combination of such methods of sale, at market prices prevailing at the time of sale, or at prices related to such prevailing market prices, at negotiated prices, or at fixed prices, which may be changed. If any broker-dealer purchases the Resale Shares or the Notes as principal it may effect resales of the Resale Shares or the Notes from time to time directly or through other broker-dealers, and the other broker-dealers may receive compensation in the form of discounts concessions or commissions from the Selling Securityholders and/or the purchasers of the Resale Shares or the Notes for whom they may act as agents or to whom they may sell as principals. The Selling Securityholders and any underwriter, dealer or agent that participates in the distribution of the Resale Shares or the Notes may be deemed underwriters under the Securities Act, and any profit on the sale of the Resale Shares or the Notes by them and any discounts, commissions, concessions or other compensation received by any such underwriters, dealers or agents may be deemed to be underwriting discounts and commissions under the Securities Act. In addition, the Selling Securityholders have informed the Company that they may, on an individual basis, from time to time following the effective date of the Registration Statement of which this Prospectus is a part, sell shares of Common Stock in short-sale transactions (including, without limitation, selling short against the box) and use some or all of the Resale Shares to cover such transactions. At the time a particular offer of the Resale Shares is made, to the extent required, a Prospectus Supplement will be distributed which will set forth the number of shares of Common Stock or the Notes being offered and the terms of the offering, including the name or names of any underwriters, brokers, dealers, or agents (whether such party is acting as a principal or as an agent for the Selling Securityholders), any discounts, commissions, concessions and other items constituting compensation from the Selling Securityholders and any discounts, commissions or concessions allowed or re-allowed or paid to dealers. The terms of the 1998 Recapitalization require the Company to file a shelf registration statement (the "Shelf Registration Statement") covering the Resale Shares and the Notes. The Registration Statement of which this Prospectus is a part constitutes the Shelf Registration Statement. The Company has agreed to use its best reasonable efforts to cause the Shelf Registration Statement to become effective and keep the Shelf Registration Statement effective until the earlier of (i) such time as all of the Resale Shares or Notes have been sold pursuant to the Shelf Registration Statement, (ii) such time as all of the Resale Shares and the Notes are eligible for sale pursuant to Rule 144(k) promulgated under the Securities Act and (iii) the two year anniversary of the effectiveness of the Shelf Registration Statement. 53 DESCRIPTION OF COMMON STOCK The Company's Certificate of Incorporation provides for authorized capital stock of 12,000,000 shares of Common Stock, par value $.01 per share. As of May 30, 1998, 8,000,000 shares of Common Stock were outstanding. Holders of Common Stock are entitled to one vote per share in the election of directors and on all other matters on which stockholders are entitled or permitted to vote. Holders of Common Stock are not entitled to cumulative voting rights. Therefore, holders of a majority of the shares voting for the election of directors can elect all the directors. Subject to restrictions imposed by the terms of any indebtedness of the Company, the holders of Common Stock are entitled to dividends in such amounts and at such times as may be declared by the Company's Board of Directors out of funds legally available therefor. See "Dividend Policy." Upon liquidation or dissolution, holders of Common Stock are entitled to share ratably in all the assets available for distribution to stockholders. Holders of Common Stock have no redemption, conversion or preemptive rights. The Common Stock currently outstanding, and the shares of Common Stock covered by this Prospectus, is and will be validly issued, fully paid and nonassessable. The transfer agent for the Common Stock is ChaseMellon Shareholder Services, L.L.C. DESCRIPTION OF NOTES GENERAL The Notes were issued pursuant to an Indenture dated as of February 27, 1998, as amended (the "Indenture"), between the Company and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"). The following summary of certain provisions of the Indenture and the Notes does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all of the provisions of the Indenture, including the definitions therein of certain terms used below. Copies of the Indenture will be made available upon request to the Company. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are subject to all such terms, and holders of the Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The definitions of certain terms used in the following summary are set forth below under "-- Certain Definitions". The Notes rank subordinate in right of payment to all existing and future Senior Indebtedness of the Company pursuant to the Subordination Agreement. As of the date of the Indenture, all of the Company's Subsidiaries were Restricted Subsidiaries. Under certain circumstances, however, the Company will be able to designate current and future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the restrictive covenants set forth in the Indenture. See "-- Certain Covenants". TERMS OF THE NOTES The Notes are limited to $100.0 million aggregate principal amount, and will mature on February 27, 2003. Payment of the principal of, premium, if any, and interest on the Notes is irrevocably and unconditionally guaranteed by each of the Subsidiary Guarantors. The Notes bear interest at the rate of 10% per annum from February 27, 1998, or from the most recent date to which interest has been paid or provided for, payable semi-annually to holders of record at the close of business on February 15 or August 15 immediately preceding the interest payment date on March 1 and September 1 of each year, commencing September 1, 1998. Optional Redemption. The Notes will be subject to redemption at the option of the Company, in whole or in part, at any time upon giving notice to the holders, not less than 30 nor more than 60 days before the redemption date, at the redemption prices (expressed as percentage of principal amount) set 54 forth below plus accrued and unpaid interest, if any, to the applicable redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date) if redeemed during the twelve-month period beginning on February 27 of the years indicated below: YEAR PERCENTAGE -------------------------- ----------- 1998 ..................... 105% 1999 ..................... 105% 2000 ..................... 105% 2001 ..................... 103% 2002 ..................... 101% SUBORDINATION The payment of all Obligations on the Notes is subordinated in right of payment to the prior payment in full in cash of all Obligations on Senior Indebtedness pursuant to the Subordination Agreement dated February 27, 1998 between the Trustee and Congress. Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors or marshaling of assets of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, whether voluntary or involuntary, all Obligations due or to become due upon all Senior Indebtedness shall first be paid in full in cash, or such payment duly provided for to the satisfaction of the holders of Senior Indebtedness, before any payment or distribution of any kind or character is made on account of any Obligations on the Notes, or for the acquisition of any of the Notes for cash or property or otherwise. No payments can be made with respect to any Obligations on the Notes or to acquire any of the Notes for cash or property or otherwise so long as any Senior Indebtedness is outstanding, except that scheduled semi-annual interest payments on the Notes can be made (1) except during a Blockage Period or when a Payment Event of Default or Insolvency Event (each as defined in the Subordination Agreement) has occurred and is continuing, and (2) except as provided below, provided that the Excess Availability Test (as defined in the Subordination Agreement) is satisfied. If payment of semi-annual interest cannot be made solely because the Excess Availability Test is not satisfied, then the payment will be postponed until the first day of the next month (if the Excess Availability Test is then met) or the first day of the second month following the original payment date (whether or not the Excess Availability Test is then met). As defined in the Subordination Agreement, (1) a "Blockage Period" means the period from the date that notice of an Event of Default under the Senior Credit Facility is given (other than for a Payment Event of Default) until the earlier of (a) the date that the Event of Default has been cured or waived, or (b) 180 days after the date that the Blockage Notice was given unless the lender under the Senior Credit Facility accelerates the loans under the Senior Credit Facility and enforces its remedies as a result thereof, in which event the Blockage Period will continue until all Obligations under the Senior Credit Facility have been paid in full, (2) "Payment Event of Default" means any default in payment of any Obligations under the Senior Credit Facility which continues beyond any applicable grace period and is not waived by the lender, (3) "Insolvency Event" means any proceeding, voluntary or involuntary, relating to bankruptcy, insolvency, reorganization, conservatorship or relief of debtors, and (4) "Excess Availability Test" means that for the 30 days preceding the date of any payment, and giving pro forma effect to the payment, there shall be at least $5,000,000 available to be borrowed by the Company under the Senior Credit Facility in accordance with its terms. By reason of such subordination, in the event of the insolvency of the Company, creditors of the Company who are not holders of Senior Indebtedness, including the Holders of the Notes, may recover less, ratably, than holders of Senior Indebtedness. As of May 30, 1998, the aggregate amount of Senior Indebtedness was approximately $90.0 million. In addition, the Company had up to an additional $110.0 million of available borrowings (assuming there was an adequate collateral borrowing base) under the Senior Credit Facility. 55 GUARANTEES The Subsidiary Guarantors and certain future subsidiaries of the Company (as described below) have or will irrevocably and unconditionally Guarantee on a senior subordinated basis, jointly and severally, the performance and punctual payment when due, whether at Stated Maturity, by acceleration or otherwise, of all obligations of the Company under the Indenture, the Notes and the Security Agreements, whether for payment of principal of or interest on the Notes, expenses, indemnification or otherwise (all such obligations guaranteed by such Subsidiary Guarantors being herein called the "Guaranteed Obligations" and the Guarantee thereof by each Subsidiary Guarantor, a "Subsidiary Guarantee"). The Subsidiary Guarantees are subordinated to Senior Indebtedness on the same basis as the Notes are subordinated to Senior Indebtedness. Each Subsidiary Guarantor also agreed to pay any and all costs and expenses (including reasonable attorneys' fees and expenses) incurred by the Trustee or any holder in enforcing any rights under any Subsidiary Guarantee. Each Subsidiary Guarantee is limited in amount to an amount not to exceed the maximum amount that can be guaranteed by the applicable Subsidiary Guarantor without rendering the applicable Subsidiary Guarantee voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. If a Subsidiary Guarantee were to be rendered voidable, it could be subordinated by a court to all other indebtedness (including guarantees and other contingent liabilities) of the applicable Subsidiary Guarantor, and, depending on the amount of such indebtedness, a Subsidiary Guarantor's liability on its Subsidiary Guarantee could be reduced to zero. Each Subsidiary Guarantee is a continuing guarantee and shall (a) remain in full force and effect until payment in full of all principal of or interest on the Notes, and all other Guaranteed Obligations then due and payable, or upon such Subsidiary Guarantor no longer being a Restricted Subsidiary, (b) be binding upon each Subsidiary Guarantor and (c) inure to the benefit of and be enforceable by the Trustee, the holders of the Notes, and their successors, transferees and assigns. Upon the sale or other disposition of all the Capital Stock of a Subsidiary Guarantor or the sale or disposition of all or substantially all the assets of a Subsidiary Guarantor (in each case other than to the Company or an Affiliate of the Company) permitted by the Indenture, such Subsidiary Guarantor will be released and relieved from all its obligations under its Subsidiary Guarantee. COLLATERAL In order to secure the Company's Obligations under the Notes, (a) pursuant to an Amended and Restated Pledge Agreement the Company pledged in favor of the Trustee, for the benefit of the holders of the Notes, (i) all the issued and outstanding capital stock of each Subsidiary Guarantor, (ii) all intercompany notes, and (iii) all proceeds of the foregoing, and (b) pursuant to an Amended and Restated Company Security Agreement, the Company granted to the Trustee, for the benefit of the holders of the Notes, a security interest in substantially all of the Company's assets, including, without limitation, all Accounts, Chattel Paper, Contracts, Documents, Equipment, General Intangibles, Instruments, Inventory, Investment Property, Patent Licenses, Patents, Trademark Licenses, Trademarks (all as defined in the Security Agreement) and all proceeds and products of the foregoing. Pursuant to an Amended and Restated Subsidiary Security Agreement, and as security for its Obligations under the Subsidiary Guarantees, each Subsidiary Guarantor also granted the Trustee, for the benefit of the holders of the Notes, a security interest in substantially all of its assets. The pledge by the Company and the security interests granted by the Company and the Subsidiary Guarantors are subordinate in priority to the security interests held by the lender under the Senior Credit Facility in accordance with the terms of the Subordination Agreement. Upon performance and payment in full of all the of the Company's Obligations, all such pledges and security interests in favor of the Trustee shall terminate. CHANGE OF CONTROL Upon the occurrence of a Change of Control (as defined below), each holder of the Notes will have the right to require the Company to repurchase all or any part of such holder's Notes pursuant to the offer described below at an offer price in cash equal to 101% of the aggregate principal amount of the 56 Notes plus accrued and unpaid interest, if any, thereon to the date of repurchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). A "Change of Control" means any of the following events: (a) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof (whether or not otherwise in compliance with the provisions of this Indenture); (b) the approval by the holders of Capital Stock of the Company of any plan or proposal for the liquidation or dissolution of the Company (whether or not otherwise in compliance with the provisions of this Indenture); or (c) any Person or Group (other than (i) the holders on the Issue Date of the Capital Stock of the Company or any Affiliates of such holders and (ii) the holders of the Management Stock Options (as defined in the Master Restructuring Agreement)) shall become the owner, directly or indirectly, beneficially or of record, of shares representing more than fifty percent (50%) of the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of the Company, unless the Holders of a majority of the outstanding principal amount of the Notes consents to such Person or Group becoming the owner of such shares; in each case together with a failure of the Notes to have a rating of at least BBB -- (or equivalent successor rating) by Standard & Poor's Ratings Service or at least Baa 3 (or equivalent successor rating) by Moody's Investors Service, Inc. on the 30th day after the occurrence of any such event. Within 30 days following any Change of Control, the Company will distribute a notice to the holders, with a copy to the Trustee, stating: (1) that a Change of Control has occurred and that such holder has the right to require the Company to repurchase such holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest on the relevant interest payment date); (2) the repurchase date (which shall be no earlier than 30 days nor later than 45 days from the date such notice is given, other than as required by law) and (3) the instructions determined by the Company, consistent with this covenant, that a holder must follow in order to have its Notes purchased. The Company shall comply, to the extent applicable, with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to the covenant described hereunder. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the covenant described hereunder, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the covenant described hereunder by virtue thereof. The Change of Control purchase feature is solely a result of negotiations between the Company and the original holders of the Notes. Subject to the limitations discussed below, the Company could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of indebtedness outstanding at such time or otherwise affect the Company's capital structure or credit ratings. Restrictions on the ability of the Company to incur additional Indebtedness are contained in the covenants described under "-- Certain Covenants -- Limitation on Indebtedness" and "-- Limitation on Liens". Such restrictions can only be waived with the consent of the holders of a majority in principal amount of the Notes then outstanding. Except for the limitations contained in such covenants, however, the Indenture does not contain any covenants or provisions that may afford holders of the Notes protection in the event of a highly leveraged transaction. The Senior Credit Facility includes covenants that prohibit a sale of all or substantially all of the assets of the Company, a merger in which the Company is not the surviving corporation and a liquidation or dissolution of the Company. The Subordination Agreement also prohibits the repurchase of the 57 Notes prior to payment in full of the Company's Obligations under the Senior Credit Facility. Therefore, the Company could not engage in certain events that would constitute a Change of Control or repurchase the Notes without the consent of the lender under the Senior Credit Facility. Future indebtedness of the Company may also contain prohibitions on the occurrence of certain events that would constitute a Change of Control or require such indebtedness to be repurchased upon a Change of Control. Moreover, the exercise by the holders of their right to require the Company to repurchase the Notes could cause a default under such indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Company. Finally, the Company's ability to pay cash to the holders of Notes following the occurrence of a Change of Control may also be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. The provisions under the Indenture relative to the Company's obligation to make an offer to repurchase the Notes as a result of a Change of Control may be waived or modified with the written consent of the holders of a majority in the principal amount of the Notes. CERTAIN COVENANTS The Indenture contains covenants including, among others, the following: Limitation on Incurrence of Additional Indebtedness. The Company will not, and the Company will not permit any of its Restricted Subsidiaries to, Incur, any Indebtedness other than Permitted Indebtedness; provided, however, that if no Default or Event of Default shall have occurred and be continuing at the time or as a consequence of the incurrence of any such Indebtedness, the Company or any Subsidiary Guarantor may incur Indebtedness if on the date of the incurrence of such Indebtedness, after giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.0 to 1.0. "Permitted Indebtedness" means, without duplication: (i) the Notes and the obligations under the Subsidiary Guarantees; (ii) Indebtedness incurred pursuant to the Senior Credit Facility; (iii) other Indebtedness of the Company and its Restricted Subsidiaries outstanding on February 27, 1998 reduced by the amount of any scheduled amortization payments or mandatory prepayments when actually paid or permanent reductions thereon; (iv) Interest Swap Obligations of the Company or any Restricted Subsidiary thereof covering Indebtedness of the Company or any Restricted Subsidiary thereof; provided that any Indebtedness to which any such Interest Swap Obligations correspond is otherwise permitted to be incurred under the Indenture; provided, further, that such Interest Swap Obligations are entered into, in the judgment of the Company, to protect the Company and any such Restricted Subsidiary thereof from fluctuation in interest rates on their respective outstanding Indebtedness; (v) Indebtedness under Currency Agreements; (vi) intercompany Indebtedness owed by the Company to any Wholly-Owned Restricted Subsidiary thereof or by any Restricted Subsidiary of the Company to the Company or to any Wholly-Owned Restricted Subsidiary thereof; (vii) Acquired Indebtedness of the Company or any Restricted Subsidiary thereof in an aggregate principal amount outstanding not exceeding $10 million at any one time; provided that, in the case of Acquired Indebtedness of a Restricted Subsidiary of the Company, such Acquired Indebtedness was not incurred in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company; (viii) guarantees by the Company and the Wholly-Owned Restricted Subsidiaries thereof of each other's Indebtedness; provided that such Indebtedness is permitted to be incurred hereunder; (ix) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or other similar instrument inadvertently drawn against insufficient funds in the ordinary course of business; provided that such Indebtedness is extinguished within five (5) business days of its incurrence; (x) any refinancing, modification, replacement, renewal, restatement, refunding, deferral, extension, substitution, supplement, reissuance or resale of existing or future Indebtedness, including any additional Indebtedness incurred to pay interest or premiums required by the instruments governing such existing or future Indebtedness as in effect at the time of issuance thereof ("Required Premiums") and fees in connection therewith; provided that any such event shall not (i) result in an increase in the aggregate principal amount of Permitted Indebtedness (except to the extent such increase is a result of a simultaneous incurrence of additional Indebtedness (A) to pay Required Premiums and related fees or (B) otherwise permitted to be incurred under the Indenture) of the Company and the Restricted Sub- 58 sidiaries thereof (except that this subclause (i) will not apply in the event the Indebtedness being refinanced, modified, replaced, renewed, restated, refunded, deferred, extended, substituted, supplemented, reissued or resold (each, such transaction, a "Refinancing,") was originally incurred in reliance upon clause (b) of this definition or the Refinancing is effected under the Senior Credit Facility) and (ii) create Indebtedness with a Weighted Average Life to Maturity at the time such Indebtedness is incurred that is less than the Weighted Average Life to Maturity at such time of the Indebtedness being refinanced, modified, replaced, renewed, restated, refunded, deferred, extended, substituted, supplemented, reissued or resold (except that this subclause (ii) will not apply in the event the Indebtedness being refinanced, modified, replaced, renewed, restated, refunded, deferred, extended, substituted, supplemented, reissued or resold was originally incurred in reliance upon clause (b), (f), (g), (i) or (o) of this definition or the Refinancing is effected under the Senior Credit Facility); provided that no Restricted Subsidiary of the Company that is not a Subsidiary Guarantor may refinance any Indebtedness pursuant to this clause (x) other than its own Indebtedness; (xi) Indebtedness (including Capitalized Lease Obligations) incurred by the Company or any Restricted Subsidiary thereof to finance the purchase, lease or improvement of property (real or personal) or equipment (whether through the direct purchase of assets or the Capital Stock of any Person owning such assets) in an aggregate principal amount outstanding not to exceed $20 million at the time of any incurrence thereof; (xii) Indebtedness incurred by the Company or any Restricted Subsidiary thereof constituting reimbursement obligations (in addition to reimbursement obligations constituting Senior Indebtedness) with respect to letters of credit or bankers' acceptances issued in the ordinary course of business, including, without limitation, letters of credit in respect of workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; (xii) Indebtedness arising from agreements of the Company or a Restricted Subsidiary thereof providing for indemnification, adjustment of purchase price, earn out or other similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or a Restricted Subsidiary of the Company, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition, provided that the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by the Company and the Restricted Subsidiaries thereof in connection with such disposition; (xiii) obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary thereof in the ordinary course of business; (xiv) additional Indebtedness of the Company and the Restricted Subsidiaries thereof in an aggregate principal amount not to exceed $10 million at any one time outstanding; (xv) the incurrence by a Receivables Entity of Indebtedness in a Qualified Receivables Transaction that is not recourse to the Company or any Subsidiary thereof (except for Standard Securitization Undertakings); and (xvi) Indebtedness incurred by the Company in connection with and pursuant to the put options of the Company described in clause (xi) of the covenant under "Limitation on Restricted Payments" and the Company's Deferred Compensation Plan, each as in effect on the date hereof. Limitation on Restricted Payments. The Company will not, and will not permit any Restricted Subsidiary thereof to, directly or indirectly, (i) declare or pay any dividend or make any distribution (other than dividends or distributions payable in Qualified Capital Stock) on or in respect of shares of Capital Stock of the Company to holders of such Capital Stock, (ii) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock, other than the exchange of such Capital Stock for Qualified Capital Stock, or (iii) make any Investment (other than Permitted Investments) (each of the foregoing actions set forth in clauses (i), (ii) and (iii) being referred to as a "Restricted Payment"), if at the time of such Restricted Payment or immediately after giving effect thereto, (A) a Default or an Event of Default shall have occurred and be continuing, (B) the Company is not able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the Limitation on Indebtedness set forth above or (C) the aggregate amount of Restricted Payments made subsequent to February 27, 1998 shall exceed the sum of: (1) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company earned subsequent to February 27, 1998 and on or prior to the date the Restricted Payment occurs (the "Reference Date") (treating such period as a single accounting period); plus (2) 100% of the aggregate net 59 cash proceeds received by the Company from any Person (other than a Subsidiary of the Company) from the issuance and sale subsequent to February 27, 1998 and on or prior to the Reference Date of Qualified Capital Stock of the Company (including Capital Stock issued upon the conversion of convertible Indebtedness or in exchange for outstanding Indebtedness); plus (3) without duplication of any amounts included in clause (C)(2) above, 100% of the aggregate net cash proceeds of any equity contribution received by the Company from a holder of the Company's Capital Stock (excluding any net cash proceeds from such equity contribution to the extent used to redeem Notes in accordance with the optional redemption provisions of the Notes); plus (4) to the extent that any Investment (other than a Permitted Investment) that was made after February 27, 1998 is sold for cash or otherwise liquidated or repaid for cash, the lesser of (aa) the cash received with respect to such sale, liquidation or repayment of such Investment (less the cost of such sale, liquidation or repayment, if any) and (bb) the initial amount of such Investment. The provisions of the foregoing paragraph shall not prohibit: (i) the payment of any dividend or the consummation of any irrevocable redemption within sixty (60) days after the date of declaration of such dividend or notice of such redemption if the dividend or payment of the redemption price, as the case may be, would have been permitted on the date of declaration or notice; (ii) if no Event of Default shall have occurred and be continuing as a consequence thereof, the acquisition of any shares of Capital Stock of the Company, either (A) solely in exchange for shares of Qualified Capital Stock of the Company, or (B) through the application of net proceeds of a substantially concurrent sale (other than to a Subsidiary of the Company) of shares of Qualified Capital Stock of the Company; (iii) payments for the purpose of and in an amount equal to the amount required to permit the Company to redeem or repurchase shares of its Capital Stock or options in respect thereof, in each case in connection with the repurchase provisions under employee stock option or stock purchase agreements or other agreements to compensate management employees; provided that such redemptions or repurchases pursuant to this clause (iii) shall not exceed $5 million (which amount shall be increased by the amount of any cash proceeds to the Company from (A) sales of its Capital Stock to management employees subsequent to February 27, 1998 and (B) any "key-man" life insurance policies which are used to make such redemptions or repurchases) in the aggregate; (iv) the payment of fees and compensation as permitted under clause (i) of the second paragraph under "Limitation on Affiliate Transactions"; (v) so long as no Default or Event of Default shall have occurred and be continuing, payments not to exceed $100,000 in the aggregate, to enable the Company to make payments to holders of its Capital Stock in lieu of issuance of fractional shares of its Capital Stock; (vi) repurchases of Capital Stock deemed to occur upon the exercise of stock options if such Capital Stock represents a portion of the exercise price thereof; (vii) payments to management employees in connection with, and pursuant to, the Company's Deferred Compensation Plan; (viii) Restricted Payments by any Subsidiary of the Company to the Company or any other Subsidiary thereof; (ix) payments for the purpose of and in an amount equal to the amount required to permit the Company to redeem or repurchase shares of its Capital Stock acquired upon the exercise of the options issued under the Company's 1998 Stock Option Plan; (x) so long as no Default or Event of Default shall have occurred and be continuing, payments in respect of Capital Stock options of the Company, or similar rights with respect to Capital Stock of the Company, to present or former officers or employees of the Company or any Subsidiary thereof in an aggregate amount not to exceed $100,000; (xi) so long as no Default or Event of Default shall have occurred and be continuing, redemption and/or repurchase, in an aggregate amount not to exceed $550,000, of certain shares and options to purchase shares of Capital Stock of the Company owned by certain employees of the Company, pursuant to the exercise of put options pursuant to the Stockholders' Agreement dated as of June 27, 1990, as amended and in effect on the date hereof; and (xii) repurchase common stock of the Company in open market transactions involving cash expenditures of not more than $200,000 in any fiscal year of the Company, where such stock is used in such fiscal year to pay directors' fees to outside directors of the Company. In determining the aggregate amount of Restricted Payments made subsequent to February 27, 1998 in accordance with clause (C) of the immediately preceding paragraph, (a) amounts expended (to the extent such expenditure is in the form of cash or other property other than Qualified Capital Stock) pursuant to clauses (i), (ii) and (iii) above shall be included in such calculation, provided that such expenditures pursuant to clause (iii) shall not be included to the extent of cash proceeds received by the 60 Company from any "key man" life insurance policies and (b) amounts expended pursuant to clause (iv), (v) and (vi) shall be excluded from such calculation. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any Restricted Subsidiary thereof to, directly or indirectly, create or otherwise cause or permit to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock, (b) make any loans or advances or pay any Indebtedness or other obligations owed to the Company or any Restricted Subsidiary or (c) transfer any of its property or assets to the Company or any Restricted Subsidiary, except for such encumbrances or restrictions existing under or by reason of: (i) applicable law; (ii) the Indenture; (iii) non-assignment provisions of any contract or any lease entered into in the ordinary course of business; (iv) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to the Company or any Restricted Subsidiary thereof, or the properties or assets of any such Person, other than the Person or the properties or assets of the Person so acquired; (v) the Senior Credit Facility; (vi) other agreements existing on February 27, 1998 (including, without limitation, the Master Restructuring Agreement); (vii) restrictions on the transfer of assets subject to any Lien permitted under the Indenture imposed by the holder of such Lien; (viii) restrictions imposed by any agreement to sell assets permitted under the Indenture to any Person pending the closing of such sale (ix) any agreement or instrument governing Capital Stock of any Person that is acquired after February 27, 1998; (x) an agreement effecting a refinancing, replacement or substitution of Indebtedness issued, assumed or incurred pursuant to an agreement referred to in clause (ii), (iv), (v) or (vi) above; provided, however, that the provisions relating to such encumbrance or restriction contained in any such refinancing, replacement or substitution agreement referred to in such clause (ii), (iv) or (vi) are no less favorable to the Company or the Holders in any material respect as determined by the Board of Directors of the Company than the provisions relating to such encumbrance or restriction contained in agreements referred to in such clause (ii), (iv) or (vi); or (xi) Indebtedness or other contractual requirements of a Receivables Entity in connection with a Qualified Receivables Transaction; provided that such restrictions apply only to such Receivables Entity. Limitation on Asset Sales. The Company will not, and will not permit any Restricted Subsidiary thereof to, consummate an Asset Sale unless (i) the Company or the applicable Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Company's Board of Directors), (ii) at least 75% of the consideration received by the Company or such Restricted Subsidiary, as the case may be, from such Asset Sale shall be cash or Cash Equivalents and is received at the time of such disposition; provided that the amount of (A) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet or in the notes thereto) of the Company or such Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Notes or such Restricted Subsidiary's Guarantee, if any) that are assumed by the transferee of any such assets and (B) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are immediately converted by the Company or any such Restricted Subsidiary into cash or Cash Equivalents (to the extent of the cash or Cash Equivalents received) shall be deemed to be cash for purposes of this provision; and (iii) upon the consummation of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale (A) within 365 days of receipt thereof either (1) to prepay any Senior Indebtedness or Guarantor Senior Indebtedness, whether or not the amount prepaid is subsequently re-lent to the Company or any Subsidiary thereof, and, in the case of any Senior Indebtedness under any revolving credit facility, whether or not there is a permanent reduction in the availability under such revolving credit facility, (2) to reinvest in Productive Assets, or (3) a combination of prepayment and investment permitted by the foregoing clauses (iii)(A)(1) and (iii)(A)(2) or (B) on the 366th day of receipt thereof in accordance with the next succeeding sentence. On the 366th day after an Asset Sale or such earlier date, if any, as the Board of Directors of the Company or of such Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A)(1), (iii)(A)(2) and (iii)(A)(3) of the immediately preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which have not been applied on or before such Net Proceeds Offer Trigger Date 61 as required in clauses (iii)(A)(1), (iii)(A)(2) and (iii)(A)(3) of the immediately preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than thirty (30) nor more than forty-five (45) days following the applicable Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis that amount of Notes equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest thereon, if any, to the Net Proceeds Offer Payment Date; provided, however, that if at any time any non-cash consideration received by the Company or any Restricted Subsidiary thereof, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then such conversion or disposition shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in accordance with this paragraph. Notwithstanding the foregoing, if a Net Proceeds Offer Amount is less than $5 million, the application of the Net Cash Proceeds constituting such Net Proceeds Offer Amount to a Net Proceeds Offer may be deferred until such time as such Net Proceeds Offer Amount plus the aggregate amount of all Net Proceeds Offer Amounts arising subsequent to the Net Proceeds Offer Trigger Date relating to such initial Net Proceeds Offer Amount from all Asset Sales by the Company and the Restricted Subsidiaries thereof aggregate at least $5 million, at which time the Company or such Restricted Subsidiary shall apply all Net Cash Proceeds constituting all Net Proceeds Offer Amounts that have been so deferred to make a Net Proceeds Offer (the first date the aggregate of all such deferred Net Proceeds Offer Amounts is equal to $5 million or more shall be deemed to be a Net Proceeds Offer Trigger Date). Notwithstanding the two immediately preceding paragraphs, the Company and the Restricted Subsidiaries thereof will be permitted to consummate an Asset Sale without complying with such paragraphs to the extent (a) at least 75% of the consideration for such Asset Sale constitutes Productive Assets and (b) such Asset Sale is for at least fair market value (as determined in good faith by the Company's Board of Directors); provided that any consideration not constituting Productive Assets received by the Company or any Restricted Subsidiary thereof in connection with any Asset Sale permitted to be consummated under this paragraph shall constitute Net Cash Proceeds and shall be subject to the provisions of the two preceding paragraphs; provided, that at the time of entering into such transaction or immediately after giving effect thereto, no Default or Event of Default shall have occurred or be continuing or would occur as a consequence thereof. Limitation on Affiliate Transactions. The Company will not, and will not permit any Restricted Subsidiary thereof to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an "Affiliate Transaction"), other than (i) Affiliate Transactions permitted under the following paragraph and (ii) Affiliate Transactions on terms that are no less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate; provided, however, that for a transaction or series of related transactions with an aggregate value of $2 million or more, at the Company's option (A) such determination shall be made in good faith by a majority of the disinterested members of the Board of the Directors of the Company or (B) the Board of Directors of the Company or any such Restricted Subsidiary party to such Affiliate Transaction shall have received a favorable opinion from a nationally recognized investment banking firm, appraisal firm or accounting firm, as appropriate, that such Affiliate Transaction is on terms not materially less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate; provided, further, that for a transaction or series of related transactions with an aggregate value of $5 million or more, the Board of Directors of the Company shall have received a favorable opinion from a nationally recognized investment banking firm, appraisal firm or accounting firm, as appropriate, that such Affiliate Transaction is on terms not materially less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate. The provisions of the foregoing paragraph shall not prohibit (i) reasonable fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Com- 62 pany or any Subsidiary thereof as determined in good faith by the Company's Board of Directors or senior management (including, without limitation, the amounts paid pursuant to the Company's Deferred Compensation Plan); (ii) transactions exclusively between or among the Company and any Restricted Subsidiary thereof or exclusively between or among the Restricted Subsidiaries of the Company, provided that such transactions are not otherwise prohibited by the Indenture; (iii) any agreement as in effect as of February 27, 1998 or any amendment thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) or in any replacement agreement thereto so long as any such amendment or replacement agreement is not more disadvantageous to the Holders in any material respect than the original agreement as in effect on February 27, 1998; (iv) Restricted Payments permitted by the Indenture; (v) transactions effected as part of a Qualified Receivables Transaction and (vi) transactions pursuant to supply or similar agreements (including, without limitation, for the purchase of inventory) entered into in the ordinary course of business on customary terms that are not less favorable to the Company than those that would have been obtained in a comparable transaction with an unrelated Person, as determined in good faith by senior management of the Company. Limitation on Liens. The Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Liens of any kind against or upon any of its properties or assets, or any proceeds therefrom, unless (a) in the case of Liens securing Subordinated Obligations, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens and (b) in all other cases, the Notes are equally and ratably secured, except for Permitted Liens. "Permitted Liens" means the following types of Liens: (a) Liens securing any or all of the Senior Indebtedness, the Notes and the Guarantees; (b) Liens for taxes, assessments or governmental charges or claims either (i) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or the Restricted Subsidiaries thereof shall have set aside on its books such reserves as may be required pursuant to GAAP; (c) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (d) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (e) judgment Liens not giving rise to an Event of Default; (f) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any Restricted Subsidiary thereof; (g) any interest or title of a lessor under any Capitalized Lease Obligation; (h) purchase money Liens to finance property or assets of the Company or any Restricted Subsidiary thereof, provided, however, that (i) the related purchase money Indebtedness shall not exceed the cost of such property or assets and shall not be secured by any property or assets of the Company or any Restricted Subsidiary thereof other than the property and assets so acquired and (ii) the Lien securing such Indebtedness shall be created within ninety (90) days of such acquisition; (i) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment, or storage of such inventory or other goods; (j) Liens securing reimbursement obligations (in addition to Liens securing any reimbursement obligations constituting Senior Indebtedness) with respect to stand-by and commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (k) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or any Restricted Subsidiary thereof, including rights of offset and set-off; (l) Liens securing Interest Swap Obligations which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under the Indenture; (m) Liens securing Indebtedness under Currency Agreements; (n) Liens securing Acquired Indebtedness incurred in reliance on clause (g) of the definition of Permitted Indebtedness; provided that such Liens do not extend 63 to or cover any property or assets of the Company or of any Restricted Subsidiary thereof other than the property or assets that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Restricted Subsidiary thereof; (o) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and the Restricted Subsidiaries thereof; (p) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (q) Liens on property of a Person existing at the time such Person is acquired by, or such Person is merged into or consolidated or amalgamated with, the Company or any Restricted Subsidiary thereof, provided that such Liens were not created in contemplation of such acquisition, merger, consolidation or amalgamation and do not extend to any assets other than those of the Person acquired by, or merged into or consolidated or amalgamated with, the Company or any Restricted Subsidiary thereof; (r) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties in connection with the importation of goods; (s) Liens existing on February 27, 1998, together with any Liens securing Indebtedness incurred in reliance on clause (j) of the definition of Permitted Indebtedness in order to refinance the Indebtedness secured by Liens existing on February 27, 1998; provided that the Liens securing the refinancing Indebtedness (other than Senior Indebtedness) shall not extend to property other than that pledged under the Liens securing the Indebtedness being refinanced; (t) Liens of the Company or a Wholly-Owned Restricted Subsidiary thereof on assets of any Subsidiary of the Company; (u) Liens on assets transferred to a Receivables Entity or on assets of a Receivables Entity, in either case incurred in connection with a Qualified Receivables Transaction; and (v) Liens on goods which the Company or a Subsidiary thereof (acting as consignee) has agreed to sell on a consignment basis in the ordinary course of business. Merger and Consolidation. The Company will not, in a single transaction or a series of related transactions, consolidate with or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of, all or substantially all of its assets to, any Person, unless (i) either (A) the Company shall be the survivor of such merger or consolidation or (B) the surviving Person is a corporation existing under the laws of the United States, any state thereof or the District of Columbia and such surviving Person shall expressly assume all the obligations of the Company under the Notes and this Indenture; (ii) immediately after giving effect to such transaction (on a pro forma basis, including any Indebtedness incurred or anticipated to be incurred in connection with such transaction and including adjustments that are (A) directly attributable to such transaction and (B) factually supportable), the Company or the surviving Person is able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the covenant designed under "Limitations on Indebtedness"; (iii) immediately before and immediately after giving effect to such transaction (including any Indebtedness incurred or anticipated to be incurred in connection with such transaction), no Default or Event of Default shall have occurred and be continuing; (iv) each Subsidiary Guarantor, unless it is the other party to such transaction, shall have by execution of a Guarantee substantially in the form of the Subsidiary Guarantee confirmed that after consummation of such transaction its Guarantee shall apply, as such Guarantee applied on the date it was granted to the obligations of the Company under the Indenture and the Notes, to the obligations of the Company or such Person, as the case may be, under the Indenture and the Notes; and (v) the Company has delivered to the Trustee an officers' certificate and opinion of counsel, each stating that such consolidation, merger or transfer complies with this Indenture, that the surviving Person agrees to be bound thereby, and that all conditions precedent in the Indenture relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties and assets of one or more Subsidiaries of the Company, the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the 64 properties and assets of the Company. Notwithstanding the foregoing clauses (ii) and (iii) above, (x) any Restricted Subsidiary of the Company may consolidate with, merge into or transfer all or part of its properties and assets to the Company and (y) the Company may merge with an Affiliate incorporated solely for the purpose of reincorporating the Company in another jurisdiction. Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose Guarantee is to be released in accordance with the terms of its Guarantee and the Indenture in connection with any transaction complying with the provisions of the covenant described under "Limitation on Asset Sales" or as otherwise provided in the Indenture) will not, and the Company will not cause or permit any Subsidiary Guarantor to, consolidate with or merge with or into any Person other than the Company or any other Subsidiary Guarantor unless: (i) the entity formed by or surviving any such consolidation or merger (if other than the Subsidiary Guarantor) or to which such sale, lease, conveyance or other disposition shall have been made is a corporation organized and existing under the laws of the United States or any state thereof or the District of Columbia; (ii) such entity assumes by a Guarantee substantially in the form of the Subsidiary Guarantee all of the obligations of the Subsidiary Guarantor on the Guarantee; (iii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and (iv) immediately after giving effect to such transaction and the use of any net proceeds therefrom, on a pro forma basis, including adjustments that are (A) directly attributable to such transaction and (B) factually supportable, the Company could satisfy the provisions of clause (a)(ii) of the first paragraph of this section. Limitation on Incurrence of Subordinated Debt Senior to the Notes. Neither the Company nor any Subsidiary Guarantor will incur or suffer to exist Indebtedness that is senior in right of payment to the Notes or such Subsidiary Guarantor's Guarantee and subordinate in right of payment to any other Indebtedness of the Company or such Subsidiary Guarantor, as the case may be. Limitation on Preferred Stock of Subsidiaries. The Company will not permit any of its Restricted Subsidiaries to issue any Preferred Stock (other than to the Company or to a Wholly-Owned Restricted Subsidiary thereof) or permit any Person (other than the Company or a Wholly-Owned Restricted Subsidiary thereof) to own any Preferred Stock of any Restricted Subsidiary of the Company. Limitation on Future Guarantees. The Company will not permit any of its Restricted Subsidiaries which is not a Subsidiary Guarantor, directly or indirectly, to incur, guarantee or secure through the granting of Liens the payment of Senior Indebtedness or any refunding or refinancing thereof, in each case unless such Restricted Subsidiary, the Company and the Trustee also execute and deliver a Guarantee substantially in the form of the Subsidiary Guarantee evidencing such Restricted Subsidiary's guarantee of the Notes, such Guarantee to be a senior subordinated secured obligation of such Restricted Subsidiary. Neither the Company nor any such Subsidiary Guarantor shall be required to make a notation on the Notes or the Guarantees to reflect any such subsequent Guarantee. Conduct of Business. The Company and its Restricted Subsidiaries will not engage in any businesses which are not the same, similar, related or ancillary to the businesses in which the Company and the Restricted Subsidiaries thereof were engaged on February 27, 1998. Additional Information. The Company will deliver to the Trustee within fifteen (15) days after the filing of the same with the Commission, copies of the quarterly and annual reports and of the information, documents and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the Commission, to the extent permitted, and provide the Trustee and the Holders with such annual reports and such information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of Section 314(a) of the Trust Indenture Act. EVENTS OF DEFAULT The following events are defined in the Indenture as "Events of Default": 65 (a) the Company defaults in any payment of interest on any Note when the same becomes due and payable, whether or not such payment shall be prohibited by the Subordination Agreement, and such default continues for a period of thirty (30) days; (b) the Company defaults in the payment of the principal of any Note when the same becomes due and payable at its Stated Maturity, upon optional redemption, upon required repurchase pursuant to a Change of Control Offer or a Net Proceeds Offer, upon declaration or otherwise, whether or not such payment shall be prohibited by the Subordination Agreement; (c) the Company defaults in the observance or performance of any other covenant or agreement contained in the Indenture which default continues for a period of sixty (60) days after the Company receives written notice specifying the default (and demanding that such default be remedied) from the Trustee or the Holders of at least 25% of the outstanding principal amount of the Notes; (d) the Company fails to pay at final maturity (giving effect to any applicable grace periods and any extensions thereof) the principal amount of any Indebtedness of the Company or any Restricted Subsidiary thereof (other than a Receivables Entity), or the acceleration of the final stated maturity of any such Indebtedness if, in either case, the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final maturity or which has been accelerated, aggregates $10 million or more at any time; (e) one or more judgments in an aggregate amount in excess of $10 million shall have been rendered against the Company or any Significant Subsidiary thereof and such judgments remain undischarged, unpaid or unstayed for a period of sixty (60) days after such judgment or judgments become final and non-appealable, and in the event such judgment is covered by insurance, an enforcement proceeding has been commenced by any creditor upon such judgment which is not promptly stayed; (f) the Company or a Significant Subsidiary thereof pursuant to or within the meaning of any Bankruptcy Law: (i) commences a voluntary case or proceeding; (ii) consents to the entry of judgment, decree or order for relief against it in an involuntary case or proceeding; (iii) consents to the appointment of a custodian of it or for any substantial part of its property; (iv) makes a general assignment for the benefit of its creditors; (v) consents to or acquiesces in the institution of a bankruptcy or an insolvency proceeding against it; or (vi) takes any corporate action to authorize or effect any of the foregoing; or takes any comparable action under any foreign laws relating to insolvency; (g) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any Significant Subsidiary thereof in an involuntary case; (ii) appoints a custodian of the Company or any Significant Subsidiary thereof or for any substantial part of its property; or (iii) orders the winding up or liquidation of the Company or any Significant Subsidiary thereof; or any similar relief is granted under any foreign laws and the order, decree or relief remains unstayed and in effect for sixty (60) days; or 66 (h) any of the Guarantees of the Subsidiary Guarantors that are also Significant Subsidiaries of the Company ceases to be in full force and effect or any of such Guarantees is declared to be null and void and unenforceable or any of such Guarantees is found to be invalid or any of such Subsidiary Guarantors denies its liability under its Guarantee (other than by reason of release of such Subsidiary Guarantor in accordance with the terms of the Indenture). If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the outstanding Notes may declare the principal of and accrued but unpaid interest on all the Notes to be due and payable. Upon such a declaration, such principal and interest shall be due and payable immediately. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company or any Significant Subsidiary occurs and is continuing, the principal of and interest on all the Notes will ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holders of the Notes. Under certain circumstances, the holders of a majority in principal amount of the outstanding Notes may rescind and cancel any such acceleration with respect to the Notes and its consequences. Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the holders of the Notes unless such holders have offered to the Trustee reasonable indemnity or security against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no holder of a Note may pursue any remedy with respect to the Indenture, any Security Agreements or the Notes unless (i) such holder has previously given the Trustee notice that an Event of Default is continuing, (ii) holders of at least 25% in principal amount of the outstanding Notes have requested the Trustee to pursue the remedy, (iii) such holders have offered the Trustee reasonable security or indemnity against any loss, liability or expenses, (iv) the Trustee has not complied with such request within 45 days after the receipt thereof and the offer of security or indemnity and (v) the holders of a majority in principal amount of the outstanding Notes have not given the Trustee a direction inconsistent with such request within such 45-day period. Subject to certain restrictions, the holders of a majority in principal amount of the outstanding Notes are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other holder of a Note or that would involve the Trustee in personal liability. The Indenture provides that if a default occurs and is continuing and is known to the Trustee, the Trustee must mail to each holder of the Notes notice of the Default within 60 days after it occurs. Except in the case of a default in the payment of principal of or interest on any Note, the Trustee may withhold notice if it determines that withholding notice is in the interests of the holders of the Notes. In addition, the Company and each Subsidiary Guarantor is required to deliver to the Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. The Company also is required to deliver to the Trustee, within 30 days after the occurrence thereof, written notice of any event which would constitute certain Defaults, their status and what action the Company is taking or proposes to take in respect thereof. AMENDMENTS AND WAIVERS Subject to certain exceptions, the Indenture may be amended with the consent of the holders of a majority in principal amount of the Notes then outstanding, and any past Default or Event of Default or compliance with any provisions may also be waived with the consent of the holders of a majority in principal amount of the Notes then outstanding. However, without the consent of each holder of an outstanding Note affected thereby, no amendment may (a) reduce the amount of Notes whose holders must consent to an amendment; (b) reduce the rate of or change or have the effect of changing the time for payment of interest, including defaulted interest, on any Note; (c) reduce the principal of or change or have the effect of changing the Stated Maturity of any Note, or change the date on which any Notes may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor; (d) make any Note payable in money other than that stated in the Note; (e) make any change in 67 provisions of the Indenture protecting the right of each holder to receive payment of principal of, premium, if any, and interest on such Note on or after the due date thereof or to bring suit to enforce such payment, or permitting holders of a majority in outstanding principal amount of the Notes to waive Defaults or Events of Default (other than Defaults or Events of Default with respect to the payment of principal of, premium, if any, or interest on the Notes); (f) modify the Subordination Agreement to affect the ranking of the Notes or the priority of the claims of the holders in and to the Collateral in a manner adversely affecting the holders in any material respect; or (g) release any Subsidiary Guarantor that is a Significant Subsidiary of the Company from any of its obligations under its Guarantee or the Indenture otherwise than in accordance with the terms of the Indenture. The consent of the holders of the Notes is not necessary under the Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. Without the consent of any holder of the Notes, the Company and the Trustee may amend the Indenture and the Security Agreements (a) to cure any ambiguity, omission, defect or inconsistency; provided that such amendment does not in the opinion of the Trustee, adversely affect the rights of any Holder in any material respect; (b) to comply with the covenant described under "Merger and Consolidation"; (c) to provide for uncertificated Notes in addition to or in place of certificated Notes; (d) to make any change in the Subordination Agreement that would limit or terminate the benefits of any holder of Senior Indebtedness or Guarantor Senior Indebtedness (or representatives therefor) under the Subordination Agreement; (e) to add Guarantees with respect to the Notes or to provide additional security for the Notes; (f) to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; (g) to comply with any requirements of the Securities and Exchange Commission in connection with qualifying the Indenture under the Trust Indenture Act; (h) to make any change that does not adversely affect the rights of any Holder; or (i) to correct or amplify the description of any assets subject to any Security Document or to subject additional assets to any Security Document. After an amendment under the Indenture or the Security Agreements becomes effective, the Company is required to mail to holders of the Notes a notice briefly describing such amendment. However, the failure to give such notice to all holders of the Notes, or any defect therein, will not impair or affect the validity of the amendment. No amendment may make any change that adversely affects the rights under the Subordination Agreement of any holder of Senior Indebtedness or Guarantor Senior Indebtedness then outstanding unless the holders of such Senior Indebtedness or Guarantor Senior Indebtedness (or any group or representative thereof authorized to give a consent) consent in a signed writing to such change. DEFEASANCE The Company may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding Notes and have each Subsidiary Guarantor's obligation, if any, discharged with respect to its Subsidiary Guarantee ("Legal Defeasance") except for (i) the Company's obligations with respect to such Notes concerning issuing temporary Notes, registration of transfer or exchange of such Notes, replacement of mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payments, (ii) the rights, powers, trusts, duties and immunities of the Trustee, and the Company's obligations in connection therewith and (iii) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company and have each Subsidiary Guarantor's obligation, if any, released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any failure to comply with such obligations shall not constitute a Default or Event of Default. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "Defaults" will no longer constitute Events of Default. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the holders of the Notes, cash in U.S. dollars, non-callable U.S. government obligations, or a combination thereof, in such amounts as will be suffi- 68 cient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel reasonably acceptable to such Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable income tax law, in either case to the effect that, and based thereon such opinions of counsel shall confirm that, the holders of the outstanding Notes will not recognize income, gain or loss for income tax purposes as a result of such Legal Defeasance and will be subject to income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel reasonably acceptable to such Trustee confirming that the holders of the outstanding Notes will not recognize income, gain or loss for income tax purposes as a result of such Covenant Defeasance and will be subject to income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or, insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than the Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an opinion of counsel reasonably acceptable to the Trustee to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Company must deliver to the Trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the holders of the Notes over the other creditors of the Company, or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (viii) the Company must deliver to the Trustee an officers' certificate and an opinion of counsel reasonably acceptable to the Trustee, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with. CONCERNING THE TRUSTEE IBJ Schroder Bank & Trust Company is the Trustee under the Indenture, and the Registrar and Paying Agent with regard to the Notes. The holders of a majority in principal amount of the outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that if an Event of Default occurs (and is not cured), the Trustee will be required, in the exercise of its power, to use the degree of care and skill of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any holder of Notes, unless such holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense and then only to the extent required by the terms of the Indenture. GOVERNING LAW The Indenture provides that it and the Notes will be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other terms used herein for which no definition is provided. 69 "Acquired Indebtedness" means Indebtedness (a) of a Person or any Subsidiary thereof existing at the time such Person becomes a Restricted Subsidiary of the Company or (b) assumed in connection with the acquisition of assets from such Person, in each case whether or not incurred by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company or such acquisition. Acquired Indebtedness shall be deemed to have been incurred, with respect to clause (a) of the preceding sentence, on the date such Person becomes a Restricted Subsidiary of the Company and, with respect to clause (b) of the preceding sentence, on the date of consummation of such acquisition of assets. "Affiliate" means a Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Company. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Notwithstanding the foregoing, no Person (other than the Company or any Subsidiary thereof) in whom a Receivables Entity makes an Investment in connection with a Qualified Receivables Transaction shall be deemed to be an Affiliate of the Company or any of its Subsidiaries solely by reason of such Investment. "Asset Acquisition" means (a) an Investment by the Company or any Restricted Subsidiary thereof in any other Person pursuant to which such Person shall become a Restricted Subsidiary of the Company or of any Restricted Subsidiary of the Company, or shall be merged with or into the Company or any Restricted Subsidiary thereof, or (b) the acquisition by the Company or any Restricted Subsidiary thereof of the assets of any Person which constitute all or substantially all of the assets of such Person, any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business. "Asset Sale" means any direct or indirect sale, issuance, conveyance, transfer, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer for value by the Company or any of its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any Person other than the Company or a Wholly-Owned Restricted Subsidiary thereof of (a) any Capital Stock of any Restricted Subsidiary of the Company; or (b) any other property or assets of the Company or any Restricted Subsidiary thereof other than in the ordinary course of business; provided, however, that Asset Sales shall not include (i) a transaction or series of related transactions for which the Company or any Restricted Subsidiary thereof receives aggregate consideration of less than $1 million, (ii) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company as permitted under the covenant described under "Certain Covenants -- Merger and Consolidation", (iii) the sale or discount, in each case without recourse, of accounts receivable arising in the ordinary course of business but only in connection with the compromise or collection thereof, (iv) the factoring of accounts receivable arising in the ordinary course of business pursuant to arrangements customary in the industry, (v) the licensing of intellectual property, (vi) disposals or replacements of obsolete equipment in the ordinary course of business, (vii) the sale, lease, conveyance, disposition or other transfer by the Company or any Restricted Subsidiary thereof of assets or property to the Company or to one or more Wholly-Owned Restricted Subsidiaries thereof in connection with Investments permitted under the covenant described under "Certain Covenants -- Limitation on Restricted Payments", (viii) sales of accounts receivable and related assets of the type specified in the definition of "Qualified Receivables Transaction" to a Receivables Entity for the fair market value thereof, including cash in an amount at least equal to 75% of the book value thereof as determined in accordance with GAAP, and (ix) transfers of accounts receivable and related assets of the type specified in the definition of "Qualified Receivables Transaction" (or a fractional undivided interest therein) by a Receivables Entity in a Qualified Receivables Transaction. For the purposes of clause (viii), Purchase Money Notes shall be deemed to be cash. "Bankruptcy Law" means Title 11 of the United States Code, or any similar Federal or state law for the relief of debtors. "Capital Stock" means (a) with respect to any Person that is a corporation, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents (however designated) of capital stock, including each class of common stock and preferred stock of such Person, but excluding 70 any debt securities convertible into such equity, and (b) with respect to any Person that is not a corporation, any and all partnership or other equity interests of such Person, in each case whether now outstanding or hereafter issued. "Capitalized Lease Obligation" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "Cash Equivalents" means (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either S&P or Moody's; (c) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (d) certificates of deposit or bankers' acceptances (or, with respect to foreign banks, similar instruments) maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank, in each case having at the date of acquisition thereof combined capital and surplus of not less than $200 million; (e) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (a) above entered into with any bank meeting the qualifications specified in clause (d) above; and (f) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (a) through (e) above. "Collateral" means the collective reference to any and all property from time to time subject to security interests to secure payment or performance of the Indebtedness evidenced by the Notes or of the Guarantees pursuant to the Security Documents. "Consolidated EBITDA" means, with respect to any Person, for any period, the sum (without duplication) of (a) Consolidated Net Income and (b) to the extent Consolidated Net Income has been reduced thereby, (i) all income taxes of such Person and the Restricted Subsidiaries thereof paid or accrued in accordance with GAAP for such period, (ii) Consolidated Interest Expense and (iii) Consolidated Non-cash Charges. "Consolidated Fixed Charge Coverage Ratio" means, with respect to any Person, the ratio of Consolidated EBITDA of such Person during the four full fiscal quarters for which financial statements are available (the "Four Quarter Period") ending on or prior to the date of the transactions giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transactions Date") to Consolidated Fixed Charges of such Person for the Four Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect on a pro forma basis for the period of such calculation to: (a) the incurrence of any Indebtedness of such Person or any Restricted Subsidiaries thereof (and the application of the proceeds thereof) giving rise to the need to make such calculation and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof) occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transactions Date, as if such incurrence or repayment, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four Quarter Period; (b) any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or a Restricted Subsidiary thereof (including any Person who becomes a Restricted Subsidiary as a result of any Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness and also including 71 any Consolidated EBITDA (including any pro forma expense and cost reductions that are (i) directly attributable to such transaction and (ii) factually supportable) attributable to the assets which are the subject of any Asset Acquisition or Asset Sale during the Four Quarter Period) occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transactions Date, as if such Asset Sale or Asset Acquisition (including the incurrence, assumption or liability for any such Indebtedness or Acquired Indebtedness) occurred on the first day of the Four Quarter Period; (c) with respect to any such Four Quarter Period commencing prior to the Transactions, the Transactions (including any pro forma expense and cost reductions related thereto that are (A) directly attributable to such transaction and (B) factually supportable) shall be deemed to have taken place on the first day of such Four Quarter Period; and (d) any Asset Sales or Asset Acquisitions (including any Consolidated EBITDA (including any pro forma expense and cost reductions that are (A) directly attributable to such transaction and (B) factually supportable) attributable to the assets which are the subject of the Asset Acquisition or Asset Sale during the Four Quarter Period) that have been made by any Person that has become a Restricted Subsidiary of the Company or has been merged with or into the Company or any Restricted Subsidiary thereof during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transactions Date that would have constituted Asset Sales or Asset Acquisitions had such transactions occurred when such Person was a Restricted Subsidiary of the Company or subsequent to such Person's merger into the Company, as if such asset sale or asset acquisition (including the incurrence, assumption or liability for any Indebtedness or Acquired Indebtedness in connection therewith) occurred on the first day of the Four Quarter Period; provided that to the extent that clause (b) or (d) of this sentence requires that pro forma effect be given to an Asset Sale or Asset Acquisition, such pro forma calculation shall be based upon the four full fiscal quarters immediately preceding the Transactions Date of the Person, or division or line of business of the Person, that is acquired or disposed for which financial information is available. If such Person or any Restricted Subsidiary thereof directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or any Restricted Subsidiary thereof had directly incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (x) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transactions Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transactions Date; (y) if interest on any Indebtedness actually incurred on the Transactions Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transactions Date will be deemed to have been in effect during the Four Quarter Period; and (z) notwithstanding clause (x) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. "Consolidated Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (a) Consolidated Interest Expense (excluding amortization or write-off of debt issuance costs) plus (b) the product of (i) the amount of all dividend payments on any series of Preferred Stock of such Person (other than dividends paid in Qualified Capital Stock) times (ii) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective consolidated Federal, state and local tax rate of such Person expressed as a decimal. "Consolidated Interest Expense" means, with respect to any Person for any period, the sum of, without duplication, (a) the aggregate of all cash and non-cash interest expense with respect to all outstanding Indebtedness of such Person and the Restricted Subsidiaries thereof, including the net costs 72 associated with Interest Swap Obligations, for such period determined on a consolidated basis in conformity with GAAP, and (b) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and the Restricted Subsidiaries thereof during such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" of the Company means, for any period, the aggregate net income (or loss) of the Company and the Restricted Subsidiaries thereof for such period on a consolidated basis, determined in accordance with GAAP; provided that there shall be excluded therefrom: (a) gains and losses from Asset Sales or abandonments or reserves relating thereto and the related tax effects according to GAAP; (b) gains and losses due solely to fluctuations in currency values and the related tax effects according to GAAP; (c) items classified as extraordinary, unusual or nonrecurring gains and losses, and the related tax effects according to GAAP; (d) the net income (or loss) of any Person acquired in a pooling of interests transaction accrued prior to the date it becomes a Restricted Subsidiary of the Company or is merged or consolidated with the Company or any Restricted Subsidiary thereof; (e) the net income of any Restricted Subsidiary of the Company to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is restricted by contract, operation of law or otherwise; (f) the net loss of any Person other than a Restricted Subsidiary of the Company; (g) the net income of any Person, other than a Restricted Subsidiary, except to the extent of cash dividends or distributions paid to the Company or a Restricted Subsidiary thereof by such Person unless, in the case of a Restricted Subsidiary of the Company who receives such dividends or distributions, such Restricted Subsidiary is subject to clause (e) above; (h) non-cash compensation charges, including any arising from existing stock options resulting from any merger or recapitalization transaction; and (i) net income (or loss) from discontinued operations. "Consolidated Non-cash Charges" means, with respect to any Person for any period, the aggregate depreciation, amortization and other non-cash expenses of such Person and the Restricted Subsidiaries thereof reducing Consolidated Net Income of such Person and the Restricted Subsidiaries thereof for such period, determined on a consolidated basis in accordance with GAAP (excluding any such charges (other than charges with respect to the Company's Deferred Compensation Plan) which require an accrual of or a reserve for cash charges for any future period). "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any Restricted Subsidiary thereof against fluctuations in currency values. "Default" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default. "Disqualified Capital Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening of any event (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is convertible or exchangeable for Indebtedness or Disqualified Capital Stock or (c) is redeemable at the option of the holder thereof, in whole or in part, in each case on or prior to the Stated Maturity of the Notes; provided, however, that any Capital Stock that would not constitute Disqualified Capital Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an asset sale or change of control occurring on or prior to the Stated Maturity of the Notes shall not constitute Disqual- 73 ified Capital Stock if the asset sale or change of control provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the provisions specified in the covenants described under "-- Change of Control" and "-- Certain Covenants -- Limitation on Asset Sales". "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means, unless otherwise specified, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transactions. Fair market value shall be determined by the Board of Directors of the Company acting reasonably and in good faith and shall be evidenced by a resolution of the Board of Directors of the Company delivered to the Trustee. "GAAP" means generally accepted accounting principles in the United States of America as in effect on February 27, 1998, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (b) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. "Guarantor Senior Indebtedness" means, with respect to any Subsidiary Guarantor, any Indebtedness of such Subsidiary Guarantor under the Senior Credit Facility or otherwise in respect of Senior Indebtedness, including interest thereon (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to such Subsidiary Guarantor whether or not a claim for post-filing interest is allowed in such proceeding), whether outstanding on February 27, 1998 or thereafter incurred. "Incur" means directly or indirectly create, incur, assume, guarantee, acquire, become liable, contingently or otherwise with respect to or otherwise become responsible for payment. "Indebtedness" means with respect to any Person, without duplication: (a) all obligations of such Person for borrowed money; (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) all Capitalized Lease Obligations of such Person; (d) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all obligations under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (e) all obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction; (f) guarantees and other contingent obligations in respect of Indebtedness referred to in clauses (a) through (e) above and clause (h) below; (g) all obligations of any third party of the type referred to in clauses (a) through (f) which are secured by any Lien on any property or asset of such Person but which obligations are not assumed by such Person, the amount of such obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the obligation so secured; (h) all obligations under Currency Agreements and Interest Swap Obligations of such Person; and (i) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, (x) the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be 74 determined pursuant to the Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock and (y) any transfer of accounts receivable or other assets which constitute a sale for purposes of GAAP shall not constitute Indebtedness. "Interest Swap Obligations" means the obligations of any Person, pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount, including, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "Investment" means, with respect to any Person, any direct or indirect loan or other extension of credit (including, without limitation, a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any Person. "Investment" shall exclude extensions of trade credit by the Company and the Restricted Subsidiaries thereof on commercially reasonable terms in accordance with normal trade practices of the Company or such Restricted Subsidiary, as the case may be. For the purposes of the covenant described under "Certain Covenants -- Limitation on Restricted Payments", (a) "Investment" shall include and be valued at the fair market value of the net assets of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary and shall exclude the fair market value of the net assets of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary and (b) the amount of any Investment shall be the original cost of such Investment plus the cost of all additional Investments by the Company or any Restricted Subsidiary thereof, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, reduced by the payment of dividends or distributions (including tax sharing payments) in connection with such Investment or any other amounts received in respect of such Investment; provided that no such payment of dividends or distributions or receipt of any such other amounts shall reduce the amount of any Investment if such payment of dividends or distributions or receipt of any such amounts would be included in Consolidated Net Income. If the Company or any Restricted Subsidiary thereof sells or otherwise disposes of any common stock of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, the Company no longer owns, directly or indirectly, a majority of the outstanding common stock of such Restricted Subsidiary, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the common stock of such Restricted Subsidiary not sold or disposed of. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "Master Restructuring Agreement" means the Master Restructuring Agreement, dated as of February 27, 1998, among the Company, the Subsidiary Guarantors, the Lenders (as defined therein), The Chase Manhattan Bank, as agent for the Lenders, and the Existing Management Holders (as defined therein), as the same may be amended, supplemented or otherwise modified from time to time. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (other than the portion of any such deferred payment constituting interest) received by the Company or any Subsidiary thereof from such Asset Sale net of: (a) out-of-pocket expenses and fees relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions); (b) taxes paid or payable after taking into account any reduction in consolidated tax liability due to available tax credits or deductions and any tax sharing arrangements; (c) repayment of Senior Indebtedness that is required to be repaid in connection with such Asset Sale, whether or not all or any portion of the amount repaid is re-lent to the Company or any 75 Subsidiary thereof; (d) any portion of cash proceeds which the Company determines in good faith should be reserved for post-closing adjustments, it being understood and agreed that on the day that all such post-closing adjustments have been determined, the amount (if any) by which the reserved amount in respect of such Asset Sale exceeds the actual post-closing adjustments payable by the Company or any Subsidiary thereof shall constitute Net Cash Proceeds on such date; and (e) appropriate amounts which the Company determines in good faith to be provided by the Company or any Subsidiary thereof, as the case may be, as a reserve against any liabilities associated with such Asset Sale and retained by the Company or any Subsidiary thereof, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in the Officers' Certificate delivered to the Trustee. "Obligations" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness, without duplication. "Permitted Investments" means: (a) Investments by the Company or any Restricted Subsidiary thereof in any Wholly-Owned Restricted Subsidiary of the Company (whether existing on February 27, 1998 or created thereafter) and Investments in the Company by any Restricted Subsidiary thereof, provided that, in the case of an Investment by the Company or any Restricted Subsidiary thereof in any Wholly-Owned Restricted Subsidiary of the Company, such Wholly-Owned Restricted Subsidiary is not restricted from making dividends or similar distributions by contract, operation of law or otherwise; (b) cash and Cash Equivalents; (c) Investments existing on February 27, 1998; (d) loans and advances to employees and officers of the Company (other than as permitted under clause (m)) and the Restricted Subsidiaries thereof not in excess of $1 million at any one time outstanding; (e) accounts receivable created or acquired in the ordinary course of business; (f) Currency Agreements and Interest Swap Obligations; (g) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; (h) guarantees by the Company or any Restricted Subsidiaries thereof of Indebtedness otherwise permitted to be incurred by the Company or any of its Restricted Subsidiaries under the Indenture; (i) Investments by the Company or any Restricted Subsidiary thereof in a Person, if as a result of such Investment (i) such Person becomes a Wholly-Owned Restricted Subsidiary of the Company or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys all or substantially all of its assets to, or is liquidated into, the Company or a Wholly-Owned Restricted Subsidiary thereof; (j) additional Investments having an aggregate fair market value, taken together with all other Investments made pursuant to this clause (j) that are at the time outstanding, not exceeding $5 million at the time of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value), plus an amount equal to (i) 100% of the aggregate net cash proceeds received by the Company from any Person (other than a Subsidiary of the Company) from the issuance and sale subsequent to February 27, 1998 of Qualified Capital Stock of the Company (including Qualified Capital Stock issued upon the conversion of convertible Indebtedness or in exchange for outstanding Indebtedness or as capital contributions to the Company (other than from a Subsidiary)) and (ii) without duplication of any amounts included in clause (j)(i) above, 100% of the aggregate net cash proceeds of any equity contribution received by the Company from a holder of the Company's Capital Stock, that in the case of amounts described in clause (j)(i) or (j)(ii) are applied by the Company within 180 days after receipt, to make additional Permitted Investments under this clause (j) (such additional Permitted Investments being referred to collectively as "Stock Permitted Investments"); (k) Investments received by the Company or its Restricted Subsidiaries as consideration for asset sales, including Asset Sales; provided in the case of an Asset Sale, such Asset Sale is effected in compliance with the covenant described under "Certain Covenants -- Limitation on Asset Sales"; (1) any Investment by the Company or a Wholly-Owned Subsidiary of the Company in a Receivables Entity or any Investment by a Receivables Entity in any other Person in connection with a Qualified Receivables Transaction; provided that any Investment in a Receivables Entity is in the form of a Purchase Money Note or an equity interest; and (m) loans and advances to employees and officers of the Company in the form of Option Notes pursuant to, and as defined in, the Company's 1998 Stock Option Plan. 76 Any net cash proceeds that are used by the Company or any of its Restricted Subsidiaries to make Stock Permitted Investments pursuant to clause (j) of this definition shall not be included in subclauses (2) and (3) of clause (C) of the covenant described under "Certain Covenants -- Limitation on Restricted Payments". "Person" means an individual, partnership, corporation, association, joint-stock company, unincorporated organization, trust or joint venture, government or any agency or political subdivision thereof or any other entity. "Preferred Stock" of any Person means any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation. "Productive Assets" means assets (including Capital Stock) of a kind used or usable in the businesses of the Company and the Restricted Subsidiaries thereof as, or related to such business, conducted on the date of the relevant Asset Sale. "Purchase Money Note" means a promissory note of a Receivables Entity evidencing a line of credit, which may be irrevocable, from the Company or any Subsidiary thereof in connection with a Qualified Receivables Transaction to a Receivables Entity, which note shall be repaid from cash available to the Receivables Entity, other than amounts required to be established as reserves pursuant to agreements, amounts paid to investors in respect of interest, principal and other amounts owing to such investors and amounts owing to such investors and amounts paid in connection with the purchase of newly generated receivables. "Qualified Capital Stock" means any stock that is not Disqualified Capital Stock. "Qualified Receivables Transaction" means any transaction or series of transactions that may be entered into by the Company or any of its Subsidiaries pursuant to which the Company or any of its Subsidiaries may sell, convey or otherwise transfer to (a) a Receivables Entity (in the case of a transfer by the Company or any of its Subsidiaries) and (b) any other Person (in the case of a transfer by a Receivables Entity), or may grant a security interest in, any accounts receivable (whether now existing or arising in the future) of the Company or any of its Subsidiaries, and any assets related thereto including, without limitation, all collateral securing such accounts receivable, all contracts and all guarantees or other obligations in respect of such accounts receivable, proceeds of such accounts receivable and other assets which are customarily transferred or in respect of which security interests are customarily granted in connection with asset securitization transactions involving accounts receivable. "Receivables Entity" means a Wholly-Owned Subsidiary of the Company (or another Person in which the Company or any Subsidiary thereof makes an Investment and to which the Company or any Subsidiary thereof transfers accounts receivable and related assets) which engages in no activities other than in connection with the financing of accounts receivable and which is designated by the Board of Directors of the Company (as provided below) as a Receivables Entity (a) no portion of the Indebtedness or any other Obligations (contingent or otherwise) of which (i) is guaranteed by the Company or any Subsidiary thereof (excluding guarantees of Obligations (other than the principal of, and interest on, Indebtedness) pursuant to Standard Securitization Undertakings), (ii) is recourse to or obligates the Company or any Subsidiary thereof in any way other than pursuant to Standard Securitization Undertakings or (iii) subjects any property or asset of the Company or any other Subsidiary thereof, directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to Standard Securitization Undertakings, (b) with which neither the Company nor any other Subsidiary thereof has any material contract, agreement, arrangement or understanding other than on terms no less favorable to the Company or such Subsidiary than those that might be obtained at the time from Persons that are not Affiliates of the Company, other than fees payable in the ordinary course of business in connection with servicing accounts receivable, and (c) to which neither the Company nor any other Subsidiary thereof has any obligation to maintain or preserve such entity's financial condition or cause such entity to achieve certain levels of operating results. Any such designation by the Board of Directors of the Company shall be evidenced to the Trustee by filing with the Trustee a certified copy of the resolution of the Board of Directors of the Company giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions. 77 "Restricted Subsidiary" of any Person means any Subsidiary of such Person which at the time of determination is not an Unrestricted Subsidiary. "Sale and Leaseback Transaction" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to the Company or a Restricted Subsidiary of any property, whether owned by the Company or any Restricted Subsidiary at the Issue Date or later acquired, which has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such Person or to any other Person from whom funds have been or are to be advanced by such Person on the security of such Property. "Secured Indebtedness" means any Indebtedness of the Company secured by a Lien. "Senior Credit Facility" means the revolving credit and letter of credit facility governed by the Loan and Security Agreement, dated as of May 15, 1997, as amended, among the Company, Pacific Trail, Inc., The Scranton Outlet Corporation (a wholly-owned subsidiary of the Company) and Congress Financial Corporation, together with all existing and future agreements, documents and instruments related thereto (including, without limitation, any guarantees, promissory notes, letters of credit and collateral documents), as each such agreement or document may be amended, supplemented or otherwise modified from time to time, or refunded, refinanced, restructured, replaced, renewed, repaid or extended from time to time (whether with the original lender or other lenders or otherwise, and whether provided under the original Senior Credit Facility or other credit agreements or otherwise). "Senior Indebtedness" means any and all obligations, liabilities and other amounts, whether outstanding on the Issue Date or thereafter incurred, at any time owed or payable by the Company or any Subsidiary thereof under or in respect of the Senior Credit Facility, including principal, premium (if any), interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company or any Restricted Subsidiary thereof whether or not a claim for post-filing interest is allowed in such proceedings), fees, charges, expenses, reimbursement obligations, indemnities, guarantees and all other amounts payable thereunder or in respect thereof. "Senior Subordinated Indebtedness" means the Notes and any other Indebtedness of the Company that specifically provides that such Indebtedness is to rank pari passu with the Notes and is not by its express terms subordinate in right of payment to any Indebtedness of the Company other than Senior Indebtedness. "Significant Subsidiary" means, as of any date of determination, for any Person, each Restricted Subsidiary of such Person which (a) for the most recent fiscal year of such Person accounted for more than 10% of consolidated revenues or consolidated net income of such Person or (b) as at the end of such fiscal year, was the owner of more than 10% of the consolidated assets of such Person. "Standard Securitization Undertakings" means representations, warranties, covenants and indemnities entered into by the Company or any Subsidiary thereof which are reasonably customary in an accounts receivable transaction. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision. "Subordinated Obligation" means any Indebtedness of the Company (whether outstanding on the Issue Date or thereafter incurred) which is expressly subordinate in right of payment to the Notes pursuant to a written agreement. "Subsidiary" means, with respect to any Person, (a) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors under ordinary circumstances shall at the time be owned, directly or indirectly, by such Person or (b) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. 78 "Subsidiary Guarantee" means the Amended and Restated Subsidiary Guarantee, dated as of even date herewith, made by each of the Subsidiary Guarantors in favor of the Trustee, for the benefit of the Holders, substantially in the form of Exhibit F, as the same may be amended, supplemented or otherwise modified from time to time. "Subsidiary Guarantor" means (a) each of the Company's Subsidiaries existing on the Issue Date that is a borrower or has guaranteed the Indebtedness under the Senior Credit Facility and (b) each of the Company's Subsidiaries that in the future executes a Guarantee, substantially in the form of the Subsidiary Guarantee. "Unrestricted Subsidiary" of any Person means (a) any Subsidiary of such Person that at the time of determination shall be or continue to be designated an Unrestricted Subsidiary by the Board of Directors of such Person in the manner provided below and (b) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any other Subsidiary thereof that is not a Subsidiary of the Subsidiary to be so designated; provided that (x) the Company certifies to the Trustee that such designation complies with Section 4.4 and (y) each Subsidiary to be so designated and each of its Subsidiaries has not at the time of designation, and does not thereafter, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to any Indebtedness pursuant to which the lender of any such Indebtedness has recourse to any of the assets of the Company or any of its Restricted Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if (a) immediately after giving effect to such designation and treating all Indebtedness of such Unrestricted Subsidiary as being incurred on such date, the Company is able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with Section 4.3 and (b) immediately before and immediately after giving effect to such designation, no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations of, and obligations guaranteed by, the United States of America for the payment of which the full faith and credit of the United States of America is pledged. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "Wholly-Owned Restricted Subsidiary" of any Person means any Restricted Subsidiary of such Person of which all the outstanding voting securities (other than directors' qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly-Owned Restricted Subsidiary of such Person. DESCRIPTION OF WARRANTS As of May 30, 1998, 530,726 1998 Recapitalization Warrants and 80,032 1998 Management Warrants were outstanding. Each Warrant entitles the holder to purchase at any time until February 28, 2005 one share of Common Stock at an exercise price of $15.72 per share. The Management Warrants are not exercisable until the first date on which any of the 1998 Recapitalization Warrants are exercised. The number of shares issued upon exercise of the Warrants is subject to adjustment as the result of a stock split, combination of shares or stock dividends payable with respect to the Common Stock. If the Company engages in a merger, consolidation, reorganization, recapitalization or similar transaction, thereafter a holder of a Warrant will be entitled to receive upon exercise of a Warrant the kind and amount of 79 shares of stock or other securities or assets which the holder would have been entitled to receive after the occurrence of such event had such Warrant been exercised immediately prior to such event (with appropriate adjustment, if any, to the exercise price). The Warrants do not confer upon the holder thereof the right to vote or to consent to or receive notice as a stockholder in respect of meetings for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company. DESCRIPTION OF CERTAIN INDEBTEDNESS SENIOR CREDIT FACILITY Pursuant to the Senior Credit Facility, Congress Financial Corporation ("Congress") has made available to the Company and certain of its subsidiaries a revolving line of credit and letter of credit facility on the following terms: Amount Available. The maximum amount available under the Senior Credit Facility is the lesser of $200,000,000 or an amount determined by a formula based on the eligible accounts receivable and the eligible inventory of the Company plus certain amounts during certain periods of the year. Within this $200 million limit, up to $90 million may be used for outstanding letters of credit. Repayment. The Senior Credit Facility is due and payable on April 30, 2001. Security; Guaranty. The Senior Credit Facility is secured by a first priority lien on substantially all of the tangible and intangible properties and assets of the Company and its subsidiaries (including trademarks), owned now or acquired later (other than the Eldersburg, Maryland facility). The Senior Credit Facility is guaranteed by substantially all of the Company's subsidiaries that are not borrowers. Interest. At the Company's option, the interest rate per annum applicable to the revolving credit borrowings under the Senior Credit Facility is a fluctuating rate of interest measured by reference either to: (i) LIBOR plus 2.75% (or 2.5% if annual Consolidated EBITA (as defined in the Senior Credit Facility) is more than $12,000,000) or (ii) Core States Bank, N.A.'s (or its successor's) published prime rate plus .75%. Currently, the Company's LIBOR based borrowing rate is LIBOR plus 2.5%. Fees. The Company has agreed to pay certain fees with respect to the Senior Credit Facility including (i) a closing fee of $1,125,000, (ii) servicing fees of $10,000 per month, (iii) commitment fees of .5% per annum on the amount by which $145,000,000 exceeds the average daily amount of the facility outstanding during the months of May through November, (iv) a fee of $100,000 if certain supplemental loans (as defined in the Senior Credit Facility) are made in any year, (v) fees of $500,000 in connection with the amendment to the Senior Credit Facility in February 1998 and (vi) fees at an annual rate of 1.5% of the average amount of letters of credit outstanding under the Facility. In addition, the Senior Credit Facility stipulates certain prepayment fees. Covenants. The Senior Credit Facility contains covenants, among others, restricting the ability of the Company and its subsidiaries to: (i) declare dividends or redeem or repurchase capital stock; (ii) prepay, redeem or purchase debt; (iii) incur liens; (iv) make loans, investments and guarantees; (v) incur additional debt; (vi) make capital expenditures; (vii) engage in mergers, acquisitions and asset sales; and (viii) transact with affiliates. The Senior Credit Facility also contains certain customary affirmative covenants, including a requirement that the Company maintain a minimum level of Consolidated EBITA (as defined in the Senior Credit Facility) equal to $8,000,000 for the fiscal year ending February 1999 and $10,000,000 for each of the fiscal years ending February 2000 and February 2001. The Company is also required to maintain Excess Availability (as defined in the Senior Credit Facility) of greater than $15,000,000 for at least 30 consecutive days between December 1 of each year and March 31 of the following year. Events of Default. Events of default under the Senior Credit Facility include: (i) the Company's failure to pay principal or interest when due; (ii) the Company's breach of any covenant, representation or warranty contained in the loan documents; (iii) customary cross-default provisions; (iv) events of bankruptcy, insolvency or dissolution of the Company; (v) the levy of certain judgments against the 80 Company or its assets, (vi) a change of control of the Company; (vii) each of the persons holding the offices of chief executive officer, chief operating officer and chief financial officer shall cease to act in such capacity, unless replaced by a successor of comparable experience and capability or (viii) a material adverse change in the business or assets of the Company and its subsidiaries taken as a whole. MORTGAGE NOTE The mortgage note payable had an outstanding principal amount of approximately $11.2 million as of May 30, 1998, bears interest at an annual rate of 10.25% and requires monthly principal and interest payments of $137,430 through June 1999, with a final payment of $10,626,505 in July 1999. The mortgage is secured by the land, building and improvements of the Company's Eldersburg, Maryland corporate offices and distribution center. VALIDITY OF THE COMMON STOCK AND THE NOTES The validity of the Common Stock and the Notes is being passed upon for the Company by Proskauer Rose LLP, New York, New York. EXPERTS The audited financial statements and schedules included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "SEC") a Registration Statement on Form S-1 (together with all amendments and exhibits, the "Registration Statement") under the Securities Act. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules to the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. For further information with respect to the Company and the Common Stock and the Notes offered hereby, reference is made to the Registration Statement and to its exhibits and schedules. The Registration Statement, including exhibits, may be inspected and copied without charge at the SEC's principal office located at 450 Fifth Street, NW, Judiciary Plaza, Washington D.C. 20549 and at the regional offices of the SEC located at Seven World Trade Center, Suite 1300, New York, New York 10048 and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, upon the payment of prescribed fees. The Commission also maintains a web site at http:// www.sec.gov that contains reports, proxy and information statements, as well as other information regarding registrants that file electronically with the SEC. 81 LONDON FOG INDUSTRIES, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ----- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants ................................................ F-2 Consolidated Balance Sheets as of February 22, 1997 and February 28, 1998 ............... F-3 Consolidated Statements of Operations for the Fiscal Years Ended February 24, 1996, February 22, 1997 and February 28, 1998 ................................................ F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Fiscal Years Ended February 24, 1996, February 22, 1997 and February 28, 1998 ............................ F-5 Consolidated Statements of Cash Flows for the Fiscal Years Ended February 24, 1996, February 22, 1997 and February 28, 1998 ............................................... F-6 Notes to Consolidated Financial Statements .............................................. F-7 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of February 28, 1998 and May 30, 1998 (unaudited)............................................................................. F-26 Condensed Consolidated Statements of Operations (unaudited) for the fourteen weeks ended May 31, 1997 and the thirteen weeks ended May 30, 1998 ................................ F-27 Condensed Consolidated Statements of Cash Flows (unaudited) for the fourteen weeks ended May 31, 1997 and the thirteen weeks ended May 30, 1998 ................................ F-28 Notes to Unaudited Condensed Consolidated Financial Statements .......................... F-29
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of London Fog Industries, Inc.: We have audited the accompanying consolidated balance sheets of London Fog Industries, Inc. and subsidiaries (the Company) as of February 22, 1997 and February 28, 1998, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows of the Company for the years ended February 24, 1996, February 22, 1997 and February 28, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of London Fog Industries, Inc. and subsidiaries as of February 22, 1997 and February 28, 1998, and the results of their operations and their cash flows for the years ended February 24, 1996, February 22, 1997 and February 28, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Baltimore, Maryland, April 3, 1998 F-2 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF FEBRUARY 22, 1997 AND FEBRUARY 28, 1998 (DOLLARS IN THOUSANDS)
1997 1998 ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents ............................................... $ 26,841 $ 566 Accounts receivable, net (Note 4) ....................................... 23,642 31,509 Inventories (Note 5) .................................................... 48,138 69,729 Prepaid expenses and other current assets ............................... 2,250 4,310 ---------- ---------- Total current assets .................................................. 100,871 106,114 PROPERTY, PLANT AND EQUIPMENT, net (Note 6) .............................. 32,558 36,347 GOODWILL AND OTHER ASSETS (Note 7) ....................................... 72,916 72,630 ---------- ---------- Total assets .......................................................... $ 206,345 $ 215,091 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Revolving credit borrowings (Note 8) .................................... $ -- $ 18,176 Current portion of long-term debt (Note 8) .............................. 463 10,512 Accounts payable ........................................................ 4,689 4,226 Accrued expenses (Note 9) ............................................... 20,471 22,784 Accrued restructuring charges (Note 16) ................................. 2,554 1,416 ---------- ---------- Total current liabilities ............................................. 28,177 57,114 LONG-TERM DEBT, net of current portion (Note 8) .......................... 329,862 150,810 OTHER LONG-TERM LIABILITIES .............................................. 10,372 11,756 ---------- ---------- Total liabilities ..................................................... 368,411 219,680 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 8 and 12) STOCKHOLDERS' EQUITY (DEFICIT) (Notes 8 and 10): 17.5% Cumulative voting preferred stock, $.01 par value, 400,000 shares authorized; 115,242 shares issued and outstanding in 1997 ............. 1,500 -- Nonvoting common stock, $.01 par value, 110,000 shares authorized; 99,967 shares issued and outstanding in 1997 ................................. 1 -- Common stock, $.01 par value, 12,000,000 shares authorized; 8,000,000 shares issued and outstanding in 1998 ................................. -- 80 Warrants outstanding .................................................... -- 536 Additional paid-in capital .............................................. 158,101 165,493 Unearned portion of stock options ....................................... -- (4,789) Accumulated deficit ..................................................... (321,668) (165,909) ---------- ---------- Total stockholders' equity (deficit) .................................. (162,066) (4,589) ---------- ---------- Total liabilities and stockholders' equity (deficit) .................. $ 206,345 $ 215,091 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED ----------------------------------------------- FEBRUARY 24, FEBRUARY 22, FEBRUARY 28, 1996 1997 1998 -------------- -------------- ------------- Net sales ................................................. $ 274,394 $ 279,107 $ 335,621 Cost of goods sold ........................................ 203,469 185,102 227,405 ---------- ---------- ---------- Gross profit ............................................. 70,925 94,005 108,216 Licensing revenues ........................................ 1,947 3,064 4,055 ---------- ---------- ---------- 72,872 97,069 112,271 Selling, general and administrative expenses .............. 86,641 83,848 98,499 Restructuring and special charges (Note 16) ............... -- -- 7,535 Deferred compensation expense (Note 11) ................... -- -- 2,735 Amortization of goodwill and licensing agreements (Note 7) 4,024 2,487 2,126 ---------- ---------- ---------- Operating income (loss) .................................. (17,793) 10,734 1,376 Interest expense, net (Note 8) ............................ 16,790 12,530 14,664 Gain from sale of investment (Note 14) .................... -- -- (2,260) ---------- ---------- ---------- Loss before provision (benefit) for income taxes and extraordinary gain ..................................... (34,583) (1,796) (11,028) Provision (benefit) for income taxes (Note 13) ............ 176 158 (5,932) ---------- ---------- ---------- Loss before extraordinary gain ........................... (34,759) (1,954) (5,096) Extraordinary gain on extinguishment of debt, net of income taxes of $6,080 (Notes 8 and 13) ......................... -- -- 160,855 ---------- ---------- ---------- Net income (loss) ........................................ $ (34,759) $ (1,954) $ 155,759 ========== ========== ========== Basic and diluted earnings (loss) per share available to common stockholders (Note 17): Income (loss) before extraordinary gain .................. $ (6.60) $ (3.15) $ (4.12) ========== ========== ========== Net income (loss) ........................................ $ (6.60) $ (3.15) $ 15.99 ========== ========== ========== Weighted average shares outstanding ....................... 8,000,000 8,000,000 8,000,000 ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. F-4 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
CUMULATIVE VOTING NONVOTING PREFERRED STOCK COMMON STOCK COMMON STOCK ------------------- ----------------------- ---------------------- AMOUNT SHARES AMOUNT SHARES AMOUNT ------------------- ------------ ---------- ------------- -------- BALANCE, February 25, 1995 ............................. $ -- -- $-- 100 $ -- Issuance of common stock (Note 8) ..................... -- 100,000 1 -- -- Issuance of preferred stock (Note 8) .................. 1,500 -- -- -- -- Redemption of equity and other ........................ -- (11) -- (100) -- Net loss .............................................. -- -- -- -- -- Reduction of minimum pension liability in excess of unrecognized prior service cost ...................... -- -- -- -- -- --------- ------- --- ---- ---- BALANCE, February 24, 1996 ............................. 1,500 99,989 1 -- -- Redemption of common and preferred stock .............. -- (22) -- -- -- Net loss .............................................. -- -- -- -- -- Reduction of minimum pension liability in excess of unrecognized prior service cost ...................... -- -- -- -- -- --------- ------- --- ---- ---- BALANCE, February 22, 1997 ............................. 1,500 99,967 1 -- -- Exchange of preferred stock and non-voting common stock for stock warrants (Note 8) .......................... (1,500) (99,967) (1) -- -- Issuance of common stock (Note 8) ..................... -- 8,000,000 80 Issuance of stock options (Note 10) ................... -- -- -- -- -- Amortization of unearned stock-based compensation (Note 11) .................................................. -- -- -- -- -- Net income ............................................ -- -- -- -- -- --------- ------- ----- --------- ---- BALANCE, February 28, 1998 ............................. $ -- -- $ -- 8,000,000 $ 80 ========= ======= ===== ========= ====
ADDITIONAL UNEARNED WARRANTS PAID-IN PORTION OF ACCUMULATED OUTSTANDING CAPITAL STOCK OPTIONS DEFICIT ------------- -------------- --------------- -------------- BALANCE, February 25, 1995 ............................. $ -- $158,273 $ -- $ (285,700) Issuance of common stock (Note 8) ..................... -- (1) -- -- Issuance of preferred stock (Note 8) .................. -- -- -- -- Redemption of equity and other ........................ -- (171) -- -- Net loss .............................................. -- -- -- (34,759) Reduction of minimum pension liability in excess of unrecognized prior service cost ...................... -- -- -- 44 ---- --------- -------- ---------- BALANCE, February 24, 1996 ............................. -- 158,101 -- (320,415) Redemption of common and preferred stock .............. -- -- -- -- Net loss .............................................. -- -- -- (1,954) Reduction of minimum pension liability in excess of unrecognized prior service cost ...................... -- -- -- 701 ---- --------- -------- ---------- BALANCE, February 22, 1997 ............................. -- 158,101 -- (321,668) Exchange of preferred stock and non-voting common stock for stock warrants (Note 8) .......................... 536 965 -- -- Issuance of common stock (Note 8) ..................... -- (80) -- -- Issuance of stock options (Note 10) ................... -- 6,507 (6,507) -- Amortization of unearned stock-based compensation (Note 11) .................................................. -- -- 1,718 -- Net income ............................................ -- -- -- 155,759 ---- --------- -------- ---------- BALANCE, February 28, 1998 ............................. $536 $165,493 $ (4,789) $ (165,909) ==== ========= ======== ========== TOTAL -------------- BALANCE, February 25, 1995 ............................. $ (127,427) Issuance of common stock (Note 8) ..................... -- Issuance of preferred stock (Note 8) .................. 1,500 Redemption of equity and other ........................ (171) Net loss .............................................. (34,759) Reduction of minimum pension liability in excess of unrecognized prior service cost ...................... 44 ---------- BALANCE, February 24, 1996 ............................. (160,813) Redemption of common and preferred stock .............. -- Net loss .............................................. (1,954) Reduction of minimum pension liability in excess of unrecognized prior service cost ...................... 701 ---------- BALANCE, February 22, 1997 ............................. (162,066) Exchange of preferred stock and non-voting common stock for stock warrants (Note 8) .......................... -- Issuance of common stock (Note 8) ..................... -- Issuance of stock options (Note 10) ................... -- Amortization of unearned stock-based compensation (Note 11) .................................................. 1,718 Net income ............................................ 155,759 ---------- BALANCE, February 28, 1998 ............................. $ (4,589) ==========
The accompanying notes are an integral part of these consolidated statements. F-5 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED ------------------------------------------- FEBRUARY 24, FEBRUARY 22, FEBRUARY 28, 1996 1997 1998 -------------- -------------- ------------- Cash Flows From Operating Activities: Net income (loss) ................................................... $ (34,759) $ (1,954) $ 155,759 Adjustments to reconcile net income (loss) to net cash flows from operating activities: Extraordinary gain on extinguishment of debt ...................... -- -- (166,935) Gain on sale of investment ........................................ -- -- (2,260) Depreciation ...................................................... 3,836 5,426 7,027 Deferred compensation expense ..................................... -- -- 2,735 Amortization of goodwill and licensing agreements ................. 4,024 2,487 2,126 Amortization of deferred financing costs .......................... 4,720 2,653 1,715 Loss on sale of property, plant and equipment ..................... 65 -- 459 Other ............................................................. 1,068 1,210 1,089 Changes in operating assets and liabilities: Accounts receivable, net ......................................... 13,541 5,287 (7,867) Inventories ...................................................... 31,075 (11,113) (21,591) Prepaid expenses and other current assets ........................ 2,451 (117) (2,060) Other assets ..................................................... (19) 128 27 Acounts payable .................................................. (6,365) 980 (463) Accrued expenses ................................................. 5,864 2,294 (829) Accrued restructuring charges .................................... (17,488) (5,804) (1,138) Other long-term liabilities ...................................... 198 -- 485 --------- --------- ---------- Net cash flows from operating activities ....................... 8,211 1,477 (31,721) --------- --------- ---------- Cash Flows From Investing Activities: Capital expenditures ................................................ (4,696) (7,703) (11,844) Proceeds from sale of investment .................................... -- -- 2,260 Other ............................................................... 284 933 569 --------- --------- ---------- Net cash flows from investing activities ....................... (4,412) (6,770) (9,015) --------- --------- ---------- Cash Flows From Financing Activities: Increase in borrowings under revolving credit facility .............. -- -- 18,176 Payments on long-term debt .......................................... (377) (417) (464) Borrowings under long-term debt arrangements ........................ 7,000 -- -- Payment of deferred financing costs ................................. (4,766) -- (3,677) Other ............................................................... -- -- 426 --------- --------- ---------- Net cash flows from financing activities ....................... 1,857 (417) 14,461 --------- --------- ---------- NET INCREASE (DECREASE) IN CASH ...................................... 5,656 (5,710) (26,275) CASH AND CASH EQUIVALENTS, beginning of period ....................... 26,895 32,551 26,841 --------- --------- ---------- CASH AND CASH EQUIVALENTS, end of period ............................. $ 32,551 $ 26,841 $ 566 ========= ========= ========== CASH PAID FOR: Interest ............................................................ $ 8,495 $ 9,215 $ 12,535 ========= ========= ========== Income taxes ........................................................ $ 219 $ 184 $ 165 ========= ========= ==========
The accompanying notes are an integral part of these consolidated statements. F-6 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS London Fog Industries, Inc. , a Delaware corporation, and its subsidiaries (the "Company") design, market and distribute men's and women's rainwear and men's, women's and children's outerwear and skiwear and related accessories under the LONDON FOG(Reg. TM) brand name, the PACIFIC TRAIL(Reg. TM) brand name and related brand names. The Company sells its products to a variety of apparel retailers located throughout the United States. Also, the Company receives licensing revenues from licensing agreements with third parties which provide for the manufacture and marketing of various apparel and accessories under trade names owned by the Company. In addition, certain of the Company's revenues are generated directly from consumers through its chain of retail stores (primarily factory outlet stores) located in the United States and Puerto Rico. On February 27, 1998, the Company completed a restructuring of the Company's outstanding subordinated debt and equity capitalization (the "1998 Recapitalization") which significantly decreased the Company's debt obligations. In addition to the 1998 Recapitalization, over the past three years management has significantly restructured the Company's operations (see Note 16). Subsequent to the 1998 Recapitalization (see Note 8), the Company remains highly leveraged. The Company's viability is dependent upon its ability to finance its operations and meet its debt obligations when due. While there can be no assurance that these will occur, based on the Company's 1998 Recapitalization and the Company's operating plan for Fiscal 1999, management believes that its current capitalization and financing structure will be adequate to finance its operations and meet its debt service obligations during Fiscal 1999 and beyond. 2. BASIS OF PRESENTATION The Company was a wholly-owned subsidiary of London Fog Corporation ("Holdings") until May 31, 1995. Pursuant to the Company's Recapitalization on May 31, 1995, Holdings was dissolved and all assets and liabilities of Holdings were transferred to or assumed by the Company (see Note 8). The Company reports on a 52-53 week fiscal year ending the last Saturday in February. The fiscal years ended February 24, 1996 ("Fiscal 1996") and February 22, 1997 ("Fiscal 1997") consisted of 52 weeks. The fiscal year ended February 28, 1998 ("Fiscal 1998") consisted of 53 weeks. The consolidated financial statements include the accounts of London Fog Industries, Inc. and its subsidiaries. All intercompany transactions have been eliminated in consolidation. In June 1997, the Company effected a 1 for 1,000 reverse stock split with respect to the cumulative voting preferred stock and the nonvoting common stock. All shares and per share amounts in the accompanying financial statements and related notes have been restated for all periods to reflect this reverse stock split. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents Cash and cash equivalents consist of operating and petty cash balances that are used to conduct day-to-day business operations, as well as cash equivalents having a maturity of 90 days or less. Inventories Inventories are stated at the lower of first-in, first-out cost or market. F-7 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Property, Plant and Equipment Property, plant and equipment are stated at cost. The Company depreciates property, plant and equipment and amortizes leasehold improvements on a straight-line basis over the following useful lives:
ASSET CLASS USEFUL LIVES - ------------------------------------------------ ----------------------- Building and improvements .......... 5-30 years Equipment .......................... 3-15 years Furniture and fixtures ............. 2-10 years Leasehold improvements ............. Initial term of lease, not to exceed 15 years
Goodwill Goodwill, representing the excess of acquisition cost over the fair value of net identifiable assets acquired, is being amortized on a straight-line basis over a period of forty years. The Company continually evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related business units' operating earnings over the remaining life of the goodwill in measuring whether the goodwill is recoverable. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments" (SFAS 107), requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates of future cash flows. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The fair value of the Company's debt is estimated using a discounted cash flow analysis based on the Company's borrowing costs for similar credit facilities at February 28, 1998. Other than with respect to the Company's 1998 10% Senior Subordinated Notes, ("Notes") (see Note 8), management believes the carrying value of its financial instruments approximates fair value. With respect to the Company's Notes issued on February 27, 1998, SFAS No. 15, "Accounting By Debtors and Creditors for Troubled Debt Restructurings" (SFAS 15) required the Company to record such debt on its balance sheet at $150 million, representing the $100 million principal amount of such notes and $50 million of future interest payments due during the five year term of the notes (see Note 8). Management believes the fair value of the Notes as of February 28, 1998 approximates its principal amount of $100 million. This disclosure relates to financial instruments only. The fair value assumptions were based upon subjective estimates of market conditions and perceived risks of the financial instruments. Deferred Financing Costs Deferred financing costs are amortized over the lives of the related debt using the effective interest method (see Note 8). Advertising Expense Advertising costs are generally expensed as the advertisements are run. Advertising expense was approximately $10.4 million, $7.6 million and $9.9 million for Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. Advertising costs recorded in prepaid expenses were $468,000, $310,000 and $201,000 at the end of Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. F-8 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) New Accounting Pronouncements During June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income" (SFAS 130), which establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management intends to implement the pronouncement at year end Fiscal 1999 and expects to report changes in the Company's minimum pension liability as a component of comprehensive income. During June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131), which establishes a new approach for determining segments within a company and reporting information on those segments. SFAS 131 is effective for fiscal years beginning after December 15, 1997. Management intends to adopt the pronouncement at year end Fiscal 1999. The Company has not yet completed its analysis of which operating segments, if any, on which it will report. During June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which standardizes the accounting for derivative instruments by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. SFAS 133 is effective for fiscal quarters of all fiscal years beginning after June 15, 1999. Management believes that the implementation of SFAS 133 would not have had a material effect on the accompanying financial statements. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. As a result of historical losses, the Company has recorded a valuation allowance against its deferred tax assets as of February 22, 1997 and February 28, 1998 (see Note 13). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains and losses during the reporting periods. Actual results could differ from these estimates. 4. ACCOUNTS RECEIVABLE Accounts receivable consisted of the following as of February 22, 1997 and February 28, 1998 (dollars in thousands): 1997 1998 ---------- ---------- Trade .......................................... $23,678 $30,168 Other .......................................... 1,949 2,578 ------- ------- 25,627 32,746 Less- Allowance for doubtful accounts .......... 1,985 1,237 ------- ------- Accounts receivable, net ....................... $23,642 $31,509 ======= ======= F-9 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) As of February 28, 1998, the Company had $2,288,000 of trade accounts receivable due from several apparel retailers that are considered highly leveraged. 5. INVENTORIES Inventories consisted of the following as of February 22, 1997 and February 28, 1998 (dollars in thousands): 1997 1998 ---------- ---------- Finished goods ........... $33,257 $52,716 Work in process .......... 3,291 8,883 Raw materials ............ 11,590 8,130 ------- ------- $48,138 $69,729 ======= ======= 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following as of February 22, 1997 and February 28, 1998 (dollars in thousands):
1997 1998 --------- --------- Land ........................................................ $ 1,400 $ 1,400 Buildings, improvements and leasehold improvements .......... 22,738 27,150 Equipment, furniture and fixtures ........................... 18,613 23,813 ------- ------- 42,751 52,363 Less- Accumulated depreciation and amortization ............. 10,193 16,016 ------- ------- Property, plant and equipment, net .......................... $32,558 $36,347 ======= =======
Depreciation and amortization expense included in cost of goods sold was $270,000, $345,000 and $137,000 for Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. Depreciation and amortization expense included in selling, general and administrative expenses was $3,566,000, $5,081,000 and $6,890,000 for Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. 7. GOODWILL AND OTHER ASSETS Goodwill and other assets consisted of the following as of February 22, 1997 and February 28, 1998 (dollars in thousands):
1997 1998 ---------- ---------- Goodwill, net of accumulated amortization of $12,153 and $14,240 .................................................... $71,414 $69,327 Deferred financing costs, net of accumulated amortization of $4,841 and $917 ............................................ 369 2,236 Other ........................................................ 1,133 1,067 ------- ------- $72,916 $72,630 ======= =======
Amortization expense related to goodwill and other assets was $8,744,000, $5,140,000 and $3,841,000 for Fiscal 1996, Fiscal 1997 and Fiscal 1998, which includes amortization of deferred financing costs of $4,720,000, $2,653,000 and $1,715,000, respectively, recorded as interest expense. In connection with the 1995 Recapitalization and obtaining the 1995 Credit Facility (see Note 8), the Company capitalized $4,766,000 of financing costs which were amortized over the terms of the related debt. F-10 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In connection with obtaining or amending certain of the Company's debt facilities during Fiscal 1998, the Company capitalized $3,677,000 of financing costs. 8. LONG-TERM DEBT Long-term debt consisted of the following as of February 22, 1997 and February 28, 1998 (dollars in thousands):
1997 1998 ---------- ---------- Mortgage note payable ............................. $ 11,784 $ 11,322 10% Senior Subordinated Notes due 2003 Principal ........................................ -- 100,000 Future interest capitalized per SFAS 15 .......... -- 50,000 -------- -------- Total recorded amount ............................ -- 150,000 1995 Term Loan Principal plus deferred interest ................. 196,601 -- Future interest capitalized per SFAS 15 .......... 63,141 -- -------- -------- Total recorded amount ............................ 259,742 -- 1995 Note Principal plus deferred interest ................. 44,557 -- Future interest capitalized per SFAS 15 .......... 14,242 -- -------- -------- Total recorded amount ............................ 58,799 -- -------- -------- Total long-term debt Principal plus deferred interest ................. 252,942 111,322 Future interest capitalized per SFAS 15 .......... 77,383 50,000 -------- -------- Total recorded amount ............................ 330,325 161,322 -------- -------- Less - Current portion Principal payments ............................... 463 512 Future interest capitalized per SFAS 15 .......... -- 10,000 -------- -------- Total recorded amount ............................ 463 10,512 -------- -------- Long-term debt, net of current portion ........... $329,862 $150,810 ======== ========
Interest Rate Protection Agreements In July 1994, the Company entered into an interest rate cap agreement with the agent for its May 1994 Bank Credit Agreement. This agreement effectively limited the Company's interest rate exposure on $50 million of its floating rate debt to a Eurodollar rate of 7% (plus the applicable spreads per the terms of the May 1994 Bank Credit Agreement) through June 27, 1996. In connection with this agreement, the Company paid $365,000. This amount was amortized through the June 27, 1996 maturity date as additional interest expense. Mortgage Note The mortgage note payable bears interest at 10.25% and requires monthly principal and interest payments of $137,430 through June 1999, with a final payment of $10,626,505 in July 1999. The mortgage is secured by the land and the building and improvements constructed thereon which house the Company's Eldersburg, Maryland corporate offices and distribution center. F-11 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1995 Credit Facility On March 30, 1995, the Company obtained a revolving credit and letter of credit facility (the "1995 Credit Facility") with various maximum line of credit limits as high as $120 million, which accrued interest, payable monthly in arrears, at the ABR (Alternate Base Rate) plus 2% or, at the Company's option, one-, two- or three-month LIBOR plus 3%. The ABR was, for any day, the greatest of the prime rate, the base certificate of deposit rate plus 1%, or the Federal Funds effective rate plus 1/2%. The obligations outstanding on the facility were secured by substantially all of the assets of the Company, except as otherwise encumbered. In addition to the payment terms noted above, the 1995 Credit Facility stipulated certain prepayment terms and fees. An additional fee at an annual rate of .5% was payable monthly in arrears on the average daily unused amount of the available commitment. Additional fees were payable on the outstanding balance of letters of credit under the 1995 Credit Facility at an annual rate of 1.5% for commercial letters of credit and 2.0% for standby letters of credit. The average and highest amounts outstanding under the 1995 Credit Facility were approximately $33.7 million and $69.6 million, respectively, for the period from March 30, 1995 through February 24, 1996. The average and highest amounts outstanding for Fiscal 1997 were approximately $42.9 million and $76.5 million, respectively. The average and highest amounts outstanding under the 1995 Credit Facility were approximately $61.0 million and $106.5 million, respectively, for the period from February 23, 1997 through May 14, 1997. The average interest rate on the revolving credit borrowings under the 1995 Credit Facility for the period from March 30, 1995 through February 24, 1996, Fiscal 1997 and the period from February 23, 1997 through May 14, 1997 were 9.3%, 8.8% and 10.5%, respectively. Effective interest rates, including related fees and the amortization of related deferred financing costs, for the period from March 30, 1995 through February 24, 1996, Fiscal 1997 and the period from February 23, 1997 through May 14, 1997, were 19.6%, 15.8% and 17.3%, respectively. As of March 31, 1997, the Company negotiated an amendment of the 1995 Credit Facility which extended the expiration date from the original expiration date of March 31, 1997 to May 15, 1997. This amendment established various maximum lines of credit through May 15, 1997. On May 15, 1997, the Company obtained a revolving credit and letter of credit facility to replace the 1995 Credit Facility. Senior Credit Facility On May 15, 1997, the Company obtained a revolving credit and letter of credit facility (the "Senior Credit Facility") with a maximum line of credit of $140 million through April 30, 1998 and $150 million from May 1, 1998 through April 30, 2000. In connection with the 1998 Recapitalization, on February 27, 1998 the Company amended certain terms and provisions of the Senior Credit Facility (the "1998 Amendment"), including increasing the maximum line of credit to $200 million and extending the expiration date of the facility from April 30, 2000 to April 30, 2001. Within this $200 million limit, up to $90 million may be used for outstanding letters of credit. The balance outstanding on the facility cannot exceed the aggregate of stipulated percentages of collateral values associated with the Company's eligible inventory, accounts receivable and letters of credit goods, plus certain amounts during certain periods of the year. The obligations outstanding on the facility are secured by substantially all of the assets of the Company (including trademarks), except as otherwise encumbered. The original terms of the Senior Credit Facility required that revolving credit borrowings under the facility be no more than $10 million for at least 30 consecutive days during each December 1 through March 31 period for the duration of the agreement. The terms of the 1998 Amendment eliminated this provision. The terms of the Senior Credit Facility require that the Company maintain excess availability (as defined) under the facility of greater than $15 million for at least 30 consecutive days during each December 1 through March 31 period for the duration of the agreement. F-12 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Senior Credit Facility accrues interest, payable in cash monthly in arrears, at the prime rate plus 0.75% per annum, or, at the Company's option, one-, two- or three-month LIBOR plus 2.75% per annum. An interest rate reduction of 0.25% per annum for the LIBOR option interest rate (to one-, two-or three-month LIBOR plus 2.50% per annum) will be available to the Company beginning in May 1998 if it attains certain financial performance benchmarks. At February 28, 1998, based on collateral value restrictions, the Company had additional borrowings available of approximately $31 million under the Senior Credit Facility. The average and highest amounts outstanding under the Senior Credit Facility were approximately $85.7 million and $131.5 million, respectively, for the period from May 15, 1997 through February 28, 1998. For this same period, the average interest rate on revolving credit borrowings under the Senior Credit Facility was 8.8% and the effective interest rate, including related fees and the amortization of related deferred financing costs, was 9.8%. In addition to the payment terms noted above, the Senior Credit Facility stipulates certain prepayment terms and fees. The original terms of the Senior Credit Facility stipulated a fee at an annual rate of 0.5% payable in cash monthly in arrears on the amount by which $110,000,000 exceeds the average daily amount of the facility outstanding during the months of May through November. Pursuant to the 1998 Amendment, beginning February 27, 1998 such fee becomes payable in cash monthly in arrears at an annual rate of 0.5% on the amount by which $145,000,000 exceeds the average daily amount of the facility outstanding during the months of May through November. Additional fees at an annual rate of 1.5% are payable in cash monthly in arrears on the daily outstanding balance of both commercial and standby letters of credit issued and outstanding for the immediately preceding month. 1995 Recapitalization On May 31, 1995, the Company consummated a restructuring of the Company's outstanding debt and equity capitalization (the "1995 Recapitalization"). In the accompanying financial statements the 1995 Recapitalization has been accounted for in accordance with SFAS No. 15 "Accounting By Debtors and Creditors For Troubled Debt Restructurings" (SFAS 15). The aggregate outstanding debt as of May 31, 1995 of approximately $317.8 million (including approximately $6.8 million of accrued interest) under its May 1994 Bank Credit Agreement was restructured into a new facility (the "1995 Restructured Facility") consisting of: (i) a $175 million term loan (the "1995 Term Loan"), (ii) a $36 million note (the "1995 Note"), (iii) approximately $106.8 million liquidation value of cumulative voting preferred stock, which was recorded at its May 1995 appraised value of $1.5 million, and (iv) nonvoting common shares representing 80% of the common stock of the Company. The debt and equity securities issued in the 1995 Recapitalization were restructured and retired on February 27, 1998 in connection with the 1998 Recapitalization. 1995 Term Loan. Tranche 1 of the 1995 Restructured Facility was a term loan having a principal amount of $175 million (the "1995 Term Loan") which accrued interest from April 1, 1995 at a rate of prime plus 1%. From April, 1995 through May 31, 1997, the 1995 Term Loan bore cash interest, payable monthly beginning in June 1995, at the rate of 3% per annum with the difference (the "Deferred Interest") accruing on a non-interest bearing basis. On May 15, 1997, the 1995 Term Loan was amended to extend through April 30, 2000, the period during which the 1995 Term Loan bore cash interest at the rate of 3% per annum, with the difference accruing on a non-interest bearing basis. Giving effect to the May 15, 1997 amendment, there were no scheduled principal payments prior to the maturity date of May 31, 2002, at which time the principal amount of $175 million, plus Deferred Interest would have become due and payable. F-13 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1995 Note. Tranche 2 of the 1995 Restructured Facility was a note having a principal amount of $36 million (the "1995 Note") with a scheduled maturity of May 31, 2002, which accrued interest on a non-interest bearing basis, at a fixed rate per annum of 12.5%. In accordance with SFAS 15, the Company recorded equity interests granted under the 1995 Restructured Facility as partial settlement of the debt outstanding under the May 1994 Bank Credit Agreement at their estimated fair value. SFAS 15 requires the debtor to continue to record debt on its books at the lesser of the outstanding balance prior to the restructuring or the total amount due under the restructured debt. Since the remaining outstanding debt of $316.3 million, net of $1.5 million of appraised value of equity interests granted, under the May 1994 Bank Credit Agreement, including accrued interest, was less than the total future principal and interest payments required under the 1995 Term Loan and the 1995 Note, the Company continued to record the restructured term debt at $316.3 million as of May 31, 1995, even though the restructured principal amount of the 1995 Term Loan and the 1995 Note totaled only $211 million. The difference of $105.3 million as of May 31, 1995 effectively represented future interest payments and, therefore, reduced interest expense in subsequent periods. Cumulative voting preferred stock. In connection with the 1995 Recapitalization, the Lenders also received 106,764 shares of Series A cumulative voting preferred stock. In addition, the holders of the common stock of Holdings (the "Old Common Stock") received 8,493 shares of Series B cumulative voting preferred stock. The Company also granted options to certain executive officers to purchase 6,066 shares of Series C cumulative preferred stock at an exercise price of $13 per share. Each series of the cumulative voting preferred stock has a liquidation value of $1,000 per share and is redeemable at the Company's option, after the 1995 Term Loan, the 1995 Note and the Deferred Interest have been paid in full in cash, at liquidation value plus dividends accrued and unpaid to that date. The cumulative voting preferred stock accrued dividends quarterly from April 1, 1995 at an annual rate of 17.5%; however, no cash dividend payments on the preferred stock could be made until the 1995 Term Loan, the 1995 Note and the Deferred Interest had been paid in full, at which time the dividends, if declared, would become payable in cash. Nonvoting common stock. In connection with the 1995 Recapitalization, the Lenders received 80,000 shares of $.01 par value nonvoting common stock of the Company (the "1995 Nonvoting Common Stock") with an additional 20,000 shares issued to holders of the Old Common Stock. Reverse Stock Split. As discussed in Note 2, the accompanying financial statements and related notes have been restated for all periods to reflect a 1 for 1,000 reverse stock split with respect to the cumulative voting preferred stock and the 1995 Nonvoting Common Stock. 1998 Recapitalization On February 27, 1998, the Company consummated a restructuring of the Company's outstanding subordinated debt and equity capitalization (the "1998 Recapitalization"). The objectives of the 1998 Recapitalization were to improve the Company's financial condition and provide the Company with a capital structure to facilitate its continued growth through execution of its strategic business plan. The Company has accounted for the 1998 Recapitalization in accordance with the provisions of SFAS 15. The aggregate principal plus deferred interest outstanding under the 1995 Term Loan and 1995 Note of approximately $257.2 million as of February 27, 1998 (including Deferred Interest on the 1995 Term Loan and accrued interest on the 1995 Note totaling approximately $46.2 million) was restructured into: (i) $100 million of 10% Senior Subordinated Notes (the "Notes") and (ii) 8,000,000 shares of newly issued common stock of the Company, representing 100% of the outstanding shares of common stock as of February 28, 1998, which represents 80% of the common shares outstanding after giving pro forma effect to the potential issuance of 2,000,000 shares of common stock pursuant to the 1998 Stock Option Plan, but not giving pro forma effect to the potential shares to be issued upon the exercise of the 1998 Recapitalization Warrants or the 1998 Management Warrants (see Note 10). F-14 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Pursuant to the 1998 Recapitalization transactions, all of the aggregate outstanding shares of cumulative voting preferred stock as of February 27, 1998 (represented by 106,764 shares of Series A cumulative voting preferred stock and 8,479 shares of Series B cumulative voting preferred stock) were converted into warrants to purchase an aggregate of 530,726 common shares of the Company (the "1998 Recapitalization Warrants"), with such shares of preferred stock being cancelled pursuant to the 1998 Recapitalization transactions. Each of the 1998 Recapitalization Warrants represents the right to purchase one share of common stock of the Company at a price of $15.72 per share at any time up to and including the expiration date of February 28, 2005. The 1998 Recapitalization Warrants were recorded on the February 28, 1998 balance sheet at their appraised fair value of approximately $536,000 based on an appraisal of $1.01 per warrant as of the date of the 1998 Recapitalization. The options held by certain executive officers to purchase 6,066 shares of Series C cumulative preferred stock at an exercise price of $13 per share were cancelled as a result of the 1998 Recapitalization transactions. Also pursuant to the 1998 Recapitalization transactions, all of the 99,967 outstanding shares of the 1995 Nonvoting Common Stock were cancelled as of February 27, 1998, with those shares of the 1995 Nonvoting Common Stock held by holders of the Series B cumulative voting preferred stock being converted into the right to receive $.01 in cash for each such share of 1995 Nonvoting Common Stock. Notes. The Notes were issued as of February 27, 1998 in an aggregate principal amount of $100 million, with a maturity of February 27, 2003, and bear interest at the rate of 10% per annum payable in semiannual interest payments on March 1 and September 1 of each year, beginning September 1, 1998. The Notes are redeemable at the Company's option, in whole or in part, at any time at a defined redemption price. In addition, in the event of the occurrence of a Change of Control Triggering Event (as defined), each holder of the Notes has the right to require that the Company purchase all or a portion of such holder's Notes at a purchase price of 101% of principal amount, plus accrued interest to the date of purchase. The obligations under the Notes are secured, on a subordinated basis, by substantially all of the assets of the Company, except as otherwise encumbered, and are subordinated to all amounts due pursuant to the Senior Credit Facility or any eligible successor facility on the terms and conditions set forth in the Subordination Agreement. As of February 26, 1998, the total recorded debt outstanding under the 1995 Term Loan and the 1995 Note, including future interest recorded in accordance with SFAS 15, totaled approximately $319.7 million. Since the Notes issued pursuant to the 1998 Recapitalization require total future payments of $150 million, including $50 million of interest payments over five years, SFAS 15 requires the Company to continue to record $150 million of debt on its books related to the $100 million principal amount of the Notes. As a result, the Company will record all future payments on the Notes, including principal and interest, as a reduction of the recorded debt and no interest expense will be recorded on the Company's Consolidated Statements of Operations with respect to the Notes. The excess of the $319.7 million of debt previously recorded over the $150 million recorded as of February 27, 1998, or $169.7 million, less $2.7 million of transaction costs incurred, has been recorded as an extraordinary gain on early extinguishment of debt, less an income tax provision of $6.1 million. Covenants The Company's debt agreements contain various covenants, certain of which require the maintenance of certain financial ratios and restrictions on the declaration or payment of dividends and other distributions. The Company is in compliance with all covenants related to its debt agreements. F-15 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Aggregate Scheduled Maturities Aggregate scheduled maturities of long-term debt for each of the fiscal years subsequent to February 28, 1998 are as follows (dollars in thousands):
SCHEDULED SCHEDULED PRINCIPAL FUTURE INTEREST PAYMENTS FISCAL YEAR ENDING FEBRUARY PAYMENTS CAPITALIZED PER SFAS 15 TOTAL - ----------------------------- ----------- ------------------------- ---------- 1999 ........................ $ 512 $10,000 $ 10,512 2000 ........................ 10,810 10,000 20,810 2001 ........................ -- 10,000 10,000 2002 ........................ -- 10,000 10,000 2003 and thereafter ......... 100,000 10,000 110,000 -------- ------- -------- $111,322 $50,000 $161,322 ======== ======= ========
9. ACCRUED EXPENSES Accrued expenses consisted of the following as of February 22, 1997 and February 28, 1998 (dollars in thousands): 1997 1998 --------- --------- Payroll .................... $ 5,439 $ 5,388 Employee benefits .......... 4,767 3,559 Returns reserve ............ 2,766 2,901 Advertising ................ 3,084 2,815 Other ...................... 4,415 8,121 ------- ------- $20,471 $22,784 ======= ======= 10. STOCK-BASED COMPENSATION PLANS Effective February 27, 1998, the Board of Directors adopted, and the shareholders approved, a stock option plan (the "1998 Stock Option Plan"), which provides for the grant to eligible participants of options to purchase up to a total of 2,000,000 shares of the Company's common stock, subject to adjustment for future stock dividends, stock splits, reorganizations and other events. The 1998 Stock Option Plan authorizes the Compensation Committee of the Board of Directors to administer the plan and to grant to eligible participants stock options under the plan. Pursuant to the provisions of the 1998 Stock Option Plan, options granted under the plan expire ten years from the date of grant and have an exercise price equal to at least 25% of the fair value of the Company's common stock at the date of grant. As of February 28, 1998, options to purchase a total of 1,925,334 shares had been granted under the 1998 Stock Option Plan and there remained available for future grant options to purchase 74,666 shares under the plan. The options granted under the plan have an exercise price of $2.00 per share, expire on February 27, 2008, and vest in equal annual installments, with the first installment vesting on the date of grant and the final installment vesting two years to four years from the date of grant, subject to accelerated vesting provisions under certain circumstances as described in the plan. Effective February 27, 1998, as part of the 1998 Recapitalization transactions and pursuant to the 1998 Stock Option Plan, the Company's shareholders and Board of Directors approved the issuance of warrants (the "1998 Management Warrants") to purchase up to an aggregate of 83,799 shares of the Company's common stock at a purchase price of $15.72 per share. The 1998 Management Warrants expire on February 28, 2005 (subject to adjustment as specified in the Warrant Agreement) and vest in proportional installments as the options vest which are held by such participant under the 1998 Stock F-16 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Option Plan. In addition, the 1998 Management Warrants are only exercisable after the first date on which any of the 1998 Recapitalization Warrants are exercised. As of February 28, 1998, the Company had issued 1998 Management Warrants to purchase an aggregate of 80,667 shares to participants under the 1998 Stock Option Plan. As permitted under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company has elected to follow the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), whereby the intrinsic value method is used to measure compensation expense for its stock-based employee compensation plans. As required by SFAS 123, the Company provides pro forma disclosures of net income as if the fair value-based method prescribed by SFAS 123 had been applied in measuring compensation expense. The table below summarizes the activity in the Company's outstanding options and warrants, represented by those granted pursuant to the 1998 Stock Option Plan and the 1998 Management Warrants:
WEIGHTED-AVERAGE WEIGHTED-AVERAGE SHARES EXERCISE PRICE EXERCISABLE EXERCISE PRICE ------------ ------------------ ------------- ----------------- Outstanding at February 24, 1996 and February 22, 1997 ....................... -- -- -- -- Fiscal 1998 Activity: Granted ................................. 2,006,001 $ 2.55 -- -- Exercised ............................... -- -- -- -- Forfeited ............................... -- -- -- -- --------- ------ -- -- Outstanding at February 28, 1998 ......... 2,006,001 $ 2.55 529,748 $ 2.55 ========= =======
The following table summarizes information concerning options and 1998 Management Warrants outstanding at February 28, 1998:
OUTSTANDING EXERCISABLE ------------------------------------------------------------- --------------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISE NUMBER REMAINING VESTING REMAINING CONTRACTUAL NUMBER WEIGHTED-AVERAGE PRICE OUTSTANDING PERIOD (IN YEARS) LIFE (IN YEARS) EXERCISABLE EXERCISE PRICE - ------------ ------------- ------------------- ----------------------- ------------- ----------------- $ 2.00 1,925,334 1.5 10.0 508,445 $ 2.00 15.72 80,667 1.5 7.0 21,303 15.72 - -------- --------- --- ---- ------- ------ $ 2.55 2,006,001 1.5 9.9 529,748 $ 2.55 ========= =======
Using the provisions of APB 25 and an appraised fair value (including valuation discounts for minority interest and lack of marketability) of $5.38 per share for the Company's common stock as of the date of grant of the options, the Company recorded compensation expense (included under the caption Deferred Compensation Expense) of approximately $1,718,000 for Fiscal 1998 with respect to vested options granted under the 1998 Stock Option Plan. No compensation expense was recorded with respect to vested 1998 Management Warrants, since the exercise price of such warrants exceeded the appraised fair value of the common stock as of the date of grant. If the Company had elected to recognize compensation expense based upon the fair value at the date of grant of the options and 1998 Management Warrants, consistent with the provisions of SFAS 123, the Company's net income for Fiscal 1998 would be reduced by approximately $540,000. The fair value of the options and the 1998 Management Warrants for pro forma disclosure purposes was computed as of the date of grant of such options or warrants using the Black-Scholes option pricing model and the following weighted average assumptions: expected volatility of approximately 41%; risk-free F-17 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) interest rate of 5.24% - 5.53%; expected lives of six to ten years; and expected dividend yield of zero. The weighted-average fair value of the options and 1998 Management Warrants granted was $3.63 per share for Fiscal 1998. 11. DEFERRED COMPENSATION EXPENSE During Fiscal 1998, the Company recorded deferred compensation expense of approximately $2,735,000, consisting of: (i) approximately $1,718,000 of compensation expense calculated using the provisions of APB 25 related to stock-based compensation (see Note 10); and (ii) approximately $1,017,000 of compensation expense related to non-cash accruals under a deferred compensation plan adopted at the time of the 1998 Recapitalization. 12. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS Leases The Company has various noncancelable operating leases for retail stores, manufacturing, warehouse and administrative office facilities. In addition to the minimum lease payments, certain leases require additional payments for insurance, property taxes and a proportional share of maintenance costs. The retail store leases generally provide for annual base minimum rentals plus contingent rentals based upon sales in excess of specified minimums. Future minimum lease payments under noncancelable operating leases for all facilities and equipment with lease terms exceeding one year as of February 28, 1998 are as follows (dollars in thousands): FISCAL YEAR ENDING FEBRUARY -------------------------------- 1999 ........................... $12,926 2000 ........................... 11,683 2001 ........................... 10,388 2002 ........................... 8,852 2003 ........................... 7,061 2004 and thereafter ............ 29,942 ------- Total minimum payments ......... $80,852 ======= Rent expense was approximately $13.7 million, $12.8 million and $15.7 million for Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. Compensation As of February 28, 1998, the Company is committed to employment arrangements with certain of its executives, through 2002, aggregating base compensation of approximately $9.4 million over the remaining terms after February 28, 1998. The arrangements also provide for additional incentive payments subject to performance standards. Litigation The Company is a defendant in several lawsuits arising from the normal course of business. Management believes that the ultimate outcome of such cases will not have a material adverse effect on the Company's financial condition. Concentrations Certain of the raw materials (such as fabrics, linings and trim items) used by the Company are manufactured to its custom specifications to be shipped to its independent manufacturers and may be available in the short term from only one or a very limited number of vendors. While the Company F-18 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) believes it could find additional vendors to produce these raw materials, the interruption or delay of supply of these materials by existing vendors, for any reason, could have a material adverse effect on the Company. Four of the Company's raw material suppliers accounted for approximately 37% of the Company's raw material needs (excluding trim items) for the fall 1997 and spring 1998 seasons. South Korean-based suppliers account for a significant majority of the Company's fabric purchases. Other Contingencies As of February 28, 1998, the Company was contingently liable for outstanding letters of credit, aggregating approximately $24.8 million, relating to the purchase of inventories. 13. INCOME TAXES In connection with the 1998 Recapitalization, the Company triggered a taxable gain of approximately $16 million, which has been offset by current year net operating losses. In accordance with SFAS 109, the extraordinary gain for financial reporting purposes has been recorded net of a $6.1 million tax provision. Primarily due to the debt restructuring, the Company's available net operating loss carryforward balance has been reduced from approximately $66 million as of February 22, 1997 to approximately $19 million as of February 28, 1998, which will begin to expire in 2011. This amount has been fully reserved in the accompanying financial statements. The provision (benefit) for income taxes is comprised of the following for Fiscal 1996, Fiscal 1997 and Fiscal 1998 (dollars in thousands):
FISCAL YEAR ENDED ----------------------------------------------- FEBRUARY 24, FEBRUARY 22, FEBRUARY 28, 1996 1997 1998 -------------- -------------- ------------- Provision (benefit) for income taxes before extraordinary gain ...................................... $ 176 $158 $ (5,932) Provision for income taxes on extraordinary gain ......... -- -- 6,080 ----- ---- -------- Provision for income taxes ............................ $ 176 $158 $ 148 ===== ==== ======== Federal: Current ................................................. $ 155 $140 $ 119 Deferred ................................................ -- -- -- State: Current ................................................. 21 18 29 Deferred ................................................ -- -- -- ----- ---- -------- Provision for income taxes ............................ $ 176 $158 $ 148 ===== ==== ========
F-19 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The reconciliation of the provision (benefit) for income taxes before extraordinary items to amounts computed by applying the Federal statutory rate to earnings before provision for income taxes and extraordinary items is as follows for Fiscal 1996, Fiscal 1997 and Fiscal 1998 (dollars in thousands):
FISCAL YEAR ENDED ------------------------------------------- FEBRUARY 24, FEBRUARY 22, FEBRUARY 28, 1996 1997 1998 -------------- -------------- ------------- Tax benefit at federal statutory rate .............................. $ (11,758) $ (611) $ (3,750) Increase (decrease) in taxes resulting from: State income taxes, net of federal benefit ........................ 14 12 19 Effect of nondeductible goodwill amortization ..................... 842 808 808 Valuation allowance ............................................... 10,629 (352) (3,213) Other ............................................................. 449 301 204 --------- ------ -------- Provision (benefit) for income taxes before extraordinary gain ..... $ 176 $ 158 $ (5,932) ========= ====== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at February 22, 1997 and February 28, 1998 are presented below (dollars in thousands):
1997 1998 ------------ ------------ Deferred tax assets: Accounts receivable reserves ............................ $ 735 $ 459 Inventories ............................................. 4,064 5,414 Other accrued expenses .................................. 1,749 1,414 Accrued employee benefits (current) ..................... 1,243 995 Accrued employee benefits (noncurrent) .................. 4,153 4,071 Accrued restructuring expenses .......................... 761 256 Capital loss carryforward ............................... 1,898 -- Deferred financing fees ................................. 4,226 3,421 Long-term debt under SFAS 15 ............................ 27,899 18,980 Deferred compensation ................................... -- 1,038 Net operating loss and tax credit carryforwards ......... 25,613 7,112 Other ................................................... 3,131 3,099 Valuation allowance ..................................... (70,691) (41,234) --------- --------- Gross deferred tax assets .............................. 4,781 5,025 --------- --------- Deferred tax liabilities: Plant and equipment ..................................... (4,752) (5,010) Other ................................................... (29) (15) --------- --------- Gross deferred tax liabilities ......................... (4,781) (5,025) --------- --------- Net deferred tax asset ................................. $ -- $ -- ========= =========
F-20 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 14. SALE OF INVESTMENT During Fiscal 1998, the Company sold an equity investment for approximately $2,260,000 which resulted in a gain of approximately $2,260,000. 15. BENEFIT PLANS The Company has a defined benefit "account balance" pension plan covering all nonunion employees. Prior to January 1, 1996, plan participant accounts were credited annually with 4% of compensation up to 62.5% of social security taxable wage base plus 4.75% of the excess. As of January 1, 1996, all further annual credits based on compensation have been frozen. Accounts of active participants are also credited with interest at a variable rate equal to the five year Treasury constant maturity rate, compounded annually to retirement. Accounts of terminated participants are credited annually with interest at 4%. However, there is a minimum benefit equal to the participant's January 1, 1994 account balance, compounded annually with 7.5% interest to retirement. Participants are 100% vested in their account balance after five years of credited service. Net periodic pension costs for Fiscal 1996, Fiscal 1997 and Fiscal 1998 with respect to the plan were $451,000, $23,000 and ($29,000), respectively. The following table sets forth the plan's funded status at December 31, 1996 and 1997, based upon calculations made by the Company's consulting actuaries (dollars in thousands):
1996 1997 --------- --------- Actuarial present value of obligations: Accumulated benefit obligation including vested benefits of $5,342 and $6,371 as of December 31, 1996 and 1997, respectively ................................ $5,690 $6,659 ====== ====== Projected benefit obligation for services rendered to date ...................... $5,690 $6,659 Plan assets at fair value ........................................................ 5,487 6,710 ------ ------ Projected benefit obligation in excess of (less than) plan assets ................ 203 (51) Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions ............................................... 459 72 Unrecognized prior service cost .................................................. (55) (51) ------ ------ Accrued (prepaid) pension cost .................................................. $ 607 $ (30) ====== ======
The plan's assets at December 31, 1997 consisted of U.S. government and agency debt securities, equity securities and short-term debt securities, with the majority of the plan's assets comprised of U.S. government and agency debt securities. Net periodic pension cost, as determined by the Company's consulting actuaries, included the following for the years ended December 31, 1996 and 1997 (dollars in thousands):
1996 1997 --------- --------- Service costs--benefits earned during the period . $ -- $ -- Interest cost on projected benefit obligation ......... 442 442 Actual return on plan assets .......................... (341) (793) Net amortization and deferral ......................... (78) 322 ------ ------ $ 23 $ (29) ====== ======
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.75% and 7.25% as of December 31, 1996 and 1997, respectively. The weighted-average expected long-term rate of return on plan assets for 1996 and 1997 was 8.5%. F-21 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) During Fiscal 1996 and Fiscal 1997, the Company recorded a credit to retained earnings of $44,000 and $701,000, respectively, to reflect a reduction in its minimum liability. Certain of the Company's employees in its Eldersburg, Maryland distribution facility are covered by collective bargaining agreements and participate in pension and benefit plans administered by the national and local Amalgamated Clothing and Textile Workers Union. Subsequent to signing the contract, the Amalgamated Clothing and Textile Workers Union merged with the International Ladies Garment Workers Union becoming the Union of Needletrades, Industrial and Textile Employees ("UNITE"). The Company makes payments to the plans in accordance with the collective bargaining agreements. Total payments relating to the pension plans were $525,000, $545,000 and $355,000 for Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. The Company contributes to the Amalgamated Insurance Fund (the "Clothing Fund"), a multiemployer pension plan, on behalf of the union employees at its Eldersburg, Maryland facility pursuant to a collective bargaining agreement with the Union. Under a separate collective bargaining agreement with the Union, the Company contributed to another multiemployer pension plan, the Textile Pension Fund (the "Textile Fund"), on behalf of the union employees at its former Savannah, Georgia distribution center. Under the Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA"), an employer that completely or partially withdraws from a multiemployer pension plan may be liable to such plan for a share of the plan's unfunded vested benefits. Management believes, based upon information received from the Textile Fund in March 1995, that the Company has no contingent MPPAA withdrawal liability attributable to the Textile Fund. The Clothing Fund has advised the Company that its contingent MPPAA withdrawal liability for a complete withdrawal from the Clothing Fund was estimated to be approximately $18.3 million as of the end of 1996, which is the last date as of which such information is available. During Fiscal 1995, the Company recorded a contingent liability of $8,250,000 related to a partial withdrawal from the plan in connection with the restructuring of its domestic production operations. During Fiscal 1996, an additional $665,000 was provided to increase this provision to $8,915,000. During Fiscal 1998, an additional $485,000 was provided to increase this provision to $9,400,000. The increase in the provision was due to the closing of the Company's Baltimore Maryland manufacturing facility (see Note 16). Under the terms of the plan, the Company believes it triggered a partial withdrawal liability as of the end of calendar year 1997. The Company estimates that this will result in an annual cash payment, consisting of principal and interest, of approximately $1.8 million. This payment will be due in quarterly installments, commencing in January 1998 or later, and continuing until the liability is satisfied. The Company has a 401(k) savings plan (the "Savings Plan") covering all non-union employees except factory store hourly wage employees. Participants can elect to make pre-tax contributions up to 15% of their salary to the Savings Plan subject to legal limitations. The Company matches the contributions of participating employees on the basis of a formula specified in the Savings Plan. Total costs relating to the Savings Plan were $56,000, $224,000 and $235,000 for Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. Prior to Fiscal 1997, in addition to providing pension benefits, the Company provided certain life insurance benefits for retired employees. Such benefits were available to employees who had certain minimum years of continuous service at retirement. On February 28, 1993, the Company implemented Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" (SFAS 106), which requires that liabilities be accrued for such postretirement benefit obligations over the service lives of the employees eligible for coverage. During Fiscal 1997, those benefits were discontinued, which resulted in the elimination of a corresponding $103,000 liability. F-22 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 16. RESTRUCTURING AND SPECIAL CHARGES Fiscal 1995 Restructuring During Fiscal 1995, the Company recorded a $61.2 million charge related to the restructuring of its manufacturing, distribution and other operations, the changes in its senior management, the restructuring of its debt and equity capitalization, the closing of certain factory outlet stores, the relocation of its corporate headquarters and the consolidation of other office facilities, and the write-down of a receivable from Holdings related to its investment in a joint venture. Included in restructuring charges were approximately $24.4 million of noncash charges primarily related to asset writedowns resulting from the closing of two production facilities and certain factory outlet stores and the writedown of Holdings' investment in a joint venture. Fiscal 1998 Restructuring During Fiscal 1998, the Company discontinued operations at its rainwear manufacturing plant located in Baltimore, Maryland. This action represents the conclusion of a two year experiment in cooperation with the City of Baltimore, the State of Maryland and the plant's employee union to determine whether a domestic-based, rainwear manufacturing facility could provide quick response to retail inventory demand and compete on a cost basis with off-shore contractors. The results of this effort determined that the experiment was too costly to continue. In connection with the closing of this facility, the Company recorded a Fiscal 1998 restructuring charge of $3.7 million. Included in this restructuring charge are $1.2 million of cash expenditures primarily related to employee severance and ongoing occupancy costs and a $2.5 million charge related to the loss from sale of fixed assets as well as the increase in the Company's multiemployer pension liability resulting from the closure of the facility. In addition, during Fiscal 1998, the Company made special payments of approximately $3.8 million to certain executives of the Company due to the triggering of contractual "change of control" payment rights in the employment agreements of such executives. Such amount has been included in the $7.5 million Restructuring and Special Charges figure for Fiscal 1998. As of February 22, 1997 and February 28, 1998, the accrued restructuring liability related to the Fiscal 1995 and Fiscal 1998 restructuring charges was approximately $2,554,000 and $1,416,000, respectively. F-23 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 17. EARNINGS PER SHARE During 1997, the FASB issued Statement No. 128, "Earnings per Share" (SFAS 128), which establishes new standards for computing and presenting earnings per share. SFAS 128 requires presentation of basic earnings per share and diluted earnings per share. There were no adjustments to net income available to common stockholders in computing diluted earnings per share for the periods presented. The income (loss) available to common stockholders and the weighted average shares used to calculate basic and diluted earnings per share in accordance with SFAS 128 are as follows (dollars in thousands, except per share data):
FISCAL YEAR ENDED ----------------------------------------------- FEBRUARY 24, FEBRUARY 22, FEBRUARY 28, 1996 1997 1998 -------------- -------------- ------------- Income (loss) before extraordinary gain .................... $ (34,759) $ (1,954) $ (5,096) Preferred stock dividends declarable ....................... 18,053 23,237 27,864 ---------- ---------- ----------- Income (loss) before extraordinary gain available to common stockholders ....................................... (52,812) (25,191) (32,960) Extraordinary gain ......................................... -- -- 160,855 ---------- ---------- ----------- Net income (loss) available to common stockholders ......... $ (52,812) $ (25,191) $ 127,895 ========== ========== =========== Weighted average shares outstanding for basic earnings per share ................................................. 8,000,000 8,000,000 8,000,000 Dilutive effect of common stock equivalents ................ -- -- -- ---------- ---------- ----------- Weighted average shares outstanding for diluted earnings per share ................................................. 8,000,000 8,000,000 8,000,000 ========== ========== =========== Income (loss) before extraordinary gain per share avail- able to common stockholders -- basic and diluted .......... $ (6.60) $ (3.15) $ (4.12) Extraordinary gain per share available to common stockholders -- basic and diluted ......................... -- -- 20.11 ---------- ---------- ----------- Net income (loss) per share available to common stockholders -- basic and diluted ......................... $ (6.60) $ (3.15) $ 15.99 ========== ========== ===========
For the fiscal years ended February 24, 1996, February 22, 1997 and February 28, 1998, dividends of $18,053, $23,237 and $27,864, respectively, on the 17.5% cumulative voting preferred stock had accumulated and therefore are deducted from earnings in arriving at net income (loss) available to common stockholders. However, given that such dividends had not been declared and that management believed there was a remote chance that such dividends would be declared, the Company has not recorded such dividends in the accompanying financial statements. Pursuant to the 1998 Recapitalization, on February 27, 1998, the Company issued 8,000,000 shares of common stock (see Note 8). For purposes of calculating earnings per share, all shares and per share amounts for the fiscal years ended February 24, 1996, February 22, 1997 and February 28, 1998, have been restated to reflect the 1998 Recapitalization. Weighted average shares outstanding for calculating diluted earnings per share include basic shares outstanding, plus shares issuable upon the exercise of stock options, using the treasury stock method. As of February 28, 1998, the Company had outstanding stock options and warrants with an anti-dilutive effect of 1,925,334 shares and 611,393 shares, respectively. F-24 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 18. SUMMARY FINANCIAL INFORMATION The Notes are guaranteed, jointly and severally, on a senior subordinated basis, by all of the Company's subsidiaries other than London Fog Raincoats Limited, the Company's United Kingdom subsidiary, (collectively, the "Subsidiary Guarantors"). The obligations under the Notes are secured, on a senior subordinated basis, by the capital stock of each Subsidiary Guarantor, and by substantially all of the assets of the Company and each Subsidiary Guarantor. The following represents summary financial information for London Fog Industries, Inc., the Subsidiary Guarantors and London Fog Raincoats Limited (dollars in thousands): FISCAL YEAR ENDED FEBRUARY 24, 1996
LONDON FOG SUBSIDIARY LONDON FOG INDUSTRIES, INC. GUARANTORS RAINCOATS LIMITED CONSOLIDATED ------------------ ------------ ------------------- ------------- Net sales .............................. $ 166,005 $108,014 $ 375 $ 274,394 Gross profit ........................... 43,444 27,424 57 70,925 Income (loss) before extraordinary gain (25,925) (8,779) (55) (34,759) Net income (loss) ...................... (25,925) (8,779) (55) (34,759) Current assets ......................... $ 80,585 $ 20,321 $ 409 $ 101,315 Non-current assets ..................... 94,042 15,356 -- 109,398 Current liabilities .................... 26,311 5,685 43 32,039 Non-current liabilities ................ 339,487 -- -- 339,487
FISCAL YEAR ENDED FEBRUARY 22, 1997
LONDON FOG SUBSIDIARY LONDON FOG INDUSTRIES, INC. GUARANTORS RAINCOATS LIMITED CONSOLIDATED ------------------ ------------ ------------------- ------------- Net sales .............................. $149,389 $129,200 $518 $279,107 Gross profit ........................... 46,291 47,567 147 94,005 Income (loss) before extraordinary gain (6,304) 4,329 21 (1,954) Net income (loss) ...................... (6,304) 4,329 21 (1,954) Current assets ......................... $ 68,597 $ 31,481 $793 $100,871 Non-current assets ..................... 98,893 6,581 -- 105,474 Current liabilities .................... 25,713 2,378 86 28,177 Non-current liabilities ................ 340,211 23 -- 340,234
FISCAL YEAR ENDED FEBRUARY 28, 1998
LONDON FOG SUBSIDIARY LONDON FOG INDUSTRIES, INC. GUARANTORS RAINCOATS LIMITED CONSOLIDATED ------------------ ------------ ------------------- ------------- Net sales .............................. $ 166,300 $168,990 $ 331 $335,621 Gross profit ........................... 47,623 60,518 75 108,216 Income (loss) before extraordinary gain (10,444) 5,379 (31) (5,096) Net income (loss) ...................... 150,411 5,379 (31) 155,759 Current assets ......................... $ 62,898 $ 42,186 $1,030 $106,114 Non-current assets ..................... 100,799 8,178 -- 108,977 Current liabilities .................... 53,715 3,346 53 57,114 Non-current liabilities ................ 162,543 23 -- 162,566
F-25 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
FEBRUARY 28, MAY 30, 1998 1998 -------------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents ...................................... $ 566 $ 2,714 Accounts receivable, net ....................................... 31,509 7,856 Inventories .................................................... 69,729 124,829 Prepaid expenses and other current assets ...................... 4,310 4,224 ---------- ---------- Total current assets ......................................... 106,114 139,623 PROPERTY, PLANT AND EQUIPMENT, net .............................. 36,347 34,701 GOODWILL AND OTHER ASSETS ....................................... 72,630 71,908 ---------- ---------- Total assets ................................................. $ 215,091 $ 246,232 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Revolving credit borrowings .................................... $ 18,176 $ 63,213 Current portion of long-term debt .............................. 10,512 10,526 Accounts payable ............................................... 4,226 8,470 Accrued expenses ............................................... 22,784 16,813 Accrued restructuring charges .................................. 1,416 2,868 ---------- ---------- Total current liabilities .................................... 57,114 101,890 LONG-TERM DEBT, net of current portion .......................... 150,810 150,674 OTHER LONG-TERM LIABILITIES ..................................... 11,756 11,069 ---------- ---------- Total liabilities .............................................. 219,680 263,633 ---------- ---------- COMMITMENTS AND CONTINGENCIES ................................... STOCKHOLDERS' EQUITY (DEFICIT): Common Stock ................................................... 80 80 Warrants outstanding ........................................... 536 536 Additional paid-in capital ..................................... 165,493 165,493 Unearned portion of stock options .............................. (4,789) (4,359) Accumulated deficit ............................................ (165,909) (179,151) ---------- ---------- Total stockholders' equity (deficit) ......................... (4,589) (17,401) ---------- ---------- Total liabilities and stockholders' equity (deficit) ......... $ 215,091 $ 246,232 ========== ==========
The accompanying notes are an integral part of these unaudited condensed consolidated balance sheets. F-26 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE FOURTEEN FOR THE THIRTEEN WEEKS ENDED WEEKS ENDED MAY 31, 1997 MAY 30, 1998 ------------------ ----------------- (UNAUDITED) Net sales ..................................................... $ 41,678 $ 36,627 Cost of goods sold ............................................ 27,022 22,753 ---------- ---------- Gross profit ................................................. 14,656 13,874 Licensing revenues ............................................ 1,010 860 ---------- ---------- 15,666 14,734 Selling, general and administrative expenses .................. 20,039 21,754 Restructuring and special charges ............................. 3,500 3,500 Deferred compensation expense ................................. -- 684 Amortization of goodwill and licensing agreements ............. 561 532 ---------- ---------- Operating loss ............................................... (8,434) (11,736) Interest expense, net ......................................... 4,011 1,455 ---------- ---------- Loss before provision for income taxes ....................... (12,445) (13,191) Provision for income taxes .................................... 48 51 ---------- ---------- Net loss ..................................................... $ (12,493) $ (13,242) ========== ========== Basic and diluted earnings (loss) per share available to common stockholders: Net loss ..................................................... $ (2.43) $ (1.66) ========== ========== Weighted average shares outstanding ........................... 8,000,000 8,000,000 ========== ==========
The accompanying notes are an integral part of these unaudited condensed consolidated statements. F-27 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE FOURTEEN FOR THE THIRTEEN WEEKS ENDED WEEKS ENDED MAY 31, 1997 MAY 30, 1998 ------------------ ----------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ................................................................. $ (12,493) $ (13,242) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation .......................................................... 1,676 1,958 Deferred compensation ................................................. -- 684 Amortization of goodwill and licensing agreements ..................... 561 532 Amortization of deferred financing costs .............................. 1,139 181 Loss on sale of property, plant and equipment ......................... 78 -- Anticipated loss on disposal of property, plant and equipment ......... -- 1,900 Other ................................................................. 290 -- Changes in operating assets and liabilities: Accounts receivable, net ............................................. 16,991 23,653 Inventories .......................................................... (48,526) (55,100) Prepaid expenses and other current assets ............................ (2,694) 86 Other assets ......................................................... 7 9 Accounts payable ..................................................... 834 4,244 Accrued expenses ..................................................... (5,214) (5,376) Accrued restructuring charges ........................................ 739 1,452 Other long-term liabilities .......................................... 1,250 (687) --------- --------- Net cash flows from operating activities ........................... (45,362) (39,706) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .................................................... (2,173) (2,212) Other ................................................................... 357 -- --------- --------- Net cash flows from investing activities ........................... (1,816) (2,212) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in borrowings under revolving credit facility .................. 26,341 45,037 Payments on long-term debt .............................................. (111) (122) Payment of deferred financing costs ..................................... (2,917) -- Other ................................................................... 750 (849) --------- --------- Net cash flows from financing activities ........................... 24,063 44,066 --------- --------- NET INCREASE (DECREASE) IN CASH .......................................... (23,115) 2,148 CASH AND CASH EQUIVALENTS, beginning of period ........................... 26,841 566 --------- --------- CASH AND CASH EQUIVALENTS, end of period ................................. $ 3,726 $ 2,714 ========= ========= CASH PAID FOR: Interest ................................................................ $ 2,835 $ 1,201 ========= ========= Income taxes ............................................................ $ 20 $ 19 ========= =========
The accompanying notes are an integral part of these unaudited condensed consolidated statements. F-28 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS The condensed consolidated financial statements include the accounts of London Fog Industries, Inc., a Delaware corporation, and its subsidiaries (the Company). The Company designs, markets and distributes men's and women's rainwear and men's, women's and children's outerwear and skiwear and related accessories under the LONDON FOG(Reg. TM) brand name, the PACIFIC TRAIL(Reg. TM) brand name and related brand names. The Company sells its products to a variety of apparel retailers located throughout the United States. Also, the Company receives licensing revenues from licensing agreements with third parties which provide for the manufacture and marketing of various apparel and accessories under trade names owned by the Company. In addition, certain of the Company's revenues are generated directly from consumers through its chain of retail stores (primarily factory outlet stores) located in the United States and Puerto Rico. The condensed consolidated financial statements for the thirteen weeks ended May 30, 1998, and the fourteen weeks ended May 31, 1997, are unaudited, but, in the opinion of management, such condensed consolidated financial statements have been presented on the same basis as the audited consolidated financial statements for the year ended February 28, 1998, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods. These condensed consolidated financial statements do not include all disclosures normally included with audited consolidated financial statements and, accordingly, should be read in conjunction with the audited consolidated financial statements and notes as of February 28, 1998. Sales of rainwear and outerwear, the principal products of the Company, are highly seasonal. Historically, the Company has realized its highest level of sales in its third fiscal quarter (September through November) and its lowest level of sales in its first fiscal quarter (March through May). The results of operations for the periods presented are not necessarily indicative of the operating results for an entire year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents Cash and cash equivalents consist of operating and petty cash balances that are used to conduct day-to-day business operations, as well as cash equivalents having a maturity of 90 days or less. Inventories Inventories are stated at the lower of first-in, first-out cost or market. Property, Plant and Equipment Property, plant and equipment are stated at cost. The Company depreciates property, plant and equipment and amortizes leasehold improvements on a straight-line basis over the following useful lives: ASSET CLASS USEFUL LIVES - ------------------------------------------- ----------------------- Building and improvements .......... 5-30 years Equipment .......................... 3-15 years Furniture and fixtures ............. 2-10 years Leasehold improvements ............. Initial term of lease, not to exceed 15 years Goodwill Goodwill, representing the excess of acquisition cost over the fair value of net identifiable assets acquired, is being amortized on a straight-line basis over a period of forty years. The Company continually evaluates whether later events and circumstances have occurred that indicate the remaining esti- F-29 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) mated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related business units' operating earnings over the remaining life of the goodwill in measuring whether the goodwill is recoverable. Deferred Financing Costs Deferred financing costs are amortized over the lives of the related debt using the effective interest method. New Accounting Pronouncements During June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income" (SFAS 130), which establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management intends to implement the pronouncement at year end Fiscal 1999 and expects to report changes in the Company's minimum pension liability as a component of comprehensive income. During June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131), which establishes a new approach for determining segments within a company and reporting information on those segments. SFAS 131 is effective for fiscal years beginning after December 15, 1997. Management intends to adopt the pronouncement at year end Fiscal 1999. The Company has not yet completed its analysis of which operating segments, if any, on which it will report. During June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which standardizes the accounting for derivative instruments by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. SFAS 133 is effective for fiscal quarters of all fiscal years beginning after June 15, 1999. Management believes that the implementation of SFAS 133 would not have had a material effect on the accompanying financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains and losses during the reporting periods. Actual results could differ from these estimates. 3. INVENTORIES Inventories consisted of the following as of February 28, 1998 and May 30, 1998 (dollars in thousands): FEBRUARY 28, MAY 30, 1998 1998 -------------- ------------ (UNAUDITED) Finished goods .......... $52,716 $ 73,625 Work in process ......... 8,883 43,205 Raw materials ........... 8,130 7,999 ------- -------- $69,729 $124,829 ======= ======== F-30 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 4. RESTRUCTURING CHARGES During the thirteen week period ended May 30, 1998, the Company recorded a restructuring charge of $3.5 million related to the planned closing or downsizing of five of the Company's eight test retail superstores open as of May 30, 1998. These superstores, the first of which was opened in May 1997, were opened to test an alternative, larger format retail distribution channel for the Company's product offerings to supplement the Company's traditional wholesale and factory outlet store retail distribution channels. Based on initial sales results for these test retail superstores, management has determined that most of the existing superstores, many of which are greater than 25,000 square feet in size, are too large to generate acceptable profitability within an acceptable period of time. As a result, the Company has adopted a plan to restructure its larger concept store strategy by closing or significantly downsizing most of the Company's current superstores and focusing on a store size significantly smaller than 25,000 square feet. The restructuring charge of $3.5 million included an accrual of $1.6 million for anticipated cash restructuring expenditures, primarily to cover costs associated with amending or terminating store leases, and $1.9 million of non-cash charges related to anticipated write-offs of fixed assets in the stores to be closed or downsized. During the fourteen week period ended May 31, 1997, the Company recorded a restructuring charge of $3.5 million related to the closing of the Company's Baltimore, Maryland rainwear manufacturing facility. In the fourth quarter of Fiscal 1998, the Company increased the restructuring charge related to this facility to $3.7 million. 5. EARNINGS PER SHARE During 1997, the FASB issued Statement No. 128, "Earnings per Share" (SFAS 128), which establishes new standards for computing and presenting earnings per share. SFAS 128 requires presentation of basic earnings per share and diluted earnings per share. There were no adjustments to net income available to common stockholders in computing diluted earnings per share for the periods presented. The income (loss) available to common stockholders and the weighted average shares used to calculate basic and diluted earnings per share in accordance with SFAS 128 are as follows (dollars in thousands, except per share data):
FOURTEEN THIRTEEN WEEKS ENDED WEEKS ENDED MAY 31, MAY 30, 1997 1998 ------------- ------------ Net Loss ............................................................. $ 12,493 $ 13,242 Preferred stock dividends declarable ................................. 6,953 -- ---------- --------- Net loss available to common stockholders ............................ $ 19,446 $ 13,242 ========== ========= Weighted average shares outstanding for basic earnings per share ..... 8,000,000 8,000,000 Dilutive effect of common stock equivalents .......................... -- -- ---------- --------- Weighted average shares outstanding for diluted earnings per share . 8,000,000 8,000,000 ========== ========= Net loss per share available to common stockholders -- basic and diluted ................................................... $ (2.43) $ (1.66) ========== =========
During the fourteen weeks ended May 31, 1997, dividends of $6,953 on the 17.5% cumulative voting preferred stock had accumulated and therefore are deducted from earnings in arriving at net loss available to common stockholders. However, given that such dividends had not been declared and that management believed there was a remote chance that such dividends would be declared, the Company has not recorded such dividends in the accompanying financial statements. F-31 LONDON FOG INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Pursuant to the 1998 Recapitalization, on February 27, 1998, the Company issued 8,000,000 shares of common stock. For purposes of calculating earnings per share, all shares and per share amounts for the fourteen weeks ended May 31, 1997 have been restated to reflect the 1998 Recapitalization. Weighted average shares outstanding for calculating diluted earnings per share include basic shares outstanding, plus shares issuable upon the exercise of stock options, using the treasury stock method. As of May 30, 1998, the Company had outstanding stock options and warrants with an anti-dilutive effect of 1,910,194 shares and 610,758 shares, respectively. 6. SUMMARY FINANCIAL INFORMATION The Notes are guaranteed, jointly and severally, on a senior subordinated basis, by all of the Company's subsidiaries other than London Fog Raincoats Limited, the Company's United Kingdom subsidiary (collectively, the "Subsidiary Guarantors"). The obligations under the Notes are secured, on a senior subordinated basis, by the capital stock of each Subsidiary Guarantor, and by substantially all of the assets of the Company and each Subsidiary Guarantor. The following represents summary financial information for London Fog Industries, Inc., the Subsidiary Guarantors and London Fog Raincoats Limited (dollars in thousands): FOURTEEN WEEKS ENDED MAY 31, 1997
LONDON FOG SUBSIDIARY LONDON FOG INDUSTRIES, INC. GUARANTORS RAINCOATS LIMITED CONSOLIDATED ------------------ ------------ ------------------- ------------- Net sales ....................... $ 17,374 $ 24,228 $ 76 $ 41,678 Gross profit .................... 5,740 8,893 23 14,656 Net income (loss) ............... (6,765) (5,728) -- (12,493) Current assets .................. $ 63,105 $ 48,077 $800 $ 111,982 Non-current assets .............. 99,610 7,136 -- 106,746 Current liabilities ............. 48,334 2,891 36 51,261 Non-current liabilities ......... 342,003 23 -- 342,026
THIRTEEN WEEKS ENDED MAY 30, 1998
LONDON FOG SUBSIDIARY LONDON FOG INDUSTRIES, INC. GUARANTORS RAINCOATS LIMITED CONSOLIDATED ------------------ ------------ ------------------- ------------- Net sales ....................... $ 14,520 $ 22,032 $ 75 $ 36,627 Gross profit .................... 5,487 8,366 21 13,874 Net income (loss) ............... (6,833) (6,410) 1 (13,242) Current assets .................. $ 77,890 $ 61,372 $361 $ 139,623 Non-current assets .............. 98,895 7,714 -- 106,609 Current liabilities ............. 98,359 3,500 30 101,889 Non-current liabilities ......... 161,720 23 -- 161,743
F-32 ====================================== ====================================== No person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized. This Prospectus does not constitute an LONDON FOG INDUSTRIES, INC. offer to sell or the solicitation of an offer to buy any securities other than the securities to which it relates or an offer to sell or the solicitation of an offer to buy such securities in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no 8,614,525 SHARES COMMON STOCK change in the affairs of the Company AND since the date hereof or that the $100,000,000 10% SENIOR SUBORDINATED information contained herein is NOTES DUE 2003 correct as of any time subsequent to its date. -------------------------------- TABLE OF CONTENTS PAGE ---- Prospectus Summary ............... 2 Risk Factors ..................... 10 The Recapitalization. ............ 17 The Company ...................... 17 Use of Proceeds .................. 18 [LONDON FOG LOGO] Dividend Policy .................. 18 Capitalization ................... 19 Unaudited Pro Forma Consolidated Financial Data ................ 20 Selected Historical Consolidated Financial Data ................ 22 Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 25 Business ......................... 33 Management ....................... 46 Principal and Selling [PACIFIC TRAIL LOGO] Securityholders ............... 52 Plan of Distribution ............. 53 Description of Common Stock ...... 54 Description of Notes ............. 54 Description of Warrants .......... 79 Description of Certain Indebtedness .................. 80 Validity of the Common Stock and the Notes ..................... 81 Experts .......................... 81 Available Information ............ 81 Index to Financial Statements .... F-1 -------------------------------- _____________, 1998 Until __________, 2000 all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a Prospectus. This is in addition to the dealers' obligation to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ====================================== ====================================== PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated expenses and costs expected to be incurred by the Registrant in connection with the issuance and distribution of the securities being registered under this registration statement. Except for the SEC filing fees, all expenses have been estimated and are subject to future contingencies. SEC registration fee .................................... $43,172 Legal fees and expenses* ................................ Printing and engraving expenses* ........................ Accounting fees and expenses* ........................... Other legal fees and expenses* .......................... Transfer agent and registrar fees and expenses* ......... Miscellaneous* .......................................... ------- Total* .................................................. $ ======= - ---------- * To be provided in an amendment to this Registration Statement. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article SIXTH of the Registrant's Certificate of Incorporation provides that the Registrant shall indemnify and hold harmless, to the fullest extent authorized by the Delaware General Corporation Law, its officers and directors against all expenses, liability and loss actually and reasonably incurred in connection with any civil, criminal, administrative or investigative action, suit or proceeding. The Certificate of Incorporation also extends indemnification to those serving at the request of the Registrant as directors, officers, employees or agents of other enterprises. In addition, Article FIFTH of the Registrant's Certificate of Incorporation provides that no director shall be personally liable for monetary damages for any breach of fiduciary duty. Article FIFTH does not eliminate a director's liability (i) for a breach of his or her duty of loyalty to the Registrant or its stockholders, (ii) for acts of intentional misconduct, (iii) under Section 174 of the Delaware General Corporation Law for unlawful declarations of dividends or unlawful stock purchases or redemptions, or (iv) for any transactions from which the director derived an improper personal benefit. Section 145 of the General Corporation Law of the State of Delaware permits a corporation to indemnify its directors and officers against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties, if such directors or officers acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, i.e., one by or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by directors and officers in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interest of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant officers or directors are reasonably entitled to indemnity for such expenses despite such adjudication of liability. Section 102(b)(7) of the General Corporation Law of the State of Delaware provides that a corporation may eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the II-1 corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. Pursuant to Section 145 of the General Corporation Law of the State of Delaware and the Certificate of Incorporation and the By-laws of the Registrant, the Registrant maintains directors' and officers' liability insurance coverage. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following information is furnished with regard to all securities sold by the Registrant within the past three years which were not registered under the Securities Act: (1) In connection with a recapitalization of the Registrant, on February 27, 1998, the Registrant restructured its outstanding subordinated debt and equity capitalization (the "1998 Recapitalization"). Pursuant to the 1998 Recapitalization an aggregate of approximately $257.2 million of the Registrant's outstanding debt, including accrued interest, was restructured into (i) $100 million of 10% senior subordinated notes (the "Notes") and (ii) 8,000,000 shares (the "Shares") of newly issued common stock of the Registrant, representing 100% of the outstanding shares of common stock. The Shares and Notes were issued to the holders of the Registrant's debt. (2) Also in connection with the 1988 Recapitalization, all of the aggregate outstanding shares of cumulative preferred stock as of February 27, 1998 (represented by 106,764 shares of Series A cumulative voting preferred stock and 8,479 shares of Series B cumulative voting preferred stock) were converted into warrants to purchase at an exercise price of $15.72 an aggregate of 530,726 shares of common stock of the Registrant and issued to the holders of the Registrant's cumulative preferred stock. (3) Pursuant to the Registrant's 1998 Stock Option Plan, (i) options to purchase 1,925,334 shares have been granted to officers and other employees of the Registrant, in each case exercisable for $2.00 per share (ii) and warrants to purchase 80,667 shares have been granted to officers and other employees of the Registrant, in each case exercisable for $15.72. The sales described in this Item 15 were made in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act relating to sales by an issuer not involving any public offering. The foregoing transactions did not involve a distribution or public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 2 Master Restructuring Agreement dated as of February 27, 1998, among the Registrant, the Subsidiary Guarantors (as defined therein), the Lenders (as defined therein), The Chase Manhattan Bank, as agent for the Lenders, and the Existing Management Holders (as defined therein) 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 3.2 Amended and Restated By-Laws of the Registrant. 4.1 Loan and Security Agreement (the "Loan and Security Agreement"), dated as of May 15, 1997, by and among Congress Financial Corporation, the Registrant, Pacific Trail, Inc., and The Scranton Outlet Corporation. 4.2 Amendment No. 1 to the Loan and Security Agreement, dated February 27, 1998. 4.3 Amendment No. 2 to the Loan and Security Agreement, dated April 28, 1998. 4.4 Indenture dated as of February 27, 1998, between the Registrant and IBJ Schroder Bank & Trust Company. II-2 5.1* Opinion of Proskauer Rose LLP 10.1 Registrant's 1998 Stock Option Plan 10.2 Form of Management Stock Option Agreement 10.3 Form of Robert E. Gregory, Jr.'s Option Agreement issued pursuant to the Registrant's 1998 Stock Option Plan 10.4 Form of C. William Crain's Option Agreement issued pursuant to the Registrant's 1998 Stock Option Plan 10.5 Registrant's Deferred Compensation Plan. 10.6 Form of Management Anti-dilution Warrant. 10.7 Form of 1998 Recapitalization Warrant. 10.8 Lease Agreement, dated May 4, 1994, between London Fog Corporation and 40th Street Associates (the "May 4 Lease"). 10.9 Agreement dated August 11, 1994, between London Fog Corporation and 40th Street Associates. 10.10 Assignment and Assumption of the May 4 Lease between London Fog Corporation, as assignor, and London Fog Industries, Inc., as assignee. 10.11 Lease Agreement, dated August 23, 1994, between Pacific Trail, Inc. and The Bartell Drug Company. 10.12 Lease Addendum between Pacific Trail, Inc. and the Bartell Drug Company. 10.13 Deed of Trust and Security Agreement dated December 27, 1989 by Londontown Corporation to Daniel L. Wiencke and Jack N. Zemil, as trustees for the benefit of MetLife Capital Credit Corporation. 10.14 Assignment of Leases and Rents dated December 27, 1989 by Londontown Corporation to MetLife Capital Credit Corporation. 10.15 Deed of Trust Note dated December 27, 1989 signed by Londontown Corporation, as borrower, in favor of MetLife Capital Credit Corporation, as lender. 10.16 Second Amended and Restated Employment Agreement between Robert E. Gregory, Jr. and the Registrant dated as of February 27, 1998. 10.17 Second Amended and Restated Employment Agreement between C. William Crain and the Registrant dated as of February 27, 1998. 12.1 Computation of Ratio of Earnings to Fixed Charges. 21.1 Subsidiaries. 23.1 Consent of Arthur Andersen LLP 23.2* Consent of Proskauer Rose LLP (contained in opinion filed as Exhibit 5.1) 24.1 Power of Attorney (included on signature page) 25* Statement of Eligibility of Trustee 27.1 Financial Data Schedule - ---------- * To be filed by amendment (b) Financial Statement Schedules The following financial statement schedule of the Registrant included herein should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Registration Statement. Schedule II -- Valuation and Qualifying Accounts All other schedules for the Registrant are omitted because either they are not applicable or the required information is shown in the financial statements or notes thereto. II-3 ITEM 17. UNDERTAKINGS The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post effective amendment to this registration statement: (i) To include any Prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the Prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of Prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of August, 1998. LONDON FOG INDUSTRIES, INC. By:/s/ Robert E. Gregory, Jr. ---------------------------------------- Robert E. Gregory, Jr. Chairman, Chief Executive Officer and Director SIGNATURES AND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose signature appears below hereby constitutes and appoints Robert E. Gregory, Jr., Edward M. Krell and Stuart B. Fisher, or any of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf individually and in any and all capacities (until revoked in writing), any and all amendments (including post-effective amendments) to this Registration Statement on Form S-1, and any registration statement relating to the same offering as this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) and the Securities Act of 1933, to file the same with all exhibits thereto and all other documents in connection therewith with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do all such other acts and things requisite or necessary to be done, and to execute all such other documents as they, or any of them, may deem necessary or desirable in connection with the foregoing, as fully as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------- --------------------------------------- --------------- /s/ Robert E. Gregory, Jr. Chairman, Chief Executive Officer and August 28, 1998 - ----------------------------- Director (principal executive officer) Robert E. Gregory, Jr. /s/ C. William Crain President and Chief Operating Officer August 28, 1998 - ----------------------------- C. William Crain /s/ Edward M. Krell Executive Vice President and Chief August 28, 1998 - ----------------------------- Financial Officer (principal financial Edward M. Krell and accounting officer) /s/ James J. Gaffney Director August 28, 1998 - ----------------------------- James J. Gaffney /s/ Walker Lewis Director August 28, 1998 - ----------------------------- Walker Lewis
II-5
SIGNATURE TITLE DATE - ------------------------------- --------------------------------------- --------------- /s/ Christopher H. Smith Director August 28, 1998 - ----------------------------- Christopher H. Smith /s/ Michael J. Starshak Director August 28, 1998 - ----------------------------- Michael J. Starshak
II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th of August, 1998. CLIPPER MIST, INC. By:/s/ Robert E. Gregory, Jr. ---------------------------------------- Robert E. Gregory, Jr. Chairman and Director SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------- --------------------------------------- --------------- /s/ Robert E. Gregory, Jr. Chairman and Director (principal August 28, 1998 - ----------------------------- executive officer) Robert E. Gregory, Jr. /s/ C. William Crain President and Director August 28, 1998 - ----------------------------- C. William Crain /s/ Edward M. Krell Senior Vice President -- Finance August 28, 1998 - ----------------------------- and Director (principal financial Edward M. Krell and accounting officer)
II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of August, 1998. LONDON FOG SPORTSWEAR, INC. By:/s/ Robert E. Gregory, Jr. ---------------------------------------- Robert E. Gregory, Jr. Chairman and Director SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------- --------------------------------------- --------------- /s/ Robert E. Gregory, Jr. Chairman and Director (principal August 28, 1998 - ----------------------------- executive officer) Robert E. Gregory, Jr. /s/ C. William Crain President and Director August 28, 1998 - ----------------------------- C. William Crain /s/ Edward M. Krell Senior Vice President -- Finance August 28, 1998 - ----------------------------- and Director (principal financial Edward M. Krell and accounting officer)
II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of August, 1998. MATTHEW MANUFACTURING CO., INC. By:/s/ Robert E. Gregory, Jr. ---------------------------------------- Robert E. Gregory, Jr. Chairman and Director SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated
SIGNATURE TITLE DATE - ------------------------------- --------------------------------------- --------------- /s/ Robert E. Gregory, Jr. Chairman and Director (principal August 28, 1998 - ----------------------------- executive officer) Robert E. Gregory, Jr. /s/ C. William Crain President and Director August 28, 1998 - ----------------------------- C. William Crain /s/ Edward M. Krell Senior Vice President -- Finance August 28, 1998 - ----------------------------- and Director (principal financial Edward M. Krell and accounting officer)
II-9 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of August, 1998. PACIFIC TRAIL, INC. By:/s/ Robert E. Gregory, Jr. ---------------------------------------- Robert E. Gregory, Jr. Chairman and Director SIGNATURES AND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose signature appears below hereby constitutes and appoints Robert E. Gregory, Jr., Edward M. Krell and Stuart B. Fisher, or any of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf individually and in any and all capacities (until revoked in writing), any and all amendments (including post-effective amendments) to this Registration Statement on Form S-1, and any registration statement relating to the same offering as this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) and the Securities Act of 1933, to file the same with all exhibits thereto and all other documents in connection therewith with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do all such other acts and things requisite or necessary to be done, and to execute all such other documents as they, or any of them, may deem necessary or desirable in connection with the foregoing, as fully as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------- -------------------------------------- --------------- /s/ Robert E. Gregory, Jr. Chairman and Director (principal August 28, 1998 - ----------------------------- executive officer) Robert E. Gregory, Jr. /s/ William Dragon, Jr. President and Director August 28, 1998 - ----------------------------- William Dragon, Jr. /s/ Edward M. Krell Senior Vice President -- Finance and August 28, 1998 - ----------------------------- Director (principal financial and Edward M. Krell accounting officer) /s/ C. William Crain Director August 28, 1998 - ----------------------------- C. William Crain
II-10 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of August, 1998. PTI HOLDING CORP. By:/s/ Robert E. Gregory, Jr. ---------------------------------------- Robert E. Gregory, Jr. Chairman and Director SIGNATURES AND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose signature appears below hereby constitutes and appoints Robert E. Gregory, Jr., Edward M. Krell and Stuart B. Fisher, or any of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf individually and in any and all capacities (until revoked in writing), any and all amendments (including post-effective amendments) to this Registration Statement on Form S-1, and any registration statement relating to the same offering as this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) and the Securities Act of 1933, to file the same with all exhibits thereto and all other documents in connection therewith with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do all such other acts and things requisite or necessary to be done, and to execute all such other documents as they, or any of them, may deem necessary or desirable in connection with the foregoing, as fully as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------- ----------------------------------- --------------- /s/ Robert E. Gregory, Jr. Chairman and Director (principal August 28, 1998 - ----------------------------- executive officer) Robert E. Gregory, Jr. /s/ William Dragon, Jr. President and Director August 28, 1998 - ----------------------------- William Dragon, Jr. /s/ Edward M. Krell Senior Vice President-Finance and August 28, 1998 - ----------------------------- Director (principal financial and Edward M. Krell accounting officer) /s/ C. William Crain Director August 28, 1998 - ----------------------------- C. William Crain
II-11 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of August, 1998. PTI TOP COMPANY, INC. By:/s/ Robert E. Gregory, Jr. ---------------------------------------- Robert E. Gregory, Jr. Chairman and Director SIGNATURES AND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose signature appears below hereby constitutes and appoints Robert E. Gregory, Jr., Edward M. Krell and Stuart B. Fisher, or any of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf individually and in any and all capacities (until revoked in writing), any and all amendments (including post-effective amendments) to this Registration Statement on Form S-1, and any registration statement relating to the same offering as this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) and the Securities Act of 1933, to file the same with all exhibits thereto and all other documents in connection therewith with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do all such other acts and things requisite or necessary to be done, and to execute all such other documents as they, or any of them, may deem necessary or desirable in connection with the foregoing, as fully as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------- ----------------------------------- --------------- /s/ Robert E. Gregory, Jr. Chairman and Director (principal August 28, 1998 - ----------------------------- executive officer) Robert E. Gregory, Jr. /s/ William Dragon, Jr. President and Director August 28, 1998 - ----------------------------- William Dragon, Jr. /s/ Edward M. Krell Senior Vice President-Finance and August 28, 1998 - ----------------------------- Director (principal financial and Edward M. Krell accounting officer) /s/ C. William Crain Director August 28, 1998 - ----------------------------- C. William Crain
II-12 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of August, 1998. STAR SPORTSWEAR MANUFACTURING CORPORATION By:/s/ Robert E. Gregory, Jr. ---------------------------------------- Robert E. Gregory, Jr. Chairman and Director SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------- ----------------------------------- --------------- /s/ Robert E. Gregory, Jr. Chairman and Director (principal August 28, 1998 - ----------------------------- executive officer) Robert E. Gregory, Jr. /s/ Edward M. Krell President and Director August 28, 1998 - ----------------------------- C. William Crain /s/ Edward M. Krell Senior Vice President-Finance and August 28, 1998 - ----------------------------- Director (principal financial and Edward M. Krell accounting officer)
II-13 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of August, 1998. THE MOUNGER CORPORATION By:/s/ Robert E. Gregory, Jr. ---------------------------------------- Robert E. Gregory, Jr. Chairman and Director SIGNATURES AND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose signature appears below hereby constitutes and appoints Robert E. Gregory, Jr., Edward M. Krell and Stuart B. Fisher, or any of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf individually and in any and all capacities (until revoked in writing), any and all amendments (including post-effective amendments) to this Registration Statement on Form S-1, and any registration statement relating to the same offering as this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) and the Securities Act of 1933, to file the same with all exhibits thereto and all other documents in connection therewith with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do all such other acts and things requisite or necessary to be done, and to execute all such other documents as they, or any of them, may deem necessary or desirable in connection with the foregoing, as fully as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------- ----------------------------------- --------------- /s/ Robert E. Gregory, Jr. Chairman and Director (principal August 28, 1998 - ----------------------------- executive officer) Robert E. Gregory, Jr. /s/ William Dragon, Jr. President and Director August 28, 1998 - ----------------------------- William Dragon, Jr. /s/ Edward M. Krell Senior Vice President-Finance and August 28, 1998 - ----------------------------- Director (principal financial and Edward M. Krell accounting officer) /s/ C. William Crain Director August 28, 1998 - ----------------------------- C. William Crain
II-14 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of August, 1998. THE SCRANTON OUTLET CORPORATION By:/s/ Robert E. Gregory, Jr. ---------------------------------------- Robert E. Gregory, Jr. Chairman and Director SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------- ----------------------------------- --------------- /s/ Robert E. Gregory, Jr. Chairman and Director (principal August 28, 1998 - ----------------------------- executive officer) Robert E. Gregory, Jr. /s/ C. William Crain President and Director August 28, 1998 - ----------------------------- C. William Crain /s/ Edward M. Krell Senior Vice President-Finance and August 28, 1998 - ----------------------------- Director (principal financial and Edward M. Krell accounting officer)
II-15 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of August, 1998. WASHINGTON HOLDING COMPANY By:/s/ Robert E. Gregory, Jr. ---------------------------------------- Robert E. Gregory, Jr. Chairman and Director SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------- ----------------------------------- --------------- /s/ Robert E. Gregory, Jr. Chairman and Director (principal August 28, 1998 - ----------------------------- executive officer) Robert E. Gregory, Jr. /s/ C. William Crain President and Director August 28, 1998 - ----------------------------- C. William Crain /s/ Edward M. Krell Senior Vice President-Finance and August 28, 1998 - ----------------------------- Director (principal financial and Edward M. Krell accounting officer)
II-16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of London Fog Industries, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements of London Fog Industries, Inc. included in this prospectus and have issued our report thereon dated April 3, 1998. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying Schedule of Valuation and Qualifying Accounts is the responsibility of the company's management and is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Baltimore, Maryland April 3, 1998 S-1 SCHEDULE II LONDON FOG INDUSTRIES, INC VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COST AND CHARGED TO END OF DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS (A) PERIOD - ----------------------------------------- -------------- ------------ ---------------- ---------------- ----------- Fiscal 1996 Allowance for doubtful accounts ......... $2,825 $ 954 $ -- $1,036 $2,743 Fiscal 1997 Allowance for doubtful accounts ......... 2,743 381 -- 1,139 1,985 Fiscal 1998 Allowance for doubtful accounts ......... 1,985 (490) -- 258 1,237
- ---------- (a) Amounts written off net of recoveries on accounts previously written off. S-2 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - -------- ----------------------------------------------------------------------- 2 Master Restructuring Agreement dated as of February 27, 1998, among the Registrant, the Subsidiary Guarantors (as defined therein), the Lenders (as defined therein), The Chase Man- hattan Bank, as agent for the Lenders, and the Existing Management Holders (as defined therein) 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 3.2 Amended and Restated By-Laws of the Registrant. 4.1 Loan and Security Agreement (the "Loan and Security Agreement"), dated as of May 15, 1997, by and among Congress Financial Corporation, the Registrant, Pacific Trail, Inc., and The Scranton Outlet Corporation. 4.2 Amendment No. 1 to the Loan and Security Agreement, dated February 27, 1998. 4.3 Amendment No. 2 to the Loan and Security Agreement, dated April 28, 1998. 4.4 Indenture dated as of February 27, 1998, between the Registrant and IBJ Schroder Bank & Trust Company. 5.1* Opinion of Proskauer Rose LLP 10.1 Registrant's 1998 Stock Option Plan 10.2 Form of Management Stock Option Agreement 10.3 Form of Robert E. Gregory, Jr.'s Option Agreement issued pursuant to the Registrant's 1998 Stock Option Plan 10.4 Form of C. William Crain's Option Agreement issued pursuant to the Registrant's 1998 Stock Option Plan 10.5 Registrant's Deferred Compensation Plan. 10.6 Form of Management Anti-dilution Warrant. 10.7 Form of 1998 Recapitalization Warrant. 10.8 Lease Agreement, dated May 4, 1994, between London Fog Corporation and 40th Street Associates (the "May 4 Lease"). 10.9 Agreement dated August 11, 1994, between London Fog Corporation and 40th Street Associates. 10.10 Assignment and Assumption of the May 4 Lease between London Fog Corporation, as assignor, and London Fog Industries, Inc., as assignee. 10.11 Lease Agreement, dated August 23, 1994, between Pacific Trail, Inc. and The Bartell Drug Company. 10.12 Lease Addendum between Pacific Trail, Inc. and the Bartell Drug Company. 10.13 Deed of Trust and Security Agreement dated December 27, 1989 by Londontown Corporation to Daniel L. Wiencke and Jack N. Zemil, as trustees for the benefit of MetLife Capital Credit Corporation. 10.14 Assignment of Leases and Rents dated December 27, 1989 by Londontown Corporation to MetLife Capital Credit Corporation. 10.15 Deed of Trust Note dated December 27, 1989 signed by Londontown Corporation, as borrower, in favor of MetLife Capital Credit Corporation, as lender. 10.16 Second Amended and Restated Employment Agreement between Robert E. Gregory, Jr. and the Registrant dated as of February 27, 1998. 10.17 Second Amended and Restated Employment Agreement between C. William Crain and the Registrant dated as of February 27, 1998. 12.1 Computation of Ratio of Earnings to Fixed Charges. 21.1 Subsidiaries. 23.1 Consent of Arthur Andersen LLP 23.2* Consent of Proskauer Rose LLP (contained in opinion filed as Exhibit 5.1) 24.1 Power of Attorney (included on signature page) 25* Statement of Eligibility of Trustee 27.1 Financial Data Schedule
- ---------- * To be filed by amendment EX-2 2 EXHIBIT 2 EXHIBIT 2 ================================================================================ MASTER RESTRUCTURING AGREEMENT among LONDON FOG INDUSTRIES, INC., THE EXISTING MANAGEMENT HOLDERS, THE SEVERAL LENDERS PARTIES HERETO and THE CHASE MANHATTAN BANK, as Agent Dated as of February 27, 1998 ================================================================================ TABLE OF CONTENTS Page ---- SECTION 1. DEFINITIONS............................................. 2 1.1 Defined Terms................................................ 2 1.2 Other Definitional Provisions................................ 9 SECTION 2. MERGER OF LFI MERGER CORP. WITH AND INTO LONDON FOG............................................ 10 2.1 Formation of LFI Merger Corp................................. 10 2.2 Filing of Certificate of Merger; Effect of Merger............ 10 SECTION 3. TREATMENT OF CONGRESS; RESTRUCTURE OF EXISTING SUBORDINATED OBLIGATIONS; TREATMENT OF EXISTING EQUITY AND MANAGEMENT HOLDERS; ALLOCATION............................................ 11 3.1 Treatment of Existing Congress Obligations................... 11 3.2 Restructure of Existing Subordinated Obligations............. 11 3.3 Treatment of Existing Series B Equity Holders................ 14 3.4 Treatment of Management Holders.............................. 14 3.5 Old Debt Agreements Superseded............................... 15 3.6 Cancellation of Old Master Restructuring Agreement........... 15 3.7 Existing Management Holders' Employment Agreements........... 15 SECTION 4. APPOINTMENT OF BOARD OF DIRECTORS....................... 16 4.1 Board of Directors........................................... 16 SECTION 5. SHELF REGISTRATION...................................... 16 5.1 Shelf Registration........................................... 16 5.2 Registration Procedures...................................... 17 5.3 Registration Expenses........................................ 20 5.4 Indemnification.............................................. 20 SECTION 6. REPRESENTATIONS AND WARRANTIES.......................... 20 6.1 No Material Tax Liability.................................... 20 6.2 Capitalization............................................... 21 6.3 Corporate Existence; Compliance with Law..................... 21 6.4 Corporate Power; Authorization; Enforceable Obligations................................................ 21 6.5 No Legal Bar................................................. 22 - i - Page ---- 6.6 No Material Litigation....................................... 22 6.7 No Default................................................... 22 SECTION 7. CONDITIONS PRECEDENT.................................... 22 7.1 Conditions to Restructure of Existing Obligations............ 22 SECTION 8. MISCELLANEOUS........................................... 25 8.1 Amendments and Waivers....................................... 25 8.2 Notices...................................................... 26 8.3 Payment of Expenses.......................................... 26 8.4 Counterparts................................................. 27 8.5 Severability................................................. 27 8.6 Integration.................................................. 27 8.7 GOVERNING LAW................................................ 27 8.8 Submission To Jurisdiction; Waivers.......................... 28 8.9 Acknowledgements............................................. 28 8.10 WAIVERS OF JURY TRIAL........................................ 29 - ii - SCHEDULES 1A Lender Allocation Schedule 1B Existing Series B Equity Allocation Schedule 1C Management Holder Allocation Schedule 2 Additional Management Holders 2.1 Distribution of Common Stock of LFI Merger Corp. 3.2 Legend 5.4 Indemnification with Respect to Shelf Registration Statement 6.2 Capitalization of London Fog 8.2 Address for Notices EXHIBITS A Amended and Restated By-Laws B Amended and Restated Certificate of Incorporation C-1 Second Amended and Restated Employment Agreement With Respect to Robert E. Gregory, Jr. C-2 Second Amended and Restated Employment Agreement With Respect to C. William Crain. D Amendment to Senior Loan Agreement E-1 Agreement of Merger E-2 Certificate of Merger F Existing Series B Equity Holder Consent and Joinder G Management Stock Option Agreements H Form of Management Warrant I Form of Merger Warrant J New Subordinated Note Indenture K Registration Rights Agreement L Stock Subscription Agreement M Form of Closing Certificate N-1 Opinion of Proskauer Rose LLP N-2 Opinion of Stuart Fisher, Esq. N-3 Opinion of Young, Conaway, Stargatt & Taylor - iii - MASTER RESTRUCTURING AGREEMENT, dated as of February 27, 1998, among (i) London Fog Industries, Inc., a Delaware corporation ("London Fog"), (ii) the Subsidiary Guarantors (as defined in Subsection 1.1), (iii) the several banks and other financial institutions from time to time parties to the Term Loan Agreement and the Note Agreement (each as defined in the Recitals) (the "Lenders"), (iv) The Chase Manhattan Bank, a New York banking corporation, as agent for the Lenders (in such capacity, the "Agent"), and (v) the Existing Management Holders (as defined in subsection 1.1). W I T N E S S E T H : WHEREAS, London Fog, the Lenders and the Agent are parties to a Term Loan Agreement dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Term Loan Agreement"), pursuant to which loans to London Fog by the Lenders in the original aggregate principal amount of $175,000,000 plus interest accreted and accrued and unpaid thereon are outstanding; WHEREAS, London Fog, the Lenders and the Agent are parties to a Note Agreement dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Note Agreement"; together with the Term Loan Agreement, collectively, together with all related documents, instruments and agreements, including, without limitation, predecessor agreements, the "Old Debt Agreements"), pursuant to which loans to London Fog by the Lenders in the original aggregate principal amount of $36,000,000 plus interest accreted and unpaid thereon are outstanding; WHEREAS, pursuant to the Subsidiary Guarantee dated as of May 20, 1994 (as amended by Amendment No. 1 thereto dated as of May 31, 1995, the "Existing Subsidiaries Guarantee") by the Subsidiary Guarantors in favor of the Agent for the ratable benefit of the Lenders, the Subsidiary Guarantors guaranteed the Existing Subordinated Obligations (as defined in subsection 1.1). WHEREAS, Congress, London Fog and the Subsidiary Guarantors are parties to a Loan and Security Agreement dated as of May 15, 1997, (as heretofore or as may hereafter be amended, supplemented or otherwise modified, the "Senior Loan Agreement"), pursuant to which Congress (as defined in subsection 1.1) has from time to time made loans to, and issued letters of credit for the account of, London Fog, guaranteed by the Subsidiary Guarantors; WHEREAS, the Lenders and the Existing Series B Equity Holders (as defined in subsection 1.1) hold approximately 88% and 7%, respectively, of the issued and outstanding Old Preferred Stock (as defined in subsection 1.1) (on a fully diluted basis) and the Existing 2 Management Holders hold Old Series C Options (as defined in subsection 1.1) to purchase 5% of the Old Preferred Stock (on a fully diluted basis); WHEREAS, (a) London Fog, the Lenders and the Agent have engaged in negotiations to effect (i) a restructuring of London Fog's obligations under the Old Debt Agreements and (ii) a recapitalization of London Fog, including the merger of LFI Merger Corp. with and into London Fog, with London Fog being the surviving corporation and (b) London Fog and Congress have engaged in negotiations to effect certain modifications to the Senior Loan Agreement; and WHEREAS, (a) London Fog has requested, and the Agent and the Lenders are agreeable, that the obligations of London Fog and the Subsidiary Guarantors under the Old Debt Agreements be restructured, LFI Merger Corp. be merged with and into London Fog, and London Fog be recapitalized, as contemplated by this Agreement, and (b) London Fog has requested, and Congress is agreeable, that the Senior Loan Agreement be modified, as contemplated by the Amendment to Senior Loan Agreement (as defined in subsection 1.1). NOW, THEREFORE, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Additional Management Holders": the individuals listed on Schedule 2 and any other individuals to whom Management Stock Options are issued after the date hereof, together with their successors, heirs and assigns. "Affiliate": as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either (a) to vote securities having 10% or more of the ordinary voting power for the election of directors of such Person or (b) to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Agent": The Chase Manhattan Bank, as the agent for the Lenders under this Agreement and the other Restructuring Documents. "Agreement": this Master Restructuring Agreement, as amended, supplemented or otherwise modified from time to time. "Agreement of Merger": the Agreement of Merger dated as of February 27, 1998 between LFI Merger Corp. and London Fog, substantially in the form of Exhibit E-1. 3 "Amended and Restated By-Laws": the amended and restated by-laws of London Fog, substantially in the form of Exhibit A. "Amended and Restated Certificate of Incorporation": the amended and restated certificate of incorporation of London Fog, substantially in the form of Exhibit B. "Amended and Restated Management Holders' Employment Agreements ": the collective reference to (a) the Second Amended and Restated Employment Agreement dated as of February 27, 1998 between Robert E. Gregory, Jr. and London Fog and (b) the Second Amended and Restated Employment Agreement dated as of February 27, 1998 between C. William Crain and London Fog, substantially in the forms of Exhibits C-1 and C-2, respectively. "Amendment to Senior Loan Agreement": Amendment No. 1 dated as of February 27, 1998 among London Fog, Pacific Trail, Inc., The Scranton Outlet Corporation and Congress with respect to the Senior Loan Agreement, substantially in the form of Exhibit D. "Capital Stock": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person that is not a corporation and any and all warrants or options to purchase any of the foregoing. "Certificate of Merger": the Certificate of Merger of LFI Merger Corp. with and into London Fog, substantially in the form of Exhibit E-2. "Chase": The Chase Manhattan Bank, a New York banking corporation. "Closing": the time on the Closing Date at which the conditions precedent set forth in subsection 7.1 shall have been satisfied or waived in accordance with the terms hereof. "Closing Date": the date on which the conditions precedent set forth in subsection 7.1 shall have been satisfied or waived in accordance with the terms hereof. "Commission": the United States Securities and Exchange Commission or any successor thereto. "Congress": Congress Financial Corporation, a California corporation. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. 4 "Exchange Act": the Securities Exchange Act of 1934, as amended, and any successor legislation thereto. "Existing Congress Obligations": the indebtedness and other obligations of London Fog and the Subsidiary Guarantors to Congress under the Senior Loan Agreement and the other Financing Agreements referred to therein. "Existing Management Holders": Robert E. Gregory, Jr. and C. William Crain, together with their successors, heirs and assigns. "Existing Management Holders' Employment Agreements": the collective reference to (a) the Amended and Restated Employment Agreement dated as of May 31, 1995 between Robert E. Gregory, Jr. and London Fog and (b) the Amended and Restated Employment Agreement dated as of May 31, 1995 between C. William Crain and London Fog. "Existing Series B Equity Allocation Schedule": the Existing Series B Equity Allocation Schedule annexed as Schedule 1B, setting forth for each Existing Series B Equity Holder, the number of Warrants to be delivered, pursuant to the Certificate of Merger, to such Existing Series B Equity Holder at the Closing. "Existing Series B Equity Holder Consent and Joinder": the Existing Series B Equity Holder Consent and Joinder, substantially in the form of Exhibit F. "Existing Series B Equity Holders": all holders as of the Closing Date of Old Series B Preferred Stock. "Existing Subordinated Obligations": the indebtedness and other obligations of London Fog and the Subsidiary Guarantors to the Lenders under the Old Debt Agreements and the other Loan Documents referred to therein. "Form S-1": such form of registration statement under the Securities Act as in effect on the date hereof or any successor form thereto. "Form S-3": such form of registration statement under the Securities Act as in effect on the date hereof or any successor form thereto. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Holders": the holders from time to time of the Registerable Securities. 5 "Lender Allocation Schedule": the Lender Allocation Schedule annexed as Schedule 1A, setting forth for each Lender (a) the principal amount of the New Subordinated Indebtedness to be issued at the Closing to such Lender, (b) the number of shares of New Common Stock to be delivered to such Lender at the Closing and (c) the number of Merger Warrants to be delivered, pursuant to the Certificate of Merger and subsection 3.2(d), to such Lender at the Closing. "Lenders": the financial institutions parties to the Old Debt Agreements, together with their successors and assigns. "LFI Merger Corp.": LFI Merger Corp., a Delaware corporation. "Management Anti-Dilution Warrants": the warrants of London Fog issued to the Management Holders terminating on the seventh anniversary of the Closing Date which are exercisable, upon the terms and conditions contained therein, in the aggregate into 83,799 shares of the New Common Stock (representing in the aggregate approximately 0.79% of the issued and outstanding New Common Stock after giving effect to the issuance of 2,000,000 shares of New Common Stock pursuant to the Management Stock Options and after giving effect to the exercise of the Management Anti-Dilution Warrants and the exercise of the Merger Warrants), substantially in the form of Exhibit H. "Management Holder Allocation Schedule": the Management Holder Allocation Schedule annexed as Schedule 1C, setting forth for each Management Holder (i) the number of Management Stock Options to be delivered to such Management Holder at the Closing and (ii) the number of Management Anti-Dilution Warrants to be delivered to such Management Holder at the Closing. "Management Holders": the collective reference to the Existing Management Holders and the Additional Management Holders. "Management Stock Options": the options granted to the Management Holders representing the right to acquire an aggregate of 2,000,000 shares of the New Common Stock (representing in the aggregate 20% of the issued and outstanding New Common Stock after giving effect to the issuance of 2,000,000 shares of New Common Stock pursuant to the Management Stock Options but not giving effect to the exercise of the Management Anti-Dilution Warrants and the exercise of the Merger Warrants) pursuant to, and upon the terms and conditions contained in, the Management Stock Option Agreements. "Management Stock Option Agreements": the Management Stock Option Agreements between London Fog and each Management Holder with respect to the Management Stock Options, substantially in the form of Exhibit G. 6 "Material Adverse Effect": a material adverse effect on (a) the business, operations, property, condition (financial or otherwise) or prospects of London Fog and its Subsidiaries taken as a whole or (b) the validity or enforceability of this Agreement or any of the other Restructuring Documents or the rights or remedies of the Agent or the Lenders hereunder or thereunder. "Merger Warrants": the warrants of London Fog issued to each holder of Old Series B Preferred Stock or each holder of common stock of LFI Merger Corp., as the case may be, terminating on the seventh anniversary of the Closing Date which are exercisable in the aggregate into 530,726 shares of the New Common Stock (representing in the aggregate 5.0% of the issued and outstanding New Common Stock after giving effect to the issuance of 2,000,000 shares of New Common Stock pursuant to the Management Stock Options and after giving effect to the exercise of the Management Anti-Dilution Warrants and the exercise of the Merger Warrants) issued pursuant to, and upon the terms and conditions contained in, the Certificate of Merger, substantially in the form of Exhibit I. "New Common Stock": the common stock, $.01 par value per share, of London Fog, authorized pursuant to the Amended and Restated Certificate of Incorporation. "New Subordinated Indebtedness": the $100,000,000 of subordinated indebtedness issued to the Lenders pursuant to the New Subordinated Note Indenture. "New Subordinated Note Indenture": the Indenture dated as of February 27, 1998 among London Fog, the Subsidiary Guarantors and IBJ Schroder Bank & Trust Company, as Trustee, substantially in the form of Exhibit J. "New Subordinated Notes": the Initial Notes and, when issued in exchange for Initial Notes upon the effectiveness of the Shelf Registration Statement as provided in the New Subordinated Note Indenture, the Exchange Notes, in each case as defined in the New Subordinated Note Indenture. "Old By-Laws": the by-laws of London Fog in effect immediately prior to the Closing. "Old Certificate of Incorporation": the certificate of incorporation of London Fog in effect immediately prior to the Closing. "Old Common Stock": the common stock, $.01 par value per share, of London Fog issued and outstanding immediately prior to the filing of the Certificate of Merger pursuant to subsection 2.2(a). "Old Debt Agreements': as defined in the Recitals hereto. 7 "Old Master Restructuring Agreement": the Master Restructuring Agreement dated as of May 31, 1995, as amended, among London Fog, London Fog Corporation, certain of the Existing Series B Equity Holders, the Existing Management Holders, the Lenders and the Agent. "Old Preferred Stock": the 17.5% Per Annum Cumulative Preferred Stock, Series A-1, A-2, B and C, of London Fog issued and outstanding immediately prior to the filing of the Certificate of Merger pursuant to subsection 2.2(a). "Old Series A Preferred Stock": the collective reference to the Old Series A-1 Preferred Stock and Old Series A-2 Preferred Stock. "Old Series A-1 Preferred Stock": the 17.5% Per Annum Cumulative Preferred Stock, Series A-1, of London Fog, issued pursuant to, and upon the terms and conditions contained in, the Old Certificate of Incorporation. "Old Series A-2 Preferred Stock": the 17.5% Per Annum Cumulative Preferred Stock, Series A-2, of London Fog, issued pursuant to, and upon the terms and conditions contained in, the Old Certificate of Incorporation. "Old Series B Preferred Stock": the 17.5% Per Annum Cumulative Preferred Stock, Series B, of London Fog, issued pursuant to, and upon the terms and conditions contained in, the Old Certificate of Incorporation. "Old Series C Option Agreement": the Series C Option Agreement dated as of May 31, 1995 between the Existing Management Holders and London Fog with respect to the Old Series C Options. "Old Series C Options": the options to purchase shares of Old Series C Preferred Stock granted to the Existing Management Holders pursuant to, and upon the terms and conditions contained in, the Old Series C Option Agreement. "Old Series C Preferred Stock": the 17.5% Per Annum Cumulative Preferred Stock, Series C, of London Fog, issuable pursuant to, and upon the terms and conditions contained in, the Old Certificate of Incorporation. "Person": an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Preliminary Prospectus": each preliminary prospectus included in a Registration Statement or in any amendment thereto prior to the date on which such Registration Statement is declared effective under the Securities Act, including any prospectus filed with the Commission pursuant to Rule 424(a) under the Securities Act. 8 "Prospectus": each prospectus included in a Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective Registration Statement in accordance with Rule 430A), together with any supplement thereto, as filed with, or transmitted for filing to, the Commission pursuant to Rule 424(b) under the Securities Act. "Registerable Securities": (a) the New Subordinated Notes, (b) the New Common Stock and (c) any other securities issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the New Subordinated Notes or the New Common Stock. "Registration": registration of securities pursuant to the Securities Act. "Registration Rights Agreement": the Registration Rights Agreement dated as of February 27, 1998 with respect to shares of New Common Stock issued (i) upon exercise of the Merger Warrants and (ii) upon exercise of the Management Anti- Dilution Warrants, substantially in the form of Exhibit K. "Registration Statement": any registration statement (including the Preliminary Prospectus, the Prospectus, any amendments (including any post-effective amendments) thereof, any supplements and all exhibits thereto and any documents incorporated therein by reference pursuant to the rules and regulations of the Commission), filed by London Fog with the Commission which complies with the requirements of the Securities Act and the rules and regulations of the Commission thereunder. "Required Lenders": the holders of at least a majority in outstanding principal amount of the New Subordinated Indebtedness. "Requirement of Law": as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Restructuring Documents": this Agreement, the New Subordinated Note Indenture, the New Subordinated Notes, the Registration Rights Agreement, the Amended and Restated By-Laws, the Amended and Restated Certificate of Incorporation, the Certificate of Merger and any other agreement or instrument executed and delivered in connection herewith and therewith. "Rule 415": Rule 415 promulgated by the Commission under the Securities Act or any successor to such Rule. 9 "Rule 424(b)": Rule 424(b) promulgated by the Commission under the Securities Act or any successor to such Rule. "Rule 430A": Rule 430A promulgated by the Commission under the Securities Act or any successor to such Rule. "Securities Act": the Securities Act of 1933, as amended, or any successor legislation thereto. "Senior Loan Agreement": as defined in the Recitals hereto. "Shelf Filing Period": the period from 90 days following the Closing Date to July 31, 1998. "Shelf Registration Period": as defined in subsection 5.1(b). "Shelf Registration Statement": as defined in subsection 5.1(a). "Stock Subscription Agreement": the Stock Subscription Agreement dated as of February 27, 1998 among the Lenders and LFI Merger Corp., substantially in the form of Exhibit L. "Subsidiary": as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of London Fog. "Subsidiary Guarantors": as defined in the New Subordinated Note Indenture. 1.2 Other Definitional Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the other Restructuring Documents or any certificate or other document made or delivered pursuant hereto or thereto. (b) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. 10 (c) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. MERGER OF LFI MERGER CORP. WITH AND INTO LONDON FOG 2.1 Formation of LFI Merger Corp. Effective on the Closing Date, but immediately prior to the action taken pursuant to subsection 2.2, (a) the Lenders and LFI Merger Corp. shall (i) enter into the Stock Subscription Agreement pursuant to which the Lenders shall contribute to LFI Merger Corp. (A) all shares of Old Series A Preferred Stock held by the Lenders (an aggregate of 106,763.589 shares) and (B) all shares of Old Common Stock held by the Lenders (an aggregate of 80,000 shares) in exchange for 100% of the issued and outstanding shares of common stock of LFI Merger Corp. (an aggregate of 245,839.5 shares), which shares of common stock of LFI Merger Corp. shall thereupon be distributed to each Lender on a pro rata basis as set forth on Schedule 2.1, and (ii) take all action necessary to consummate the merger set forth in subsection 2.2 and otherwise comply with the provisions of the Stock Subscription Agreement and (b) LFI Merger Corp. and London Fog shall enter into the Agreement of Merger and take all action necessary to consummate the merger set forth in subsection 2.2. 2.2 Filing of Certificate of Merger; Effect of Merger. (a) Effective on the Closing Date, contemporaneously with the consummation of the transactions set forth in Section 3, London Fog shall file or cause to be filed with the Secretary of State of the State of Delaware the Certificate of Merger. (b) Upon the filing of the Certificate of Merger and pursuant to the Agreement of Merger, the following events shall occur contemporaneously with the transactions set forth in subsections 3.1, 3.2, 3.3 and 3.4: (i) LFI Merger Corp. shall merge with and into London Fog, with London Fog being the surviving corporation; (ii) the Old Preferred Stock shall be cancelled and retired and cease to exist; (iii) the Old Common Stock shall be cancelled and retired and cease to exist; (iv) all options (including, without limitation, the Old Series C Options) to purchase Capital Stock of London Fog and warrants exercisable into shares of Capital Stock of London Fog shall be cancelled and retired and cease to exist; (v) the common stock of LFI Merger Corp. shall be cancelled and retired and cease to exist; 11 (vi) each share of Old Series B Preferred Stock or other rights in respect thereof immediately prior to cancellation thereof as set forth in clause (ii) above shall be converted into 4.60536 Merger Warrants for each such share of Old Series B Preferred Stock (and for each share into which any options or warrants may have been exercisable); (vii) each share of common stock of LFI Merger Corp. or other rights in respect thereof immediately prior to cancellation thereof as set forth in clause (v) above shall be converted into 2.0 Merger Warrants for each such share of common stock (and for each share into which any options or warrants may have been exercisable); (viii) each share of Old Common Stock or other rights in respect thereof immediately prior to cancellation thereof as set forth in clause (iii) above shall be converted into $.01 in cash for each such share of Old Common Stock (and for each share into which any options or warrants may have been exercisable); (ix) the Amended and Restated Certificate of Incorporation shall, as set forth in the Certificate of Merger and pursuant to section 251(e) of the Delaware General Corporation Law, without the necessity of any further action by any party, be the certificate of incorporation of London Fog; and (x) London Fog shall assume, by operation of law, all debts, liabilities, obligations and contracts of LFI Merger Corp. and shall, by operation of law, continue to be obligated for all debts, liabilities and contracts of London Fog, and all property, real or personal, including, without limitation, all of the Capital Stock of the Subsidiary Guarantors, and all rights, privileges and powers of each of LFI Merger Corp. and London Fog shall vest in London Fog, in accordance with the Delaware General Corporation Law. 12 SECTION 3. TREATMENT OF CONGRESS; RESTRUCTURE OF EXISTING SUBORDINATED OBLIGATIONS; TREATMENT OF EXISTING EQUITY AND MANAGEMENT HOLDERS; ALLOCATION; CERTAIN AGREEMENTS 3.1 Treatment of Existing Congress Obligations. At the Closing, subject to the terms and conditions hereof, contemporaneously with the filing of the Certificate of Merger pursuant to subsection 2.2(a), London Fog, the Subsidiary Guarantors and Congress shall execute and deliver the Amendment to Senior Loan Agreement, which Amendment shall, among other things, provide for Congress' consent (to the extent required) to the transactions contemplated hereby. 3.2 Restructure of Existing Subordinated Obligations. At the Closing, subject to the terms and conditions hereof and in exchange for the consideration set forth below, contemporaneously with the filing of the Certificate of Merger pursuant to subsection 2.2(a), the Existing Subordinated Obligations shall be restructured as follows: (a) New Subordinated Notes. In renewal and extension of (but not in substitution and exchange for, or in payment or novation of) $100,000,000 in aggregate principal amount of the Existing Subordinated Obligations, London Fog shall issue, and the Subsidiary Guarantors shall guarantee, on the terms and conditions contained in the New Subordinated Note Indenture, $100,000,000 in aggregate principal amount of the New Subordinated Notes, which New Subordinated Notes shall (i) be allocated among the Lenders in accordance with the Lender Allocation Schedule, (ii) bear interest and be paid in accordance with the terms of the New Subordinated Note Indenture, (iii) until the effectiveness of the Shelf Registration Statement as provided in Section 5, bear the legend substantially as set forth in Schedule 3.2 and (iv) be otherwise subject to the terms and conditions of the New Subordinated Note Indenture. To satisfy the requirements of this subsection 3.2(a), at the Closing London Fog shall be permitted to issue for the benefit of the Lenders temporary promissory notes representing $100,000,000 in aggregate principal amount of the New Subordinated Notes to be issued pursuant to the New Subordinated Note Indenture; provided that the temporary promissory notes shall be exchanged for the New Subordinated Notes to be issued pursuant to the New Subordinated Note Indenture as soon as practicable after the Closing. (b) New Common Stock. In satisfaction of the remainder of the aggregate outstanding amount of the Existing Subordinated Obligations (including, without limitation, (i) interest accrued and unpaid on the remaining Existing Subordinated Obligations to the Closing Date and (ii) fees (other than fees required to be paid at Closing pursuant to subsection 7.1(l)) accrued and unpaid on the remaining Existing Subordinated Obligations to the Closing Date), London Fog shall issue to the Lenders an aggregate of 8,000,000 shares of New Common Stock, which New Common Stock shall (A) represent in the aggregate 80% of the New Common Stock issued and outstanding after giving effect to the issuance of 2,000,000 shares of New Common Stock pursuant to 13 the Management Stock Options but not giving effect to the exercise of the Management Anti-Dilution Warrants and the exercise of the Merger Warrants, (B) be allocated among the Lenders in accordance with the Lender Allocation Schedule and (C) until the effectiveness of the Shelf Registration Statement as provided in Section 5, bear the legend substantially as set forth in Schedule 3.2. To satisfy the requirements of this subsection 3.2(b), at the Closing London Fog shall be permitted to issue for the benefit of the Lenders a global stock certificate in respect of the New Common Stock, representing in the aggregate the number of shares of New Common Stock to be issued to the Lenders pursuant to this subsection 3.2(b); provided that the New Common Stock shall be allocated among the Lenders pursuant to clause (B) of the immediately preceding sentence as soon as practicable after the Closing. (c) Cancellation of Notes Under Old Debt Agreements; Certain Acknowledgements. At the Closing, upon the consummation of the transactions set forth in clauses (a) and (b) above, each Lender shall deliver to London Fog all the promissory notes issued under, and evidencing the indebtedness under, the Old Debt Agreements, which promissory notes, whether or not in such Lender's possession and whether or not delivered pursuant to this subsection 3.2(c), shall be deemed superseded, cancelled and replaced (provided that the indebtedness evidenced by said notes shall have been renewed and extended in the amount of $100,000,000 plus interest accruing thereon after the date hereof and otherwise satisfied pursuant to subsections 3.2(a) and (b)). Each Lender acknowledges, effective upon the Closing, that such Lender shall hold no indebtedness or other obligations or security interests under the Old Debt Agreements, except security interests held by the Agent under the Old Debt Agreements that will be held solely by the Trustee under the New Subordinated Note Indenture. The Agent acknowledges that upon the Closing it has delivered to London Fog (and to Congress) a true and correct copy of the Register of the Existing Subordinated Obligations, as such Register has been maintained by the Agent under the Old Debt Agreements, showing the registered holders of the Existing Subordinated Obligations as the date hereof, based on the information provided to the Agent in connection with the execution and delivery of the Old Debt Agreements and any subsequent assignments of the Existing Subordinated Obligations. The Agent further acknowledges that upon execution and delivery of the New Subordinated Note Indenture, the Agent shall no longer hold any security interests in or liens on any asset or property of London Fog (after giving effect to the merger pursuant to Section 2) or any of the Subsidiary Guarantors, and all such security interests and liens previously held by the Agent shall, pursuant to the New Subordinated Note Indenture and the Security Documents (as defined in the New Subordinated Note Indenture), be held solely by the Trustee under the New Subordinated Note Indenture for the benefit of the holders of the New Subordinated Notes. (d) Merger Warrants Effective upon the Closing, pursuant to the Certificate of Merger and as set forth in subsection 2.2(b)(vii), London Fog shall issue to the Lenders 491,679 in aggregate number of Merger Warrants, which Merger Warrants shall (i) be exercisable into approximately 4.63% of the New Common Stock issued and outstanding 14 after giving effect to the issuance of 2,000,000 shares of New Common Stock pursuant to the Management Stock Options and after giving effect to the exercise of the Management Anti-Dilution Warrants and the exercise of the Merger Warrants and (ii) be allocated among the Lenders in accordance with the Lender Allocation Schedule. To satisfy the requirements of this subsection 3.2(d), at the Closing London Fog shall be permitted to issue for the benefit of the Lenders a global warrant certificate representing the aggregate number of Merger Warrants to be issued to the Lenders pursuant to this subsection 3.2(d); provided that the Merger Warrants shall be allocated among the Lenders pursuant to clause (ii) of the immediately preceding sentence as soon as practicable after the Closing. (e) Accredited Investor or QIB. Each Lender represents that it is either an "accredited investor" within the meaning of Rule 501 under the Securities Act or a QIB (as defined in the New Subordinated Note Indenture), and is acquiring the New Subordinated Notes, the New Common Stock and the Merger Warrants for its own account without a view toward resale or distribution in a manner that would violate applicable securities laws. 3.3 Treatment of Existing Series B Equity Holders. Effective upon the Closing, pursuant to the Certificate of Merger and as set forth in subsection 2.2(b)(vi), London Fog shall issue to the Existing Series B Equity Holders 39,047 in aggregate number of Merger Warrants, which Merger Warrants shall (i) be exercisable in the aggregate into approximately 0.37% of the New Common Stock issued and outstanding after giving effect to the issuance of 2,000,000 shares of New Common Stock pursuant to the Management Stock Options and after giving effect to the exercise of the Management Anti-Dilution Warrants and the exercise of the Merger Warrants and (ii) be allocated among the Existing Series B Equity Holders in accordance with the Existing Series B Equity Allocation Schedule. To satisfy the requirements of this subsection 3.3, at the Closing London Fog shall be permitted to issue for the benefit of the Existing Series B Equity Holders a global warrant certificate representing in the aggregate the number of Merger Warrants to be issued to the Existing Series B Equity Holders pursuant to this subsection 3.3; provided that the Merger Warrants shall be allocated among the Existing Series B Equity Holders pursuant to clause (ii) of the immediately preceding sentence as soon as practicable after the Closing. 3.4 Treatment of Management Holders. (a) Existing Management Holders. At the Closing, contemporaneously with the filing of the Certificate of Merger pursuant to subsection 2.2(a), London Fog shall issue to the Existing Management Holders Management Stock Options representing the right to acquire in the aggregate 1,000,000 shares of New Common Stock, which Management Stock Options shall (i) represent the right to purchase in the aggregate 10.00% of the New Common Stock issued and outstanding after giving effect to the issuance of 2,000,000 shares of New Common Stock pursuant to the Management Stock Options but not giving effect to the exercise of the Management Anti-Dilution Warrants and the exercise of the Merger Warrants, (ii) be allocated among the Existing Management Holders in accordance with the Management Holder Allocation 15 Schedule and (iii) be otherwise subject to the terms and conditions of, and vest in favor of the Existing Management Holders as set forth in, the relevant Management Stock Option Agreement. (b) Cancellation of Old Series C Options and Old Series C Stock Option Agreement. At the Closing, immediately prior to the consummation of the transaction set forth in clause (a) above, the Old Series C Option Agreement and the Old Series C Options shall, without the necessity of further action by any party, be deemed terminated and cancelled and shall be of no further force and effect. (c) Additional Management Holders. At the Closing, contemporaneously with the filing of the Certificate of Merger pursuant to subsection 2.2(a), or from time to time following the Closing, London Fog shall issue to the Additional Management Holders Management Stock Options representing the right to acquire in the aggregate 1,000,000 shares of New Common Stock, which Management Stock Options shall (i) represent the right to purchase in the aggregate 10.00% of the New Common Stock issued and outstanding after giving effect to the issuance of 2,000,000 shares of New Common Stock pursuant to the Management Stock Options but not giving effect to the exercise of the Management Anti- Dilution Warrants and the Merger Warrants, (ii) be allocated among the Additional Management Holders in accordance with the Management Holder Allocation Schedule and (iii) be otherwise subject to the terms and conditions of, and vest in favor of the Additional Management Holders as set forth in, the relevant Management Stock Option Agreement. (d) Management Anti-Dilution Warrants. At the Closing, contemporaneously with the filing of the Certificate of Merger pursuant to subsection 2.2(a), or from time to time following the Closing, London Fog shall issue to the Management Holders 83,799 in aggregate number of Management Anti-Dilution Warrants, which Management Anti-Dilution Warrants shall (i) be exercisable in the aggregate into approximately 0.79% of the New Common Stock issued and outstanding after giving effect to the issuance of 2,000,000 shares of New Common Stock pursuant to the Management Stock Options and after giving effect to the exercise of the Management Anti-Dilution Warrants and the exercise of the Merger Warrants and (ii) be allocated among the Management Holders in accordance with the Management Holder Allocation Schedule. 3.5 Old Debt Agreements Superseded. Upon the Closing, the Old Debt Agreements shall be superseded by this Agreement, the New Subordinated Note Indenture and (to the extent applicable) the other Restructuring Documents and shall be of no further force and effect (provided that the Existing Subordinated Obligations shall have been renewed, extended and otherwise satisfied pursuant to subsections 3.2(a) and (b)). 3.6 Cancellation of Old Master Restructuring Agreement. Upon the Closing, the Old Master Restructuring Agreement shall, with respect to each party hereto party to the Old Master Restructuring Agreement and each Existing Series B Equity Holder who executes and delivers the Existing Series B Equity Holder Consent and Joinder, be deemed terminated and cancelled and shall be of no further force and effect. 16 3.7 Existing Management Holders' Employment Agreements. At the Closing, subject to the terms and conditions hereof, each Existing Management Holder and London Fog shall execute and deliver the Amended and Restated Existing Management Holder Employment Agreement with respect to such Existing Management Holder, which Agreement shall provide, among other things, that (a) the term of such Existing Management Holder Employment Agreement shall be extended for at least three years from the termination date thereof (as set forth in Section 1 therein) and (b) commencing with the beginning of the fiscal year ending in February 2000, the provisions contained in such Existing Management Holder Employment Agreements providing for an annual bonus based on 6% of Consolidated EBITA (as defined therein), in the case of Robert E. Gregory, Jr., or 4% of Consolidated EBITA (as defined therein), in the case of C. William Crain, as the case may be, shall be deleted and replaced with provisions providing for an annual bonus to be paid to each such Existing Management Holder as may be determined by the then-current Board of Directors of London Fog or a sub-committee thereof. SECTION 4. APPOINTMENT OF BOARD OF DIRECTORS 4.1 Board of Directors. During the period from the Closing Date to the date that the directors elected at the first annual meeting of stockholders following the Closing Date scheduled for the purpose of electing directors pursuant to section 211 of the Delaware General Corporation Law shall commence serving their respective terms (such date, the "Outside New Board Date"), the individuals currently serving as directors on the Board of Directors of London Fog shall, in accordance with the terms of the Amended and Restated By-Laws, continue to serve as directors; provided, however, that as soon as practicable following the Closing Date but in no event later than the Outside New Board Date, the Board of Directors of London Fog shall consist of five (5) individuals who shall be elected in accordance with the terms of the Amended and Restated Certificate of Incorporation and the Amended and Restated By-Laws; provided, further, that four directors shall be elected, as set forth in the Amended and Restated By-Laws, by the holders of the New Common Stock and the fifth director shall be the Chairperson of the Board of Directors of London Fog who shall also be the then-current Chief Executive Officer of London Fog. SECTION 5. SHELF REGISTRATION 5.1 Shelf Registration. (a) London Fog shall prepare and, at any time during the Shelf Filing Period, shall file with the Commission a "shelf" Registration Statement on Form S-1 or Form S-3, as appropriate, relating to the offer and sale of the Registerable Securities by the Holders from time to time in accordance with the methods of distribution set forth in such Registration Statement (the "Shelf Registration Statement"). (b) London Fog shall use its best reasonable efforts to have the Shelf Registration Statement declared effective under the Securities Act by the Commission no later than 135 days after the filing thereof and shall keep the Shelf Registration Statement continuously effective for a period of two years from the date on which the Shelf Registration Statement is declared 17 effective under the Securities Act or such shorter period (in either such case, such period being called the "Shelf Registration Period") that will terminate when either (i) all the Registerable Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement or (ii) all the Registerable Securities are eligible for sale pursuant to Rule 144(k) promulgated under the Securities Act. London Fog shall be deemed not to have used its reasonable best efforts to keep the Shelf Registration Statement effective during the Shelf Registration Period if it voluntarily takes any action that would result in Holders of Registerable Securities covered thereby not being able to offer and sell such Registerable Securities during the Shelf Registration Period unless such action is required by applicable law; provided, however, that the foregoing shall not apply to actions taken by London Fog in good faith and for valid business reasons (not including avoidance of its obligations hereunder and under the other Restructuring Documents), including, without limitation, the acquisition or divestiture of assets, so long as London Fog within 120 days thereafter complies with the requirements of subsection 5.2(h). Any such period during which London Fog fails to keep the Shelf Registration Statement effective and usable for offers and sales of Registerable Securities is referred to as a "Suspension Period." A Suspension Period shall commence on and include the date that London Fog gives notice that the Shelf Registration Statement is no longer effective or the Prospectus included therein is no longer usable for offers and sales of Registerable Securities and shall end on the date when each Holder of Registerable Securities covered by such Shelf Registration Statement either receives the copies of the supplemented or amended Prospectus contemplated by subsection 5.2(h) or is advised in writing by London Fog that use of the Prospectus may be resumed. If one or more Suspension Periods occur, the two-year time period referenced above shall be extended by the number of days included in each such Suspension Period. (c) Notwithstanding any other provisions hereof, London Fog will ensure that (i) any Shelf Registration Statement and any amendment thereto and any Prospectus forming part thereof and any supplement thereto complies in all material respects with the Securities Act and the rules and regulations thereunder, (ii) any Shelf Registration Statement and any amendment thereto (in either case, other than with respect to information included therein in reliance upon or in conformity with written information furnished to London Fog by or on behalf of any Holder specifically for use therein (the "Holders' Information")) does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Shelf Registration Statement, and any supplement to such Prospectus (in either case, other than with respect to the Holders' Information), does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (d) In the event the Shelf Registration Statement is filed on Form S-1, upon satisfaction of the requirements therefor, London Fog may amend the Shelf Registration Statement on Form S-1 to become a Registration Statement on Form S-3. 5.2 Registration Procedures. In connection with the Shelf Registration Statement, the following provisions shall apply: 18 (a) London Fog shall furnish to each Holder, prior to the filing thereof with the Commission, a copy of the Shelf Registration Statement and each amendment thereto and each supplement, if any, to the Prospectus included therein and shall use reasonable efforts to reflect in each such document, when so filed with the Commission, such comments as one counsel for the Holders reasonably may propose. (b) London Fog shall advise each Holder, and, if requested by any such Holder, confirm such advice in writing (which advice pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction to suspend the use of the Prospectus included in the Shelf Registration Statement until the requisite changes have been made): (i) when the Shelf Registration Statement and any amendment thereto has been filed with the Commission and when such Shelf Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the Commission for amendments or supplements to the Shelf Registration Statement or the Prospectus included therein or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Shelf Registration Statement or the initiation of any proceedings for that purpose; (iv) of the receipt by London Fog of any notification with respect to the suspension of the qualification of the Registerable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event that requires the making of any changes in the Shelf Registration Statement or the Prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (c) London Fog shall use its best reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of the Shelf Registration Statement at the earliest possible time. (d) London Fog shall furnish to each Holder of Registerable Securities included within the coverage of the Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if any Holder so requests in writing, all exhibits (including those incorporated by reference). 19 (e) London Fog shall, during the Shelf Registration Period, promptly deliver to each Holder of Registerable Securities included within the coverage of the Shelf Registration Statement, without charge, as many copies of the Prospectus (including each Preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as any such Holder may reasonably request; and London Fog consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Registerable Securities in connection with the offering and sale of the Registerable Securities covered by the Prospectus or any amendment or supplement thereto. (f) Prior to any public offering of Registerable Securities pursuant to the Shelf Registration Statement, London Fog shall use its best reasonable efforts to register, qualify or cooperate with the Holders of Registerable Securities included therein and their respective counsel in connection with the registration or qualification of such Registerable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holder reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Registerable Securities covered by such Shelf Registration Statement; provided, however, that London Fog shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or to taxation in any such jurisdiction where it is not then so subject. (g) London Fog shall cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registerable Securities to be sold pursuant to the Shelf Registration Statement free of any restrictive legends and in such denominations and registered in such names as the Holders may request in writing prior to sales of Registerable Securities pursuant to such Shelf Registration Statement. (h) If (i) any event contemplated by clauses (b)(ii) through (v) above occurs during the Shelf Registration Period or (ii) any Suspension Period remains in effect more than 120 days after the occurrence of any event contemplated by clauses (b)(ii) through (v) above, London Fog will promptly prepare a post-effective amendment to the Shelf Registration Statement or a supplement to the related Prospectus or file any other required document so that, as thereafter delivered to purchasers of the Registerable Securities from a Holder, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (i) Not later than the effective date of the Shelf Registration Statement, London Fog shall provide a CUSIP number for the Registerable Securities and provide the applicable trustee or transfer agent with printed certificates for the Registerable Securities, as the case may be, in a form eligible for deposit with The Depository Trust Company. 20 (j) London Fog shall comply with all applicable rules and regulations of the Commission and will make generally available to the Holders as soon as practicable after the effective date of the Shelf Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Securities Act; provided that in no event shall such earnings statement be delivered later than 45 days after the end of a 12-month period (or 90 days, if such period is a fiscal year) beginning with the first month of London Fog's first fiscal quarter commencing after the effective date of the applicable Registration Statement, which statements shall cover such 12-month period. (k) London Fog shall cause the New Subordinated Note Indenture to be qualified under the Trust Indenture Act of 1939, as amended, as required by applicable law in a timely manner. (l) London Fog may require each Holder of Registerable Securities to be sold pursuant to the Shelf Registration Statement to furnish to London Fog such information regarding such Holder and the distribution of such Registerable Securities as London Fog may, from time to time, reasonably require for inclusion in such Shelf Registration Statement, and London Fog may exclude from such registration the Registerable Securities of any Holder that fails to furnish such information within a reasonable time after receiving such request. (m) Each Holder agrees by acquisition of the Registerable Securities that, upon receipt of any notice from London Fog (i) of a Suspension Period under subsection 5.1(b) or (ii) pursuant to subsection 5.2(b)(ii) through (v) hereof, such Holder will discontinue any disposition of the Registerable Securities held by it until such Holder's receipt of copies of the supplemental or amended Prospectus contemplated by subsection 5.2(h) hereof or until advised in writing (the "Advice") by London Fog that the use of the applicable Prospectus may be resumed. If London Fog shall give any notice under subsection 5.2(b)(ii) through (v) during the Shelf Registration Period, the two-year period referenced in the definition of "Shelf Registration Period" in subsection 5.1(b) shall be extended by the number of days during such period from and including the date of the giving of such notice to and including the date when each seller of Registerable Securities covered by such Shelf Registration Statement shall have received (x) the copies of the supplemental or amended Prospectus contemplated by subsection 5.2(h) (if an amended or supplemental Prospectus is required) or (y) the Advice (if no amended or supplemental Prospectus is required). 5.3 Registration Expenses. London Fog shall bear all expenses incurred in connection with the performance of its obligations under this Section 5 and London Fog shall reimburse the Holders for the reasonable fees and disbursements of Simpson Thacher & Bartlett, as counsel to the Holders, in connection with the Shelf Registration Statement. 21 5.4 Indemnification. In connection with the Shelf Registration Statement or any Prospectus delivery pursuant thereto, London Fog shall indemnify and hold harmless each Holder, its directors, officers, agents and employees and each Person, if any, who controls such Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and the directors, officers, agents and employees of such controlling Persons as set forth on Schedule 5.4. SECTION 6. REPRESENTATIONS AND WARRANTIES To induce the Agent and the Lenders to enter into this Agreement and to restructure the Existing Subordinated Obligations, London Fog hereby represents and warrants to the Agent and each Lender: 6.1 No Material Tax Liability. The restructuring or the recapitalization of London Fog will not result in any material current cash tax liability of London Fog or its Subsidiaries to the United States Internal Revenue Service, except for liabilities pursuant to the alternative minimum tax. 6.2 Capitalization. The authorized and issued Capital Stock of London Fog as at the Closing Date (after giving effect to the transactions contemplated by this Agreement) is as set forth in Schedule 6.2. There are no outstanding rights, options, warrants or agreements for the purchase from, or sale by, London Fog of any shares of its Capital Stock, except as set forth on Schedule 6.2. All of the issued and outstanding shares of Capital Stock of London Fog are validly issued, fully paid and non-assessable. 6.3 Corporate Existence; Compliance with Law. Each of London Fog and its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 6.4 Corporate Power; Authorization; Enforceable Obligations. Each of London Fog and the Subsidiary Guarantors have the corporate power and authority, and the legal right, to make, deliver and perform this Agreement and the other Restructuring Documents to which it is a party and London Fog has taken all necessary corporate action to authorize (a) the execution, delivery and performance of this Agreement and the other Restructuring Documents to which it is a party and (b) the issuance and delivery of the New Common Stock, the Merger Warrants, the Management Anti-Dilution Warrants and the Management Stock Options. Upon delivery to the Lenders of certificates representing the New Common Stock, pursuant to this Agreement, such 22 shares will be validly issued, full paid and non-assessable and free of preemptive rights, and the Lenders will have good title to such shares, free and clear of any lien. Upon issuance of shares of New Common Stock upon the exercise of the Merger Warrants or the Management Anti-Dilution Warrants, as the case may be, such shares will be validly issued, fully paid and non-assessable and free of preemptive rights, and the holders thereof will have good title to such shares, free and clear of any lien. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement and the other Restructuring Documents to which London Fog and the Subsidiary Guarantors is a party. This Agreement has been, and each other Restructuring Document to which each of London Fog and the Subsidiary Guarantors is a party will be, duly executed and delivered on behalf of London Fog and each such Subsidiary Guarantor. This Agreement constitutes, and each other Restructuring Document to which it is a party when executed and delivered will constitute, a legal, valid and binding obligation of London Fog and each such Subsidiary Guarantor enforceable against London Fog and each such Subsidiary Guarantor in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. 6.5 No Legal Bar. The execution, delivery and performance of this Agreement and the other Restructuring Documents to which each of London Fog and the Subsidiary Guarantors is a party will not violate any Requirement of Law or Contractual Obligation of any of London Fog or its Subsidiaries and will not result in, or require, the creation or imposition of an lien on any of their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation. 6.6 No Material Litigation. No litigation by, investigation by, or proceeding of or before any arbitrator or any Governmental Authority is pending or, to the knowledge of London Fog, threatened by or against any of London Fog, or its Subsidiaries or against any of their respective properties or revenues (including after giving effect to the merger of LFI Merger Corp. with and into London Fog) (a) with respect to any of the Restructuring Documents or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to have a Material Adverse Effect. 6.7 No Default. None of London Fog or any Subsidiary Guarantor is in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. After giving effect to the transactions contemplated hereby, no default or event of default has occurred and is continuing under the Senior Loan Agreement or the New Subordinated Note Indenture. 23 SECTION 7. CONDITIONS PRECEDENT 7.1 Conditions to Restructure of Existing Obligations. The agreement of each Lender to restructure the Existing Subordinated Obligations, the agreement of Congress to enter into the Amendment to the Senior Loan Agreement, the agreement of each Lender and each Existing Management Holder to recapitalize London Fog and the effectiveness of this Agreement is subject to the satisfaction (unless otherwise waived to the extent permitted pursuant to subsection 8.1), immediately prior to or concurrently with such restructuring on the Closing Date, of the following conditions precedent: (a) Restructuring Documents. The Agent shall have received (i) this Agreement, executed and delivered by a duly authorized officer of each of the parties hereto, with a counterpart for each party hereto, (ii) the New Subordinated Note Indenture, executed and delivered by a duly authorized officer of each of the parties thereto, together with all related subordinated loan documents required to be executed and delivered thereunder, with a counterpart for each Lender, and (iii) the Amendment to the Senior Loan Agreement, executed and delivered by a duly authorized officer of each of the parties thereto. (b) Related Agreements. The Agent shall have received, with a copy for each Lender, such other documents or instruments as may be reasonably requested by the Agent, including, without limitation, a copy of any debt instrument, security agreement or other material contract to which London Fog or its Subsidiaries may be a party, including without limitation, (i) the Amended and Restated Management Holders' Employment Agreements, (ii) the Registration Rights Agreement and (iii) the Guarantees, the Security Documents and the Subordination Agreement (each as defined in the New Subordinated Note Indenture). (c) Closing Certificate. The Agent shall have received, with a counterpart for each Lender, a certificate of London Fog and each Subsidiary Guarantor, dated the Closing Date, substantially in the form of Exhibit M, with appropriate insertions and attachments, satisfactory in form and substance to the Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of London Fog or such Subsidiary Guarantor, as applicable. (d) Corporate Proceedings. The Agent shall have received, with a counterpart for each Lender, a copy of the resolutions, in form and substance satisfactory to the Agent, of the Board of Directors (and, where applicable, the stockholders) of each of London Fog, each Subsidiary Guarantor and LFI Merger Corp. authorizing (i) the execution, delivery and performance of the Restructuring Documents to which it is a party, (ii) the restructure and recapitalization contemplated hereunder and (iii) the merger of LFI Merger Corp. with and into London Fog, each certified by the Secretary or an Assistant Secretary of London Fog, such Subsidiary Guarantor or LFI Merger Corp., as applicable, as of the Closing Date, which certificate shall be in form and substance satisfactory to the Agent 24 and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (e) Corporate Documents. The Agent shall have received, (i) with a counterpart for each Lender, true and complete copies of the Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws of London Fog certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of London Fog and (ii) with a counterpart for each Lender, true and complete copies of the certificate of incorporation and by-laws of each Subsidiary Guarantor, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the applicable Subsidiary Guarantor. (f) Legal Opinions. (i) The Agent shall have received, with a counterpart for each Lender, the following executed legal opinions: (A) the legal opinion of Proskauer Rose LLP, special counsel to London Fog and the Subsidiary Guarantors, substantially in the form of Exhibit N-1; (B) the legal opinion of Stuart Fisher, Esq., general counsel of London Fog, substantially in the form of Exhibit N-2; and (C) the legal opinion of Young, Conaway, Stargatt & Taylor, special Delaware counsel to London Fog and the Subsidiary Guarantors, substantially in the form of Exhibit N-3. Each such legal opinion shall cover such other matters incident to the transactions contemplated by this Agreement as the Agent may reasonably require. Congress may rely on the provisions of the legal opinions referred to above as may be specified therein. (g) Delivery of New Common Stock. The Agent shall have received the certificates or a global certificate representing the New Common Stock to be issued to the Lenders in accordance with the Lender Allocation Schedule. (h) Delivery of Lenders' Merger Warrants. The Agent shall have received the certificates or a global certificate representing the Merger Warrants to be issued to the Lenders in accordance with the Lender Allocation Schedule. (i) No Default. No Default or Event of Default shall have occurred and be continuing under the Senior Loan Agreement or the New Subordinated Note Indenture. (j) Delivery of Existing Series B Equity Holders' Merger Warrants. The Existing Series B Equity Holders shall have received the certificates or a global certificate representing the Merger Warrants to be issued to the Existing Series B Equity Holders 25 pursuant to the Certificate of Merger and in accordance with the Existing Series B Equity Holder Allocation Schedule. (k) Management Stock Option Agreement. The Existing Management Holders and London Fog shall have received, with a counterpart for the Agent and each Lender and Congress, the Management Stock Option Agreements, with respect to such Existing Management Holders, executed and delivered by the parties thereto. (l) Fees and Expenses. London Fog shall have reimbursed, with respect to invoices received at least one Business Day prior to the Closing Date, each Lender and the Agent for all its reasonable costs and expenses, including, without limitation, (i) the reasonable fees and disbursements of counsel to each Lender and the Agent (including Simpson Thacher & Bartlett and the allocated fees and expenses of in-house counsel) and (ii) the reasonable fees and expenses of Alvarez & Marsal, Inc., in connection with the restructure and recapitalization contemplated hereby; provided that with respect to invoices received by London Fog thereafter, London Fog shall reimburse the entity submitting such invoice in accordance with this Agreement as soon as practicable after receipt of such invoice. (m) Agreement of Merger; Certificate of Merger. (i) The Agent shall have received, with a copy for each Lender, a copy of the Agreement of Merger, executed and delivered by a duly authorized officer of each of the parties thereto. (ii) London Fog shall have filed or caused to be filed with the Secretary of State of the State of Delaware, and the Secretary of State of the State of Delaware shall have accepted for filing, the Certificate of Merger. (n) Amended and Restated Certificate of Incorporation. Contemporaneously with the filing of the Certificate of Merger pursuant to subsection 7.1(m), London Fog shall have filed or caused to be filed with the Secretary of State of the State of Delaware, and the Secretary of State of the State of Delaware shall have accepted for filing, the Amended and Restated Certificate of Incorporation. (o) Management Anti-Dilution Warrants. The Management Holders receiving Management Stock Options at the Closing shall have received the certificates or a global certificate representing the Management Anti-Dilution Warrants to be issued to such Management Holders in accordance with the Management Holder Allocation Schedule. (p) Additional Matters. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement and the other Restructuring Documents shall be reasonably satisfactory in form and substance to the Agent, and the Agent shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request. 26 SECTION 8. MISCELLANEOUS 8.1 Amendments and Waivers. Neither this Agreement, nor any terms hereof, may be amended, waived, supplemented or modified except in accordance with the provisions of this subsection 8.1. The Agent, the Required Lenders, London Fog and the Existing Management Holders may from time to time, (a) enter into written amendments, supplements or modifications hereto for the purpose of adding any provisions to this Agreement or changing in any manner the rights of the parties hereunder or (b) waive, on such terms and conditions as the parties hereto may specify in such instrument, any of the requirements of this Agreement; provided, however, that any such waiver and any such amendment, supplement or modification which shall amend, modify or waive (i) any provisions of subsection 3.1, and any corresponding definition in subsection 1.1, shall only require the consent of each of London Fog, the Agent and the Required Lenders, (ii) any provisions of Section 2, subsection 3.3 and Section 5, and any corresponding definition of subsection 1.1, shall only require the consent of each of London Fog, the Agent and the Required Lenders, (iii) any provisions of subsection 3.2, and any corresponding definition of subsection 1.1, shall only require the consent of each of London Fog, the Agent and each Lender affected thereby, (iv) any provisions of subsections 3.4 and 3.7, and any corresponding definition in subsection 1.1, shall only require the consent of each of London Fog, the Agent, the Required Lenders and the Existing Management Holders and (v) any provisions of subsections 3.5 and 3.6 and Section 4, and any corresponding definition in subsection 1.1, shall only require the consent of each of London Fog, the Agent and the Required Lenders. Any such waiver and any such amendment, supplement or modification shall apply equally to, and shall be binding upon all of, the parties hereto and all future holders of the New Subordinated Indebtedness. 8.2 Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or three Business Days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed as follows in the case of London Fog and the Agent, and as set forth in Schedule 8.2 in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto and their successors and assigns: London Fog: London Fog Industries, Inc. 1332 Londontown Boulevard Eldersburg, Maryland 21784 Attention: Edward M. Krell Telecopy: 410-549-8499 with a copy to: London Fog Industries, Inc. 8 West 40th Street New York, New York 10018 Attention: Stuart Fisher, Esq. Telecopy: 212-790-3195 27 The Agent: The Chase Manhattan Bank 270 Park Avenue, 30th Floor New York, New York 10017 Attention: Mr. Charles O. Freedgood Telecopy: 212-661-8396 provided that any notice, request or demand to or upon the Agent and the Lenders shall not be effective until received. 8.3 Payment of Expenses. London Fog agrees (a) to pay or reimburse the Agent for all its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Restructuring Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent, (b) to pay or reimburse each Lender and the Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Restructuring Documents and any such other documents, including, without limitation, the fees and disbursements of counsel (including the allocated fees and expenses of in-house counsel) to each Lender and of counsel to the Agent, (c) to pay, indemnify, and hold each Lender and the Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Restructuring Documents and any such other documents, and (d) to pay, indemnify, and hold each Lender and the Agent and their respective officers, directors, partners, members, employees, affiliates, agents and controlling persons (each, an "indemnitee") harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Restructuring Documents and any such other documents, including, without limitation, any of the foregoing relating to the use of proceeds of the loans or the violation of, noncompliance with or liability under, any environmental law applicable to the operations of London Fog, any of its Subsidiaries or any of their respective properties (all the foregoing in this clause (d), collectively, the "indemnified liabilities"), provided, that London Fog shall have no obligation hereunder to any indemnitee with respect to indemnified liabilities to the extent such indemnified liabilities are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such indemnitee. The agreements in this subsection 8.3 shall survive repayment of the Senior Loan Agreement and the New Subordinated Indebtedness, and all other amounts payable under the Restructuring Documents. 28 8.4 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with London Fog and the Agent. 8.5 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8.6 Integration. This Agreement and the other Restructuring Documents represents the agreement of London Fog, the Subsidiary Guarantors, the Agent, the Lenders and the Existing Management Holders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by London Fog, the Subsidiary Guarantors, the Agent, any Lender or any Existing Management Holder relative to the subject matter hereof not expressly set forth or referred to herein or in the other Restructuring Documents. 8.7 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 8.8 Submission To Jurisdiction; Waivers. Each of London Fog, the Subsidiary Guarantors, the Agent, the Lenders and the Existing Management Holders hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Restructuring Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to London Fog and the Subsidiary Guarantors at 29 their respective addresses set forth in subsection 8.2 or at such other address of which the Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection 8.8 any special, exemplary, punitive or consequential damages. 8.9 Acknowledgements. Each of London Fog, the Subsidiary Guarantors and the Existing Management Holders hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Restructuring Documents; (b) neither the Agent nor any Lender (as a lender) has any fiduciary relationship with or duty to London Fog arising out of or in connection with this Agreement or any of the other Restructuring Documents, and the relationship between Agent and Lenders, on the one hand, and London Fog, on the other hand, in connection herewith or therewith is solely that of debtor and creditor and, in the case of the Lenders, stockholder thereof; and (c) no joint venture is created hereby or by the other Restructuring Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among London Fog, the Subsidiary Guarantors, the Existing Management Holders and the Lenders. 8.10 WAIVERS OF JURY TRIAL. EACH OF LONDON FOG, THE SUBSIDIARY GUARANTORS, THE EXISTING MANAGEMENT HOLDERS, THE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER RESTRUCTURING DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 4 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. LONDON FOG INDUSTRIES, INC. By: ------------------------------------ Name: Edward M. Krell Title: Chief Financial Officer CLIPPER MIST, INC. By: ------------------------------------ Name: Stuart B. Fisher Title: Secretary LONDON FOG SPORTSWEAR, INC. By: ------------------------------------ Name: Stuart B. Fisher Title: Secretary MATTHEW MANUFACTURING CO., INC. By: ------------------------------------ Name: Stuart B. Fisher Title: Secretary PACIFIC TRAIL, INC. By: ----------------------------------- Name: Stuart B. Fisher Title: Secretary PTI HOLDING CORP. By: ----------------------------------- Name: Stuart B. Fisher Title: Secretary PTI TOP COMPANY, INC. By: ------------------------------------ Name: Stuart B. Fisher Title: Secretary STAR SPORTSWEAR MANUFACTURING CORP. By: ------------------------------------ Name: Stuart B. Fisher Title: Secretary THE MOUNGER CORPORATION By: ------------------------------------ Name: Stuart B. Fisher Title: Secretary THE SCRANTON OUTLET CORPORATION By: ------------------------------------ Name: Stuart B. Fisher Title: Secretary WASHINGTON HOLDING COMPANY By: ------------------------------------ Name: Stuart B. Fisher Title: Secretary ROBERT E. GREGORY, JR., as an Existing Management Holder ---------------------------------------- C. WILLIAM CRAIN, as an Existing Management Holder ---------------------------------------- THE CHASE MANHATTAN BANK, as Agent and as a Lender By: ------------------------------------ Name: Title: BIII CAPITAL PARTNERS L.P. By: ------------------------------------ Name: Title: BAKER NYE SPECIAL CREDITS, INC. By: ------------------------------------ Name: Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ------------------------------------ Name: Title: BEAR STEARNS & CO. INC. By: ------------------------------------- Name: Title: CIBC OPPENHEIMER CORP. By: Contrarian Capital Advisors, L.L.C., its duly authorized agent By: ------------------------------------ Name: Title: CITIBANK, N.A. By: ------------------------------------ Name: Title: CONTRARIAN CAPITAL PARTNERS L.L.C. By: ------------------------------------ Name: Title: DLJ CAPITAL FUNDING, INC. By: ------------------------------------ Name: Title: DAYSTAR LLC, as agent By: ------------------------------------ Name: Title: DAYSTAR SPECIAL SITUATIONS FUND LP By: ------------------------------------ Name: Title: FOOTHILL CAPITAL CORPORATION By: ------------------------------------ Name: Title: MELLON BANK, N.A., as Trustee for First Plaza Group Trust, as directed by Contrarian Capital Advisors, L.L.C. By: ------------------------------------ Name: Title: MWV SEPARATE ACCOUNT ALPHA, LLC By: ------------------------------------ Name: Title: MORGENS WATERFALL DOMESTIC PARTNERS, L.L.C. By: ------------------------------------ Name: Title: NATEXIS BANQUE BCFE By: ------------------------------------ Name: Title: PRIME INCOME TRUST By: ----------------------------------- Name: Title: VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST By: ------------------------------------ Name: Title: EX-3.1 3 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF LONDON FOG INDUSTRIES, INC. London Fog Industries, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: I. The name of the Corporation is "London Fog Industries, Inc." The original Certificate of Incorporation was filed with the Secretary of the State of Delaware on March 3, 1986 under the name "LT Corporation". II. The text of the Certificate of Incorporation as amended heretofore is hereby amended and restated to read as herein set forth in full: FIRST: The name of the corporation is London Fog Industries, Inc. SECOND: The address of the corporation's registered office in Delaware is 1013 Centre Road, Wilmington (Newcastle County), Delaware 19805. The Prentice-Hall Corporation System, Inc. is the corporation's registered agent at that address. THIRD: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The corporation shall have the authority to issue 12,000,000 shares of common stock, par value $.01 per share. FIFTH: A director of this corporation shall not be personally liable to the corporation or its stockholders for monetary damages for the breach of any fiduciary duty as a director, except in the case of (a) any breach of the director's duty of loyalty to the corporation or its stockholders, (b) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (c) under section 174 of the General Corporation Law of the State of Delaware or (d) for any transaction from which the director derives an improper personal benefit. Any repeal or modification of this Article by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. SIXTH: The corporation shall, to the fullest extent permitted by law, as the same is now or may hereafter be in effect, indemnify each person (including the heirs, executors, administrators and other personal representatives of such person) against expenses including attorneys' fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection with any threatened, pending or completed suit, action or proceeding (whether civil, criminal, administrative or investigative in nature or otherwise) in which such person may be involved by reason of the fact that he or she is or was a director or officer of the corporation or is or was serving any other incorporated or unincorporated enterprise in such capacity at the request of the corporation. SEVENTH: Unless, and except to the extent that, the by-laws of the corporation shall so require, the election of directors of the corporation need not be by written ballot. EIGHTH: The corporation hereby confers the power to adopt, amend or repeal bylaws of the corporation upon the directors. IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation which restates, integrates and amends the provisions of the Certificate of Incorporation of the Corporation, having been duly adopted in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware, has been executed by its duly authorized officer and has been affixed hereunto with the corporate seal this 27th day of February, 1998. LONDON FOG INDUSTRIES, INC. By: ---------------------------------- 2 EX-3.2 4 EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF LONDON FOG INDUSTRIES, INC. ARTICLE I OFFICES. SECTION 1. REGISTERED OFFICE -- The registered office of LONDON FOG INDUSTRIES, INC. (the "Corporation") shall be established and maintained at the office of The Prentice-Hall Corporation System, Inc. at The Prentice-Hall Corporation System, Inc., 1013 Centre Road, Wilmington (Newcastle County), Delaware 19805, and said company shall be the registered agent of the Corporation in charge thereof. SECTION 2. OTHER OFFICES -- The Corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time select or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS. SECTION 1. ANNUAL MEETINGS -- Annual meetings of stockholders for the election of directors, and for such other business as may be stated in the notice of the meeting, shall be held on such date, at such place, either within or without the State of Delaware, and at such time as the Board of Directors, by resolution, shall determine and as set forth in the notice of the meeting. If the Board of Directors fails so to determine the time and place of the meeting, the annual meeting of stockholders shall be held at 9:00 am at the registered office of the Corporation on the last Tuesday in May. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. Except as otherwise provided herein, at each annual meeting, the stockholders entitled to vote shall elect a Board of Directors and they may transact such other corporate business as shall be stated in the notice of the meeting. SECTION 2. SPECIAL MEETINGS -- Special meetings of the stockholders for any purpose or purposes may be called by the Chairman of the Board, the Chief Executive Officer, the President or the Secretary, by resolution of the Board of Directors or by the holders of a majority of the outstanding stock of the Corporation. SECTION 3. VOTING -- Each stockholder shall be entitled to one vote for each share registered in his name and may vote in person or by proxy, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. All elections for directors shall be decided by plurality vote; all other questions shall be decided by majority vote except as otherwise provided by the laws of the State of Delaware. A complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, with the address of each, and the number of shares held by each, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is entitled to be present. SECTION 4. QUORUM -- Except as otherwise required by law, the presence, in person or by proxy, of stockholders holding shares constituting a majority of the voting power of the Corporation shall constitute a quorum at all meetings of the stockholders. In case a quorum shall not be present at any meeting, a majority in interest of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of stock entitled to vote shall be represented; provided, however, that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At any such adjourned meeting at which the requisite amount of stock entitled to vote shall be represented, any business may be transacted that might have been transacted at the meeting as originally noticed; but only those stockholders entitled to vote at the meeting as origi nally noticed shall be entitled to vote at any adjournment or adjournments thereof. The stockholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 5. NOTICE OF MEETINGS -- Written notice, stating the place, date and time of the meeting, and the general nature of the business to be considered, shall be given to each stockholder entitled to vote thereat at his address as it appears on the records of the Corporation, not less than ten nor more than sixty days before the date of the meeting. No business other than that stated in the notice shall be transacted at a special meeting without the unanimous consent of all the stockholders entitled to vote thereat. -2- SECTION 6. ACTION WITHOUT MEETING -- Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS. SECTION 1. GENERAL POWERS -- The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. In addition to the powers and authorities by these By-Laws expressly conferred upon them, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or done by the stockholders. SECTION 2. NUMBER AND TERM -- The Board of Directors shall initially consist of five directors. The number of directors may be changed by resolution of a majority of the Board or by the stockholders, but no decrease may shorten the term of any incumbent director and the number of directors shall not be decreased to less than two. A director need not be a stockholder of the Company. Directors shall be elected at each annual meeting of stockholders by a plurality of the votes cast and shall hold office until the next annual meeting of stockholders and until the election and qualification of their respective successors. As used in these by-laws, the term "Whole Board" means the total number of directors the Corporation would have, if there were no vacancies on the Board. SECTION 3. RESIGNATIONS -- Any director may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the Chairman of the Board, the Chief Executive Officer, the President or the Secretary. The acceptance of a resignation shall not be necessary to make it effective. SECTION 4. VACANCIES -- Subject to applicable law, any vacancy on the Board of Directors, including one created by an increase in the number of directors, may be filled for the unexpired term by a majority vote of the remaining directors, though less than a quorum. -3- SECTION 5. REMOVAL -- Subject to the provisions of applicable law and except as hereinafter provided, any director or directors may be removed with or without cause at any time by vote of the stockholders. SECTION 6. COMMITTEES -- The Board of Directors may, by resolution or resolutions passed by a majority of the Whole Board, designate one or more committees, each committee to consist of two or more directors of the Corporation. Any such committee, to the extent provided in the resolution of the Board of Directors, or in these By-Laws, shall, unless prohibited by applicable law, have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. A majority of the members of any committee may determine its action and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. SECTION 7. MEETINGS -- The newly elected directors may hold their first meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after the annual meeting of the stockholders; or the time and place of such meeting may be fixed by consent of all the directors. Regular meetings of the directors may be held at such places and times as shall be determined from time to time by resolution of the directors, or as shall be stated in the call of the meeting. Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer or the President, or by the Secretary on the written request of any director, and shall be held at such place or places as may be determined by the directors, or as shall be stated in the call of the meeting. Members of the Board of Directors, or any committee designated by the Board of Directors may participate in any meeting of the Board of Directors or any committee thereof by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. SECTION 8. NOTICE OF MEETINGS -- Written notice, stating the place, date and time of the meeting and the general nature of the business to be considered, shall be given to each director, if given by overnight mail, hand delivery, telecopy, or telephone, not less than two days or, if given by regular mail, not less than five days, before the date of any regular or special meeting, unless notice to any director has been waived in writing by such director. -4- SECTION 9. QUORUM -- A majority of the directors shall constitute a quorum for the transaction of business. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by an nouncement at the meeting which shall be so adjourned. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. SECTION 10. COMPENSATION -- Directors shall receive such compensation as the Board determines, together with reimbursement of their reasonable expenses in connection with the performance of their duties. A director also may be paid for serving the Corporation or its affiliates or subsidiaries in other capacities. SECTION 11. ACTION WITHOUT MEETING -- Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or such committee. ARTICLE IV OFFICERS. SECTION 1. OFFICERS -- The officers of the Corporation may include, as elected by the board of directors, a Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial Officer, one or more Vice Presidents (including one or more Executive Vice Presidents and one or more Senior Vice Presidents), a Treasurer and a Secretary, all of whom shall be elected by the Board of Directors and shall hold office until their successors are elected and qualified. In addition, the Board of Directors may elect such Assistant Secretaries and Assistant Treasurers as they may deem proper. The Board of Directors may appoint such other officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. SECTION 2. CHAIRMAN OF THE BOARD -- The Chairman of the Board shall preside at all meetings of the Board of Directors and shall have and perform such other duties as may be assigned to him by the Board of Directors. The Chairman of the Board shall have the power to execute bonds, mortgages and other contracts on behalf of the Corporation, and to cause the seal of the Corporation to be affixed to any instrument requiring it, and when so affixed, the seal shall be attested to by the signature of the Secretary or the Treasurer or an As sistant Secretary or an Assistant Treasurer. If so appointed by the Board of Directors, the Chairman of the Board may also serve as an officer of the Corporation. -5- SECTION 3. CHIEF EXECUTIVE OFFICER -- The Chief Executive Officer of the Corporation shall have and perform such duties as may be assigned to him by the Board of Directors. The Chief Executive Officer shall have the power to execute bonds, mortgages and other contracts on behalf of the Corporation, and to cause the seal of the Corporation to be affixed to any instrument requiring it, and when so affixed, the seal shall be attested to by the signature of the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer. SECTION 4. PRESIDENT -- The President shall be the Chief Operating Officer of the Corporation. He shall have the general powers and duties of supervision and management usually vested in the office of President of a corporation. The President shall have the power to execute bonds, mortgages and other contracts on behalf of the Corporation, and to cause the seal of the Corporation to be affixed to any instrument requiring it, and when so affixed, the seal shall be attested to by the signature of the Secretary or the Treasurer or an As sistant Secretary or an Assistant Treasurer. SECTION 5. VICE PRESIDENTS -- Each Vice President shall have such powers and shall perform such duties as shall be assigned to him by the Board of Directors. SECTION 6. CHIEF FINANCIAL OFFICER -- The Chief Financial Officer shall have the custody of the Corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the Corporation. He shall deposit all moneys and other valuables in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President, taking proper vouchers for such disbursements. He shall render to the Chairman of the Board, the Chief Executive Officer, the President and Board of Directors at the regular meetings of the Board of Directors, or whenever they may request it, an account of all his transactions as Chief Financial Officer and of the financial condition of the Corporation. SECTION 7. SECRETARY -- The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors and all other notices required by law or by these By-Laws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the Chairman of the Board, the Chief Executive Of ficer or the President, or by the directors, upon whose request the meeting is called as provided in these By-Laws. He shall record all the proceedings of the meetings of the Board of Directors, any committees thereof and the stockholders of the Corporation in a book to be kept for that purpose, and shall perform such other duties as may be assigned to him by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President. He shall have the custody of the seal of the Corporation and shall affix the same to all instruments requiring it, when authorized by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President, and attest to the same. -6- SECTION 8. TREASURER, ASSISTANT TREASURERS AND ASSISTANT SECRETARIES -- A Treasurer, Assistant Treasurers and Assistant Secretaries, if any, may be elected and shall have such powers and shall perform such duties as shall be assigned to them, respectively, by the Board of Directors. SECTION 9. REMOVAL -- Any officer elected, or agent appointed, by the Board of Directors may be removed by the affirmative vote of a majority of the Whole Board whenever, in their judgment, the best interests of the Corporation would be served thereby. ARTICLE V MISCELLANEOUS. SECTION 1. CERTIFICATES OF STOCK -- A certificate of stock shall be issued to each stockholder certifying the number of shares owned by such stockholder in the Corporation, provided that the Board of Directors may provide, by resolution or resolutions, that some or all of any or all classes or series of stock shall be uncertificated shares. Certificates of stock of the Corporation shall be of such form and device as the Board of Directors may from time to time determine. SECTION 2. LOST CERTIFICATES -- A new certificate of stock may be issued in the place of any certificate theretofore issued by the Corporation, alleged to have been lost or destroyed, and the Board of Directors may, in its discretion, require the owner of the lost or destroyed certificate, or such owner's legal representatives, to give the Corporation a bond, in such sum as they may direct, not exceeding double the value of the stock, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of any such certificate, or the issuance of any such new certificate. SECTION 3. TRANSFER OF SHARES -- The shares of stock of the Corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the Corporation by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other person as the Board of Directors may designate, by whom they shall be cancelled, and new certificates shall thereupon be issued. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer. SECTION 4. STOCKHOLDERS RECORD DATE -- (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days -7- before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to action in writing without a meeting, when no prior action by the Board of Directors is required, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stock holders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Any prior notice of the fixing of a record date required to be given to any holders of options or warrants to acquire the Corporation's Common Stock or any other person entitled to notice pursuant to any agreement with the Corporation shall be given. SECTION 5. DIVIDENDS -- The Board of Directors may, out of funds legally available therefor at any regular or special meeting, declare dividends upon stock of the Corporation as and when they deem appropriate. -8- SECTION 6. SEAL -- The corporate seal of the Corporation shall be in such form as shall be determined by resolution of the Board of Directors. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise imprinted upon the subject document or paper. SECTION 7. FISCAL YEAR -- The fiscal year of the Corporation shall be determined by resolution of the Board of Directors. Until otherwise determined by the Board of Directors, the fiscal year of the Corporation shall be the 52 or 53-week period ending on the last Saturday of February. SECTION 8. CHECKS -- All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, agent or agents of the Corporation, and in such manner as shall be determined from time to time by resolution of the Board of Directors. SECTION 9. NOTICE AND WAIVER OF NOTICE -- Whenever any notice is required to be given under these By-Laws, personal notice is not required unless expressly so stated, and any notice so required shall be deemed to be sufficient if given by delivering the same by hand, by mailing the same overnight, by telecopying the same, by telephoning the same or by depositing the same in the United States mail, postage prepaid, addressed to the person entitled thereto at his address as it appears on the records of the Corporation, and such notice shall be deemed to have been given on the day of such delivery, telecopying, telephoning or mailing, as the case may be. Whenever any notice is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation of the Corporation or of these By-Laws, a waiver thereof, in writing and signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to such required notice. SECTION 10. VOTING OF SHARES IN OTHER CORPORATIONS -- Shares in other corporations which are held by the Corporation may be represented and voted by the Chief Executive Officer, the President, the Chief Financial Officer or a Vice President of the Corporation or by proxy or proxies appointed by one of them. The Board of Directors may, however, appoint some other person to vote the shares. Notwithstanding the foregoing, the voting of shares in other corporations which are held by the Corporation shall be in such a manner as is approved by a majority of directors of the Corporation. ARTICLE VI AMENDMENTS. The Board of Directors shall have the power to make, alter or repeal these By-Laws. -9- ARTICLE VII INDEMNIFICATION AND INSURANCE. SECTION 1. Indemnification and Insurance. (A) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit, or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans maintained or sponsored by the Corporation, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that except as provided in paragraph (C) of this By-Law, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. The right to indemnification conferred in this By-Law shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition, such advances to be paid by the Corporation within 20 days after the receipt by the Corporation of a statement or statements from the claimant requesting such advance or advances from time to time; provided, however, that if the General Corporation Law of the State of Delaware requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to the Corporation of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this By-Law or otherwise. (B) To obtain indemnification under this By-Law, a claimant shall submit to the Corporation a written request, including therein or therewith such documentation and infor mation as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. Upon written request by a -10- claimant for indemnification pursuant to the first sentence of this paragraph (B), a determination, if required by applicable law, with respect to the claimant's entitlement thereto shall be made as follows: (1) if requested by the claimant, by Independent Counsel (as hereinafter defined), or (2) if no request is made by the claimant for a determination by Independent Counsel, (i) by the Board of Directors by a majority vote of the Disinterested Directors (as hereinafter defined) even though less than a quorum, or (ii) if there are no Disinterested Directors, or if the directors so direct, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to the claimant, or (iii) by the stockholders of the Corporation. In the event the determination of entitlement to indemnification is to be made by Independent Counsel at the request of the claimant, the Independent Counsel shall be selected by the Board of Directors unless there shall have occurred within two years prior to the date of the commencement of the action, suit or proceeding for which indemnification is claimed a Change of Control (as here inafter defined), in which case the Independent Counsel shall be selected by the claimant unless the claimant shall request that such selection be made by the Board of Directors. If it is so determined that the claimant is entitled to indemnification, payment to the claimant shall be made within 10 days after such determination. (C) If a claim under paragraph (A) of this By-Law is not paid in full by the Corporation within thirty days after a written claim pursuant to paragraph (B) of this By-Law has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standard of conduct which makes it permissible under the General Corporation Law of the State of Delaware for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, Independent Counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board of Directors, Independent Counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (D) If a determination shall have been made pursuant to paragraph (B) of this By-Law that the claimant is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to paragraph (C) of this By-Law. (E) The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to paragraph (C) of this By-Law that the procedures and -11- presumptions of this By-Law are not valid, binding and enforceable and shall stipulate in such proceeding that the Corporation is bound by all the provisions of this By-Law. (F) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this By-Law shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or Dis interested Directors or otherwise. No repeal or modification of this By-Law shall in any way diminish or adversely affect the rights of any director, officer, employee or agent of the Corporation hereunder in respect of any occurrence or matter arising prior to any such repeal or modification. (G) The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partner ship, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. To the extent that the Corporation maintains any policy or policies providing such insurance, each such director or officer, and each such agent or employee to which rights to indemnification have been granted as provided in paragraph (H) of this By-Law, shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage thereunder for any such director, officer, employee or agent. (H) The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the Corporation the expenses incurred in defending any proceeding in advance of its final disposition, to any employee or agent of the Corporation to the fullest extent of the provisions of this By-Law with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. (I) If any provision or provisions of this By-Law shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (1) the validity, legality and enforceability of the remaining provisions of this By-Law (including, without limitation, each portion of any paragraph of this By-Law containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (2) to the fullest extent possible, the provisions of this ByLaw (including, without limitation, each such portion of any paragraph of this By-Law containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. -12- (J) For purposes of this By-Law: (1) "Change of Control" shall be deemed to have occurred in the event that, after the date of the Master Restructuring Agreement (the "MRA"), dated as of February 27, 1998, any person or entity (a "Person") or group thereof acting together which would constitute a "group" (a "Group") for purposes of Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor provision thereto, together with any Affiliates (as defined in Rule 12b-2 of the Exchange Act or any successor provision thereto) or Related Persons (as hereinafter defined) thereof, who, as of the date of the MRA, does not then own at least 50% of the aggregate voting power of all classes of capital stock of the Corporation entitled to vote generally in the election of directors of the Corporation shall beneficially own (as defined in Rule 13d-3 of the Exchange Act or any successor provision thereto) at least 50% of the aggregate voting power of all classes of capital stock of the Corporation entitled to vote generally in the election of directors of the Corporation. (2) "Disinterested Director" means a director of the Corporation who is not and was not a party to the matter in respect of which indemnification is sought by the claimant. (3) "Independent Counsel" means a law firm, a member of a law firm, or an independent practitioner, that is experienced in matters of corporation law and shall include any person who, under the applicable standards of professional conduct then prevailing, would not have a conflict of interest in representing either the Corporation or the claimant in an action to determine the claimant's rights under this By-Law. (4) "Related Person" of any Person means, without limitation, any other person owning (a) 5% or more of the outstanding common stock of such Person or (b) 5% or more of the voting stock of such Person. (K) Any notice, request or other communication required or permitted to be given to the Corporation under this By-Law shall be in writing and either delivered in person or sent by telecopy, telex, telegram, overnight mail or courier service, or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the Corporation and shall be effective only upon receipt by the Secretary. -13- EX-4.1 5 EXHIBIT 4.1 LOAN AND SECURITY AGREEMENT BY AND AMONG CONGRESS FINANCIAL CORPORATION AS LENDER AND LONDON FOG INDUSTRIES, INC. PACIFIC TRAIL, INC. THE SCRANTON OUTLET CORPORATION AS BORROWERS DATED: AS OF MAY ___, 1997 TABLE OF CONTENTS SECTION 1. DEFINITIONS...................................................... 1 SECTION 2. CREDIT FACILITIES............................................... 16 2.1 Loans.......................................................... 16 2.2 Letter of Credit Accommodations................................ 19 2.3 Availability Reserves.......................................... 23 SECTION 3. INTEREST AND FEES............................................... 23 3.1 Interest....................................................... 23 3.2 Closing Fee.................................................... 26 3.3 Servicing Fee.................................................. 26 3.4 Unused Line Fee................................................ 26 3.5 Supplemental B Loan Fee........................................ 27 3.6 Changes in Laws and Increased Costs of Loans................... 27 SECTION 4. CONDITIONS PRECEDENT............................................. 28 4.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations....................................... 28 4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations.......................................... 31 SECTION 5. SECURITY INTEREST............................................... 31 SECTION 6. COLLECTION AND ADMINISTRATION................................... 33 6.1 Borrowers' Loan Accounts....................................... 33 6.2 Statements..................................................... 33 6.3 Collection of Accounts......................................... 33 6.4 Payments....................................................... 35 6.5 Authorization to Make Loans.................................... 36 6.6 Use of Proceeds................................................ 36 SECTION 7. COLLATERAL REPORTING AND COVENANTS.............................. 37 7.1 Collateral Reporting........................................... 37 7.2 Accounts Covenants............................................. 38 7.3 Inventory Covenants............................................ 40 7.4 Equipment Covenants............................................ 41 7.5 Appraisals of Intellectual Property Intangibles................ 42 7.6 Power of Attorney.............................................. 42 7.7 Right to Cure.................................................. 43 7.8 Access to Premises............................................. 43 SECTION 8. REPRESENTATIONS AND WARRANTIES.................................. 43 8.1 Corporate Existence, Power and Authority; Subsidiaries................................................... 44 8.2 Financial Statements; No Material Adverse Change............... 44 8.3 Chief Executive Office; Collateral Locations................... 44 8.4 Priority of Liens; Title to Properties......................... 45 8.5 Tax Returns.................................................... 45 8.6 Litigation..................................................... 45 (i) 8.7 Compliance with Other Agreements and Applicable Laws........................................................... 46 8.8 Environmental Compliance....................................... 47 8.9 Credit Card Agreements......................................... 48 8.10 Employee Benefits.............................................. 48 8.11 Bank Accounts.................................................. 49 8.12 Interrelated Businesses........................................ 49 8.13 Accuracy and Completeness of Information....................... 50 8.14 Survival of Warranties; Cumulative............................. 50 SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS.............................. 50 9.1 Maintenance of Existence....................................... 50 9.2 New Collateral Locations....................................... 51 9.3 Compliance with Laws, Regulations, Etc......................... 51 9.4 Payment of Taxes and Claims.................................... 51 9.5 Insurance...................................................... 52 9.6 Financial Statements and Other Information..................... 52 9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc............................................... 54 9.8 Encumbrances................................................... 55 9.9 Indebtedness................................................... 56 9.10 Loans, Investments, Guarantees, Etc............................ 58 9.11 Dividends and Redemptions...................................... 59 9.12 Transactions with Affiliates................................... 59 9.13 Credit Card Agreements......................................... 59 9.14 Compliance with ERISA.......................................... 60 9.15 Additional Bank Accounts....................................... 61 9.16 Capital Expenditures........................................... 61 9.17 EBITA.......................................................... 61 9.18 Cleanup and Excess Availability................................ 62 9.19 Costs and Expenses............................................. 62 9.20 Certain Notices................................................ 63 9.21 Further Assurances............................................. 63 SECTION 10. EVENTS OF DEFAULT AND REMEDIES................................. 64 10.1 Events of Default.............................................. 64 10.2 Remedies....................................................... 66 SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW ... 68 11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver..................................... 68 11.2 Waiver of Notices.............................................. 69 11.3 Amendments and Waivers......................................... 70 11.4 Waiver of Counterclaims........................................ 70 11.5 Indemnification................................................ 70 SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS................................ 71 12.1 Term........................................................... 71 12.2 Appointment of Borrowers' Agent................................ 72 12.3 Notices........................................................ 73 12.4 Partial Invalidity............................................. 73 (ii) 12.5 Successors..................................................... 73 12.6 Entire Agreement............................................... 74 (iii) INDEX TO EXHIBITS AND SCHEDULES Exhibit A Information Certificate Schedule 6.3 Bank Accounts Schedule 8.4 Existing Liens Schedule 8.7 Permits Schedule 8.8 Environmental Disclosure Schedule 8.9 Credit Card Agreements Schedule 8.10 Employee Benefits Schedule 9.9 Existing Indebtedness Schedule 9.10 Loans, Investments, Guarantees LOAN AND SECURITY AGREEMENT This Loan and Security Agreement dated May __, 1997 is entered into by and among Congress Financial Corporation, a California corporation ("Lender") and London Fog Industries, Inc., a Delaware corporation ("LFI"), Pacific Trail, Inc., a Washington corporation ("PTI"), and The Scranton Outlet Corporation, a Delaware corporation ("SOC"; and together with LFI and PTI, individually referred to as a "Borrower" and collectively, as "Borrowers"). W I T N E S S E T H: WHEREAS, Borrowers have requested that Lender enter into certain financing arrangements with Borrowers pursuant to which Lender may make loans and provide other financial accommodations to Borrowers; and WHEREAS, Lender is willing to make such loans and provide such financial accommodations on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS All terms used herein which are defined in Article 1 or Article 9 of the Uniform Commercial Code shall have the meanings given therein unless otherwise defined in this Agreement. All references to the plural herein shall also mean the singular and to the singular shall also mean the plural unless the context otherwise requires. All references to Borrowers shall, unless the context otherwise expressly provides, mean each and all of them, individually and collectively, jointly and severally. All references to Borrowers and Lender pursuant to the definitions set forth in the recitals hereto, or to any other person herein, shall include their respective successors and assigns. The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. The word "including" when used in this Agreement shall mean "including, without limitation". An Event of Default shall exist or continue or be continuing until such Event of Default is waived in accordance with Section 11.3 or cured in a manner satisfactory to Lender, if such Event of Default is capable of being cured as determined by Lender. Any accounting term used herein unless otherwise defined in this Agreement shall have the meanings customarily given to such term in accordance with GAAP. For purposes of this Agreement, the following terms shall have the respective meanings given to them below: 1.1 "Accounts" shall mean, as to each Borrower, all present and future rights of such Borrower to payment for goods sold or leased or for services rendered, which are not evidenced by instruments or chattel paper, and whether or not earned by performance, and including, without limitation, Credit Card Receivables. 1.2 "Adjusted Eurodollar Rate" shall mean, with respect to each Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent) determined by dividing (a) the Eurodollar Rate for such Interest Period by (b) a percentage equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes hereof, "Reserve Percentage" shall mean the reserve percentage, expressed as a decimal, prescribed by any United States or foreign banking authority for determining the reserve requirement which is or would be applicable to deposits of United States dollars in a non-United States or an international banking office of Reference Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with the proceeds of such deposit, whether or not the Reference Bank actually holds or has made any such deposits or loans. The Adjusted Eurodollar Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. 1.3 "Availability Reserves" shall mean, as of any date of determination, such amounts as Lender may from time to time establish and revise in good faith reducing the amount of Loans and Letter of Credit Accommodations that would otherwise be available to Borrowers under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks that, as determined by Lender in good faith, do or may affect either (i) the Collateral or any other property which is security for the Obligations or its value, (ii) the assets or business of any Borrower or any Obligor or (iii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof) or (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of any Borrower or any Obligor to Lender is or may have been incomplete, inaccurate or misleading in any material respect or (c) in respect of any state of facts which Lender determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default, or (d) to reflect outstanding Letter of Credit Accommodations as -2- provided in Section 2.2 hereof or (e) as otherwise provided in Section 2.3 hereof or elsewhere in this Agreement. 1.4 "Blocked Accounts" shall have the meaning set forth in Section 6.3 hereof. 1.5 "Business Day" shall mean any day other than a Saturday, Sunday, or other day on which commercial banks are authorized or required to close under the laws of the State of New York or the Commonwealth of Pennsylvania, and a day on which the Reference Bank and Lender are open for the transaction of business, except that if a determination of a Business Day shall relate to any Eurodollar Rate Loans, the term Business Day shall also exclude any day on which banks are closed for dealings in dollar deposits in the London interbank market or other applicable Eurodollar Rate market. 1.6 "Capital Expenditures" shall mean all expenditures for any fixed or capital assets or improvements, or for replacements, substitutions or additions thereto, which should be capitalized on a balance sheet in accordance with GAAP, whether acquired by way of purchase, capital or finance lease, increased product service charges, offset items or otherwise. 1.7 "Capital Stock" shall mean any and all shares, interests, participations, or other equivalents (however designated) of corporate stock or partnership interests and any options or warrants with respect to any of the foregoing. 1.8 "Code" shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.9 "Collateral" shall have the meaning set forth in Section 5 hereof. 1.10 "Cost" shall mean, as to Inventory as of any date, the cost of such Inventory as of such date, determined on a first-in- first-out basis in accordance with GAAP. 1.11 "Credit Card Acknowledgments" shall mean, individually and collectively, the agreements by Credit Card Issuers or Credit Card Processors who are parties to Credit Card Agreements in favor of Lender acknowledging Lender's first priority security interest in the monies due and to become due to a Borrower (including, without limitation, credits and reserves) under the Credit Card Agreements, and agreeing to transfer all such amounts to the Blocked Accounts, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. -3- 1.12 "Credit Card Agreements" shall mean all agreements (oral or written) now or hereafter entered into by a Borrower with any Credit Card Issuer or any Credit Card Processor, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, including, but not limited to, the agreements identified on Schedule 8.9 hereto. 1.13 "Credit Card Issuer" shall mean any person (other than a Borrower) who issues or whose members issue credit cards, including, without limitation, MasterCard or VISA bank credit or debit cards or other bank credit or debit cards issued through MasterCard International, Inc., Visa, U.S.A., Inc. or Visa International and American Express, Discover, Diners Club, Carte Blanche and other non-bank credit or debit cards, including, without limitation, credit or debit cards issued by or through American Express Travel Related Services Company, Inc. and NOVUS Services, Inc. 1.14 "Credit Card Processor" shall mean any servicing or processing agent or any factor or financial intermediary who facilitates, services, processes or manages the credit authorization, billing transfer and/or payment procedures with respect to any of a Borrower's sales transactions involving credit card or debit card purchases by customers using credit cards or debit cards issued by any Credit Card Issuer (including, but not limited to, National Data Payment Systems, Inc., American Express Travel Related Services Company, Inc. and NOVUS Services, Inc.) 1.15 "Credit Card Receivables" shall mean collectively, (a) all present and future rights of a Borrower to payment from any Credit Card Issuer, Credit Card Processor or other third party arising from sales of goods or rendition of services to customers who have purchased such goods or services using a credit or debit card and (b) all present and future rights of a Borrower to payment from any Credit Card Issuer, Credit Card Processor or other third party in connection with the sale or transfer of Accounts arising pursuant to the sale of goods or rendition of services to customers who have purchased such goods or services using a credit card or a debit card, including, but not limited to, all amounts at any time due or to become due from any Credit Card Issuer or Credit Card Processor under the Credit Card Agreements or otherwise. 1.16 "EBITA" shall mean, for any measurement period, the Net Income (Loss) for such period, plus (a) to the extent deducted in arriving at Net Income (Loss) for such period, Interest Expense, write-off or amortization of deferred financing costs, provision for Federal, state, local and foreign income taxes, amortization expense, and any non-cash charges or non-cash losses (other than inventory write-downs, but including, without -4- limitation, increases in the amount of multiemployer pension plan liabilities, loss attributable to changes in accounting principles and loss on sale or other disposition of assets not in the ordinary course of business (other than loss on sale or other disposition of inventory), and the amount of non-cash restructuring expenses), minus (b) to the extent included in determining Net Income (Loss) for such period, gains attributable to the effect of change in accounting principles adopted by Borrowers, income tax benefit, extraordinary gains and other non-operating income, such as, but not limited to, gains from the sale or other disposition of assets other than in the ordinary course of business, or from the sale of shares of Capital Stock, or income or gains from forgiveness of indebtedness or from reduction of multiemployer pension plan liabilities or from reversal of restructuring or other expenses and any non-cash gains, minus (c) any payments made during such period in respect of multiemployer pension plan liabilities in excess of the amount equal to $500,000 multiplied by the number of fiscal quarters included in such period, plus (d) with respect to the determination of EBITA for any period during or comprising the fiscal year ending the last Saturday in February, 1998, up to an aggregate of $2,000,000 of cash restructuring charges relating to the closing of LFI's Baltimore, Maryland manufacturing facility, in each case under clauses (a), (b) and (d), determined for Borrowers and their subsidiaries for such period, on a consolidated basis in accordance with GAAP. 1.17 "Eligible Accounts" shall mean, as to each Borrower, Accounts created by such Borrower which are and continue to be acceptable to Lender based on the criteria set forth below. In general, Accounts shall be Eligible Accounts if: (a) such Accounts arise from the actual and bona fide sale and delivery of goods by such Borrower in the ordinary course of the business of Borrowers which transactions are completed in accordance with the terms and provisions contained in any documents related thereto; (b) such Accounts are not unpaid more than seventy-five (75) days after the original maturity date of the invoice therefor or more than one hundred fifty (150) days after the date of the original invoice for them; (c) such Accounts do not consist of Credit Card Receivables; (d) such Accounts comply with the terms and conditions contained in Section 7.2(c) of this Agreement; -5- (e) such Accounts do not arise from sales on consignment, guaranteed sale, sale and return, sale on approval, or other terms under which payment by the account debtor may be conditional or contingent; (f) the chief executive office of the account debtor with respect to such Accounts is located in the United States of America, or at Lender's option, if the chief executive office of the account debtor with respect to such Account is not located in the United States of America, Lender may deem such Accounts to be Eligible Accounts if: (i) such Account is payable only in the United States of America and in U.S. dollars and (ii) either: (A) the account debtor has delivered to such Borrower an irrevocable letter of credit issued or confirmed by a bank satisfactory to Lender, sufficient to cover such Account, in form and substance satisfactory to Lender and, if required by Lender, the original of such letter of credit has been delivered to Lender or Lender's agent and the issuer thereof has been notified of the assignment of the proceeds of such letter of credit to Lender, (B) such Account is subject to credit insurance payable to Lender issued by an insurer and on terms and in an amount acceptable to Lender, or (C) such Account is otherwise acceptable in all respects to Lender (subject to such lending formula with respect thereto as Lender may determine); (g) such Accounts do not consist of progress billings, bill and hold invoices or retainage invoices, except, as to bill and hold invoices, if Lender shall have received an agreement in writing from the account debtor, in form and substance satisfactory to Lender, confirming the unconditional obligation of the account debtor to take delivery of the goods related thereto and pay such invoice; (h) the account debtor with respect to such Accounts has not asserted a counterclaim, chargeback, defense or dispute and does not have, and does not engage in transactions which may give rise to, any right of setoff against such Accounts (but the portion of the Accounts of such account debtor in excess of the amount at any time and from time to time owed by such Borrower to such account debtor or claimed owed by such account debtor may be deemed Eligible Accounts); (i) there are no facts, events or occurrences which would impair the validity, enforceability or collectability of such Accounts or reduce the amount payable or delay payment thereunder; (j) such Accounts are subject to the first priority, valid and perfected security interest of Lender and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any liens except those permitted in this Agreement; -6- (k) neither the account debtor nor any officer or employee of the account debtor with respect to such Accounts is any other Borrower or a subsidiary thereof or an officer, employee or agent or an affiliate of such Borrower directly or indirectly by virtue of family membership, ownership, control, management or otherwise; (l) the account debtors with respect to such Accounts are not any foreign government, the United States of America, any State, political subdivision, department, agency or instrumentality thereof, unless, if the account debtor is the United States of America, any State, political subdivision, department, agency or instrumentality thereof, if upon Lender's request, such Borrower has complied with the Federal Assignment of Claims Act of 1940, as amended or any similar State or local law, if applicable, in a manner satisfactory to Lender; (m) there are no proceedings or actions which are threatened or pending against the account debtors with respect to such Accounts which might result in any material adverse change in any such account debtor's financial condition; (n) such Accounts of a single account debtor or its affiliates do not constitute more than twenty (20%) percent of all otherwise Eligible Accounts or, in the case of each of Federated Department Stores, Inc., May Department Stores Company, Dayton-Hudson Corporation and Dillard Department Stores, Inc., or its respective affiliates, more than forty (40%) percent of all otherwise Eligible Accounts, of all Borrowers considered in the aggregate (but the portion of the Accounts not in excess of the applicable percentage set forth in this subsection may be deemed Eligible Accounts); (o) such Accounts are not owed by an account debtor whose Accounts owed to one or more Borrowers that are unpaid more than seventy-five (75) days after the original maturity date of the invoice therefor or more than one hundred fifty (150) days after the date of the original invoice for them, constitute more than fifty (50%) percent of the total Accounts of such account debtor owed to all Borrowers considered in the aggregate; (p) such Accounts are owed by account debtors whose total indebtedness to all Borrowers, considered in the aggregate, does not exceed the credit limit with respect to such account debtors, if any, as determined by Lender from time to time (but the portion of the Accounts not in excess of such credit limit may still be deemed Eligible Accounts); and (q) such Accounts are owed by account debtors deemed creditworthy at all times by Lender, as determined by Lender. -7- General criteria for Eligible Accounts may be established and revised from time to time by Lender in good faith. Any Accounts which are not Eligible Accounts shall nevertheless be part of the Collateral. 1.18 "Eligible Inventory" shall mean, as to each Borrower, Inventory of such Borrower consisting of finished goods (including Warehouse In-Transit Goods and Non-Warehouse In- Transit Goods) held for resale in the ordinary course of the business of Borrowers and raw materials of such Borrower for the production of such finished goods, in each case that are acceptable to Lender based on the criteria set forth below. In general, Eligible Inventory shall not include (a) packaging and shipping materials; (b) supplies used or consumed in Borrowers' business; (c) Inventory at premises other than those owned and controlled by a Borrower located in the United States, except for (i) Inventory at retail store locations (including temporary sites used for closeout liquidation events) of a Borrower in the United States which are leased by it if either (A) Lender shall have received a Landlord Agreement (as defined below) duly authorized, executed and delivered by the owner and lessor of such premises or (B) if Lender has not received such Landlord Agreement, then Lender shall have established an Availability Reserve in an amount acceptable to Lender in respect of amounts due or to become due to the owner and lessor of such retail store location; provided, that, such Borrower shall use its reasonable best efforts to obtain the Landlord Agreement with respect to each of such locations, (ii) Inventory at other locations of a Borrower in the United States which are leased by it or operated by third party warehousemen or that are owned by it subject to a mortgage in favor of any Person other than Lender and otherwise permitted hereunder, if Lender shall have received an agreement in writing from the owner and lessor, or operator of such premises, or in the case of mortgaged premises, from the mortgagee thereof, in form and substance satisfactory to Lender acknowledging Lender's first priority security interest in the Inventory, waiving security interests and claims by such person against the Inventory and permitting Lender access to, and the right to remain on, the premises so as to exercise Lender's rights and remedies and otherwise deal with the Collateral (such agreement, a "Landlord Agreement", "Warehouseman's Agreement" or "Mortgagee Agreement", as applicable) and (iii) Inventory consisting of finished goods sold on consignment to third parties and located at retail stores in the United States that are operated by the consignee, if Lender shall have received an agreement in writing from the consignee of such Inventory acknowledging Lender's first priority security interest in such Inventory, waiving claims by such person against such Inventory unless paid for and provided Lender is satisfied with the creditworthiness of the consignee and shall have received such other legal documentation (including a Landlord Agreement or Mortgagee Agreement from the consignee's landlord and mortgagee -8- and acknowledgements from consignee's secured parties) deemed necessary to Lender, all of which to be acceptable to Lender; (d) Inventory subject to a security interest or lien in favor of any person other than Lender except those permitted in this Agreement; (e) bill and hold goods; (f) slow-moving Inventory to the extent of increases thereof since the most recent field examination conducted by Lender prior to the date of determination of Eligible Inventory; (g) Inventory which is not subject to the first priority, valid and perfected security interest of Lender; (h) damaged and/or defective Inventory to the extent not written-down to an amount acceptable to Lender; (i) returned Inventory that is not first quality and held for resale without the need for further preparation or processing (other than normal cleaning and pressing), to the extent not written-down to an amount acceptable to Lender (j) Inventory to be returned to vendors; (k) Inventory subject to deposits made by customers for sales of Inventory that has not been delivered; (l) Inventory that is in transit to a Borrower's location in the United States unless Lender has a first priority security interest and control of the documents of title covering such goods; and (m) samples. General criteria for Eligible Inventory may be established and revised from time to time by Lender in good faith. Any Inventory which is not Eligible Inventory shall nevertheless be part of the Collateral. 1.19 "Environmental Laws" shall mean all foreign, Federal, State and local laws (including common law), legislation, rules, codes, licenses, permits (including any conditions imposed therein), authorizations, judicial or administrative decisions, injunctions or agreements between a Borrower and any governmental authority, (a) relating to pollution and the protection, preservation or restoration of the environment (including air, water vapor, surface water, ground water, drinking water, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, (b) relating to the exposure to, or the use, storage, recycling, treatment, generation, manufacture, processing, distribution, transportation, handling, labeling, production, release or disposal, or threatened release, of Hazardous Materials, or (c) relating to all laws with regard to recordkeeping, notification, disclosure and reporting requirements respecting Hazardous Materials. The term "Environmental Laws" includes (i) the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Water Act, the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water Act of 1974, (ii) applicable state -9- counterparts to such laws, and (iii) any common law or equitable doctrine that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Materials. 1.20 "Equipment" shall mean, as to each Borrower, all of such Borrower's now owned and hereafter acquired equipment, machinery, computers and computer hardware and software (whether owned or licensed), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located. 1.21 "ERISA" shall mean the United States Employee Retirement Income Security Act of 1974, as the same now exists or may hereafter from time to time be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.22 "ERISA Affiliate" shall mean any person required to be aggregated with a Borrower or any of its subsidiaries under Sections 414(b), 414(c), 414(m) or 414(o) of the Code. 1.23 "Eurodollar Rate" shall mean with respect to the Interest Period for a Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic average of the rates of interest per annum (rounded upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is offered deposits of United States dollars in the London interbank market (or other Eurodollar Rate market selected by a Borrower and approved by Lender) on or about 9:00 a.m. (New York time) two (2) Business Days prior to the commencement of such Interest Period in amounts substantially equal to the principal amount of the Eurodollar Rate Loans requested by or by LFI on behalf of and available to Borrowers in accordance with this Agreement, with a maturity of comparable duration to the Interest Period selected by a Borrower. 1.24 "Eurodollar Rate Loans" shall mean any Loans or portion thereof on which interest is payable based on the Adjusted Eurodollar Rate in accordance with the terms hereof. 1.25 "Event of Default" shall mean the occurrence or existence of any event or condition described in Section 10.1 hereof. 1.26 "Excess Availability" shall mean the amount, as determined by Lender, calculated at any time, equal to: (a) the lesser of (i) the aggregate amount of the Primary Loans available to Borrowers as of such time based on the applicable lending formulas multiplied by the Net Amount of Eligible Accounts and the Value of Eligible Inventory, as determined by Lender, plus -10- the amount of Supplemental A Loans and Supplemental B Loans then available to Borrowers, subject to the sublimits and Availability Reserves from time to time established by Lender hereunder and (ii) the Maximum Credit less the face amount of outstanding Letter of Credit Accommodations, minus (b) the sum of: (i) the amount of all then outstanding and unpaid Obligations (other than the face amount of outstanding Letter of Credit Accommodations), plus (ii) the aggregate amount of all trade payables of Borrowers that are more than sixty (60) days past due as of such time, other than those that are being disputed by Borrowers in good faith. 1.27 "Existing Senior Lenders" shall mean the existing secured working capital lenders to LFI, and The Chase Manhattan Bank, a New York banking corporation, as agent for such lenders, pursuant to that certain Amended and Restated Credit Agreement dated as of May 31, 1995, as amended. 1.28 "Financing Agreements" shall mean, collectively, this Agreement and all notes, guarantees, security agreements, intercreditor and/or subordination agreements, and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by any Borrower or any Obligor in connection with this Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.29 "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board(s) which are applicable to the circumstances as of the date of determination consistently applied, except that, for purposes of Section 9.17 hereof, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the audited financial statements delivered to Lender prior to the date hereof. 1.30 "Guarantors" shall mean, individually and collectively, each Person that at any time guarantees payment or performance of all or any portion of the Obligations, including, as of the date hereof, PTI Holding Corp., a Nevada corporation, PTI Top Company, Inc., a Nevada corporation, Star Sportswear Manufacturing Corp., a Delaware corporation, Matthew Manufacturing Co., Inc., a Maryland corporation, Washington Holding Company, a Georgia corporation, Clipper Mist, Inc., a Maryland corporation, London Fog Sportswear, Inc., a Delaware corporation and The Mounger Corporation, a Washington corporation, and their respective successors and assigns. -11- 1.31 "Information Certificate" shall mean, collectively, the Information Certificates of Borrowers constituting Exhibit A hereto containing material information with respect to Borrowers, their business and assets, provided by or on behalf of Borrowers to Lender in connection with the preparation of this Agreement and the other Financing Agreements and the financing arrangements provided for herein. 1.32 "Intellectual Property Intangibles" shall mean, as to each Borrower, trademarks, tradenames and patents owned by such Borrower and royalties payable to such Borrower under licenses with respect thereto. 1.33 "Interest Expense" shall mean, for any period, the amount which would, in conformity with GAAP, be set forth opposite the caption "interest expense" or any like caption on a consolidated statement of operations of Borrowers and their subsidiaries prepared on a consolidated basis in accordance with GAAP, excluding amortization of deferred financing costs. 1.34 "Interest Period" shall mean for any Eurodollar Rate Loan, a period of approximately one (1), two (2), or three (3) months duration as Borrowers may elect, the exact duration to be determined in accordance with the customary practice in the applicable Eurodollar Rate market; provided, that, Borrowers may not elect an Interest Period which will end after the last day of the then-current term of this Agreement. 1.35 "Interest Rate" shall mean, as to Prime Rate Loans, a rate of three-quarters of one (3/4%) percent per annum in excess of the Prime Rate and, as to Eurodollar Rate Loans, subject to adjustment pursuant to the provisions of Section 3.1(e) hereof, a rate of two and three-quarters (2 3/4%) percent per annum in excess of the Adjusted Eurodollar Rate (based on the Eurodollar Rate applicable for the Interest Period selected by Borrowers or by LFI on behalf of Borrowers as in effect three (3) Business Days after the date of receipt by Lender of the request by Borrowers or by LFI on behalf of Borrowers for such Eurodollar Rate Loans in accordance with the terms hereof, whether such rate is higher or lower than any rate previously quoted to such Borrower); provided, that: the Interest Rate shall be increased to a rate two (2%) percent per annum in excess of the pre-default variable rate as to Prime Rate Loans and to a rate two (2%) percent per annum in excess of the pre-default variable rate as to Eurodollar Rate Loans, at Lender's option, without notice, (a) for the period on and after (i) the date of termination or non-renewal hereof and until such time as all non-contingent Obligations are fully and finally paid (notwithstanding entry of any judgment against any Borrower), or (ii) the date of the occurrence of any Event of Default or act, condition or event which with notice or passage of time or both would constitute an Event of Default, and for so long as such Event of Default or -12- other event is continuing as determined by Lender and (b) on the Loans at any time outstanding in excess of the amounts available to a Borrower under Section 2 (whether or not such excess(es), arise or are made with or without Lender's knowledge or consent and whether made before or after an Event of Default). 1.36 "Inventory" shall mean, as to each Borrower, all of such Borrower's now owned and hereafter existing or acquired raw materials, work in process, finished goods and all other inventory of whatsoever kind or nature, wherever located. 1.37 "Letter of Credit Accommodations" shall mean the letters of credit, merchandise purchase or other guaranties which are from time to time either (a) issued or opened by Lender for the account of any Borrower or, in Lender's discretion, any Obligor or (b) with respect to which Lender has agreed to indemnify the issuer or guaranteed to the issuer the performance by a Borrower of its obligations to such issuer. 1.38 "Loans" shall mean, collectively, the Primary Loans, the Supplemental A Loans and the Supplemental B Loans. 1.39 "Maximum Credit" shall mean $150,000,000, except that for the period from the date hereof through April 30, 1998, such term shall mean $140,000,000. 1.40 "MetLife" shall mean MetLife Capital Financial Corp., a Delaware corporation, and its successors and assigns. 1.41 "Net Amount of Eligible Accounts" shall mean, as to each Borrower, (a) the aggregate gross amount of Eligible Accounts of such Borrower less (b) sales, excise or similar taxes included in the amount thereof and less (c) without duplication of amounts deemed excluded from Eligible Accounts pursuant to the criteria set forth herein or established by Lender hereunder, returns (including accruals for unprocessed returns that have been received by Borrowers), discounts (including cash discount reserves), claims, credits and allowances (including cooperative advertising allowances) of any nature at any time issued, owing, granted, outstanding, available or claimed with respect thereto. 1.42 "Net Income (Loss)" shall mean, for any fiscal period, the aggregate net income (or loss) after provision (benefit) for federal, state, local and foreign income taxes of Borrowers and their subsidiaries, if any, for such period, determined on a consolidated basis in accordance with GAAP. 1.43 "Net Recovery Cost Percentage" as to Inventory at any time shall mean the fraction, expressed as a percentage, (a) the numerator of which is the amount equal to the recovery on the aggregate amount of the Inventory at such time on a "going out of business sale" basis as set forth as the mid-range recovery -13- amount in the most recent acceptable appraisal of Inventory received by Lender in accordance with Section 7.3, net of operating and occupancy expenses, liquidation expenses and commissions, and (b) the denominator of which is the original Cost of the aggregate amount of the Inventory subject to appraisal. 1.44 "Non-Warehouse In-Transit Goods" shall mean Eligible Inventory of a Borrower consisting of finished goods in transit to a warehouse, retail store of a Borrower or third party location, in each case maintained as an Eligible Inventory location hereunder covered by documents of title with respect to which Lender has possession or control. 1.45 "Obligations" shall mean any and all Loans, Letter of Credit Accommodations and all other obligations, liabilities and indebtedness of every kind, nature and description owing by any or all Borrowers to Lender and/or its affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to any or all Borrowers under the United States Bankruptcy Code or any similar statute (including, without limitation, the payment of interest and other amounts which would accrue and become due but for the commencement of such case, whether or not such amounts are allowed or allowable in whole or in part in such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Lender. 1.46 "Obligor" shall mean any Guarantor, endorser, acceptor, surety or other person liable on or with respect to the Obligations or who is the owner of any property which is security for the Obligations, other than a Borrower. 1.47 "Payment Account" shall have the meaning set forth in Section 6.3 hereof. 1.48 "Permits" shall have the meaning set forth in Section 8.7 hereof. 1.49 "Person" or "person" shall mean any individual, sole proprietorship, partnership, corporation (including, without limitation, any corporation which elects subchapter S status under the Code), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any -14- government or any agency or instrumentality or political subdivision thereof. 1.50 "Primary Loans" shall mean the loans made to or for the benefit of Borrowers by Lender on a revolving basis (including advances, repayments and readvances) as set forth in Sections 2.1(a)(i) and 2.1(a)(ii) hereof. 1.51 "Prime Rate" shall mean the rate from time to time publicly announced by CoreStates Bank, N.A., or its successors, at its office in Philadelphia, Pennsylvania, as its prime rate, whether or not such announced rate is the best rate available at such bank. 1.52 "Prime Rate Loans" shall mean any Loans or portion thereof on which interest is payable based on the Prime Rate in accordance with the terms hereof. 1.53 "Real Property" shall mean all now owned and hereafter acquired real property of a Borrower, including leasehold interests, together with all buildings, structures, and other improvements located thereon and all licenses, easements and appurtenances relating thereto, wherever located. 1.54 "Records" shall mean, as to each Borrower, all of such Borrower's present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of such Borrower with respect to the foregoing maintained with or by any other person). 1.55 "Reference Bank" shall mean CoreStates Bank, N.A. or such other bank as Lender may designate from time to time. 1.56 "Renewal Date" shall have the meaning set forth in Section 12.1 hereof. 1.57 "Supplemental A Loans," shall mean the loans made to or for the benefit of Borrowers on a revolving basis (including advances, repayments and readvances) as set forth in Section 2.1(a)(iii) hereof. 1.58 "Supplemental B Loans" shall mean the loans made to or for the benefit of Borrowers on a revolving basis (including advances, repayments and readvances) as set forth in Section 2.1(a)(iv) hereof. -15- 1.59 "Subordinated Lenders" shall mean, individually and collectively, the subordinated lenders to LFI and The Chase Manhattan Bank as agent for such lenders pursuant to the Subordinated Loan Documents, and their respective successors and assigns. 1.60 "Subordinated Loan Documents" shall mean, collectively, the Term Loan Agreement and the Note Agreement, each dated as of May 31, 1995, and the Credit Agreement dated as of May 20, 1994, each as amended, among the Subordinated Lenders and LFI, together with all documents and instruments that from time to time evidence the indebtedness of LFI and its subsidiaries to the Subordinated Lenders or secure or support payment or performance thereof. 1.61 "Value" shall mean, as determined by Lender in good faith, with respect to Inventory, the lower of (a) Cost or (b) market value. 1.62 "Warehouse In-Transit Goods" shall mean Eligible Inventory of a Borrower consisting of finished goods located in a warehouse of a Borrower maintained as a location of Eligible Inventory hereunder prior to such Inventory being entered into the warehouse computer inventory system of Borrowers as goods on hand in such warehouse. SECTION 2. CREDIT FACILITIES 2.1 Loans. (a) Subject to, and upon the terms and conditions contained herein, Lender agrees to make Loans to Borrowers, from time to time in amounts requested by Borrowers or LFI as agent for Borrowers, up to the amount equal to the sum of: (i) eighty (80%) percent of the Net Amount of Eligible Accounts of LFI and PTI; plus (ii) the sum of: (A) fifty (50%) percent of the Value of Eligible Inventory of Borrowers consisting of raw materials, plus (B) the amount equal to: (1) sixty-eight (68%) percent during the period January 1 through and including April 30 in each calendar year, or (2) eighty-three (83%) percent during the period May 1 through and including December 31 in each calendar year, of the Value of Eligible Inventory of Borrowers consisting of finished goods; plus (iii) the amount equal to: (A) $10,000,000 during the months of March and September in each calendar year, or (B) $20,000,000 during the period of April 1 through and including August 31 in each calendar year; plus -16- (iv) subject to the limitations set forth in Section 2.1(d) hereof, available in the calendar years 1998 and 1999, for any one period in each such calendar year not to exceed thirty (30) consecutive days during the period of May 1 through and including July 31 of the same calendar year, an amount not to exceed the lesser of: (A) $10,000,000 or (B) fifteen (15%) percent of the Value of Eligible Inventory consisting of finished goods; less (v) any Availability Reserves. (b) Lender may, in its discretion, from time to time, upon not less than five (5) days prior notice to LFI as agent for Borrowers, reduce the lending formula with respect to (i) Eligible Accounts to the extent that Lender determines in good faith that: (A) the dilution with respect to the Accounts for any period (based on the ratio of (1) the aggregate amount of reductions in Accounts other than as a result of payments in cash to (2) the aggregate amount of total sales) has increased in any material respect or may be reasonably anticipated to increase in any material respect above historical levels, or (B) the general creditworthiness of account debtors has declined in any material respect, or (ii) Eligible Inventory to the extent that Lender determines in good faith that: (A) the number of days of the turnover of the Inventory for any period has changed in any material respect or (B) the nature, quality or mix of the Inventory has deteriorated or (C) there is a decrease in the Net Recovery Cost Percentage after the date hereof. In determining whether to reduce the lending formula(s), Lender may consider events, conditions, contingencies or risks which are also considered in determining Eligible Accounts, Eligible Inventory or in establishing Availability Reserves. Notwithstanding the foregoing, at no time shall the applicable lending percentage set forth above in Section 2.1(a)(ii)(B) exceed the percentage, rounded to the nearest whole percent, equal to ninety (90%) percent multiplied by the Net Recovery Cost Percentage of Inventory of Borrowers at such time; provided, that in the case of the lending percentages applicable in the calendar months of May and June in any year, the Net Recovery Percentage for the "peak season" (as referred to in the most recent appraisal received by Lender in accordance with Section 7.3) shall be used instead of the Net Recovery Cost Percentage otherwise applicable to such calendar months, notwithstanding that such months do not fall within the "peak season" as identified in such appraisal. (c) Notwithstanding the foregoing, at no time shall the amount of Supplemental A Loans exceed an amount equal to seventy (70%) percent of the fair market value of the Intellectual Property Intangibles as determined by the most recent acceptable appraisal of Intellectual Property Intangibles received by Lender in accordance with Section 7.5 hereof, or, in lieu of such maximum amount in the case only of Supplemental A -17- Loans available during any period specified in Section 2.1(a)(iii) which falls within the period from the date hereof through the date of receipt by Lender of the first such appraisal of Intellectual Property Intangibles delivered or caused to be delivered after the date hereof under Section 7.5 hereof, the amount of $20,000,000. (d) In addition to the other terms and provisions of this Agreement (including the conditions precedent to Loans and Letter of Credit Accommodations set forth herein), Supplemental B Loans shall only be available to Borrowers in any calendar year referred to in Section 2.1(a)(iv), if each of the following additional conditions precedent are satisfied, as determined by Lender: (i) there shall have been no outstanding Loans for at least thirty (30) consecutive days during the period from December 1 of the calendar year ending prior to the request for Supplemental B Loans through and including March 31 of the then-current calendar year; (ii) Excess Availability shall have been greater than $15,000,000 for each of at least thirty (30) consecutive days during which there were no outstanding Loans, as referred to in Section 2.1(d)(i) above; (iii) the EBITA of Borrowers and their subsidiaries for the fiscal year most recently ended prior to the request for Supplemental B Loans, shall have been not less than $10,000,000, as shown in the unaudited consolidated financial statements prepared by Borrowers in accordance with GAAP and delivered to Lender, subject to confirmation by the annual audited financial statements delivered to Lender within the time, in the form and accompanied by the audit report and opinion required under Section 9.6(a)(ii) hereof; (iv) Lender shall have received updated appraisals of Inventory and Intellectual Property Intangibles, each acceptable to Lender, on or prior to April 15th of such year, the results of which shall confirm that there has been no decline in the values or anticipated recovery from those set forth in the appraisal reports by Buxbaum Ginsburg & Associates, Inc. as of February 22, 1997 as to the Inventory and by Daley-Hodkin Appraisal Corporation as of April 1997 as to the Intellectual Property Intangibles, each received by Lender prior to the date hereof; (v) Lender shall have received at or before the end of the fiscal year most recently ended prior to the request for Supplemental B Loans, financial projections for the next fiscal year of Borrowers based on the reasonable good faith assumptions of senior management of Borrowers, reflecting -18- borrowing availability under the lending formulas set forth herein for such fiscal year deemed by Lender in good faith to be adequate in light of the anticipated needs of the business; and (vi) the Value of Inventory of Borrowers at the end of the March fiscal month ending in such calendar year, as reported to Lender in the financial report for such month delivered under Section 9.6(a) hereof (and which shall be received by Lender prior to the request for Supplemental B Loans), shall be no more than fifteen (15%) percent greater than the Value for such month set forth in the financial projections applicable to such March fiscal month, as provided by Borrowers to Lender on or before the end of the fiscal year most recently ended prior thereto. (e) The aggregate amount of Primary Loans outstanding at any time with respect to Eligible Inventory, plus the aggregate amount of Supplemental B Loans outstanding at any time, shall not exceed $125,000,000. (f) Except in Lender's discretion, the aggregate amount of the Loans and the Letter of Credit Accommodations outstanding at any time shall not exceed the Maximum Credit. In the event that the outstanding amount of the Loans, or the aggregate amount of the outstanding Loans and Letter of Credit Accommodations, exceed the amounts available under the lending formulas, the sublimit under Section 2.1(e), the sublimits for Letter of Credit Accommodations set forth in Section 2.2(d) or the Maximum Credit, as applicable, such event shall not limit, waive or otherwise affect any rights of Lender in that circumstance or on any future occasions and Borrowers shall, upon demand by Lender, which may be made at any time or from time to time, immediately repay to Lender the entire amount of any such excess(es) for which payment is demanded. (g) For purposes of applying the sublimit set forth in Section 2.1(e) hereof, Lender may treat the amount of its reliance on Eligible Inventory that is to be purchased under, or finished with labor the costs of which are to be paid under, outstanding Letter of Credit Accommodations, as a Primary Loan based on Eligible Inventory pursuant to Section 2.1(a)(ii). In determining the amount of such reliance, the outstanding Loans and Availability Reserves shall first be attributed to any available components of the lending formulas in Section 2.1(a) that are not subject to such sublimit, before being attributed to available components of the lending formulas subject to such sublimit. 2.2 Letter of Credit Accommodations. (a) Subject to, and upon the terms and conditions contained herein, at the request of Borrowers or LFI as agent for -19- Borrowers, Lender agrees to provide or arrange for Letter of Credit Accommodations for the account of Borrowers containing terms and conditions acceptable to Lender and the issuer thereof. Any payments made by Lender to any issuer thereof and/or related parties in connection with the Letter of Credit Accommodations shall constitute additional Loans to Borrowers pursuant to this Section 2. Notwithstanding that any Letter of Credit Accommodation may designate, or any application therefor may designate or be signed by, only one Borrower as account party, each of the Borrowers shall be jointly and severally liable for all Obligations in respect of all Letter of Credit Accommodations or relating thereto (in addition to all other Obligations). (b) In addition to any charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations, Borrowers shall pay to Lender a letter of credit fee at a rate equal to one and one-half (1 1/2%) percent per annum on the daily outstanding balance of the Letter of Credit Accommodations for the immediately preceding month (or part thereof), payable in arrears as of the first day of each succeeding month, except that Borrowers shall pay to Lender such letter of credit fee, at Lender's option, without notice, at a rate equal to three and one-half (3 1/2%) percent per annum for (i) the period from and after the date of termination or non-renewal hereof until Lender has received full and final payment of all non-contingent Obligations and cash collateral (or a standby letter of credit in favor of Lender acceptable to Lender in all respects) sufficient to cover all Obligations in respect of outstanding Letter of Credit Accommodations or relating thereto (notwithstanding entry of a judgment against such Borrower) and (ii) the period from and after the date of the occurrence of an Event of Default and for so long as such Event of Default is continuing. Such letter of credit fee shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed and the obligation of Borrowers to pay such fee shall survive the termination or non-renewal of this Agreement. (c) No Letter of Credit Accommodations shall be available to Borrowers unless on the date of the proposed issuance of any Letter of Credit Accommodations, the Loans available to Borrowers (subject to the Maximum Credit, applicable sublimits and any Availability Reserves in effect immediately prior to such proposed issuance) are equal to or greater than (i) if the proposed Letter of Credit Accommodation is for the purpose of purchasing Eligible Inventory consisting of goods that are finished at the time of purchase or for the purposes of purchasing raw materials, in each case under terms requiring, as a condition of any drawing, the presentation of acceptable evidence of shipment of the subject goods to the United States in the form purchased, the percentage equal to one hundred (100%) percent minus the lending percentage applicable to such Eligible -20- Inventory under Section 2.1(a)(ii) above, multiplied by the sum of (A) the Value of such Eligible Inventory, plus (B) freight, taxes, duty and other amounts that Lender estimates must be paid in connection with such Inventory upon arrival and for delivery to one of Borrowers' locations for Eligible Inventory; (ii) if the proposed Letter of Credit Accommodations is for the purpose of paying labor costs related to the production of Eligible Inventory using raw materials located outside of the United States which are owned and have already been paid for by Borrowers, an amount equal to zero (0%) percent of the face amount thereof; and (iii) if the proposed Letter of Credit Accommodation is for any purpose, other than those set forth in Sections 2.2(c)(i) or 2.2(c)(ii), an amount equal to one hundred (100%) percent of the face amount thereof and all other commitments and obligations made or incurred by Lender with respect thereto. Effective on the issuance of each Letter of Credit Accommodations, an Availability Reserve shall be established in the applicable amount set forth in Sections 2.2(c)(i) or 2.2(c)(iii) hereof, subject to increase or decrease in the case of Letter of Credit Accommodations described in Section 2.2(c)(i), based on any change in the lending percentage applicable to such Eligible Inventory. (d) Except in Lender's discretion, the aggregate amount of all outstanding Letter of Credit Accommodations and any other commitments and obligations made or incurred by Lender in connection therewith, shall not at any time exceed $80,000,000. At any time an Event of Default exists or has occurred and is continuing, upon Lender's request, Borrowers will either furnish cash collateral to secure the reimbursement obligations to the issuer in connection with any Letter of Credit Accommodations or furnish cash collateral to Lender for the Letter of Credit Accommodations, and in either case, or, if at any other time Borrowers furnish cash collateral to Lender for the Letter of Credit Accommodations, the Loans otherwise available to Borrowers shall not be reduced as provided in Section 2.2(c) to the extent of such cash collateral. (e) Borrowers shall indemnify and hold Lender harmless from and against any and all losses, claims, damages, liabilities, costs and expenses which Lender may suffer or incur in connection with any Letter of Credit Accommodations and any documents, drafts or acceptances relating thereto, including, but not limited to, any losses, claims, damages, liabilities, costs and expenses due to any action taken by any issuer or correspondent with respect to any Letter of Credit Accommodation. Borrowers assume all risks with respect to the acts or omissions of the drawer under or beneficiary of any Letter of Credit Accommodation and for such purposes the drawer or beneficiary shall be deemed the agent of Borrowers. Borrowers assume all risks for, and agree to pay, all foreign, Federal, State and local taxes, duties and levies relating to any goods subject to -21- any Letter of Credit Accommodations or any documents, drafts or acceptances thereunder. Borrowers hereby release and hold Lender harmless from and against any acts, waivers, errors, delays or omissions, whether caused by Borrowers, by any issuer or correspondent or otherwise with respect to or relating to any Letter of Credit Accommodation. The provisions of this Section 2.2(e) shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. (f) Nothing contained herein shall be deemed or construed to grant Borrowers any right or authority to pledge the credit of Lender in any manner. Lender shall have no liability of any kind with respect to any Letter of Credit Accommodation provided by an issuer other than Lender unless Lender has duly executed and delivered to such issuer the application or a guarantee or indemnification in writing with respect to such Letter of Credit Accommodation. Borrowers shall be bound by any interpretation made in good faith by Lender, or any other issuer or correspondent under or in connection with any Letter of Credit Accommodation or any documents, drafts or acceptances thereunder, notwithstanding that such interpretation may be inconsistent with any instructions of a Borrower. Lender shall have the sole and exclusive right and authority to, and Borrowers shall not: (i) at any time an Event of Default exists or has occurred and is continuing, (A) approve or resolve any questions of non-compliance of documents, (B) give any instructions as to acceptance or rejection of any documents or goods or (C) execute any and all applications for steamship or airway guaranties, indemnities or delivery orders, and (ii) at all times, (A) grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents, and (B) agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letter of Credit Accommodations, or documents, drafts or acceptances thereunder or any letters of credit included in the Collateral. Lender may take such actions either in its own name or in the name of a Borrower. Prior to an Event of Default, Lender shall cooperate reasonably with Borrowers in considering and presenting to the issuer Borrowers' requests regarding the matters described in clause (ii) of this Section 2.2(f). (g) Any rights, remedies, duties or obligations granted or undertaken by a Borrower to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been granted or undertaken by all Borrowers to Lender. Any duties or obligations undertaken by Lender to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement by Lender in favor of any issuer or correspondent relating to any Letter of -22- Credit Accommodation, shall be deemed to have been undertaken by all Borrowers to Lender and to apply in all respects to all Borrowers. 2.3 Availability Reserves. All Loans otherwise available to Borrowers pursuant to the lending formulas and subject to the Maximum Credit and other applicable limits hereunder shall be subject to Lender's continuing right to establish and revise Availability Reserves. Without limiting any other rights or remedies of Lender under this Agreement or any of the other Financing Agreements with respect to the establishment of Availability Reserves or otherwise, Lender may establish and revise Availability Reserves to reflect: (a) inventory shrinkage; (b) the aggregate amount of deposits, if any, received by a Borrower from its retail customers in respect of unfilled orders for merchandise; (c) amounts past due in respect of sales, use and/or withholding taxes; (d) any rental payments, service charges or other amounts due to lessors, mortgagees or operators of real or personal property to the extent Inventory or Records are located in or on property or such Records are needed to monitor or otherwise deal with the Collateral, but limited, in the case of property covered by a Landlord Agreement, Mortgagee Agreement or Warehouseman's Agreement acceptable to Lender to amounts estimated by Lender as necessary to be paid in connection with the future exercise by Lender of its rights pursuant to such agreements or (e) amounts owing by any Borrower to Credit Card Issuers or Credit Card Processors in connection with the Credit Card Agreements. SECTION 3. INTEREST AND FEES 3.1 Interest. (a) Borrowers shall pay to Lender interest on the outstanding principal amount of the non-contingent Obligations at the Interest Rate. All interest accruing hereunder on and after the date of any Event of Default or termination or non-renewal hereof shall be payable on demand. (b) Borrowers or LFI as agent for Borrowers may from time to time request that Prime Rate Loans be converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans continue for an additional Interest Period. Such request from or on behalf of Borrowers shall specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate Loans (subject to the limits set forth below) and the Interest Period to be applicable to such Eurodollar Rate Loans. Subject to the terms and conditions contained herein, three (3) Business Days after receipt by Lender of such a request from or on behalf of Borrowers, such Prime Rate Loans shall be converted to Eurodollar Rate Loans or such Eurodollar Rate Loans shall continue, as the -23- case may be, provided, that, as of such date each of the following conditions is satisfied as determined by Lender: (i) no Event of Default, or event which with notice or passage of time or both would constitute an Event of Default exists or has occurred and is continuing, (ii) no party hereto shall have sent any notice of termination or non-renewal of this Agreement, (iii) Borrowers shall have complied with such customary procedures as are established by Lender and specified by Lender to Borrowers from time to time for requests by or on behalf of Borrowers for Eurodollar Rate Loans, (iv) no more than six (6) Interest Periods may be in effect at any one time, (v) the aggregate amount of the Eurodollar Rate Loans must be in an amount not less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof, (vi) the maximum amount of the Eurodollar Rate Loans at any time requested by or on behalf of Borrowers shall not exceed the amount equal eighty-five (85%) percent of the lowest principal amount of the Loans which it is anticipated will be outstanding during the applicable Interest Period, in each case as determined by Lender (but with no obligation of Lender to make such Loans by virtue of this provision) and (vii) Lender shall have determined that the Interest Period and Adjusted Eurodollar Rate is available to Lender through the Reference Bank and can be readily determined as of the date of the request for such Eurodollar Rate Loan by or on behalf of Borrowers. Any request by or on behalf of Borrowers to convert Prime Rate Loans to Eurodollar Rate Loans or to continue any existing Eurodollar Rate Loans shall be irrevocable. Notwithstanding anything to the contrary contained herein, Lender and Reference Bank shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable Eurodollar Rate market to fund any Eurodollar Rate Loans, but the provisions hereof shall be deemed to apply as if Lender and Reference Bank had purchased such deposits to fund the Eurodollar Rate Loans. (c) Any Eurodollar Rate Loans shall automatically convert to Prime Rate Loans upon the last day of the applicable Interest Period, unless Lender has received and approved a request to continue such Eurodollar Rate Loan at least three (3) Business Days prior to such last day in accordance with the terms hereof. Any Eurodollar Rate Loans shall, at Lender's option, upon notice by Lender to Borrowers or LFI as agent for Borrowers, convert to Prime Rate Loans upon the last day of the respective then-current Interest Period(s), in the event that (i) an Event of Default or act, condition or event which with the notice or passage of time or both would constitute an Event of Default, shall exist or have occurred, (ii) this Agreement shall terminate or not be renewed, or (iii) the aggregate principal amount of the Prime Rate Loans which have previously been converted to Eurodollar Rate Loans or existing Eurodollar Rate Loans continued, as the case may be, at the beginning of an Interest Period shall at any time during such Interest Period exceed either (A) the aggregate principal amount of the Loans then -24- outstanding, or (B) the Loans then available to Borrowers under Section 2 hereof. Borrowers shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge any loan account of Borrowers) any amounts required to compensate Lender, the Reference Bank or any participant with Lender for any loss (including loss of anticipated profits), cost or expense incurred by such person, as a result of the conversion of Eurodollar Rate Loans to Prime Rate Loans pursuant to any of the foregoing. (d) Interest shall be payable by Borrowers to Lender monthly in arrears not later than the first day of each calendar month and shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. The interest rate on non-contingent Obligations (other than Eurodollar Rate Loans) shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the first day of the month after any change in such Prime Rate is announced based on the Prime Rate in effect on the last day of the month in which any such change occurs. In no event shall charges constituting interest payable by Borrowers to Lender exceed the maximum amount or the rate permitted under any applicable law or regulation, and if any such part or provision of this Agreement is in contravention of any such law or regulation, such part or provision shall be deemed amended to conform thereto. (e) The Interest Rate with respect to Eurodollar Rate Loans is subject to adjustment as follows: (i) If the EBITA of Borrowers and their subsidiaries is greater than $12,000,000 for the fiscal year of Borrowers ending the last Saturday in February, 1998 or any fiscal year commencing after the last Saturday in February, 1998, then the pre-default Interest Rate for Eurodollar Rate Loans will be reduced to two and one-half (2 1/2%) percent per annum above the Adjusted Eurodollar Rate. (ii) Each adjustment in the Interest Rate for Eurodollar Rate Loans shall be applicable to each then-operative Interest Period, effective as of the first day of the month in which Lender receives the delivery of audited financial statements of Borrowers and their subsidiaries for the applicable fiscal year showing that the required financial results were achieved, which audited financial statements shall be in the form required by Section 9.6(a) hereof, accompanied by the unqualified audit report and opinion thereon of independent certified public accountants acceptable to Lender, and such adjustment shall continue to be applicable to all Interest Periods commencing thereafter, subject to Section 3.1(e)(iv). (iii) No reduction in the pre-default Interest Rate for Eurodollar Rate Loans as described in this Section 3.1(e) shall become effective if, at the time a reduction would -25- otherwise be made under this Section 3.1(e), an Event of Default exists or has occurred and is continuing. (iv) After the occurrence of a reduction in the pre-default Interest Rate for Eurodollar Rate Loans pursuant to this Section 3.1(e), in the event the EBITA of Borrowers and their subsidiaries shall be less than $12,000,000 with respect to any subsequent fiscal year, or if the audited financial statements are not timely delivered in the form and accompanied by the accountants report required under Section 3.1(e)(ii), the pre-default Interest Rate for Eurodollar Rate Loans shall revert to two and three-quarters (2 3/4%) percent per annum above the Adjusted Eurodollar Rate, applicable to all then-operative Interest Periods, effective as of the ninetieth (90th) day following the end of such fiscal year, and applicable to all Interest Periods thereafter, subject to the re-application of this Section 3.1(e) in subsequent fiscal years and (subject to Lender's default rights) as to the remainder of the then-current fiscal year upon the delivery after its due date of the audited financial statements in such form and accompanied by such report. (f) Without Lender's prior written consent, Borrowers and their subsidiaries shall not change their fiscal year from the period of fifty-two or fifty-three weeks ending the last Saturday in February. 3.2 Closing Fee. Borrowers shall pay to Lender as a closing fee the amount of $1,125,000 which shall be fully earned as of the date hereof, $375,000 of which shall be payable on the date hereof, $375,000 of which shall be payable on the first anniversary of the date hereof, and $375,000 of which shall be payable on the second anniversary of the date hereof. 3.3 Servicing Fee. Borrowers shall pay to Lender monthly a servicing fee in an amount equal to $10,000 for each month (or part thereof) while this Agreement is in effect and for so long thereafter as any of the Obligations (other than Obligations fully covered by cash collateral held by Lender or a standby letter of credit in favor of Lender acceptable to Lender in all respects) are outstanding, which fee shall be fully earned as of and payable in advance on the date hereof and on the first day of each month hereafter. 3.4 Unused Line Fee. Borrowers shall pay to Lender with respect to the calendar months of May through and including November (or part thereof) in each year while this Agreement is in effect, an unused line fee at a rate equal to one-half (1/2%) percent per annum calculated upon the amount by which $110,000,000 exceeds the average daily principal balance of the outstanding Loans and Letter of Credit Accommodations during such month (or part thereof), which fee shall be payable on the first day following each applicable month, in arrears. -26- 3.5 Supplemental B Loan Fee. If any Supplemental B Loans are made at any time in any calendar year, or if any Supplemental B Loan availability is at any time in any calendar year necessary to cover Availability Reserves or otherwise maintain the outstanding Obligations within the lending formulas and subject to the sublimits and Availability Reserves provided herein (each such Supplemental B Loan or other such use of Supplemental B Loan availability, a "Supplemental B Usage"), Borrowers shall pay to Lender, with respect to each such calendar year, a fee equal to $100,000, which fee shall be earned and payable with respect to any calendar year as of the date of the initial Supplemental B Loan made or other Supplemental B Usage occurring in such calendar year. 3.6 Changes in Laws and Increased Costs of Loans. (a) Notwithstanding anything to the contrary contained herein, all Eurodollar Rate Loans shall, upon notice by Lender to Borrowers, or to LFI as agent for Borrowers, convert to Prime Rate Loans in the event that (i) any change in applicable law or regulation (or the interpretation or administration thereof) shall either (A) make it unlawful for Lender, Reference Bank or any participant to make or maintain Eurodollar Rate Loans or to comply with the terms hereof in connection with the Eurodollar Rate Loans, or (B) shall result in the increase in the costs to Lender, Reference Bank or any participant of making or maintaining any Eurodollar Rate Loans or by an amount deemed by Lender to be material, or (C) reduce the amounts received or receivable by Lender in respect thereof, by an amount deemed by Lender to be material or (ii) the cost to Lender, Reference Bank or any participant of making or maintaining any Eurodollar Rate Loans shall otherwise increase by an amount deemed by Lender to be material. Borrowers shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge any loan account of Borrowers) any amounts required to compensate Lender, the Reference Bank or any participant with Lender for any loss (including loss of anticipated profits), cost or expense incurred by such person as a result of the foregoing, including, without limitation, any such loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such person to make or maintain the Eurodollar Rate Loans or any portion thereof. A certificate of Lender setting forth the basis for the determination of such amount necessary to compensate Lender as aforesaid shall be delivered to Borrowers and shall be conclusive, absent manifest error. (b) If any payments or prepayments in respect of the Eurodollar Rate Loans are received by Lender other than on the last day of the applicable Interest Period (whether pursuant to acceleration, upon maturity or otherwise), including any payments pursuant to the application of collections under Section 6.3 or any other payments made with the proceeds of Collateral, -27- Borrowers shall pay to Lender upon demand by Lender (or Lender may, at its option, charge any loan account of Borrowers) any amounts required to compensate Lender, the Reference Bank or any participant with Lender for any additional loss (including loss of anticipated profits), cost or expense incurred by such person as a result of such prepayment or payment, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such person to make or maintain such Eurodollar Rate Loans or any portion thereof. SECTION 4. CONDITIONS PRECEDENT 4.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations. Each of the following is a condition precedent to Lender making the initial Loans and providing the initial Letter of Credit Accommodations hereunder: (a) Lender shall have received, in form and substance satisfactory to Lender, a release agreement and all releases, terminations and such other documents as Lender may request to evidence and effectuate the termination by the Existing Senior Lenders of their financing arrangements with LFI and its Subsidiaries and the termination and release by the Existing Senior Lenders of any interest in and to any assets and properties of Borrowers and its subsidiaries, duly authorized, executed and delivered by it, including, but not limited to, (i) UCC termination statements for all UCC financing statements previously filed by them or their predecessors, as secured party, and any Borrower or any of its subsidiaries, as debtor, (ii) satisfactions and discharges of any mortgages, deeds of trust or deeds to secure debt by Borrowers or any Obligor in favor of the Existing Senior Lenders or a trustee acting on its behalf, in form acceptable for recording in the appropriate governmental office, and (iii) foreign termination and release documents with respect to all documents executed and/or filed in connection with foreign interests granted by Borrowers and/or any Obligor in favor of Existing Senior Lenders, if any; (b) Lender shall have received evidence, in form and substance satisfactory to Lender, that Lender has valid perfected and first priority security interests in and liens upon the Collateral and any other property which is intended to be security for the Obligations or the liability of any Obligor in respect thereof, subject only to the security interests and liens permitted herein or in the other Financing Agreements; (c) Lender shall have received, in form and substance satisfactory to Lender, unlimited guarantees of payment of the Obligations by each Guarantor in favor of Lender, and, with respect to each Guarantor, (i) a security agreement by each such -28- Guarantor in favor of Lender, granting Lender a first priority security interest in each such Guarantor's assets, and (ii) UCC-1 financing statements with respect thereto, in each case duly authorized, executed and delivered by the parties thereto; (d) Lender shall have received, in form and substance satisfactory to Lender, an intercreditor and subordination agreement from the Subordinated Lenders acknowledged and agreed to by Borrowers, providing for, among other things, (i) the subordination in priority of all security interests of the Subordinated Lenders in assets of Borrowers and Obligors to the security interests of Lender in such assets and the agreement of the Subordinated Lenders not to enforce or exercise their rights or remedies with respect to such security interests and claims against Borrowers and Obligors until the indefeasible payment and satisfaction in full of the Obligations, except as expressly permitted therein and (ii) the subordination in right of payment of all amounts now or hereafter owing by Borrowers and Obligors to the Subordinated Lenders to the indefeasible payment and satisfaction in full of the Obligations, except as expressly provided therein; (e) all requisite corporate action and proceedings in connection with this Agreement and the other Financing Agreements shall be satisfactory in form and substance to Lender, and Lender shall have received all information and copies of all documents, including, without limitation, records of requisite corporate action and proceedings which Lender may have requested in connection therewith, such documents where requested by Lender or its counsel to be certified by appropriate corporate officers or governmental authorities; (f) no material adverse change shall have occurred in the assets, business or prospects of any Borrower since the date of Lender's latest field examination and no change or event shall have occurred which would impair in any material amount or to any material extent the ability of any Borrower or any Obligor to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce the Obligations or realize upon the Collateral; (g) Lender shall have completed a field review of the Records and such other information with respect to the Collateral as Lender may require to determine the amount of Loans available to Borrowers, including, without limitation, current agings of Accounts (setting forth Accounts outstanding at thirty (30), sixty (60) and seventy-five (75) day intervals), current perpetual inventory records and/or roll-forwards of Accounts and Inventory through the date of closing, together with such supporting documentation as may be necessary or appropriate, and other documents and information that will enable Lender to accurately identify and verify the Collateral, the results of -29- which shall be satisfactory to Lender, not more than three (3) Business Days prior to the date hereof; (h) Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgments and other agreements from third persons which Lender may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral or to effectuate the provisions or purposes of this Agreement and the other Financing Agreements, including, without limitation, acknowledgements by lessors, mortgagees, consignees and warehousemen of Lender's security interests in the Collateral, waivers by such persons of any security interests, liens or other claims by such persons to the Collateral and agreements permitting Lender access to, and the right to remain on, the premises to exercise its rights and remedies and otherwise deal with the Collateral; (i) Borrowers shall have established the Blocked Accounts and Lender shall have received, in form and substance satisfactory to Lender, all agreements with the depository banks and Borrowers with respect to such Blocked Accounts as Lender may require pursuant to Section 6.3 hereof, duly authorized, executed and delivered by such depository banks and Borrowers; (j) Lender shall have received evidence, in form and substance satisfactory to Lender, that each Borrower has (i) directed the banks at which such Borrower maintains deposit accounts for the initial receipt of cash, checks and other items from such Borrower's retail store locations to transfer all immediately available funds deposited in such bank only to the Blocked Accounts as required pursuant to Section 6.3 hereof or as otherwise directed by Lender and (ii) notified such banks of the security interests of Lender in such funds and the other Collateral; (k) Lender shall have received Credit Card Acknowledgements in each case, duly authorized, executed and delivered by the Credit Card Issuers and Credit Card Processors; (l) Lender shall have received a copy of an amendment to the Subordinated Loan Documents, in form and substance satisfactory to Lender, setting forth amended terms and provisions for the indebtedness evidenced by the Subordinated Loan Documents not inconsistent with the terms hereof and otherwise acceptable to Lender; (m) the Excess Availability as determined by Lender, as of the date hereof, shall not be less than $12,000,000 after giving effect to the initial Loans made or to be made and Letter of Credit Accommodations issued or to be issued in connection with the initial transactions hereunder; -30- (n) Lender shall have received evidence of insurance and loss payee endorsements required hereunder and under the other Financing Agreements, in form and substance satisfactory to Lender, and certificates of insurance policies and/or endorsements naming Lender as loss payee; (o) Lender shall have received, in form and substance satisfactory to Lender, the opinion letters of counsel to Borrowers with respect to the Financing Agreements and the security interests and liens of Lender with respect to the Collateral and such other matters and Lender may reasonably request and of special trademark counsel to Lender with respect to the Intellectual Property Intangibles; and (p) the other Financing Agreements and all instruments and documents hereunder and thereunder shall have been duly executed and delivered to Lender, in form and substance satisfactory to Lender. 4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations. Each of the following is an additional condition precedent to Lender making Loans and/or providing Letter of Credit Accommodations to Borrowers, including the initial Loans and Letter of Credit Accommodations and any future Loans and Letter of Credit Accommodations: (a) all representations and warranties contained herein and in the other Financing Agreements shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of the making of each such Loan or providing each such Letter of Credit Accommodation and after giving effect thereto; and (b) no Event of Default and no event or condition which, with notice or passage of time or both, would constitute an Event of Default, shall exist or have occurred and be continuing on and as of the date of the making of such Loan or providing each such Letter of Credit Accommodation and after giving effect thereto. SECTION 5. SECURITY INTEREST To secure payment and performance of all Obligations, each Borrower hereby grants to Lender a continuing security interest in, a lien upon, and a right of set off against, and hereby assigns to Lender as security, the following property and interests in property of such Borrower, whether now owned or hereafter acquired or existing, and wherever located (collectively, the "Collateral"): -31- 5.1 Accounts; 5.2 all present and future contract rights, general intangibles (including, but not limited to, tax and duty refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names, applications for the foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer lists, licenses, whether as licensor or licensee, choses in action and other claims and existing and future leasehold interests in equipment and fixtures), chattel paper, documents, instruments, securities and other investment property, credit card sales drafts, credit card sales slips or charge slips or receipts and other forms of store receipts, letters of credit, bankers' acceptances and guaranties; 5.3 all present and future monies, securities, credit balances, deposits, deposit accounts and other property of such Borrower now or hereafter held or received by or in transit to Lender or its affiliates or at any other depository or other institution from or for the account of such Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all present and future liens, security interests, rights, remedies, title and interest in, to and in respect of Accounts and other Collateral, including, without limitation, (i) rights and remedies under or relating to guaranties, contracts of suretyship, letters of credit and credit and other insurance related to the Collateral, (ii) rights of stoppage in transit, replevin, repossession, reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, (iii) goods described in invoices, documents, credit card sales drafts, credit card sales slips or charge slips or receipts and other forms of store receipts, contracts or instruments with respect to, or otherwise representing or evidencing, Accounts or other Collateral, including, without limitation, returned, repossessed and reclaimed goods, and (iv) deposits by and property of account debtors or other persons securing the obligations of account debtors; 5.4 Inventory; 5.5 Equipment; 5.6 Records; and 5.7 all products and proceeds of the foregoing, in any form, including, without limitation, insurance proceeds and all claims against third parties for loss or damage to or destruction of any or all of the foregoing. -32- SECTION 6. COLLECTION AND ADMINISTRATION 6.1 Borrowers' Loan Accounts. Lender shall maintain one or more loan account(s) on its books in which shall be recorded (a) all Loans, Letter of Credit Accommodations and other Obligations and the Collateral, (b) all payments made by or on behalf of Borrowers and (c) all other appropriate debits and credits as provided in this Agreement, including, without limitation, fees, charges, costs, expenses and interest. All entries in the loan account(s) shall be made in accordance with Lender's customary practices as in effect from time to time. 6.2 Statements. Lender shall render to Borrowers each month a statement setting forth the balance in the Borrowers' loan account(s) maintained by Lender for Borrowers pursuant to the provisions of this Agreement, including principal, interest, fees, costs and expenses. Each such statement shall be subject to subsequent adjustment by Lender but shall, absent manifest errors or omissions, be considered correct and deemed accepted by Borrowers and conclusively binding upon Borrowers as an account stated except to the extent that Lender receives a written notice from any Borrower of any specific exceptions of such Borrower thereto within forty-five (45) days after the date such statement has been mailed by Lender. Until such time as Lender shall have rendered to Borrowers a written statement as provided above, the balance in Borrowers' loan account(s) shall be presumptive evidence of the amounts due and owing to Lender by Borrowers. 6.3 Collection of Accounts. (a) Borrowers shall establish and maintain, at their expense, deposit account arrangements and merchant payment arrangements with the banks set forth on Schedule 6.3 hereto and after prior written notice to Lender, subject to Section 9.15, such other banks as Borrowers may hereafter select as are acceptable to Lender. The banks set forth on Schedule 6.3 constitute all of the banks with whom any Borrower has deposit account arrangements and merchant payment arrangements as of the date hereof and identifies each of the deposit accounts at such banks to a retail store location of a Borrower or otherwise describes the nature of the use of such deposit account by the applicable Borrower. (i) Borrowers shall deposit all proceeds from sales of Inventory in every form, including, without limitation, cash, checks, credit card sales drafts, credit card sales or charge slips or receipts and other forms of daily store receipts, from each retail store location of Borrowers on each business day into the deposit accounts of Borrowers used solely for such purpose and identified to each retail store location as set forth on Schedule 6.3. All such funds deposited into the separate deposit accounts shall be sent by wire transfer or via Automated -33- Clearing House transfer on a daily basis and all other proceeds of Collateral shall be sent by wire transfer, to the Blocked Accounts as provided in Section 6.3(a)(ii) below. Borrowers shall irrevocably authorize and direct in writing, in form and substance satisfactory to Lender, each of the banks into which proceeds from sales of Inventory from each retail store locations of Borrowers are at any time deposited as provided above to send all funds deposited in such accounts by wire transfer on a daily basis to the Blocked Accounts and, if at any time required by Lender, Borrowers shall obtain the written agreement by such banks to do so. Such authorization and direction shall not be rescinded, revoked or modified without the prior written consent of Lender. (ii) Borrowers shall establish and maintain, at its expense, deposit accounts with such banks as are acceptable to Lender (the "Blocked Accounts") into which Borrowers shall promptly either cause all amounts on deposit in its deposit accounts used by each retail store location to be sent as provided in Section 6.3(a)(i) above or shall themselves deposit or cause to be deposited all proceeds from sales of Inventory, all amounts payable to Borrowers from Credit Card Issuers and Credit Card Processors and all other proceeds of Collateral. The banks at which the Blocked Accounts are established shall enter into an agreement, in form and substance satisfactory to Lender, providing that all items received or deposited in the Blocked Accounts are the property of Lender, that the depository bank has no lien upon, or right of setoff against, the Blocked Accounts, the items received for deposit therein, or the funds from time to time on deposit therein and that the depository bank will wire, or otherwise transfer, in immediately available funds, on a daily basis, all funds received or deposited into the Blocked Accounts to such bank account of Lender as Lender may from time to time designate for such purpose ("Payment Account"). Each Borrower agrees that all amounts deposited in such Blocked Accounts or other funds received and collected by Lender, whether as proceeds of inventory or other Collateral or otherwise shall be the property of Lender. (b) For purposes of calculating the amount of the Loans available to Borrowers, such payments under Section 6.3(a) will be applied (conditional upon final collection) to the Obligations on the Business Day of receipt by Lender of immediately available funds in the Payment Account provided such payments and notice thereof are received in accordance with Lender's usual and customary practices as in effect from time to time and within sufficient time to credit Borrowers' loan account(s) on such day, and if not, then on the next Business Day. For purposes of calculating interest on the Obligations, such payments or other funds received will be applied (conditional upon final collection) to the Obligations on the Business Day of receipt of immediately available funds by Lender -34- in the Payment Account provided such payments or other funds and notice thereof are received in accordance with Lender's usual and customary practices as in effect from time to time and within sufficient time to credit the Borrowers' loan account(s) on such day, and if not, then on the next Business Day. (c) Borrowers and all of their affiliates, subsidiaries, shareholders, directors, employees or agents shall, acting as trustee for Lender, receive, as the property of Lender, any cash, checks, credit card sales drafts, credit card sales or charge slips or receipts, notes, drafts, all forms of store receipts or any other payment relating to and/or proceeds of Accounts or other Collateral which come into their possession or under their control and immediately upon receipt thereof, shall deposit or cause the same to be deposited in the Blocked Accounts, or remit the same or cause the same to be remitted, in kind, to Lender; provided, that, if at any time the Excess Availability shall be less than $1,000,000, Borrowers shall promptly upon Lender's request cause the portion thereof representing sales and/or use taxes payable in connection with such sales or otherwise to be deposited into a separate bank account or accounts established for such purpose. In no event shall any such cash, checks, credit card sales drafts, credit card sales or charge slips or receipts, notes, drafts or other payments be commingled with Borrowers' own funds. Borrowers agree to reimburse Lender on demand for any amounts owed or paid to any bank at which a Blocked Account is established or any other bank or person involved in the transfer of funds to or from the Blocked Accounts arising out of Lender's payments to or indemnification of such bank or person. The Obligation of Borrowers to reimburse Lender for such amounts pursuant to this Section 6.3 shall survive the termination or non-renewal of this Agreement. 6.4 Payments. All Obligations shall be payable to the Payment Account as provided in Section 6.3 or such other place as Lender may designate from time to time. Lender may apply payments received or collected from Borrowers or for the account of Borrowers (including, without limitation, the monetary proceeds of collections or of realization upon any Collateral) to such of the non-contingent Obligations, whether or not then due, in such order and manner as Lender determines. At Lender's option, all principal, interest, fees, costs, expenses and other charges provided for in this Agreement or the other Financing Agreements may be charged directly to the loan account(s) of Borrowers. Borrowers shall make all payments to Lender on the Obligations free and clear of, and without deduction or withholding for or on account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions, withholding, restrictions or conditions of any kind. If after receipt of any payment of, or proceeds of Collateral applied to the payment of, any of the Obligations, Lender is required to -35- surrender or return such payment or proceeds to any Person for any reason, then the Obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Agreement shall continue in full force and effect as if such payment or proceeds had not been received by Lender. Borrowers shall be liable to pay to Lender, and each Borrower does hereby indemnify and hold Lender harmless for the amount of any payments or proceeds surrendered or returned. This Section 6.4 shall remain effective notwithstanding any contrary action which may be taken by Lender in reliance upon such payment or proceeds. This Section 6.4 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 6.5 Authorization to Make Loans. Lender is authorized to make the Loans and provide the Letter of Credit Accommodations based upon telephonic or other instructions received from anyone purporting to be an officer of Borrowers or LFI as agent for Borrowers or other authorized person or, at the discretion of Lender, if such Loans are necessary to satisfy any Obligations. All requests for Loans or Letter of Credit Accommodations hereunder shall specify the date on which the requested advance is to be made or Letter of Credit Accommodations established (which day shall be a Business Day) and the amount of the requested Loan. Requests received after 11:00 a.m. New York time on any day shall be deemed to have been made as of the opening of business on the immediately following Business Day. All Loans and Letter of Credit Accommodations under this Agreement shall be conclusively presumed to have been made to, and at the request of and for the benefit of, Borrowers when deposited to the credit of a Borrower or LFI as agent for Borrowers, or otherwise disbursed or established in accordance with the instructions of a Borrower or LFI as agent for Borrowers or in accordance with the terms and conditions of this Agreement. 6.6 Use of Proceeds. Borrowers shall use the initial proceeds of the Loans and Letter of Credit Accommodations provided by Lender to Borrowers hereunder only for: (a) payments to each of the persons listed in the disbursement direction letter furnished by Borrowers to Lender on or about the date hereof, (b) a back-up letter of credit, for the joint and several account of Borrowers, designating LFI as the account party thereon and having terms acceptable to Lender and the issuer thereof, in favor of the agent for the Existing Senior Lenders with respect to outstanding letters of credit issued pursuant to the existing working capital financing arrangements between LFI and the Existing Senior Lenders, and (c) costs, expenses and fees in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Financing Agreements. All other Loans made or Letter of Credit Accommodations provided by Lender to Borrowers pursuant to the provisions hereof shall be used by Borrowers only for general operating, working capital and other proper corporate purposes of Borrowers not otherwise -36- prohibited by the terms hereof. None of the proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or for the purposes of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Loans to be considered a "purpose credit" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System, as amended. SECTION 7. COLLATERAL REPORTING AND COVENANTS 7.1 Collateral Reporting. Borrowers shall provide Lender with the following documents in a form satisfactory to Lender: (a) on a monthly basis or more frequently as Lender may request, (i) perpetual inventory reports, (ii) inventory reports by category, (iii) agings of accounts payable, (iv) reports of sales for each category of Inventory, and (v) reports on sales and use tax collections, deposits and payments, including monthly sales and use tax accruals, (b) on a daily basis as required by Lender, a schedule of Accounts, credits and collections, (c) on a weekly basis or more frequently as Lender may request, (i) reports of sales of Inventory, indicating gross sales, returns, allowances and net sales, (ii) reports of aggregate Inventory purchases (including all costs related thereto, such as freight, duty and taxes) and identifying items of Inventory in transit to Borrowers related to the applicable documentary letter of credit and/or bill of lading number, if possible, (iii) reports of amounts of consigned Inventory held by consignees of Borrowers by consignor, (iv) reports of the Cost of the Inventory and of markdowns taken with respect to Inventory in Borrowers' retail stores, and (v) reports of outstanding Letter of Credit Accommodations identifying the applicable purposes of each based on the categories referred to in Section 2.2(c) hereof, (d) upon Lender's request, (i) copies of customer statements and credit memos, remittance advices and reports, and copies of deposit slips and bank statements, (ii) copies of shipping and delivery documents, (iii) copies of purchase orders, invoices and delivery documents for Inventory and Equipment acquired by Borrowers and (iv) reports by retail store location of sales and operating profits for each such retail store location; (e) agings of accounts receivable on a monthly basis or more frequently as Lender may request, setting forth the outstanding Accounts of each Borrower at thirty (30), sixty (60) and seventy-five (75) day intervals; (f) as soon as available, but in any event not later than five (5) days after receipt by Borrowers, the monthly statements received by Borrowers from any Credit Card Issuers or Credit Card Processors, together with such additional information with respect thereto as shall be sufficient to enable Lender to monitor the transactions pursuant to the Credit Card Agreements; and (g) such other reports as to the Collateral as Lender shall request from time to time. If any of Borrowers' records or -37- reports of the Collateral are prepared or maintained by an accounting service, contractor, shipper or other agent, Borrowers hereby irrevocably authorize such service, contractor, shipper or agent to deliver such records, reports, and related documents to Lender and to follow Lender's instructions with respect to further services at any time that an Event of Default exists or has occurred and is continuing. 7.2 Accounts Covenants. (a) Borrowers shall notify Lender promptly of (i) any material delay in any Borrower's performance of any of its obligations to any account debtor or the assertion of any claims, offsets, defenses or counterclaims by any account debtor, Credit Card Issuer or Credit Card Processor or any disputes with any of such persons or any settlement, adjustment or compromise thereof, in any instance involving an amount of $250,000 or more, (ii) all material adverse information relating to the financial condition of any account debtor, Credit Card Issuer or Credit Card Processor, and (iii) any event or circumstance which, to any Borrower's knowledge, would cause Lender to consider any Accounts in an amount of $250,000 or more previously considered to be Eligible Accounts as no longer constituting Eligible Accounts. No credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor, Credit Card Issuer or Credit Card Processor except in the ordinary course of Borrowers' business in accordance with the current practices of Borrowers as previously disclosed in writing to Lender. So long as no Event of Default exists or has occurred and is continuing, Borrowers shall settle, adjust or compromise any claim, offset, counterclaim or dispute with any account debtor, Credit Card Issuer, Credit Card Processor. At any time that an Event of Default exists or has occurred and is continuing, Lender shall, at its option, have the exclusive right to settle, adjust or compromise any claim, offset, counterclaim or dispute with account debtors, Credit Card Issuers or Credit Card Processors or grant any credits, discounts or allowances. (b) Without limiting the other reporting obligations of Borrowers hereunder, Borrowers shall promptly report to Lender on a separate basis any return of Inventory by any one account debtor if the Inventory so returned has a value in excess of $250,000. At any time that Inventory is returned, reclaimed or repossessed, the Account (or portion thereof) which arose from the sale of such returned, reclaimed or repossessed Inventory shall not be deemed an Eligible Account. In the event any account debtor returns Inventory when an Event of Default exists or has occurred and is continuing, Borrowers shall, upon Lender's request, (i) hold the returned Inventory in trust for Lender, (ii) segregate all returned Inventory from all of its other property, (iii) dispose of the returned Inventory solely according to Lender's instructions, and (iv) not issue any -38- credits, discounts or allowances with respect thereto without Lender's prior written consent. Each Borrower shall notify Lender promptly of: (x) any notice of a material default by such Borrower under any of the Credit Card Agreements or of any default which might result in the Credit Card Issuer or Credit Card Processor ceasing to make payments or suspending payments to Borrowers, (y) any notice from any Credit Card Issuer or Credit Card Processor that such person is ceasing or suspending, or will cease or suspend, any present or future payments due or to become due to any Borrower from such person, or that such person is terminating or will terminate any of the Credit Card Agreements, and (z) the failure of any Borrower to comply with any material terms of the Credit Card Agreements or any terms thereof which might result in the Credit Card Issuer or Credit Card Processor ceasing or suspending payments to any Borrower. (c) With respect to each Account: (i) the amounts shown on any invoice delivered to Lender or schedule thereof delivered to Lender shall be true and complete, (ii) no payments shall be made thereon except payments delivered to Lender pursuant to the terms of this Agreement, (iii) no credit, discount, allowance or extension or agreement for any of the foregoing shall be granted by a Borrower to any account debtor, Credit Card Issuer or Credit Card Processor, except as reported to Lender in accordance with this Agreement and except for credits, discounts, allowances or extensions made or given in the ordinary course of such Borrower's business in accordance with practices and policies previously disclosed in writing to Lender, (iv) there shall be no setoffs, deductions, contras, defenses, counterclaims or disputes existing or asserted with respect thereto except as reported to Lender in accordance with the terms of this Agreement, (v) none of the transactions giving rise thereto will violate any applicable State or Federal Laws or regulations, all documentation relating thereto will be legally sufficient under such laws and regulations and all such documentation will be legally enforceable in accordance with its terms. (d) Lender may, at any time or times that an Event of Default exists or has occurred and is continuing: (i) notify any or all account debtors, Credit Card Issuers and Credit Card Processors that the Accounts have been assigned to Lender and that Lender has a security interest therein and Lender may direct any or all account debtors, Credit Card Issuers and Credit Card Processors to make payments of Accounts directly to Lender, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Accounts or other obligations included in the Collateral and thereby discharge or release the account debtor or any other party or parties in any way liable for payment thereof without affecting any of the Obligations, (iii) demand, collect or enforce payment of any Accounts or such -39- other obligations, but without any duty to do so, and Lender shall not be liable for its failure to collect or enforce the payment thereof nor for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Lender may deem necessary or desirable for the protection of its interests. At any time that an Event of Default exists or has occurred and is continuing, at Lender's request, all invoices and statements sent to any account debtor, Credit Card Issuer or Credit Card Processor shall state that the Accounts owed by such account debtor, Credit Card Issuer or Credit Card Processor and such other obligations have been assigned to Lender and are payable directly and only to Lender and Borrowers shall deliver to Lender such originals of documents evidencing the sale and delivery of goods or the performance of services giving rise to any Accounts as Lender may require. (e) Lender shall have the right at any time or times, in Lender's name or in the name of a nominee of Lender, to verify the validity, amount or any other matter relating to any Account or other Collateral, by mail, telephone, facsimile transmission or otherwise. (f) Each Borrower shall deliver or cause to be delivered to Lender, with appropriate endorsement and assignment, with full recourse to such Borrower, all chattel paper and instruments which such Borrower now owns or may at any time acquire immediately upon such Borrower's receipt thereof, except as Lender may otherwise agree. 7.3 Inventory Covenants. With respect to the Inventory: (a) each Borrower shall at all times maintain inventory records reasonably satisfactory to Lender, keeping correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, such Borrower's cost therefor and daily withdrawals therefrom and additions thereto; (b) each Borrower shall conduct a physical count of the Inventory at least once each year, but at any time or times as Lender may request on or after an Event of Default, and promptly following such physical inventory shall supply Lender with a report in the form and with such specificity as may be reasonably satisfactory to Lender concerning such physical count; (c) no Borrower shall remove any Inventory from the locations set forth or permitted herein, without the prior written consent of Lender, except for sales of Inventory in the ordinary course of Borrowers' business and except to move Inventory directly from one location set forth or permitted herein to another such location; (d) Borrowers shall, at their expense, once in every six (6) month period, but at any time or times as Lender may request at Lender's expense, or at Borrowers' expense any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Inventory in form, scope and methodology acceptable to Lender and by an appraiser -40- acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely; (e) upon Lender's request, Borrowers shall, at their expense, conduct through RGIS Inventory Specialists, Inc. or another inventory counting service acceptable to Lender, a physical count of the Inventory in form, scope and methodology acceptable to Lender no more than once in any twelve (12) month period, but at any time or times as Lender may request on or after an Event of Default, the results of which shall be reported directly by such inventory counting service to Lender and Borrowers shall promptly deliver confirmation in a form satisfactory to Lender that appropriate adjustments have been made to the inventory records of Borrowers to reconcile the inventory count to Borrowers' inventory records; (f) Borrowers shall produce, use, store and maintain the Inventory, with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with applicable laws (including, but not limited to, the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto); (g) each Borrower assumes all responsibility and liability arising from or relating to the production, use, sale or other disposition of the Inventory; (h) no Borrower shall sell Inventory to any customer on approval, or any other basis which entitles the customer to return or may obligate such Borrower to repurchase such Inventory, except for (A) consignment arrangements in the ordinary course of business, with respect to which there exists appropriate legal documentation evidencing the terms of consignment and consignment filings against the consignee in favor of such Borrower assigned to Lender, and (B) the right of return given to retail customers of such Borrower in the ordinary course of the business of such Borrower in accordance with the then-current return policy of such Borrower; (i) Borrowers shall keep the Inventory in good and marketable condition; and (j) no Borrower shall, without prior written notice to Lender, acquire or accept any Inventory on consignment or approval. 7.4 Equipment Covenants. With respect to the Equipment: (a) upon Lender's request, Borrowers shall, at their expense, at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Equipment in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender; (b) Borrowers shall keep the Equipment in good order, repair, running and marketable condition (ordinary wear and tear excepted); (c) Borrowers shall use the Equipment with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with all applicable laws; (d) the Equipment is and shall be used in Borrowers' business and not for personal, family, household or farming use; (e) no Borrower shall remove any Equipment from the locations set forth or permitted herein, except to the extent necessary to have any Equipment repaired or maintained in the ordinary course of -41- the business of such Borrower or to move Equipment directly from one location set forth or permitted herein to another such location and except for the movement of motor vehicles used by or for the benefit of such Borrower in the ordinary course of business; (f) the Equipment is now and shall remain personal property and Borrowers shall not permit any of the Equipment to be or become a part of or affixed to real property; and (g) each Borrower assumes all responsibility and liability arising from its use of the Equipment. 7.5 Appraisals of Intellectual Property Intangibles. Borrowers shall at their expense, once in every twelve (12) month period, but at any time or times as Lender may request at Lender's expense, or at any time or times as Lender may request at Borrowers' expense on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Intellectual Property Intangibles, in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely. 7.6 Power of Attorney. Each Borrower hereby irrevocably designates and appoints Lender (and all persons designated by Lender) as such Borrower's true and lawful attorney-in-fact, and authorizes Lender, in such Borrower's or Lender's name, to: (a) at any time an Event of Default or event which with notice or passage of time or both would constitute an Event of Default exists or has occurred and is continuing (i) demand payment on Accounts or other proceeds of Inventory or other Collateral, (ii) enforce payment of Accounts by legal proceedings or otherwise, (iii) exercise all of such Borrower's rights and remedies to collect any Account or other Collateral, (iv) sell or assign any Account upon such terms, for such amount and at such time or times as the Lender deems advisable, (v) settle, adjust, compromise, extend or renew an Account, (vi) discharge and release any Account, (vii) prepare, file and sign such Borrower's name on any proof of claim in bankruptcy or other similar document against an account debtor, (viii) notify the post office authorities to change the address for delivery of such Borrower's mail to an address designated by Lender, and open and dispose of all mail addressed to such Borrower, and (ix) do all acts and things which are necessary, in Lender's determination, to fulfill such Borrower's obligations under this Agreement and the other Financing Agreements and (b) at any time to (i) take control in any manner of any item of payment or proceeds thereof, (ii) have access to any lockbox or postal box into which such Borrower's mail is deposited, (iii) endorse such Borrower's name upon any items of payment or proceeds thereof and deposit the same in the Lender's account for application to the Obligations, (iv) endorse such Borrower's name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Account or any goods pertaining thereto or any other -42- Collateral, (v) sign such Borrower's name on any verification of Accounts and notices thereof to account debtors and (vi) execute in such Borrower's name and file any UCC financing statements or foreign equivalents thereof or amendments thereto. Each Borrower hereby releases Lender and its officers, employees and designees from any liabilities arising from any act or acts under this power of attorney and in furtherance thereof, whether of omission or commission, except as a result of Lender's own gross negligence or wilful misconduct as determined pursuant to a final non-appealable judgment of a court of competent jurisdiction. 7.7 Right to Cure. Lender may, at its option, (a) cure any default by a Borrower under any agreement with a third party or pay or bond on appeal any judgment entered against a Borrower, (b) discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and (c) pay any amount, incur any expense or perform any act which, in Lender's judgment, is necessary or appropriate to preserve, protect, insure or maintain the Collateral and the rights of Lender with respect thereto. Lender may add any amounts so expended to the Obligations and charge such Borrower's account therefor, such amounts to be repayable by such Borrower on demand. Lender shall be under no obligation to effect such cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation or liability of any Borrower. Any payment made or other action taken by Lender under this Section shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly. 7.8 Access to Premises. From time to time as requested by Lender, at the cost and expense of Borrowers, (a) Lender or its designee shall have complete access to all of Borrowers' premises during normal business hours and after notice to Borrowers, or at any time and without notice to Borrowers if an Event of Default exists or has occurred and is continuing, for the purposes of inspecting, verifying and auditing the Collateral and all of Borrowers' books and records, including, without limitation, the Records, and (b) Borrowers shall promptly furnish to Lender such copies of such books and records or extracts therefrom as Lender may request, and (c) use during normal business hours such of Borrowers' personnel, equipment, supplies and premises as may be reasonably necessary for the foregoing and if an Event of Default exists or has occurred and is continuing for the collection of Accounts and realization of other Collateral. SECTION 8. REPRESENTATIONS AND WARRANTIES Borrowers hereby, jointly and severally, represent and warrant to Lender the following (which shall survive the execution and delivery of this Agreement), the truth and accuracy -43- of which is a continuing condition of the making of Loans and providing Letter of Credit Accommodations by Lender to Borrowers: 8.1 Corporate Existence, Power and Authority; Subsidiaries. Each Borrower is a corporation duly organized and in good standing under the laws of its state of incorporation and is duly qualified as a foreign corporation and in good standing in all states or other jurisdictions where the nature and extent of the business transacted by it or the ownership of assets makes such qualification necessary, except for those jurisdictions in which the failure to so qualify would not have a material adverse effect on such Borrower's financial condition, results of operation or business or the rights of Lender in or to any of the Collateral. The execution, delivery and performance of this Agreement, the other Financing Agreements and the transactions contemplated hereunder and thereunder are all within each Borrower's corporate powers, have been duly authorized and are not in contravention of law or the terms of each Borrower's certificate of incorporation, by-laws, or other organizational documentation, or any indenture, agreement or undertaking to which any Borrower is a party or by which any Borrower or its property is bound. This Agreement and the other Financing Agreements constitute legal, valid and binding obligations of Borrowers enforceable in accordance with their respective terms. Borrowers do not have any subsidiaries except as set forth on the Information Certificate. 8.2 Financial Statements; No Material Adverse Change. All financial statements relating to Borrowers which have been or may hereafter be delivered by Borrowers to Lender have been prepared in accordance with GAAP and fairly present the financial condition and the results of operation of Borrowers as at the dates and for the periods set forth therein. Except as disclosed in any interim financial statements furnished by Borrowers to Lender prior to the date of this Agreement, there has been no material adverse change in the assets, liabilities, properties and condition, financial or otherwise, of Borrowers, on a consolidated basis, since the date of the most recent audited financial statements furnished by Borrowers to Lender prior to the date of this Agreement. 8.3 Chief Executive Office; Collateral Locations. The chief executive office of each Borrower is located at the address set forth below and each Borrower's Records concerning Accounts and Inventory are located at the address set forth below and its only other places of business and the only other locations of Collateral, if any, are the addresses set forth in the Information Certificate, subject to the right of Borrowers to establish new locations in accordance with Section 9.2 below. The Information Certificate correctly identifies as of the date hereof any of such locations which are not owned by Borrowers and sets forth the owners and/or operators thereof and, to the best -44- of each Borrower's knowledge, the holders of any mortgages on such locations. 8.4 Priority of Liens; Title to Properties. The security interests and liens granted to Lender under this Agreement and the other Financing Agreements constitute valid and perfected first priority liens and security interests in and upon the Collateral, subject only to the liens indicated on Schedule 8.4 hereto and the other liens permitted under Section 9.8 hereof. Each Borrower has good and marketable title to all of its properties and assets, subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those granted to Lender and such others as are specifically listed on Schedule 8.4 hereto or permitted under Section 9.8 hereof. 8.5 Tax Returns. Each Borrower has filed, or caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it (in the case of returns for sales and/or use taxes and, if the estimated liability of Borrowers is $250,000 or more, returns for any other taxes, without requests for extension, except as previously disclosed in writing to Lender). All information in such tax returns, reports and declarations is complete and accurate in all material respects. Each Borrower has paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by it, and has collected, deposited and remitted in accordance with all applicable laws all sales and/or use taxes applicable to the conduct of its business, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to such Borrower and with respect to which adequate reserves have been set aside on its books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. Each Borrower has collected and, when and if required by this Agreement, deposited in a separate bank account, and, in all events timely remitted when due to the appropriate tax authority all sales and/or use taxes applicable to its business required to be collected under the laws of the United States and each possession or territory thereof, and each State or political subdivision thereof, including any State in which such Borrower owns any Inventory or owns or leases any other property, and under the applicable laws of any foreign jurisdiction. 8.6 Litigation. Except as set forth on the Information Certificate, as of the date hereof, there is no present investigation by any governmental agency pending, or to the best of any Borrower's knowledge threatened, against or affecting any Borrower, its assets or business and there is no action, suit, proceeding or claim by any Person pending, or to the best of any -45- Borrower's knowledge threatened, against any Borrower or its assets or goodwill, or against or affecting any transactions contemplated by this Agreement, which has a reasonable likelihood of an adverse determination and which, if adversely determined against any Borrower, would result in any material adverse change in the assets, business or prospects of Borrowers, on a consolidated basis or would impair the ability of any Borrower to perform its Obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce any Obligations or realize upon any Collateral. 8.7 Compliance with Other Agreements and Applicable Laws. (a) No Borrower is in default in any respect under, or in violation in any respect of any of the terms of, any material agreement, contract, instrument, lease or other commitment to which it is a party or by which it or any of its assets are bound. Borrowers are in compliance in all material respects with the requirements of all applicable laws, rules, regulations and orders of any governmental authority relating to their business, including, without limitation, those set forth in or promulgated pursuant to the Occupational Safety and Health Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, ERISA, the Code, as amended, and the rules and regulations thereunder, all federal, state and local statutes, regulations, rules and orders relating to consumer credit (including, without limitation, as each has been amended, the Truth-in-Lending Act, the Fair Credit Billing Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act, and regulations, rules and orders promulgated thereunder), all federal, state and local and foreign statutes, regulations, rules and orders pertaining to sales of consumer goods (including, without limitation, the Consumer Products Safety Act of 1972, as amended, and the Federal Trade Commission Act of 1914, as amended, and all regulations, rules and orders promulgated thereunder). (b) Each Borrower has obtained all material permits, licenses, approvals, consents, certificates, orders or authorizations of any governmental agency required for the lawful conduct of its business. Schedule 8.7 hereto sets forth all material permits, licenses, approvals, consents, certificates, orders or authorizations (the "Permits") issued to or held by Borrowers as of the date hereof by any federal, state, local or foreign governmental agency and any applications pending by Borrowers with such federal, state, local or foreign governmental agency. The Permits constitute all permits, licenses, approvals, consents, certificates, orders or authorizations necessary for each Borrower to own and operate its business as presently conducted or proposed to be conducted where the failure to have such Permits would have a material adverse effect on the business, performance, operations or properties of such Borrower or the legality, validity or enforceability of this Agreement or the other Financing Agreements or the ability of such Borrower to -46- perform its obligations under this Agreement or any of the other Financing Agreements or the rights and remedies of Lender under this Agreement or any of the other Financing Agreements. All of the Permits are valid and subsisting and in full force and effect. There are no actions, claims or proceedings pending or threatened that seek the revocation, cancellation, suspension or modification of any of the Permits. 8.8 Environmental Compliance. (a) Except as set forth on Schedule 8.8 hereto, no Borrower has generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in any manner which at any time violates any applicable Environmental Law in any material respect or any license, permit, certificate, approval or similar authorization issued to a Borrower thereunder and the operations of Borrowers comply in all material respects with all applicable Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder. (b) Except as set forth on Schedule 8.8 hereto, there is no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other person pending or to the best of each Borrower's knowledge threatened, with respect to any non-compliance with or violation of the requirements of any applicable Environmental Law by such Borrower nor has there been any release, spill or discharge, overtly threatened or actual, of any Hazardous Material on any properties of Borrowers, or to the best of each Borrower's knowledge, releases, spills or discharges from any properties at which any Borrower has transported, stored or disposed of any Hazardous Materials, or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental matter which affects any Borrower or its business, operations or assets in any material respect. (c) Except as set forth in Schedule 8.8 hereto, no Borrower has material liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials. (d) Each Borrower has all licenses, permits, certificates, approvals or similar authorizations required to be obtained or filed in connection with the operations of such Borrower under any Environmental Law and all of such licenses, permits, certificates, approvals or similar authorizations are valid and in full force and effect in each case where the failure -47- to obtain or maintain such licenses, permits, certificates, approvals or similar authorizations would have a material adverse effect on the assets or business of such Borrower or would impair the ability of such Borrower to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce any Obligations or realize upon any Collateral. 8.9 Credit Card Agreements. Set forth on Schedule 8.9 hereto is a correct and complete list of (a) all of the Credit Card Agreements and all other agreements, documents and instruments existing as of the date hereof between or among each Borrower, any of its affiliates, the Credit Card Issuers, the Credit Card Processors and any of their affiliates, (b) the percentage of each sale payable to the Credit Card Issuer or Credit Card Processor under the terms of the Credit Card Agreements, (c) all other fees and charges payable by Borrowers under or in connection with the Credit Card Agreements and (d) the term of such Credit Card Agreements. The Credit Card Agreements constitute all of such agreements necessary for each Borrower to operate its business as presently conducted with respect to credit cards and debit cards and no Accounts of Borrowers arise from purchases by customers of Inventory with credit cards or debit cards, other than those which are issued by Credit Card Issuers with whom Borrowers shall have entered into one of the Credit Card Agreements set forth on Schedule 8.9 hereto or with whom Borrowers shall have entered into a Credit Card Agreement in accordance with Section 9.13 hereof. Each of the Credit Card Agreements constitutes the legal, valid and binding obligation of each Borrower party thereto and, to the best of each Borrower's knowledge, the other parties thereto, is enforceable in accordance with its respective terms and is in full force and effect. No default or event of default, or act, condition or event which after notice or passage of time or both, would constitute a default or an event of default under any of the Credit Card Agreements exists or has occurred. Borrowers and the other parties thereto have complied with all of the terms and conditions of the Credit Card Agreements to the extent necessary for Borrowers to be entitled to receive all payments thereunder. Borrowers have delivered, or caused to be delivered to Lender, true, correct and complete copies of all of the Credit Card Agreements. 8.10 Employee Benefits. (a) No Borrower has engaged in any transaction in connection with which any Borrower or any of its ERISA Affiliates could be subject to either a civil penalty assessed pursuant to ERISA or a tax imposed the Code, including any accumulated funding deficiency described in Section 8.10(c) hereof and any deficiency with respect to vested accrued benefits described in Section 8.10(d) hereof. -48- (b) No liability to the Pension Benefit Guaranty Corporation has been or is expected by any Borrower to be incurred with respect to any employee benefit plan of any Borrower or any of its ERISA Affiliates. There has been no reportable event (within the meaning of ERISA) or any other event or condition with respect to any employee benefit plan of any Borrower or any of its ERISA Affiliates which presents a risk of termination of any such plan by the Pension Benefit Guaranty Corporation. (c) Full payment has been made of all amounts which each Borrower or any of its ERISA Affiliates is required under ERISA and the Code to have paid under the terms of each employee benefit plan as contributions to such plan as of the last day of the most recent fiscal year of such plan ended prior to the date hereof, and no accumulated funding deficiency (as defined in ERISA and the Code), whether or not waived, exists with respect to any employee pension benefit plan, including any penalty or tax described in Section 8.10(a) hereof and any deficiency with respect to vested accrued benefits described in Section 8.10(d) hereof. (d) Except as set forth on Schedule 8.10 hereto, the current value of all vested accrued benefits under all employee benefit plans maintained by each Borrower that are subject to Title IV of ERISA does not exceed the current value of the assets of such plans allocable to such vested accrued benefits, including any penalty or tax described in Section 8.10(a) hereof and any accumulated funding deficiency described in Section 8.10(c) hereof. The terms "current value" and "accrued benefit" have the meanings specified in ERISA. (e) Except as disclosed on Schedule 8.10 hereto, no Borrower or any ERISA Affiliate of a Borrower is or has ever been obligated to contribute to any "multiemployer plan" (as such term is defined in ERISA) that is subject to Title IV of ERISA, and, except as disclosed on Schedule 8.10 hereto, no Borrower has any existing or future liability under any such multiemployer plan. 8.11 Bank Accounts. All of the deposit accounts, investment accounts or other accounts in the name of or used by Borrowers maintained at any bank or other financial institution are set forth on Schedule 6.3 hereto, subject to the right of Borrowers to establish new accounts in accordance with Section 9.15 below. 8.12 Interrelated Businesses. Borrowers and Guarantors make up an interrelated organization of various entities constituting a single economic and business enterprise in which each of Borrowers and Guarantors shares an identity of interests such that any benefit received by any one of the Borrowers and Guarantors benefits the other Borrowers and Guarantors. Each of -49- Borrowers and Guarantors purchases or sells and supplies goods and renders or receives services to or from, or for the benefit of, the other such Persons and provides or receives other financial accommodations to or for the benefit of the other such Persons and administrative, marketing, payroll and management services to or from or for the benefit of, the other Borrowers and Guarantors. Borrowers and Guarantors have (i) substantially consolidated accounting, administrative, financial, computer, credit, legal and other services, and (ii) substantially common officers and directors and are identified to creditors as a common entity. 8.13 Accuracy and Completeness of Information. All information furnished by or on behalf of any Borrower in writing to Lender in connection with this Agreement or any of the other Financing Agreements or any transaction contemplated hereby or thereby, including, without limitation, all information on the Information Certificate is true and correct in all material respects on the date as of which such information is dated or certified and does not omit any material fact necessary in order to make such information not misleading. No event or circumstance has occurred which has had or could reasonably be expected to have a material adverse affect on the business, assets or prospects of any Borrower, which has not been fully and accurately disclosed to Lender in writing. 8.14 Survival of Warranties; Cumulative. All representations and warranties contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and shall be deemed to have been made again to Lender on the date of each additional borrowing or other credit accommodation hereunder and shall be conclusively presumed to have been relied on by Lender regardless of any investigation made or information possessed by Lender. The representations and warranties set forth herein shall be cumulative and in addition to any other representations or warranties which any Borrower shall now or hereafter give, or cause to be given, to Lender. SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS 9.1 Maintenance of Existence. Each Borrower shall at all times preserve, renew and keep in full, force and effect its corporate existence and rights and franchises with respect thereto and maintain in full force and effect all permits, licenses, trademarks, tradenames, approvals, authorizations, leases and contracts necessary to carry on its business as presently or proposed to be conducted. Each Borrower shall give Lender thirty (30) days prior written notice of any proposed change in its corporate name, which notice shall set forth the new name and such Borrower shall deliver to Lender a copy of the amendment to the Certificate of Incorporation of such Borrower -50- providing for the name change certified by the Secretary of State of the jurisdiction of incorporation of such Borrower as soon as it is available. 9.2 New Collateral Locations. Subject to Section 9.16 hereof with respect to certain Capital Expenditures, any Borrower may open any new location within the continental United States provided such Borrower (a) gives Lender thirty (30) days prior written notice of the intended opening of any such new location, other than temporary sites for closeout liquidation events established on reasonable advance notice to Lender and (b) executes and delivers, or causes to be executed and delivered, to Lender such agreements, documents, and instruments as Lender may deem reasonably necessary or desirable to protect its interests in the Collateral at such location, including UCC financing statements, Landlord Agreements, Mortgagee Agreements and Warehouseman's Agreements, as applicable. 9.3 Compliance with Laws, Regulations, Etc. Each Borrower shall at all times comply in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders applicable to it and duly observe all requirements, of any foreign, Federal, State or local governmental authority, including, without limitation, the Occupational Safety and Health Act of 1970, as amended, the Code, the Fair Labor Standards Act of 1938, as amended, and the rules and regulations thereunder, all Federal, State and local statutes, regulations, rules and orders relating to consumer credit (including, without limitation, as each has been amended, the Truth-in-Lending Act, the Fair Credit Billing Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act, and regulations, rules and orders promulgated thereunder), all Federal, State and local statutes, regulations, rules and orders pertaining to sales of consumer goods (including, without limitation, the Consumer Products Safety Act of 1972, as amended, and the Federal Trade Commission Act of 1914, as amended, and all regulations, rules and orders promulgated thereunder) and all statutes, rules, regulations, orders, permits and stipulations relating to environmental pollution and employee health and safety, including, without limitation, all Environmental Laws. 9.4 Payment of Taxes and Claims. Each Borrower shall duly pay and discharge all taxes, assessments, contributions and governmental charges upon or against it or its properties or assets, except for taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to such Borrower and with respect to which adequate reserves have been set aside on its books. Each Borrower shall be liable for any tax or penalties imposed on Lender as a result of the financing arrangements provided for herein and Borrowers agree to indemnify and hold Lender harmless with respect to the foregoing, and to repay to Lender on demand -51- the amount thereof, and until paid by Borrowers such amount shall be added and deemed part of the Loans, provided, that, nothing contained herein shall be construed to require any Borrower to pay any income or franchise taxes attributable to the income of Lender from any amounts charged or paid hereunder to Lender. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 9.5 Insurance. Each Borrower shall, at all times, maintain with financially sound and reputable insurers insurance with respect to the Collateral against loss or damage and all other insurance of the kinds and in the amounts customarily insured against or carried by corporations of established reputation engaged in the same or similar businesses and similarly situated. Said policies of insurance shall be satisfactory to Lender as to form, amount and insurer. Each Borrower shall furnish certificates, policies or endorsements to Lender as Lender shall require as proof of such insurance, and, if any Borrower fails to do so, Lender is authorized, but not required, to obtain such insurance at the expense of Borrowers. All policies shall provide for at least thirty (30) days prior written notice to Lender of any cancellation or reduction of coverage and that Lender may act as attorney for Borrowers in obtaining, and at any time an Event of Default exists or has occurred and is continuing, adjusting, settling, amending and canceling such insurance. Borrowers shall cause Lender to be named as a loss payee and an additional insured (but without any liability for any premiums) under such insurance policies and Borrowers shall obtain non-contributory lender's loss payable endorsements to all insurance policies in form and substance satisfactory to Lender. Such lender's loss payable endorsements shall specify that the proceeds of such insurance shall be payable to Lender as its interests may appear and further specify that Lender shall be paid regardless of any act or omission by any Borrower or any of its affiliates. At its option, Lender may apply any insurance proceeds received by Lender at any time to the cost of repairs or replacement of Collateral and/or to payment of the Obligations, whether or not then due, in any order and in such manner as Lender may determine or hold such proceeds as cash collateral for the Obligations. 9.6 Financial Statements and Other Information. (a) Each Borrower shall keep proper books and records in which true and complete entries shall be made of all dealings or transactions of or in relation to the Collateral and the business of such Borrower and its subsidiaries (if any) in accordance with GAAP, and Borrowers shall furnish or cause to be furnished to Lender: (i) within thirty (30) days after the end of each fiscal month, monthly unaudited consolidated financial statements (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of -52- shareholders' equity), and an unaudited consolidating statement of operations by business unit, all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrowers and their subsidiaries as of the end of and through such fiscal month and (ii) within ninety (90) days after the end of each fiscal year, audited consolidated financial statements (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of shareholders' equity), and the accompanying notes thereto, all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrowers and their subsidiaries as of the end of and for such fiscal year, together with the unqualified opinion of independent certified public accountants, which accountants shall be an independent accounting firm selected by Borrowers and reasonably acceptable to Lender, that such financial statements have been prepared in accordance with GAAP, and present fairly the results of operations and financial condition of Borrowers and their subsidiaries as of the end of and for the fiscal year then ended. (b) Borrowers shall promptly notify Lender in writing of the details of (i) any loss, damage, investigation, action, suit, proceeding or claim relating to the Collateral or any other property which is security for the Obligations, in each case having a value of $250,000 or more, or which would result in any material adverse change in any Borrower's business, properties, assets, goodwill or condition, financial or otherwise and (ii) the occurrence of any Event of Default or act, condition or event which, with the passage of time or giving of notice or both, would constitute an Event of Default. (c) Borrowers shall promptly after the sending or filing thereof furnish or cause to be furnished to Lender copies of all reports which Borrowers send to their stockholders generally and copies of all reports and registration statements which Borrowers file with the Securities and Exchange Commission, any national securities exchange or the National Association of Securities Dealers, Inc. (d) Borrowers shall furnish or cause to be furnished to Lender such budgets, forecasts, projections and other information respecting the Collateral and the business of Borrowers, as Lender may, from time to time, reasonably request. Lender is hereby authorized to deliver a copy of any financial statement or any other information relating to the business of Borrowers to any court or other government agency or to any participant or assignee or prospective participant or assignee. Each Borrower hereby irrevocably authorizes and directs all accountants or auditors to deliver to Lender, at Borrowers' expense, copies of the financial statements of Borrowers and any reports or management letters prepared by such accountants or auditors on behalf of Borrowers and to disclose to Lender such -53- information as they may have regarding the business of any Borrower. Any documents, schedules, invoices or other papers delivered to Lender may be destroyed or otherwise disposed of by Lender one (1) year after the same are delivered to Lender, except as otherwise designated by Borrowers to Lender in writing. 9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. No Borrower shall, directly or indirectly: (a) merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of any stock or indebtedness to any other Person or any of its assets to any other Person, except for: (i) sales of Inventory in the ordinary course of business or consignments of Inventory permitted hereunder, (ii) the disposition of worn-out or obsolete Equipment, so long as (A) if an Event of Default exists or has occurred and is continuing, any proceeds are paid to Lender and (B) such sales do not involve Equipment having an aggregate fair market value in excess of $500,000 for all such Equipment disposed of in any fiscal year of Borrowers, but excluding for purposes of such $500,000 limitation, the value of any Equipment that was previously used in LFI's manufacturing facility in Baltimore, Maryland and is disposed of in any such fiscal year, (iii) sales or other dispositions by a Borrower of assets in connection with the closing or sale of a retail store location of such Borrower in the ordinary course of Borrowers' business which consist of leasehold interests in the premises of such store, the Equipment and fixtures located at such premises and the books and records relating exclusively and directly to the operations of such store; provided, that, as to each and all such sales, (A) on the date of, and after giving effect to, any such sale, Borrowers shall not have closed or sold retail store locations accounting for more than twenty-five (25%) of all retail store sales of Borrowers in the immediately preceding twelve (12) month period, (B) Lender shall have received not less than ten (10) Business Days prior written notice of such sale, which notice shall set forth in reasonable detail satisfactory to Lender, the parties to such sale or other disposition, the assets to be sold or otherwise disposed of, the purchase price and the manner of payment thereof and such other information with respect thereto as Lender may request, (C) as of the date of such sale or other disposition and after giving effect thereto, no Event of Default, or act, condition or event which with notice or passage of time would constitute an Event of Default, shall exist or have occurred and be continuing, (D) such sale shall be on -54- commercially reasonable prices and terms in a bona fide arm's length transaction, and (E) any and all net proceeds payable or delivered to a Borrower in respect of such sale or other disposition shall be paid or delivered, or caused to be paid or delivered, to Lender in accordance with the terms of this Agreement either, at Lender's option, for application to the Obligations in accordance with the terms hereof (except to the extent such proceeds reflect payment in respect of indebtedness secured by a properly perfected first priority security interest in the assets sold, in which case, such proceeds shall be applied to such indebtedness secured thereby) or to be held by Lender as cash collateral for the Obligations on terms and conditions acceptable to Lender; or (c) form or acquire any subsidiaries, or (d) wind up, liquidate or dissolve (except for dissolution of any inactive Guarantors upon not less than twenty (20) days prior written notice to Lender), or (e) agree to do any of the foregoing. 9.8 Encumbrances. No Borrower shall create, incur, assume or suffer to exist any security interest, mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on any of its assets or properties, including, without limitation, the Collateral, except: (a) liens and security interests of Lender; (b) liens securing the payment of taxes, either not yet overdue or the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrowers and with respect to which adequate reserves have been set aside on their books; (c) non-consensual statutory liens (other than liens securing the payment of taxes) arising in the ordinary course of Borrowers' business to the extent: (i) such liens secure indebtedness which is not overdue or (ii) such liens secure indebtedness relating to claims or liabilities which are fully insured and being defended at the sole cost and expense and at the sole risk of the insurer or being contested in good faith by appropriate proceedings diligently pursued and available to Borrowers, in each case prior to the commencement of foreclosure or other similar proceedings and with respect to which adequate reserves have been set aside on their books; (d) zoning restrictions, easements, licenses, covenants and other restrictions affecting the use of Real Property which do not interfere in any material respect with the use of such Real Property or ordinary conduct of the business of Borrowers as presently conducted thereon or materially impair the value of the Real Property which may be subject thereto; (e) purchase money security interests in Equipment (including capital leases) and purchase money mortgages on real estate not to exceed $5,000,000 in the aggregate at any time outstanding so long as such security interests and mortgages do not apply to any property of Borrowers -55- other than the Equipment or real estate so acquired, and the indebtedness secured thereby does not exceed the cost of the Equipment or real estate so acquired, as the case may be; (f) subordinate liens and security interests of the Subordinated Lenders securing indebtedness and subject to the intercreditor and subordination agreement in favor of Lender referred to in Section 9.9(d) hereof; (g) liens and security interests with respect to the Real Property of LFI located in Eldersburg, Maryland securing indebtedness permitted under Section 9.9(e) or (f) hereof; (h) liens or rights of setoff on or against credit balances of Borrowers with Credit Card Issuers (but not liens on or rights of setoff against any other property or assets of Borrowers) pursuant to the Credit Card Agreements to secure the obligations of Borrowers to the Credit Card Issuers as a result of fees and chargebacks; (i) deposits of cash with the owner or lessor of premises leased and operated by a Borrower in the ordinary course of the business of Borrowers' to secure the performance by such Borrower of its obligations under the terms of the lease for such premises; and (j) the liens and security interests set forth on Schedule 8.4 hereto. 9.9 Indebtedness. No Borrower shall incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any indebtedness, except: (a) the Obligations; (b) short-term intercompany loans by one Borrower to another Borrower in the ordinary course of business; (c) purchase money indebtedness (including capital leases) to the extent not incurred or secured by liens (including capital leases) in violation of any other provision of this Agreement; (d) fully subordinated indebtedness of Borrowers to the Subordinated Lenders pursuant to the financing arrangements and documents, agreements and/or instruments described on Schedule 9.9 hereto; provided, that, (i) Borrowers may only make payments in respect of such indebtedness in accordance with the terms of the Subordinated Loan Documents as in effect on the date hereof, and provided each such payment is permitted under the intercreditor and subordination agreement executed by the Subordinated Lenders in favor of Lender with respect thereto, (ii) Borrowers shall not, directly or indirectly, (A) amend, modify, alter or change in any way adverse to Lender or any Borrowers or Obligor, the terms of such indebtedness or any agreement, document or instrument related thereto as in effect on the date hereof, or (B) redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (iii) Borrowers shall furnish to Lender all notices or demands in connection with -56- such indebtedness either received by Borrowers or on their behalf, promptly after the receipt thereof, or sent by Borrowers or on their behalf, concurrently with the sending thereof, as the case may be; (e) indebtedness of LFI to MetLife pursuant to the financing arrangements and documents, agreements and/or instruments described on Schedule 9.9 hereto; provided, that, (i) LFI may only make regularly scheduled payments of principal and interest in respect of such indebtedness in accordance with the terms of the document, agreement and/or instrument evidencing or giving rise to such indebtedness as in effect on the date hereof, (ii) LFI shall not, directly or indirectly, (A) amend, modify, alter or change in any way adverse to Lender or any Borrower or Obligor, the terms of such indebtedness or any agreement, document or instrument related thereto as in effect on the date hereof, or (B) redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (iii) LFI shall furnish to Lender all notices or demands in connection with such indebtedness either received by LFI or on its behalf, promptly after the receipt thereof, or sent by LFI or on its behalf, concurrently with the sending thereof, as the case may be; (f) indebtedness that refinances the indebtedness described in Section 9.9(e) on terms not involving an increased principal amount of such indebtedness as so refinanced, or a shorter maturity, or a larger amortization of principal required in any period, or an increased interest rate, or any additional collateral or other provisions adverse to Lender or any Borrower or Obligor, and provided the holder of any lien on the Real Property described in Section 9.8(g) that secures such refinancing indebtedness executes and delivers a Mortgagee Agreement in favor of Lender containing the same provisions for Lender's benefit as the Mortgagee Agreement delivered by MetLife or such other terms as Lender shall require or approve; (g) indebtedness to certain employees of LFI evidenced by notes required to be delivered by LFI if such employee exercises such employee's put option in respect of shares of and options to purchase Capital Stock of LFI subject thereto and LFI is not, for any reason, permitted to or able to pay the purchase price for the shares and options subject to such exercise, in all events limited by the terms of the Stockholders' Agreement dated as of June 27, 1990, as amended, as in effect on the date hereof; provided such indebtedness is fully subordinated in right of payment to the prior indefeasible payment and satisfaction of all Obligations; and (h) indebtedness existing as of the date hereof set forth on Schedule 9.9 hereto, provided, that, (i) the applicable Borrower may only make regularly scheduled payments of principal -57- and interest in respect of such indebtedness in accordance with the terms of the agreement or instrument evidencing or giving rise to such indebtedness as in effect on the date hereof, (ii) such Borrower shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such indebtedness or any agreement, document or instrument related thereto as in effect on the date hereof, or (B) redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (iii) such Borrower shall furnish to Lender all notices or demands in connection with such indebtedness either received by such Borrower or on its behalf, promptly after the receipt thereof, or sent by such Borrower or on its behalf, concurrently with the sending thereof, as the case may be. 9.10 Loans, Investments, Guarantees, Etc. None of the Borrowers shall directly or indirectly make any loans or advance money or property to any person, or invest in (by capital contribution, dividend or otherwise) or purchase or repurchase the stock or indebtedness or all or a substantial part of the assets or property of any person, or guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly) the indebtedness, performance, obligations or dividends of any Person or agree to do any of the foregoing, except: (a) the endorsement of instruments for collection or deposit in the ordinary course of business; (b) investments in: (i) short-term direct obligations of the United States Government, (ii) negotiable certificates of deposit issued by any bank satisfactory to Lender, payable to the order of any Borrower or to bearer and delivered to Lender, and (iii) commercial paper rated A1 or P1; provided, that, as to any of the foregoing, unless waived in writing by Lender, Borrowers shall take such actions as are deemed necessary by Lender to perfect the security interest of Lender in such investments; (c) loans and advances by one Borrower to another Borrower constituting permitted indebtedness under Section 9.9 hereof; (d) advances to employees of Borrowers for travel and relocation expenses, in the ordinary course of business, not to exceed $500,000 in the aggregate for all such advances by any and all Borrowers at any one time outstanding; and (e) the existing loans, advances and guarantees by Borrowers outstanding as of the date hereof as set forth on Schedule 9.10 hereto; provided, that, as to such loans, advances and guarantees, (i) Borrowers shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such loans, advances or guarantees or any agreement, document or instrument related thereto, or (B) as to such guarantees, redeem, retire, defease, purchase or otherwise acquire any such guarantee or set aside or otherwise deposit or invest any sums for such purpose and (ii) Borrowers shall furnish to Lender all notices, demands or other material in connection with such loans, advances or guarantees either received by Borrowers or on their behalf, promptly after -58- the receipt thereof, or sent by Borrowers or on their behalf, concurrently with the sending thereof, as the case may be. 9.11 Dividends and Redemptions. No Borrower shall, directly or indirectly, declare or pay any dividends on account of any shares of class of Capital Stock of any Borrower now or hereafter outstanding, or set aside or otherwise deposit or invest any sums for such purpose, or redeem, retire, defease, purchase or otherwise acquire any shares of any class of Capital Stock (or set aside or otherwise deposit or invest any sums for such purpose) for any consideration other than common stock or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) in respect of any such shares or agree to do any of the foregoing, except that LFI may, out of legally available funds therefor, redeem and/or repurchase certain shares and options to purchase shares of Capital Stock of LFI owned by certain employees of LFI, pursuant to the exercise of the put options described in Section 9.9(g) hereof ("Management Put Repurchases"), but not to exceed the amount of $250,000 so expended in any fiscal year of LFI and provided no Event of Default, and no event or state of facts that would, with notice or passage of time or both, constitute an Event of Default, exists or has occurred and is continuing, or would exist or occur after giving effect to such redemption or repurchase or any payment therefor (other than by delivery of a subordinated note evidencing indebtedness permitted under Section 9.9(g) hereof). Any amount permitted to be paid for Management Put Repurchases and not so used in any fiscal year may be carried over to succeeding fiscal years, but in no event may the amount so paid, including any amount carried over from prior years, exceed $500,000 in the aggregate in any fiscal year of Borrowers. 9.12 Transactions with Affiliates. No Borrower shall, directly or indirectly, (a) purchase, acquire or lease any property from, or sell, transfer or lease any property to, any officer, employee, shareholder, director, agent or any other affiliate of such Borrower, except in the ordinary course of and pursuant to the reasonable requirements of Borrowers' business and upon fair and reasonable terms no less favorable to such Borrower than such Borrower would obtain in a comparable arm's length transaction with an unaffiliated person or (b) make any payments of management, consulting or other fees for management or similar services, or of any indebtedness owing, to any officer, employee, shareholder, director or other person affiliated with such Borrower except reasonable compensation to officers, employees and directors for services rendered to such Borrower in the ordinary course of business. 9.13 Credit Card Agreements. Each Borrower shall (a) observe and perform all material terms, covenants, conditions and provisions of the Credit Card Agreements to be observed and performed by it at the times set forth therein; (b) not do, -59- permit, suffer or refrain from doing anything, as a result of which there could be a default under or breach of any of the terms of any of the Credit Card Agreements and (c) at all times maintain in full force and effect the Credit Card Agreements and not terminate, cancel, surrender, modify, amend, waive or release any of the Credit Card Agreements, or consent to or permit to occur any of the foregoing; except, that, each Borrower may terminate or cancel any of the Credit Card Agreements in the ordinary course of the business of Borrowers; provided, that, such Borrower shall give Lender not less than fifteen (15) days prior written notice of its intention to so terminate or cancel any of the Credit Card Agreements; (d) not enter into any new Credit Card Agreements with any new Credit Card Issuer unless (i) Lender shall have received not less than thirty (30) days prior written notice of the intention of a Borrower to enter into such agreement (together with such other information with respect thereto as Lender may request) and (ii) such Borrower delivers, or causes to be delivered to Lender, a Credit Card Acknowledgment in favor of Lender; (e) give Lender immediate written notice of any Credit Card Agreement entered into by such Borrower after the date hereof, together with a true, correct and complete copy thereof and such other information with respect thereto as Lender may request; and (f) furnish to Lender, promptly upon the request of Lender, such information and evidence as Lender may require from time to time concerning the observance, performance and compliance by such Borrower or the other party or parties thereto with the terms, covenants or provisions of the Credit Card Agreements. 9.14 Compliance with ERISA. (a) No Borrower shall with respect to any "employee benefit plans" maintained by a Borrower or any ERISA Affiliate of a Borrower: (i) terminate any of such employee benefit plans so as to incur any liability to the Pension Benefit Guaranty Corporation established pursuant to ERISA, (ii) allow or suffer to exist any prohibited transaction involving any of such employee benefit plans or any trust created thereunder which would subject a Borrower or such ERISA Affiliate to a tax or penalty or other liability on prohibited transactions imposed under the Code or ERISA, (iii) fail to pay to any such employee benefit plan any contribution which it is obligated to pay under ERISA, the Code or the terms of such plan, (iv) allow or suffer to exist any accumulated funding deficiency, whether or not waived, with respect to any such employee benefit plan, (v) allow or suffer to exist any occurrence of a reportable event or any other event or condition which presents a material risk of termination by the Pension Benefit Guaranty Corporation of any such employee benefit plan that is a single employer plan, which termination could result in any liability to the Pension Benefit Guaranty Corporation, or (vi) except as described in Schedule -60- 8.10 hereto, incur any withdrawal liability with respect to any multiemployer pension plan. (b) As used in this Section 9.14, the terms "employee benefit plans", "accumulated funding deficiency" and "reportable event" shall have the respective meanings assigned to them in ERISA, and the term "prohibited transaction" shall have the meaning assigned to it in the Code and ERISA. 9.15 Additional Bank Accounts. No Borrower shall, directly or indirectly, open, establish or maintain any deposit account, investment account or any other account with any bank or other financial institution, other than the Blocked Accounts and the accounts set forth in Schedule 6.3 hereto, except: (a) as to any new or additional Blocked Accounts and other such new or additional accounts which contain any Collateral or proceeds thereof, with the prior written consent of Lender and subject to such conditions thereto as Lender may establish and (b) as to any accounts used by Borrowers to make payments of payroll, taxes or other obligations to third parties, after prior written notice to Lender. 9.16 Capital Expenditures. Borrowers and their subsidiaries shall not, directly or indirectly, make any Capital Expenditures, during any measurement period listed below, in excess of the amounts listed below for such period, on an aggregate basis for all Borrowers and their subsidiaries: Fiscal Year Ending the Last Saturday in February Amount 1998 $12,000,000 1999 $20,000,000 2000 and, unless otherwise agreed in writing by the parties hereto, each year thereafter $20,000,000 Up to $2,000,000 in the aggregate for Borrowers and their subsidiaries of amounts permitted to be expended for Capital Expenditures as provided above, if not expended in the fiscal year for which permitted, may be carried forward for Capital Expenditures in the next following fiscal year. 9.17 EBITA. Borrowers shall not permit EBITA of Borrowers and their subsidiaries for any period commencing on the first day of the applicable fiscal year set forth below and ending on the last day of the applicable fiscal quarter set forth below (each such period, a year-to-date ("YTD") or full fiscal year, as -61- applicable) to be less than the respective amount set forth below opposite such fiscal quarter: ================================================================================ Fiscal Year Ending Last Saturday in February, 1998 Minimum EBITA - -------------------------------------------------------------------------------- First Quarter YTD ($12,000,000) - -------------------------------------------------------------------------------- Second Quarter YTD ($12,000,000) - -------------------------------------------------------------------------------- Third Quarter YTD $ 1,000,000 - -------------------------------------------------------------------------------- Full Fiscal Year $ 6,000,000 ================================================================================ ================================================================================ Fiscal Year Ending Last Saturday in February, 1999 - -------------------------------------------------------------------------------- First Quarter YTD ($12,000,000) - -------------------------------------------------------------------------------- Second Quarter YTD ($12,000,000) - -------------------------------------------------------------------------------- Third Quarter YTD $ 3,000,000 - -------------------------------------------------------------------------------- Full Fiscal Year $ 8,000,000 ================================================================================ ================================================================================ Fiscal Year Ending Last Saturday in February, 2000 and, unless otherwise agreed in writing by the parties hereto, each year thereafter - -------------------------------------------------------------------------------- First Quarter YTD ($12,000,000) - -------------------------------------------------------------------------------- Second Quarter YTD ($12,000,000) - -------------------------------------------------------------------------------- Third Quarter YTD $ 5,000,000 - -------------------------------------------------------------------------------- Full Fiscal Year $10,000,000 ================================================================================ 9.18 Cleanup and Excess Availability. For at least thirty (30) consecutive days during the period between December 1 of each calendar year and March 31 of the immediately following calendar year, Borrowers (i) shall not permit the aggregate principal amount of all outstanding Loans to be greater than $10,000,000 and (ii) shall maintain Excess Availability of greater than $15,000,000. 9.19 Costs and Expenses. Borrowers shall pay to Lender on demand all costs, expenses, filing fees and taxes paid or payable in connection with the preparation, negotiation, execution, delivery, recording, administration, collection, liquidation, -62- enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement, the other Financing Agreements and all other documents related hereto or thereto, including any amendments, supplements or consents which may hereafter be contemplated (whether or not executed) or entered into in respect hereof and thereof, including: (a) all costs and expenses of filing or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) all insurance premiums, appraisal fees and search fees; (c) costs and expenses of remitting loan proceeds, collecting checks and other items of payment, and establishing and maintaining the Blocked Accounts, together with Lender's customary charges and fees with respect thereto; (d) charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations; (e) costs and expenses of preserving and protecting the Collateral; (f) costs and expenses paid or incurred in connection with obtaining payment of the Obligations, enforcing the security interests and liens of Lender, selling or otherwise realizing upon the Collateral, and otherwise enforcing the provisions of this Agreement and the other Financing Agreements or defending any claims made or threatened against Lender arising out of the transactions contemplated hereby and thereby (including preparations for and consultations concerning any such matters); (g) all out-of-pocket expenses and costs heretofore and from time to time hereafter incurred by Lender during the course of periodic field examinations of the Collateral and Borrowers' operations, plus a per diem charge at the rate of $600 per person per day for Lender's examiners in the field and office; and (h) the fees and disbursements of counsel (including legal assistants) to Lender in connection with any of the foregoing. 9.20 Certain Notices. Borrowers or LFI as agent for Borrowers shall promptly send to Lender a copy of each default or termination notice sent by or on behalf of any Borrower to, or to any Borrower by, any operator of a warehouse where Eligible Inventory is kept, or any lessor of a material number of retail store locations of Borrowers, or any mortgagee of Real Property of any Borrower, or any Credit Card Issuer or Credit Card Processor, or any trademark licensor or licensee of any Borrower, or any customs broker or similar agent for a Borrower, or any material Equipment lessor, with respect to the existing or any future arrangements or agreements between any Borrower and any such person(s). 9.21 Further Assurances. At the request of Lender at any time and from time to time, Borrowers shall, at Borrowers' expense, duly execute and deliver, or cause to be duly executed and delivered, such further agreements, documents and instruments, and do or cause to be done such further acts as may be necessary or proper to evidence, perfect, maintain and enforce -63- the security interests and the priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Financing Agreements. Lender may at any time and from time to time request a certificate from an officer of each Borrower and/or LFI as agent for Borrowers representing that all conditions precedent to the making of Loans and providing Letter of Credit Accommodations contained herein are satisfied. In the event of such request by Lender, Lender may, at its option, cease to make any further Loans or provide any further Letter of Credit Accommodations until Lender has received such certificate and, in addition, Lender has determined that such conditions are satisfied. Where permitted by law, each Borrower hereby authorizes Lender to execute and file one or more UCC financing statements signed only by Lender. SECTION 10. EVENTS OF DEFAULT AND REMEDIES 10.1 Events of Default. The occurrence or existence of any one or more of the following events are referred to herein individually as an "Event of Default", and collectively as "Events of Default": (a) any Borrower fails to pay when due any of the Obligations or fails to perform any of the terms, covenants, conditions or provisions contained in this Agreement or any of the other Financing Agreements; (b) any representation, warranty or statement of fact made by any Borrower to Lender in this Agreement, the other Financing Agreements or any other agreement, schedule, confirmatory assignment or otherwise shall when made or deemed made be false or misleading in any material respect; (c) any Obligor revokes, terminates or fails to perform any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other agreement of such party in favor of Lender; (d) any judgment for the payment of money is rendered against any Borrower or any Obligor in excess of $250,000 in any one case or in excess of $1,000,000 in the aggregate and shall remain undischarged or unvacated for a period in excess of thirty (30) days or execution shall at any time not be effectively stayed, or any judgment other than for the payment of money, or injunction, attachment, garnishment or execution is rendered against any Borrower or any Obligor or any of their assets; (e) any Obligor (being a natural person or a general partner of an Obligor which is a partnership) dies or any Borrower or any Obligor, which is a partnership, limited liability company, limited liability partnership or a -64- corporation, dissolves or suspends or discontinues doing business; (f) any Borrower or any Obligor is generally unable to meet its debts as they become due during the then-current term or renewal term of this Agreement, makes an assignment for the benefit of creditors, or makes or sends notice of a bulk transfer; (g) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is filed against any Borrower or any Obligor or all or any part of its properties and such petition or application is not dismissed within thirty (30) days after the date of its filing or any Borrower or any Obligor shall file any answer admitting or not contesting such petition or application or indicates its consent to, acquiescence in or approval of, any such action or proceeding or the relief requested is granted sooner; (h) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at a law or equity) is filed by any Borrower or any Obligor or for all or any part of its property; or (i) any default by any Borrower or any Obligor under any of the Subordinated Loan Documents or any default by any Borrower or any Obligor under any other agreement, document or instrument relating to any indebtedness for borrowed money owing to any person other than Lender, or any capitalized lease obligations, contingent indebtedness in connection with any guarantee, letter of credit, indemnity or similar type of instrument in favor of any person other than Lender, where the agreement, document or instrument under which the default arises or exists, relates to such indebtedness or obligations in an amount in excess of $1,000,000, which default continues for more than the applicable cure period, if any, with respect thereto, or any default by any Borrower or any Obligor under any material contract, lease, license or other obligation to any person other than Lender, which default continues for more than the applicable cure period, if any, with respect thereto; (j) (i) any change in its controlling ownership occurs with respect to any Borrower other than LFI, or (ii) with respect to LFI, if, other than as a result of a public offering of the common stock of LFI, any person, or two or more persons -65- acting in concert, acquires ownership or control of shares of Capital Stock of LFI representing more than fifty (50%) percent of the combined voting power of all outstanding Capital Stock of LFI, or the power to designate or elect a majority of the members of the Board of Directors of LFI, excluding, however, (x) ownership or control of Capital Stock of LFI, or power to designate or elect a majority of the members of the Board of Directors of LFI, whether or not acquired after the date hereof by any or all of the existing holders of the Capital Stock of LFI as of the date hereof, and (y) ownership or control of Capital Stock of LFI or the power to designate or elect a majority of the members of the Board of Directors of LFI, to the extent acquired by persons that are not holders of the Capital Stock of LFI as of the date hereof but are financial institutions or institutional investors acceptable to Lender; (k) the indictment or threatened indictment of any Borrower or any Obligor under any criminal statute, or commencement or threatened commencement of criminal or civil proceedings against any Borrower or any Obligor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any of the property of such Borrower or such Obligor; (l) each of the persons holding the offices of chief executive officer, chief operating officer and chief financial officer of LFI as of the date hereof, shall cease to act in such capacities, unless each is replaced within a reasonable period of time with persons of comparable experience and capability as reasonably determined by Lender; (m) there shall be a material adverse change after the date hereof in the business or assets of the Borrowers and Obligors, taken as a whole; or (n) there shall be an event of default under any of the other Financing Agreements. 10.2 Remedies. (a) At any time an Event of Default exists or has occurred and is continuing, Lender shall have all rights and remedies provided in this Agreement, the other Financing Agreements, the Uniform Commercial Code and other applicable law, all of which rights and remedies may be exercised without notice to or consent by any Borrower or any Obligor, except as such notice or consent is expressly provided for hereunder or required by applicable law. All rights, remedies and powers granted to Lender hereunder, under any of the other Financing Agreements, the Uniform Commercial Code or other applicable law, are cumulative, not exclusive and enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or -66- more occasions, and shall include, without limitation, the right to apply to a court of equity for an injunction to restrain a breach or threatened breach by any Borrower or Obligor of this Agreement or any of the other Financing Agreements. Lender may, at any time or times, proceed directly against any Borrower or any Obligor to collect the Obligations without prior recourse to the Collateral. (b) Without limiting the foregoing, at any time an Event of Default exists or has occurred and is continuing, Lender may, in its discretion and without limitation, (i) accelerate the payment of all Obligations and demand immediate payment thereof to Lender (provided, that, upon the occurrence of any Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations shall automatically become immediately due and payable), (ii) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, (iii) require Borrowers, at Borrowers' expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral, (v) remove any or all of the Collateral from any premises on or in which the same may be located for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including, without limitation, entering into contracts with respect thereto, public or private sales at any exchange, broker's board, at any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with the Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of any Borrower, which right or equity of redemption is hereby expressly waived and released by each Borrower and/or (vii) terminate this Agreement. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, ten (10) days prior notice by Lender to Borrowers, or to LFI as agent for Borrowers, designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof to Borrowers and each Borrower, and LFI as agent for Borrowers, waives any other notice. In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, each Borrower waives the posting of any bond which might otherwise be required. -67- (c) Lender may apply the cash proceeds of Collateral actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of the Obligations, in whole or in part and in such order as Lender may elect, whether or not then due. Each Borrower shall remain liable to Lender for the payment of any deficiency with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including reasonable attorneys' fees and legal expenses. (d) Without limiting the foregoing, upon the occurrence of an Event of Default or an event which with notice or passage of time or both would constitute an Event of Default, Lender may, at its option, without notice, (i) cease making Loans or arranging for Letter of Credit Accommodations or reduce the lending formulas or amounts of Loans and Letter of Credit Accommodations available to Borrowers and/or (ii) terminate any provision of this Agreement providing for any future Loans or Letter of Credit Accommodations to be made by Lender to Borrowers. SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW 11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. (a) The validity, interpretation and enforcement of this Agreement and the other Financing Agreements and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of New York (without giving effect to principles of conflicts of law). (b) Each Borrower and Lender irrevocably consents and submits to the non-exclusive jurisdiction of the Supreme Court of the State of New York and the United States District Court for the Southern District of New York and waives any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Agreement or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agree that any dispute with respect to any such matters shall be heard only in the courts described above (except that Lender shall have the right to bring any action or proceeding against any Borrower or its property in the courts of any other jurisdiction which Lender deems necessary or appropriate in order to realize on the -68- Collateral or to otherwise enforce its rights against such Borrower or its property). (c) Each Borrower hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to its address set forth on the signature pages hereof and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Lender's option, by service upon such Borrower in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, such Borrower shall appear in answer to such process, failing which such Borrower shall be deemed in default and judgment may be entered by Lender against such Borrower for the amount of the claim and other relief requested. (d) EACH BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. EACH BORROWER AND LENDER HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY BORROWER OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to any Borrower (whether in tort, contract, equity or otherwise) for losses suffered by any Borrower in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Agreement, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non-appealable judgment binding on Lender, that the losses were the result of acts or omissions of Lender constituting gross negligence or willful misconduct. In any such litigation, Lender shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of this Agreement and the other Financing Agreements. 11.2 Waiver of Notices. Each Borrower hereby expressly waives demand, presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments and commercial paper, included in or evidencing any of the Obligations or the Collateral, and any and all other demands and -69- notices of any kind or nature whatsoever with respect to the Obligations, the Collateral and this Agreement, except such as are expressly provided for herein. No notice to or demand on any Borrower, or on LFI as agent for Borrowers, which Lender may elect to give shall entitle such Borrower or any other Borrower or LFI as agent for Borrowers to any other or further notice or demand in the same, similar or other circumstances. 11.3 Amendments and Waivers. Neither this Agreement nor any provision hereof shall be amended, modified, waived or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender, and as to amendments, as also signed by an authorized officer of each Borrower. Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights, powers and/or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. 11.4 Waiver of Counterclaims. Each Borrower waives all rights to interpose any claims, deductions, setoffs or counterclaims of any nature (other then compulsory counterclaims) in any action or proceeding with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating hereto or thereto. 11.5 Indemnification. Borrowers shall indemnify and hold Lender, and its directors, agents, employees and counsel, harmless from and against any and all losses, claims, damages, liabilities, costs or expenses imposed on, incurred by or asserted against any of them in connection with any litigation, investigation, claim or proceeding commenced or threatened related to the negotiation, preparation, execution, delivery, enforcement, performance or administration of this Agreement, any other Financing Agreements, or any undertaking or proceeding related to any of the transactions contemplated hereby or any act, omission, event or transaction related or attendant thereto, including, without limitation, amounts paid in settlement, court costs, and the fees and expenses of counsel, except for any of such losses, claims, damages, liabilities, costs and expenses resulting from Lender's own gross negligence or wilful misconduct as determined by a final, non-appealable judgment of a court of competent jurisdiction. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section may be unenforceable because it violates any law or public policy, each Borrower shall pay the maximum portion which it is permitted to pay under applicable law to Lender in satisfaction of indemnified -70- matters under this Section. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS 12.1 Term. (a) This Agreement and the other Financing Agreements shall become effective as of the date set forth on the first page hereof and shall continue in full force and effect for a term ending on April 30, 2000 (the "Renewal Date"), and from year to year thereafter, unless sooner terminated pursuant to the terms hereof. Lender or Borrowers may terminate this Agreement and the other Financing Agreements effective on the Renewal Date or on the anniversary of the Renewal Date in any year by giving to the other parties at least sixty (60) days prior written notice; provided, that, this Agreement and all other Financing Agreements must be terminated simultaneously. Upon the effective date of termination or non-renewal of the Financing Agreements, Borrowers shall pay to Lender, in full, all outstanding and unpaid Obligations and shall furnish cash collateral to Lender in such amounts as Lender determines are reasonably necessary to secure Lender from loss, cost, damage or expense, including reasonable attorneys' fees and legal expenses, in connection with any contingent Obligations, including issued and outstanding Letter of Credit Accommodations and checks or other payments provisionally credited to the Obligations and/or as to which Lender has not yet received final and indefeasible payment. Such payments in respect of the Obligations and cash collateral shall be remitted by wire transfer in Federal funds to such bank account of Lender, as Lender may, in its discretion, designate in writing to Borrowers for such purpose. Interest shall be due until and including the next business day, if the amounts so paid by Borrowers to the bank account designated by Lender are received in such bank account later than 12:00 noon, New York time. (b) No termination of this Agreement or the other Financing Agreements shall relieve or discharge any Borrower of its respective duties, obligations and covenants under this Agreement or the other Financing Agreements until all Obligations have been fully and finally discharged and paid, and Lender's continuing security interest in the Collateral and the rights and remedies of Lender hereunder, under the other Financing Agreements and applicable law, shall remain in effect until all such Obligations have been fully and finally discharged and paid. (c) If for any reason this Agreement is terminated prior to the end of the then current term or renewal term of this Agreement, in view of the impracticality and extreme difficulty -71- of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result thereof, Borrowers agree to pay to Lender, upon the effective date of such termination, an early termination fee in the amount set forth below if such termination is effective in the period indicated: Amount Period (i) Two (2%) percent of $150,000,000 From the date hereof to and including April 30, 1998. (ii) One (1%) percent of $150,000,000 From May 1, 1998 to and including April 30, 1999. (iii) One (1%) percent of the daily From May 1, 1999 to average of outstanding Loans and but not including and Letter of Credit April 30, 2000. Accommodations for the twelve (12) months immediately preceding the effective date of termination. Such early termination fee shall be presumed to be the amount of damages sustained by Lender as a result of such early termination and each Borrower agrees that it is reasonable under the circumstances currently existing. In addition, Lender shall be entitled to such early termination fee upon the occurrence of any Event of Default described in Sections 10.1(g) and 10.1(h) hereof, even if Lender does not exercise its right to terminate this Agreement, but elects, at its option, to provide financing to one or more Borrowers or permit the use of cash collateral under the United States Bankruptcy Code. The early termination fee provided for in this Section 12.1 shall be deemed included in the Obligations. Notwithstanding the foregoing, no early termination fee shall be payable if all Borrowers request the termination of the Agreement and repay all of the Obligations with the proceeds of refinancing provided by CoreStates Bank, N.A. and otherwise comply with the provisions of this Section 12.1. 12.2 Appointment of Borrowers' Agent. (a) Each Borrower hereby irrevocably appoints LFI as agent for such Borrower hereunder and under the other Financing Agreements, to act in such capacity as agent for such Borrower hereunder and LFI hereby accepts such appointment. Each Borrower further irrevocably authorizes LFI as agent for such purposes to take such action on such Borrower's behalf and to exercise such rights and powers hereunder and under the other Financing -72- Agreements as are delegated to LFI in such capacity by the terms hereof and thereof, together with such rights and powers as are reasonably incidental thereto. (b) LFI as agent for each Borrower is hereby expressly and irrevocably authorized by each Borrower, without hereby limiting any implied or express authority, (i) to give and receive on behalf of such Borrower all notices and other materials delivered or provided to be delivered by Lender to such Borrower or by such Borrower to Lender pursuant to the Financing Agreements, (ii) to request Loans and Letter of Credit Accommodations on behalf of such Borrower, (iii) to receive disbursements of Loans and other financing accommodations on behalf of such Borrower, and (iv) to pay, on behalf of such Borrower, all Obligations of such Borrower at any time due Lender pursuant to the terms of this Agreement. 12.3 Notices. All notices, requests and demands hereunder shall be in writing and (a) made to Lender at its address set forth below and to Borrowers at their chief executive offices set forth below, or to such other address as any party may designate by written notice to the other parties in accordance with this provision, and (b) deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next Business Day, one (1) Business Day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. 12.4 Partial Invalidity. If any provision of this Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law. 12.5 Successors. This Agreement, the other Financing Agreements and any other document referred to herein or therein shall be binding upon and inure to the benefit of and be enforceable by Lender, Borrowers and their respective successors and assigns, except that Borrowers may not assign their rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein without the prior written consent of Lender. Lender may, after notice to Borrowers, assign its rights and delegate its obligations under this Agreement and the other Financing Agreements and further may assign, or sell participations in, all or any part of the Loans, the Letter of Credit Accommodations or any other interest herein -73- to another financial institution or other person, in which event, the assignee or participant shall have, to the extent of such assignment or participation, the same rights and benefits as it would have if it were the Lender hereunder, except as otherwise provided by the terms of such assignment or participation; provided, however, that, unless an Event of Default exists or has occurred and is continuing, and except at any time in favor of its affiliates or any entity that acquires or succeeds to all or substantially all of its business, Lender will not, without obtaining Borrowers' written consent (not to be unreasonably withheld or delayed), grant any participation or assign any of its interests in the Loans or Letter of Credit Accommodations under terms permitting any or all such non-affiliated participants or non-affiliated assignees to determine or restrict the right of Congress Financial Corporation or its existing or future affiliates or any entity that acquires or succeeds to all or substantially all of its business to determine, whether in its capacity as Lender, agent for the then-Lender or Lenders or otherwise, the amounts of Eligible Accounts, Eligible Inventory or Availability Reserves as provided herein, except that the foregoing agreement by Lender contained in this proviso shall not apply to any participation or assignment granted or made by Lender after the occurrence of an Event of Default. 12.6 Entire Agreement. This Agreement, the other Financing Agreements, any supplements hereto or thereto, and any instruments or documents delivered or to be delivered in connection herewith or therewith represents the entire agreement and understanding concerning the subject matter hereof and thereof between the parties hereto, and supersede all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. -74- IN WITNESS WHEREOF, Lender and Borrowers have caused these presents to be duly executed as of the day and year first above written. ================================================================================ LENDER BORROWERS CONGRESS FINANCIAL CORPORATION LONDON FOG INDUSTRIES, INC. By:___________________________ By:___________________________ Title:________________________ Title:________________________ Address: Chief Executive Office: 1133 Avenue of the Americas 1332 Londontown Boulevard New York, New York 10036 Eldersburg, Maryland 21784 PACIFIC TRAIL, INC. By:___________________________ Title:________________________ Chief Executive Office: 1700 Westlake Avenue North Suite 200 Seattle, Washington 98109 THE SCRANTON OUTLET CORPORATION By:___________________________ Title:________________________ Chief Executive Office: 1332 Londontown Boulevard Eldersburg, Maryland 21784 ================================================================================ -75- EX-4.2 6 EXHIBIT 4.2 February 27, 1998 London Fog Industries, Inc. 1332 Londontown Blvd. Eldersburg, Maryland 21784 Pacific Trail, Inc. 1700 Westlake Avenue North, Suite 200 Seattle, Washington 98109 The Scranton Outlet Corporation 1332 Londontown Blvd. Elderbsurg, Maryland 21784 Re: Amendment No. 1 to Loan and Security Agreement Gentlemen: Reference is made to the Loan and Security Agreement (the "Loan Agreement"), dated as of May 15, 1997, by and among Congress Financial Corporation ("Lender"), London Fog Industries, Inc. ("LFI"), Pacific Trail, Inc. ("PTI") and The Scranton Outlet Corporation ("SCO"; and together with LFI and PTI, collectively, "Borrowers"), together with all other agreements, documents, supplements and instruments now or at any time hereafter executed and/or delivered by Borrowers or any other person, with, to or in favor of Lender in connection therewith (all of the foregoing, together with this Agreement and the other agreements and instruments delivered hereunder, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, collectively, the "Financing Agreements"). All capitalized terms used herein and not otherwise defined herein shall have the meanings given to them in the Loan Agreement. Borrowers and Guarantors have requested that Lender (a) consent to certain transactions to be effected pursuant to the 1998 Restructuring Agreements (as hereinafter defined), to the extent requiring Lender's consent, (b) permit LFI and the other Borrowers and Guarantors to incur the indebtedness evidenced by the New LFI Subordinated Notes and certain related indebtedness, (c) permit the indebtedness evidenced by the New LFI Subordinated Notes (as hereinafter defined) and certain related indebtedness to be secured by certain assets and properties of Borrowers and Guarantors pursuant to the New LFI Subordinated Note Agreements (as hereinafter defined), (d) increase the Maximum Credit from $150,000,000 to $200,000,000, (e) increase from $125,000,000 to $150,000,000, the maximum aggregate amount of Primary Loans in respect of Eligible Inventory and Supplemental B Loans that may at any one time be outstanding, (f) make available to Borrowers Letter of Credit Accommodations in the form of banker's acceptances of up to $10,000,000 at any one time outstanding, (g) increase from $80,000,000 to $90,000,000 the maximum aggregate amount of Letter of Credit Accommodations that may at any one time be outstanding, (h) amend certain covenants and conditions of the Loan Agreement with respect to the amount of outstanding Loans, (i) amend the definition of EBITA, and (j) extend the Renewal Date to April 30, 2001. Lender is willing to do so to the extent and subject to the terms and conditions set forth herein. In consideration of the foregoing, the mutual agreements and covenants contained in this Amendment No. 1 to Loan and Security Agreement (this "Amendment"), and other good and valuable consideration, the adequacy and sufficiency of which are hereby acknowledged, Borrowers, Guarantors and Lender agree as follows: 1. Definitions. (a) Additional Definitions. As used herein or in any of the other Financing Agreements, the following terms shall have the respective meanings given to them below, and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation, each of the following definitions: (i) "Existing Subordinated Lenders" shall mean, individually and collectively, the Subordinated Lenders and The Chase Manhattan Bank, as agent for such lenders, pursuant to the Existing Subordinated Loan Documents, and their respective successors and assigns. (ii) "Existing Subordinated Loan Documents" shall mean, individually and collectively, (A) the Existing LFI Subordinated Notes, (B) the Master Restructuring Agreement dated as of May 31, 1995, the Term Loan Agreement and the Note Agreement, each dated as of May 31, 1995, and the Credit Agreement, dated as of May 20, 1994, each as amended through the date hereof, among the Existing Subordinated Lenders and LFI, and (C) all agreements, documents and instruments related thereto, including, without limitation, all agreements, documents or instruments that evidence the obligations and indebtedness of LFI and its subsidiaries to the Existing Subordinated Lenders or secure or support payment or performance thereof. (iii) "Existing LFI Capital Stock" shall mean, collectively, all Capital Stock (including warrants, options and capital stock issued upon exercise thereof), of LFI -2- issued and outstanding immediately before the effectiveness of the 1998 Restructuring Agreements. (iv) "Existing LFI Subordinated Notes" shall mean the promissory note(s) issued pursuant to the Term Loan Agreement and the Note Agreement, each dated as of May 31, 1995, each as amended through the date hereof, among the Existing Subordinated Lenders and LFI, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (v) "LFI Equity Agreements" shall mean, collectively, (A) the Amended and Restated Certificate of Incorporation of LFI, (B) the 1998 Master Restructuring Agreement, (C) the Management Equity Agreements, and (D) all other agreements, documents and instruments related to the issuance of the New LFI Equity, as the same now exist among hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (vi) "LFI Restructuring Merger" shall mean the merger of LFI Merger Corp., a Delaware corporation, with and into LFI, with LFI as the surviving corporation, effected pursuant to the 1998 Master Restructuring Agreement, the Agreement of Merger, dated as of the date hereof, between LFI and LFI Merger Corp., and the Certificate of Merger filed by the Secretary of State of the State of Delaware. (vii) "LFI Subordinated Note Indenture" shall mean the Indenture, dated of even date herewith, between LFI and the LFI Subordinated Note Trustee with respect to the New LFI Subordinated Notes, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (viii) "LFI Subordinated Note Trustee" shall mean IBJ Schroder Bank & Trust Company, a New York banking corporation, as trustee for the benefit of the New Subordinated Debtholders, and its successors and assigns, and any successor or replacement trustee and/or collateral agent appointed pursuant to the terms and conditions of the LFI Subordinated Note Indenture and the instruments and agreements thereunder. (ix) "Management Equity Agreements" shall mean, collectively, (i) the 1998 Stock Option Plan of London Fog Industries, Inc., effective as of the date hereof, and the individual stock option agreements entered into thereunder between LFI and members of LFI's senior management, (ii) the Management Anti-Dilution Warrants issued to recipients of the options issued under the Plan referred to in clause (i), and (iii) the Deferred Compensation Plan of London Fog Industries, Inc., dated as of the date hereof, relating to the Plan and -3- agreements referred to in clause (i), as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (x) "New LFI Equity" shall mean, collectively, all of the Capital Stock (including warrants, options and capital stock issued at any time upon exercise thereof) of LFI issued pursuant to the LFI Equity Agreements, as in effect on the date hereof. (xi) "New LFI Subordinated Note Agreements" shall mean, individually and collectively, (A) the New LFI Subordinated Notes, (B) the LFI Subordinated Note Indenture, (C) all agreements, documents and instruments at any time granting a security interest in or lien upon any property of Borrowers or their subsidiaries as security for all or any part of the indebtedness of LFI evidenced by the New LFI Subordinated Notes and/or the New LFI Subordinated Indenture, or guarantees thereof, or as security for other amounts owed by Borrowers or their subsidiaries to any New Subordinated Debtholder, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (xii) "New LFI Subordinated Notes" shall mean, individually and collectively, the 10% Subordinated Notes due 2003 issued by LFI pursuant to the LFI Subordinated Note Indenture, in the aggregate original principal amount of $100,000,000, including the "Temporary Notes", the "Initial Notes" and any "Exchange Notes" as defined in the LFI Subordinated Note Indenture, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, exchanged, restated or replaced. (xiii) "New Subordinated Debtholders" shall mean, individually and collectively, the LFI Subordinated Note Trustee, the holders from time to time of the New LFI Subordinated Notes, and any other holders of subordinated obligations of LFI and/or its subsidiaries arising out of, under or in connection with the 1998 Restructuring Agreements, and their respective successors and assigns. (xiv) "1998 Master Restructuring Agreement" shall mean the Master Restructuring Agreement, dated as of the date hereof, among LFI, certain of LFI's subsidiaries, the Existing Subordinated Lenders, and certain members of senior management of LFI. (xv) "1998 Intercreditor and Subordination Agreement" shall mean the Intercreditor and Subordination Agreement, dated of even date herewith, between the LFI Subordinated Note Trustee and Lender, as acknowledged by Borrowers and certain Guarantors, as the same now exists or may -4- hereafter be amended, modified, supplemented, restated or replaced. (xvi) "1998 Restructuring" shall mean the restructuring of the indebtedness heretofore evidenced by or arising under the Existing Subordinated Loan Documents, and the recapitalization of LFI, as provided for under the 1998 Restructuring Agreements. (xvii) "1998 Restructuring Agreements" shall mean, collectively, (A) the New LFI Subordinated Note Agreements, (B) the 1998 Master Restructuring Agreement, and (C) the other LFI Equity Agreements, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (xviii) "Securities Laws" shall mean the Securities Act of 1993, as amended, the Securities Exchange Act of 1934, as amended, the Trust Indenture Act of 1939, as amended, and all rules, regulations and interpretations issued pursuant thereto or in connection therewith, and all State and local statutes, rules and regulations issued in connection therewith or related thereto, as the same now exist or may hereafter be amended, modified, interpreted, recodified or supplemented. (b) Amendments to Definitions. (i) EBITA. Section 1.16 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "1.16 "EBITA" shall mean, for any measurement period, the Net Income (Loss) for such period, plus (a) to the extent deducted in arriving at Net Income (Loss) for such period, Interest Expense, write-off or amortization of deferred financing costs, provision for Federal, state, local and foreign income taxes, amortization expense, and any non-cash charges or non-cash losses (other than inventory write-downs, but including, without limitation, increases in the amount of multiemployer pension plan liabilities, non-cash loss attributable to changes in accounting principles and non-cash loss on sale or other disposition of assets not in the ordinary course of business (other than non-cash loss on sale or other disposition of inventory), non-cash expenses incurred by LFI under the Management Equity Agreements, and the amount of non-cash restructuring expenses), minus (b) to the extent included in determining Net Income (Loss) for such period, gains attributable to the effect of change in accounting principles adopted by Borrowers, income tax benefit, extraordinary gains and other non-operating -5- income, such as, but not limited to, gains from the sale or other disposition of assets other than in the ordinary course of business, or from the sale of shares of Capital Stock, or income or gains from forgiveness or exchange of indebtedness or from reduction of multiemployer pension plan liabilities or from reversal of restructuring or other expenses and any non-cash gains, minus (c) any payments made during such period in respect of multiemployer pension plan liabilities in excess of the amount equal to $500,000 multiplied by the number of fiscal quarters included in such period, plus (d) with respect to the determination of EBITA for any period during or consisting of the fiscal year ending the last Saturday in February 1998, (i) up to an aggregate of $2,000,000 of cash restructuring charges paid during such period relating to the closing of LFI's Baltimore, Maryland manufacturing facility, plus (ii) up to an aggregate amount of $3,750,000 paid in cash during such period by LFI to reimburse The Chase Manhattan Bank for amounts drawn by Messrs. Robert E. Gregory, Jr. and C. William Crain under letters of credit securing payment of certain obligations of LFI to such Persons; in each case under clauses (a), (b) and (d), determined for Borrowers and their subsidiaries for such period, on a consolidated basis in accordance with GAAP." (ii) Banker's Acceptances. Section 1.37 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "1.37 "Letter of Credit Accommodations" shall mean the letters of credit for the purchase of merchandise and banker's acceptances issued with respect to drafts presented under letters of credit for the purchase of merchandise, and merchandise purchase or other guaranties which are from time to time either (a) issued or opened by Lender for the account of any Borrower or, in Lender's discretion, any Obligor or (b) with respect to which Lender has agreed to indemnify the issuer or guaranteed to the issuer the performance by a Borrower of its obligations to such issuer." (iii) Maximum Credit. Section 1.39 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "1.39 "Maximum Credit" shall mean $200,000,000." 2. Consents. Notwithstanding anything to the contrary contained in Sections 9.7(a), 9.7(b), 9.7(e), 9.9(d), -6- 9.10(e) or 9.11 of the Loan Agreement as in effect prior to the effectiveness hereof, and subject to the terms and conditions contained herein, to the extent such consent is or may be required, Lender hereby consents to (i) the LFI Restructuring Merger, and (ii) the issuance and exchange by LFI of the New LFI Subordinated Notes and the New LFI Equity for the Existing LFI Subordinated Notes and the cancellation of the Existing LFI Capital Stock, in each case as provided in the 1998 Restructuring Agreements as in effect on the date hereof. 3. Supplemental B Loans. (a) Section 2.1(a)(iv) of the Loan Agreement is hereby amended by deleting the phrase "calendar years 1998 and 1999," appearing therein and replacing such phrase with the following: "calendar years 1998, 1999 and 2000,". (b) Sections 2.1(d)(i) and (ii) of the Loan Agreement are hereby deleted in their entirety and replaced with the following: "(i) [Intentionally Omitted]; (ii) Excess Availability shall have been greater than $15,000,000 for each of at least thirty (30) consecutive days during the period from December 1 of the calendar year ending prior to the request for Supplemental B Loans through and including March 31 of the then-current calendar year." 4. Sublimit on Primary Loans in respect of Eligible Inventory and Supplemental B Loans. The reference to the amount "$125,000,000" contained in Section 2.1(e) of the Loan Agreement is hereby deleted and replaced with the following amount: "$150,000,000". 5. Letter of Credit Accommodation Fees; Availability Reserves for Banker's Acceptances. (a) Section 2.2(b) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(b) In addition to any charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations, Borrowers shall pay to Lender (i) a letter of credit fee at a rate equal to one and one-half (1 1/2%) percent per annum on the daily outstanding balance of the Letter of Credit Accommodations, other than banker's acceptances, for -7- the immediately preceding month (or part thereof), (ii) an acceptance fee at a rate equal to three (3%) percent per annum on the daily outstanding balance of Letter of Credit Accommodations consisting of or relating to banker's acceptances for the immediately preceding month (or part thereof), in each case, payable in arrears as of the first day of each succeeding month, except that Borrowers shall pay to Lender such letter of credit fee under clause (i), at Lender's option, without notice, at a rate equal to three and one-half (3 1/2%) percent per annum, and such acceptance fee under clause (ii), at Lender's option, without notice, at a rate equal to five (5%) percent per annum, for (A) the period from and after the date of termination or non-renewal hereof until Lender has received full and final payment of all non-contingent Obligations and cash collateral (or a standby letter of credit in favor of Lender acceptable to Lender in all respects) sufficient to cover all Obligations in respect of outstanding Letter of Credit Accommodations or relating thereto (notwithstanding entry of a judgment against such Borrower) and (B) the period from and after the date of the occurrence of an Event of Default and for so long as such Event of Default is continuing. Such letter of credit and acceptance fees shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed and the obligation of Borrowers to pay such fees shall survive the termination or non-renewal of this Agreement." (b) Section 2.2(c) of the Loan Agreement is hereby amended by adding a new sentence as follows immediately prior to the final sentence of such Section 2.2(c): "Notwithstanding anything to the contrary in Section 2.2(c)(i) or (ii) hereof, upon the issuance of a banker's acceptance pursuant to a Letter of Credit Accommodation hereunder, Lender shall establish an Availability Reserve in an amount equal to one hundred (100%) percent of the face amount of such banker's acceptance plus, without duplication, the fees, taxes/duty and other amounts that Lender estimates must be paid in connection with the Inventory purchased under the letter of credit in respect of which a draft has been presented and made the subject of such banker's acceptance." (c) The reference to "$80,000,000 appearing at the end of the first sentence in Section 2.2(d) of the Loan Agreement is hereby deleted and replaced with the following: -8- "$90,000,000; provided, however, the aggregate amount of all outstanding Letter of Credit Accommodations consisting of or relating to banker's acceptances and any other commitments and obligations made or incurred by Lender in connection therewith, shall not at any time exceed $10,000,000." 6. Unused Line Fee. The reference to the amount "$110,000,000" contained in Section 3.4 of the Loan Agreement is hereby deleted and replaced with the following amount: "$145,000,000". 7. Liens. Section 9.8(f) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(f) subordinated liens and security interests of the LFI Subordinated Note Trustee and/or the other New Subordinated Debtholders securing indebtedness of LFI to the New Subordinated Debtholders to the extent permitted in Section 9.9(d) hereof and subject to the 1998 Intercreditor and Subordination Agreement;" 8. Indebtedness. (a) Effective upon the effectiveness of the 1998 Restructuring, Section 9.9(d) of the Loan Agreement shall be deleted in its entirety and replaced with the following: "(d) fully subordinated indebtedness of Borrowers to the New Subordinated Debtholders pursuant to the New LFI Subordinated Note Agreements (as in effect on the date of issuance of the New LFI Subordinated Notes) not to exceed the aggregate principal amount of $100,000,000; provided, that, (i) Borrowers may only make payments in respect of such indebtedness in accordance with the terms of the New LFI Subordinated Note Agreements as in effect on February 27, 1998 and provided each such payment is permitted under the 1998 Intercreditor and Subordination Agreement, (ii) Borrowers shall not, directly or indirectly, (A) amend, modify, alter or change in any way adverse to Lender or any Borrower or Obligor, the terms of such indebtedness or any agreement, document or instrument related thereto as in effect on the date hereof, or (B) redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (iii) Borrowers shall furnish to Lender all notices or demands in connection with such indebtedness either received by Borrowers or on their behalf, promptly after the receipt thereof, or sent by Borrowers or on their -9- behalf, concurrently with the sending thereof, as the case may be;" (b) Effective upon the effectiveness of the 1998 Restructuring, Section 9.9 of the Loan Agreement shall be amended by deleting the word "and" appearing at the end of Section 9.9(g), by deleting the period at the end of Section 9.9(h) and replacing it with "; and" and by adding a new Section 9.9(i) immediately following Section 9.9(h), as follows: "(i) indebtedness of LFI to certain employees of LFI pursuant to the Management Equity Agreements as in effect on the date hereof." 9. Dividends and Redemptions. Effective upon the effectiveness of the 1998 Restructuring, Section 9.11 of the Loan Agreement shall be deleted in its entirety and replaced with the following: "9.11 Dividends and Redemptions. No Borrower shall, directly or indirectly, declare or pay any dividends on account of any shares of any class of Capital Stock of any Borrower now or hereafter outstanding, or set aside or otherwise deposit or invest any sums for such purpose, or redeem, retire, defease, purchase or otherwise acquire any shares of any class of Capital Stock (or set aside or otherwise deposit or invest any sums for such purpose) for any consideration other than common stock, or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) in respect of any such shares, or agree to do any of the foregoing, (other than by delivery of a subordinated note evidencing indebtedness permitted under Section 9.9(g) hereof) except that, provided no Event of Default, and no event or state of facts that would, with notice or passage of time or both, constitute an Event of Default, exists or has occurred and is continuing, or would exist or occur after giving effect to such redemption or repurchase or any payment therefor, LFI may, out of legally available funds therefor: (i) redeem and/or repurchase certain shares and options to purchase shares of Capital Stock of LFI owned by certain employees of LFI, pursuant to the exercise of the put options described in Section 9.9(g) hereof ("Management Put Repurchases"), but not to exceed the aggregate amount which, when added to the amounts expended as permitted under clauses (ii) and (iii) hereof in a given fiscal year of LFI, does not exceed the amount of $250,000 so expended in such fiscal year, (ii) repurchase fractional shares, or make payments in lieu of issuing fractional shares, of common stock of -10- LFI upon the exercise of stock options or warrants issued to employees of LFI to the extent not issued in violation hereof, but not to exceed the amount of $100,000 so expended in any one fiscal year of LFI, and (iii) repurchase common stock of LFI in open market transactions involving cash expenditures of not more than $100,000 in any fiscal year of LFI, where such stock is used in such fiscal year to pay directors' fees to outside directors of LFI. Any amount permitted to be paid under clauses (i), (ii) or (iii) and not so used in any fiscal year of LFI may be carried over under the respective clauses to succeeding fiscal years, but in no event may the amounts carried forward from any fiscal year under all such clauses exceed $250,000 in the aggregate, and in no event may the amounts paid under all such clauses in a given fiscal year of LFI, including any amounts carried over from prior years, exceed $500,000 in the aggregate." 10. Amendments to Cleanup and Excess Availability Provisions. Section 9.18 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "9.18 Excess Availability. For at least thirty (30) consecutive days during the period between December 1 of each calendar year and March 31 of the immediately following calendar year, Borrowers shall maintain Excess Availability of greater than $15,000,000." 11. Term. (a) The first sentence of Section 12.1(a) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(a) This Agreement and the other Financing Agreements shall become effective as of the date set forth on the first page and shall continue in full force and effect for a term ending on April 30, 2001 (the "Renewal Date") and from year to year thereafter, unless sooner terminated pursuant to the terms hereof." (b) Subsections 12.1(c)(i) through (iii) of the Loan Agreement are hereby deleted in their entirety and replaced with the following: "Amount Period (i) Two (2%) percent From the date of Maximum Credit hereof to and including April 30, 1998. -11- (ii) One (1%) percent of From May 1, 1998 to Maximum Credit and including April 30, 1999. (iii) One (1%) percent of From May 1, 1999 to the daily average but not including of outstanding Loans April 30, 2001." and Letter of Credit Accommodations for the twelve (12) months immediately preceding the effective date of termination. 12. Amendment to Schedule 8.4 to Loan Agreement. Effective upon the effectiveness of the 1998 Restructuring, Schedule 8.4 to the Loan Agreement shall be deemed amended by replacing the references to "Chemical Bank" with "IBJ Schroder Bank & Trust Company, as Trustee". 13. Line Increase Fee. In addition to all other fees, charges, interest and expenses payable by Borrowers to Lender hereunder and under the other Financing Agreements, Borrowers shall pay to Lender a fee in respect of the increase in the Maximum Credit provided for hereunder. Such fee shall be in the amount of $375,000, which amount is fully earned as of the date hereof, of which $125,000 is payable on the date hereof, $125,000 is payable on May 15, 1998, and $125,000 is payable on May 15, 1999; provided, that the installments payable on May 15, 1998 and May 15, 1999 shall, at Lender's option, become immediately due and payable upon or at any time after an Event of Default or any termination or non-renewal hereof. Each portion or installment of such fee, when payable as provided in this Section 13, may be charged directly to Borrowers' loan account maintained by Lender. 14. Amendment Fee. In addition to all other fees, charges, interest and expenses payable by Borrowers to Lender hereunder and under the other Financing Agreements, Borrowers shall pay to Lender a fee for entering into this Amendment in the amount of $125,000, which amount is fully earned and payable as of the date hereof and may be charged directly to Borrowers' loan account maintained by Lender. 15. Additional Event of Default. Without in any way limiting the events or conditions constituting Events of Default as set forth in Section 10 of the Loan Agreement, any default under any of the 1998 Restructuring Agreements that is not cured or waived within any applicable grace or cure period thereunder shall constitute an Event of Default under the Loan Agreement and other Financing Agreements. -12- 16. Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore or hereafter made by Borrowers or Guarantors to Lender pursuant to the other Financing Agreements, Borrowers and Guarantors hereby represent, warrant and covenant with and to Lenders as follows (which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Financing Agreements): (a) The 1998 Restructuring Agreements and the transactions contemplated thereunder have, contemporaneously herewith, been duly executed, delivered and performed in accordance with their terms by the respective parties thereto in all respects, including the fulfillment (not merely the waiver) of all conditions precedent set forth therein. (b) The New LFI Subordinated Notes have, contemporaneously herewith, been duly authorized, issued and delivered by LFI and all agreements, documents and instruments related thereto, including, but not limited to, the LFI Subordinated Note Indenture, have, contemporaneously herewith, been duly authorized, executed and delivered and the transactions contemplated thereunder performed in accordance with their terms by the respective parties thereto in all respects, including the fulfillment (not merely the waiver) of all conditions precedent set forth herein. (c) All of the Existing LFI Subordinated Notes have, contemporaneously herewith, been deemed cancelled in accordance with the terms of the 1998 Restructuring Agreements, and all security interests in, and mortgages and liens upon, any of the assets of Borrowers or any Guarantor heretofore securing all or any part of the indebtedness or obligations evidenced by or arising under the Existing Subordinated Loan Documents have, contemporaneously herewith, been (i) amended and restated pursuant to the 1998 Restructuring Agreements, so as to be solely in favor of the LFI Subordinated Note Trustee for the benefit of the New Subordinated Debtholders, and (ii) made, together with all security interests, mortgages and liens securing any obligations and indebtedness arising out of, under or in connection with the New LFI Subordinated Note Agreements or any of the other 1998 Restructuring Agreements, and the indebtedness and obligations at any time secured thereby, expressly subject and subordinate to the security interests, mortgages and liens held by Lender and subject and subordinate to the other rights and remedies of Lender (including Lender's rights to prior payment of the Obligations) pursuant to the 1998 Intercreditor and Subordination Agreement. (d) All of the issued and outstanding Existing LFI Capital Stock has, contemporaneously herewith, been cancelled, retired and converted in accordance with the terms of the LFI -13- Equity Agreements and the other 1998 Restructuring Agreements (except for certain options to acquire common stock of LFI held by employees of LFI on the date hereof), and all of the shares of the New LFI Capital Stock have been or, in the case of shares issuable upon the exercise of options or warrants, when issued will be, duly authorized, validly issued and fully paid and non-assessable. All of the shareholders of LFI who own of record, or, to the best of LFI's knowledge, directly or indirectly beneficially own, ten (10%) percent or more of the issued and outstanding shares of the New LFI Capital Stock are listed, and their percentage ownership of record and, to the best of LFI's knowledge, beneficial ownership, is set forth next to such shareholder's name, on Exhibit A attached hereto. (e) All actions and proceedings required by the LFI 1998 Restructuring Agreements, applicable law and regulation have been taken and the transactions required thereunder have, contemporaneously herewith, been duly and validly taken and consummated. (f) No court of competent jurisdiction has issued any injunction, restraining order or other order which prohibits consummation of any of the transactions described in the 1998 Restructuring Agreements, and no governmental action or proceeding has been threatened or commenced seeking any injunction, restraining order or other order which seeks to void or otherwise modify the 1998 Restructuring or any provision of the 1998 Restructuring Agreements. (g) Borrowers and Guarantors have delivered, or caused to be delivered, to Lender true, correct and complete copies of the 1998 Restructuring Agreements. (h) Neither the execution and delivery of the 1998 Restructuring Agreements and the instruments and documents to be delivered pursuant thereto, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof, (i) has violated or will violate any Securities Laws or any other law or regulation or any order or decree of any court or governmental instrumentality in any respect or (ii) does or will conflict with or result in the breach of, or constitute a default in any respect under, any indenture, mortgage, deed of trust, agreement or instrument to which any Borrower or Guarantor is a party or may be bound, or (iii) result in the creation or imposition of any lien, charge or encumbrance upon any of the property of Borrowers or Guarantors, except as specifically permitted hereunder or under the other Financing Agreements, or (iv) does or shall violate any provision of the Certificate of Incorporation or By-Laws of LFI or any other Borrower or any Guarantor. -14- (i) LFI Merger Corp. was incorporated under the laws of the State of Delaware on February 13, 1998 and immediately prior to the LFI Restructuring Merger shall own no assets (except for the preferred stock and common stock of LFI contributed to LFI Merger Corp. by the holders thereof), and shall have no liabilities, and shall have engaged in no business or transaction, except becoming party to the 1998 Restructuring Merger. (j) The 1998 Restructuring will not result in any material current cash tax liability of LFI or its subsidiaries to the United States Internal Revenue Service, except for liabilities pursuant to the alternative minimum tax. (k) No Event of Default exists on the date of this Amendment (after giving effect to the consents under, and amendments to the Loan Agreement provided in, this Amendment). (l) This Amendment has been duly authorized, executed and delivered by Borrowers and Guarantors, and the agreements and obligations of Borrowers and Guarantors contained herein constitute legal, valid and binding obligations of Borrowers and Guarantors enforceable against Borrowers and Guarantors in accordance with their respective terms. 17. Conditions Precedent. The effectiveness of the consents and amendments set forth herein shall be subject to the receipt by Lender of each of the following, in form and substance satisfactory to Lender: (a) an original of this Amendment, duly authorized, executed and delivered by Borrowers and Guarantors; (b) an original of the 1998 Intercreditor and Subordination Agreement, between the LFI Subordinated Note Trustee and Lender, as acknowledged by Borrowers and the Guarantors parties thereto, duly authorized, executed and delivered by the LFI Subordinated Note Trustee, Borrowers and such Guarantors; (c) all requisite corporate action and proceedings in connection with this Amendment and the documents and instruments to be delivered hereunder shall be in form and substance satisfactory to Lender, and Lender shall have received all information and copies of all documents, including, without limitation, records of requisite corporate action and proceedings which Lender may have requested in connection therewith, such documents where requested by Lender or its counsel to be certified by appropriate corporate officers or governmental authorities; (d) a pro-forma consolidated balance sheet of LFI and subsidiaries, dated as of January 31, 1998, prepared so as to give pro-forma effect to the consummation of the 1998 -15- Restructuring, accompanied by an officer's certificate dated as of the date hereof, certified by the chief financial officer at LFI; (e) evidence that the Certificate of Merger with respect to the LFI Restructuring Merger and the Amended and Restated Certificate of Incorporation of LFI have been filed by the Secretary of State of the State of Delaware; (f) opinion letters of counsel to Borrowers and Guarantors with respect to the 1998 Restructuring Agreements and this Amendment, and such other matters as Lender may request; and (g) after giving effect to the consents under, and amendments to the Loan Agreement provided in, this Amendment, no Event of Default shall exist or have occurred and no event or condition shall have occurred or exist which with notice or passage of time or both would constitute an Event of Default. 18. Effect of this Amendment. This Amendment and the instruments and agreements delivered pursuant hereto constitute the entire agreement of the parties with respect to the subject matter hereof and thereof, and supersede all prior oral or written communications, memoranda, proposals, negotiations, discussions, term sheets and commitments with respect to the subject matter hereof and thereof. Except for the specific amendments and consents expressly set forth herein, no other changes or modifications to or consents under the Financing Agreements, and no waivers of any provisions thereof are intended or implied, and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent of conflict between the terms of this Amendment and the other Financing Agreements, the terms of this Amendment shall control. The Loan Agreement and this Amendment shall be read and construed as one agreement. 19. Further Assurances. Borrowers shall execute and deliver such additional documents and take such additional action as may be reasonably requested by Lender to effectuate the provisions and purposes of this Amendment. 20. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the internal laws of the State of New York (without giving effect to principles of conflicts of law). 21. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 22. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this -16- Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. Please sign in the space provided below and return a counterpart of this Amendment, whereupon this Amendment, as so agreed to and accepted, shall become a binding agreement among Borrowers, Guarantors and Lender. Very truly yours, CONGRESS FINANCIAL CORPORATION By: --------------------------- Title: ------------------------ AGREED AND ACCEPTED: LONDON FOG INDUSTRIES, INC. By: --------------------------- Title: ------------------------ PACIFIC TRAIL, INC. By: --------------------------- Title: ------------------------ THE SCRANTON OUTLET CORPORATION By: --------------------------- Title: ------------------------ CONSENTED TO: PTI HOLDING CORP. By: --------------------------- Title: ------------------------ [SIGNATURES CONTINUE ON NEXT PAGE] -17- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] PTI TOP COMPANY, INC. By: --------------------------- Title: ------------------------ STAR SPORTSWEAR MANUFACTURING CORP. By: --------------------------- Title: ------------------------ MATTHEW MANUFACTURING CO., INC. By: --------------------------- Title: ------------------------ WASHINGTON HOLDING COMPANY By: --------------------------- Title: ------------------------ CLIPPER MIST, INC. By: --------------------------- Title: ------------------------ LONDON FOG SPORTSWEAR, INC. By: --------------------------- Title: ------------------------ THE MOUNGER CORPORATION By: --------------------------- Title: ------------------------ -18- EX-4.3 7 EXHIBIT 4.3 EXHIBIT 4.3 April 22, 1998 London Fog Industries, Inc. 1332 Londontown Blvd. Eldersburg, Maryland 21784 Pacific Trail, Inc. 1700 Westlake Avenue North, Suite 200 Seattle, Washington 98109 The Scranton Outlet Corporation 1332 Londontown Blvd. Eldersburg, Maryland 21784 Re: Amendment No. 2 to Loan and Security Agreement Gentlemen: Reference is made to the Loan and Security Agreement (the "Loan Agreement"), dated as of May 15, 1997, by and among Congress Financial Corporation ("Lender"), London Fog Industries, Inc. ("LFI"), Pacific Trail, Inc. ("PTI") and The Scranton Outlet Corporation ("SCO"; and together with LFI and PTI, collectively, "Borrowers"), as amended by Amendment No. 1 to Loan and Security Agreement, dated as of February 27, 1998, together with all other agreements, documents, supplements and instruments now or at any time hereafter executed and/or delivered by Borrowers or any other person, with, to or in favor of Lender in connection therewith (all of the foregoing, together with this Amendment and the other agreements and instruments delivered hereunder, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, collectively, the "Financing Agreements"). All capitalized terms used herein and not otherwise defined herein shall have the meanings given to them in the Loan Agreement. Borrowers and Guarantors have requested that Lender agree to amend certain provisions of Section 9.11 of the Loan Agreement, and Lender is willing to do so to the extent and subject to the terms and conditions set forth herein. In consideration of the foregoing, the mutual agreements and covenants contained in this Amendment No. 2 to Loan and Security Agreement (this "Amendment"), and other good and valuable consideration, the adequacy and sufficiency of which are hereby acknowledged, Borrowers and Lender agree as follows: 1. Dividends and Redemptions. Section 9.11 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "9.11 Dividends and Redemptions. No Borrower shall, directly or indirectly, declare or pay any dividends on account of any shares of any class of Capital Stock of any Borrower now or hereafter outstanding, or set aside or otherwise deposit or invest any sums for such purpose, or redeem, retire, defease, purchase or otherwise acquire any shares of any class of Capital Stock (or set aside or otherwise deposit or invest any sums for such purpose) for any consideration other than common stock, or apply or set apart any sum, or make any other distrubution (by reduction of capital or otherwise) in respect of any such shares, or agree to do any of the foregoing, (other than by delivery of a subordinated note evidencing indebtedness permitted under Section 9.9(g) hereof), except that, provided no Event of Default, and no event or state of facts that would, with notice or passage of time or both, constitute an Event of Default, exists or has occurred and is continuing, or would exist or occur after giving effect to such redemption or repurchase or any payment therefor, LFI may, out of legally available funds therefor: (i) redeem and/or repurchase certain shares and options to purchase shares of Capital Stock of LFI owned by certain employees of LFI, pursuant to the exercise of the put options described in Section 9.9(g) hereof ("Management Put Repurchases"), but not to exceed the aggregate amount which, when added to the amounts expended as permitted under clauses (ii) and (iii) hereof in a given fiscal year of LFI, does not exceed the amount of $350,000 so expended in such fiscal year, (ii) repurchase fractional shares, or make payments in lieu of issuing fractional shares, of common stock of LFI upon the exercise of stock options or warrants issued to employees of LFI to the extent not issued in violation hereof, but not to exceed the amount of $100,000 so expended in any one fiscal year of LFI, and (iii) repurchase common stock of LFI in open market transactions involving cash expenditures of not more than $200,000 in any fiscal year of LFI, where such stock is used in such fiscal year to pay directors' fees to outside directors of LFI. Any amount permitted to be paid under clauses(i), (ii) or (iii) and not so used in any fiscal year of LFI may be carried over under the respective clauses to succeeding fiscal years, but in no event may the amounts carried forward from any fiscal year under all such clauses exceed $250,000 in the aggregate, and in no event may the - 2 - amounts paid under all such clauses in a given fiscal year of LFI, including any amounts carried over from prior years, exceed $600,000 in the aggregate." 2. Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore or hereafter made by Borrowers to Lender pursuant to the other Financing Agreements, Borrowers hereby represent, warrant and covenant with and to Lender as follows (which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Financing Agreements): (a) No event of Default exists on the date of this Amendment (after giving effect to the amendments to the Loan Agreement provided in this Amendment). (b) All of the representations and warranties set forth in the Loan Agreement as amended hereby, and the other Financing Agreements, are true and correct in all material respects, except to the extent any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. (c) This Amendment has been duly authorized, executed and delivered by Borrowers and consented to by Guarantors, and the agreements and obligations of Borrowers, contained herein constitute legal, valid and binding obligations of Borrowers, enforceable against Borrowers in accordance with their respective terms. 3. Conditions Precedent. The effectiveness of the amendments set forth herein shall be subject to the receipt by Lender of each of the following, in form and substance satisfactory to Lender: (a) an original of this Amendment, duly authorized, executed and delivered by Borrowers and consented to by Guarantors; and (b) after giving effect to the amendments to the Loan Agreement provided in, this Amendment, no Event of Default shall exist or have occurred and no event or condition shall have occurred or exist which with notice or passage of time or both would constitute an Event of Default. 4. Effect of this Amendment. This Amendment and the instruments and agreements delivered pursuant hereto constitute the entire agreement of the parties with respect to the subject matter hereof and thereof, and supersede all prior oral or - 3 - written communications, memoranda, proposals, negotiations, discussions, term sheets and commitments with respect to the subject matter hereof and thereof. Except for the specific amendments expressly set forth herein, no other changes or modifications to the Financing Agreements, and no consents under or waivers of any provisions of the Financing Agreements are intended or implied, and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent of conflict between the terms of this Amendment and the other Financing Agreements, the terms of this Amendment shall control. The Loan Agreement and this Amendment shall be read and construed as one agreement. 5. Further Assurances. Borrowers shall execute and deliver such additional documents and take such additional action as may be reasonably requested by Lender to effectuate the provisions and purposes of this Amendment. 6. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the internal laws of the State of New York (without giving effect to principles of conflicts of law). 7. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 8. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. Please sign in the space provided below and return a counterpart of this Amendment, whereupon this Amendment, as so agreed to and accepted, shall become a binding agreement among Borrowers and Lender, consented to by Guarantors. Very truly yours, CONGRESS FINANCIAL CORPORATION By: /s/ Lawernce S. Fonte --------------------------- Title: First Vice President ------------------------ [SIGNATURES CONTINUE ON NEXT PAGE] - 4 - [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AGREED AND ACCEPTED: LONDON FOG INDUSTRIES, INC. By:/s/ ------------------------------- Title: SR.VP ---------------------------- PACIFIC TRAIL, INC. By:/s/ ------------------------------- Title: Secretary ---------------------------- THE SCRANTON OUTLET CORPORATION By:/s/ ------------------------------- Title: Secretary ---------------------------- CONSENTED TO: PTI HOLDING CORP. By:/s/ ------------------------------- Title: Secretary ---------------------------- PTI TOP COMPANY, INC. By:/s/ ------------------------------- Title: Secretary ---------------------------- STAR SPORTSWEAR MANUFACTURING CORP. By:/s/ ------------------------------- Title: Secretary ---------------------------- - 5 - [SIGNATURES CONTINUED FROM PREVIOUS PAGE] MATTHEW MANUFACTURING CO., INC. By:/s/ ------------------------------- Title: Secretary ---------------------------- WASHINGTON HOLDING COMPANY By:/s/ ------------------------------- Title: Secretary ---------------------------- CLIPPER MIST, INC. By:/s/ ------------------------------- Title: Secretary ---------------------------- LONDON FOG SPORTSWEAR, INC. By:/s/ ------------------------------- Title: Secretary ---------------------------- THE MOUNGER CORPORATION By:/s/ ------------------------------- Title: Secretary ---------------------------- - 6 - EX-4.4 8 EXHIBIT 4.4 ================================================================================ LONDON FOG INDUSTRIES, INC. $100,000,000 10% Senior Subordinated Notes Due February 27, 2003 ========== INDENTURE Dated as of February 27, 1998 ========== IBJ SCHRODER BANK & TRUST COMPANY as Trustee ================================================================================ CROSS-REFERENCE TABLE
TIA Indenture Section Section - ------- ------- 310(a)(1) ..................................................................... 7.10 (a)(2) ..................................................................... 7.10 (a)(3) ..................................................................... N.A. (a)(4) ..................................................................... N.A. (b) ..................................................................... 7.8; 7.10 (c) ..................................................................... N.A. 311(a) ..................................................................... 7.11 (b) ..................................................................... 7.11 (c) ..................................................................... N.A. 312(a) ..................................................................... 2.5 (b) ..................................................................... 12.3 (c) ..................................................................... 12.3 313(a) ..................................................................... 7.6 (b)(1) ..................................................................... N.A. (b)(2) ..................................................................... 7.6 (c) ..................................................................... 7.6 (d) ..................................................................... 7.6 314(a) ..................................................................... 4.18 4.20; 12.2 (b) ..................................................................... N.A. (c)(1) ..................................................................... 12.4 (c)(2) ..................................................................... 12.4 (c)(3) ..................................................................... N.A. (d) ..................................................................... 10.4; 10.5 (e) ..................................................................... 12.5 (f) ..................................................................... 4.19 315(a) ..................................................................... 7.1 (b) ..................................................................... 7.5; 12.2 (c) ..................................................................... 7.1 (d) ..................................................................... 7.1 (e) ..................................................................... 6.11 316(a)(last sentence) ..................................................................... 12.6 (a)(1)(A) ..................................................................... 6.5 (a)(1)(B) ..................................................................... 6.4 (a)(2) ..................................................................... N.A. (b) ..................................................................... 6.4; 6.7 317(a)(1) ..................................................................... 6.8 (a)(2) ..................................................................... 6.9 (b) ..................................................................... 2.4 318(a) ..................................................................... 12.1 N.A. means Not Applicable.
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be part of the Indenture. TABLE OF CONTENTS
Page ---- ARTICLE I Definitions and Incorporation by Reference SECTION 1.1. Definitions............................................................... 1 SECTION 1.2. Incorporation by Reference of Trust Indenture Act......................... 25 SECTION 1.3. Rules of Construction..................................................... 26 ARTICLE II The Securities SECTION 2.1. Form and Dating........................................................... 26 SECTION 2.2. Execution and Authentication.............................................. 28 SECTION 2.3. Registrar and Paying Agent................................................ 28 SECTION 2.4. Paying Agent To Hold Money in Trust....................................... 29 SECTION 2.5. Holder Lists.............................................................. 29 SECTION 2.6. Transfer and Exchange..................................................... 29 SECTION 2.7. Replacement Securities.................................................... 36 SECTION 2.8. Outstanding Securities.................................................... 37 SECTION 2.9. Temporary Securities...................................................... 37 SECTION 2.10. Cancellation.............................................................. 37 SECTION 2.11. Defaulted Interest........................................................ 37 SECTION 2.12. CUSIP Numbers............................................................. 38 ARTICLE III Redemption SECTION 3.1. Optional Redemption....................................................... 38 SECTION 3.2. Notices to Trustee........................................................ 38 SECTION 3.3. Selection of Securities To Be Redeemed.................................... 39 SECTION 3.4. Notice of Redemption...................................................... 39 SECTION 3.5. Effect of Notice of Redemption............................................ 40 SECTION 3.6. Deposit of Redemption Price............................................... 40 SECTION 3.7. Securities Redeemed in Part............................................... 40 ARTICLE IV Covenants SECTION 4.1. Payment of Securities..................................................... 41 SECTION 4.2. Limitation on Liens....................................................... 41 SECTION 4.3. Limitation on Incurrence of Additional Indebtedness....................... 41 SECTION 4.4. Limitation on Restricted Payments......................................... 41
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Page ---- SECTION 4.5. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries....................................................................... 43 SECTION 4.6. Limitation on Asset Sales................................................. 44 SECTION 4.7. Limitation on Transactions with Affiliates................................ 46 SECTION 4.8. Change of Control......................................................... 47 SECTION 4.9. Limitation on Incurrence of Subordinated Debt Senior to the Securities.... 47 SECTION 4.10. Limitation on Preferred Stock of Subsidiaries............................. 47 SECTION 4.11. Limitation on Future Guarantees........................................... 48 SECTION 4.12. Conduct of Business....................................................... 48 SECTION 4.13. Maintenance of Office or Agency........................................... 48 SECTION 4.14. Corporate Existence....................................................... 48 SECTION 4.15. Payment of Taxes and Other Claims......................................... 48 SECTION 4.16. Maintenance of Properties and Insurance................................... 49 SECTION 4.17. Compliance with Laws...................................................... 49 SECTION 4.18. Additional Information.................................................... 49 SECTION 4.19. Further Instruments and Acts.............................................. 50 SECTION 4.20. Compliance Certificates................................................... 50 ARTICLE V Successor Company SECTION 5.1. When Company May Merge or Transfer Assets................................. 50 ARTICLE VI Defaults and Remedies SECTION 6.1. Events of Default......................................................... 52 SECTION 6.2. Acceleration.............................................................. 54 SECTION 6.3. Other Remedies............................................................ 54 SECTION 6.4. Waiver of Past Defaults................................................... 54 SECTION 6.5. Control by Majority....................................................... 55 SECTION 6.6. Limitation on Suits....................................................... 55 SECTION 6.7. Rights of Holders to Receive Payment...................................... 55 SECTION 6.8. Collection Suit by Trustee................................................ 56 SECTION 6.9. Trustee May File Proofs of Claim.......................................... 56 SECTION 6.10. Priorities................................................................ 56 SECTION 6.11. Undertaking for Costs..................................................... 56 ARTICLE VII Trustee SECTION 7.1. Duties of Trustee......................................................... 57 SECTION 7.2. Rights of Trustee......................................................... 58 SECTION 7.3. Individual Rights of Trustee.............................................. 59
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Page ---- SECTION 7.4. Trustee's Disclaimer...................................................... 59 SECTION 7.5. Notice of Defaults........................................................ 59 SECTION 7.6. Reports by Trustee to Holders............................................. 59 SECTION 7.7. Compensation and Indemnity................................................ 59 SECTION 7.8. Replacement of Trustee.................................................... 60 SECTION 7.9. Successor Trustee by Merger............................................... 61 SECTION 7.10. Eligibility; Disqualification............................................. 61 SECTION 7.11. Preferential Collection of Claims Against Company......................... 62 ARTICLE VIII Discharge of Indenture; Defeasance SECTION 8.1. Discharge of Liability on Securities...................................... 62 SECTION 8.2. Legal Defeasance and Covenant Defeasance.................................. 63 SECTION 8.3. Conditions to Defeasance.................................................. 64 SECTION 8.4. Application of Trust Money................................................ 66 SECTION 8.5. Repayment to Company or the Subsidiary Guarantors......................... 66 SECTION 8.6. Reinstatement............................................................. 67 SECTION 8.7. Release of Lien........................................................... 67 SECTION 8.8. Indemnity for Government Obligations...................................... 67 ARTICLE IX Amendments SECTION 9.1. Without Consent of Holders................................................ 67 SECTION 9.2. With Consent of Holders................................................... 68 SECTION 9.3. Compliance with Trust Indenture Act....................................... 69 SECTION 9.4. Revocation and Effect of Consents and Waivers............................. 69 SECTION 9.5. Notation on or Exchange of Securities..................................... 70 SECTION 9.6. Trustee To Sign Amendments................................................ 70 ARTICLE X Security Documents SECTION 10.1. Collateral and Security Documents........................................ 71 SECTION 10.2. Recording, Deposit of Pledged Securities, etc. .......................... 71 SECTION 10.3. Disposition of Inventory and Accounts Without Release.................... 72 SECTION 10.4. Release of Collateral.................................................... 73 SECTION 10.5. Trust Indenture Act Requirements......................................... 73 SECTION 10.6. Suits to Protect the Collateral.......................................... 73 SECTION 10.7. Determinations Relating to Collateral.................................... 73 SECTION 10.8. Impairment of Security Interests......................................... 74
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Page ---- ARTICLE XI Ancillary Documents SECTION 11.1. Security Documents and Guarantees........................................ 74 SECTION 11.2. Subordination Agreement.................................................. 74 ARTICLE XII Miscellaneous SECTION 12.1. Notices.................................................................. 75 SECTION 12.2. Communication by Holders with other Holders.............................. 76 SECTION 12.3. Certificate and Opinion as to Conditions Precedent....................... 76 SECTION 12.4. Statements Required in Certificate or Opinion............................ 76 SECTION 12.5. When Securities Disregarded.............................................. 77 SECTION 12.6. Rules by Trustee, Paying Agent and Registrar............................. 77 SECTION 12.7. Legal Holidays........................................................... 77 SECTION 12.8. Governing Law............................................................ 77 SECTION 12.9. No Recourse Against Others............................................... 77 SECTION 12.10. Successors............................................................... 77 SECTION 12.11. Multiple Originals....................................................... 78 SECTION 12.12. Variable Provisions...................................................... 78 SECTION 12.13. Qualification of Indenture............................................... 78 SECTION 12.14. Table of Contents; Headings.............................................. 78 SECTION 12.15. Severability............................................................. 78 SECTION 12.16. The Trustee.............................................................. 78 SECTION 12.17. Nonrecourse.............................................................. 78 SECTION 12.18. Counterparts............................................................. 78
- iv - EXHIBITS EXHIBIT A-1 FORM OF TEMPORARY NOTE EXHIBIT A-2 FORM OF INITIAL NOTE EXHIBIT B FORM OF EXCHANGE NOTE EXHIBIT C FORM OF COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT EXHIBIT D FORM OF COMPANY PLEDGE AGREEMENT EXHIBIT E FORM OF COMPANY SECURITY AGREEMENT EXHIBIT F FORM OF SUBSIDIARY GUARANTEE EXHIBIT G FORM OF SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT EXHIBIT H FORM OF SUBSIDIARY PLEDGE AGREEMENT EXHIBIT I FORM OF SUBSIDIARY SECURITY AGREEMENT EXHIBIT J FORM OF TRANSFEREE LETTER OF REPRESENTATION EXHIBIT K SUBORDINATION AGREEMENT EXHIBIT L ASSIGNMENT OF SECURITY INTERESTS EXHIBIT M BAILMENT AGREEMENT - v - INDENTURE dated as of February 27, 1998, between LONDON FOG INDUSTRIES, INC., a Delaware corporation (as further defined below, the "Company"), and IBJ SCHRODER BANK & TRUST COMPANY, a New York banking corporation, not in its individual capacity, but solely as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders (as defined below) of the Company's 10% Senior Subordinated Notes due 2003 that on the Issue Date (as defined below) each Holder shall be issued a temporary note in favor of such Holder (collectively, the "Temporary Notes") and, when issued in exchange for the Temporary Notes as provided herein, the Company's 10% Senior Subordinated Notes due 2003 (the "Initial Notes") and, when issued in exchange for Initial Notes as provided in the Registration Statement (as defined below), the Company's 10% Senior Subordinated Notes due 2003 (the "Exchange Notes" and, together with the Temporary Notes and the Initial Notes, the "Securities"): ARTICLE I Definitions and Incorporation by Reference ------------------------------------------ SECTION 1.1. Definitions. "Acquired Indebtedness" means Indebtedness (a) of a Person or any Subsidiary thereof existing at the time such Person becomes a Restricted Subsidiary of the Company or (b) assumed in connection with the acquisition of assets from such Person, in each case whether or not incurred by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company or such acquisition. Acquired Indebtedness shall be deemed to have been incurred, with respect to clause (a) of the preceding sentence, on the date such Person becomes a Restricted Subsidiary of the Company and, with respect to clause (b) of the preceding sentence, on the date of consummation of such acquisition of assets. "Affiliate" means a Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Company. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Notwithstanding the foregoing, no Person (other than the Company or any Subsidiary thereof) in whom a Receivables Entity makes an Investment in connection with a Qualified Receivables Transaction shall be deemed to be an Affiliate of the Company or any of its Subsidiaries solely by reason of such Investment. "Affiliate Transaction" has the meaning ascribed in Section 4.7. "Agent Member" has the meaning ascribed in Section 2.1(c). "all or substantially all" shall have the meaning given such phrase in the Revised Model Business Corporation Act. 2 "Asset Acquisition" means (a) an Investment by the Company or any Restricted Subsidiary thereof in any other Person pursuant to which such Person shall become a Restricted Subsidiary of the Company or of any Restricted Subsidiary of the Company, or shall be merged with or into the Company or any Restricted Subsidiary thereof, or (b) the acquisition by the Company or any Restricted Subsidiary thereof of the assets of any Person which constitute all or substantially all of the assets of such Person, any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business. "Asset Sale" means any direct or indirect sale, issuance, conveyance, transfer, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer for value by the Company or any of its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any Person other than the Company or a Wholly Owned Restricted Subsidiary thereof of (a) any Capital Stock of any Restricted Subsidiary of the Company; or (b) any other property or assets of the Company or any Restricted Subsidiary thereof other than in the ordinary course of business; provided, however, that Asset Sales shall not include (i) a transaction or series of related transactions for which the Company or any Restricted Subsidiary thereof receives aggregate consideration of less than $1 million, (ii) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company as permitted under Article V, (iii) the sale or discount, in each case without recourse, of accounts receivable arising in the ordinary course of business but only in connection with the compromise or collection thereof, (iv) the factoring of accounts receivable arising in the ordinary course of business pursuant to arrangements customary in the industry, (v) the licensing of intellectual property, (vi) disposals or replacements of obsolete equipment in the ordinary course of business, (vii) the sale, lease, conveyance, disposition or other transfer by the Company or any Restricted Subsidiary thereof of assets or property to the Company or to one or more Wholly Owned Restricted Subsidiaries thereof in connection with Investments permitted under Section 4.4, (viii) sales of accounts receivable and related assets of the type specified in the definition of "Qualified Receivables Transaction" to a Receivables Entity for the fair market value thereof, including cash in an amount at least equal to 75% of the book value thereof as determined in accordance with GAAP, and (ix) transfers of accounts receivable and related assets of the type specified in the definition of "Qualified Receivables Transaction" (or a fractional undivided interest therein) by a Receivables Entity in a Qualified Receivables Transaction. For the purposes of clause (viii), Purchase Money Notes shall be deemed to be cash. "Assignment of Security Interests" means the Assignment of Security Interests, dated as of the date hereof, by and between The Chase Manhattan Bank, as agent for the Lenders referenced therein, and the Trustee, substantially in the form of Exhibit L, as the same may be amended, supplemented or otherwise modified from time to time. "Bailment Agreement" the letter agreement, dated as of February 27, 1998, between Congress Financial Corporation, as bailee, and the Trustee, as bailor, acknowledging the bailment arrangement with respect to the Capital Stock of London Fog Raincoats Limited, as more fully described therein, substantially in the form of Exhibit M, as the same may be amended, supplemented or otherwise modified from time to time. 3 "Bank Credit Agreement" means the Loan and Security Agreement, dated as of May 15, 1997, among the Company, Pacific Trail, Inc., The Scranton Outlet Corporation and Congress Financial Corporation, together with all existing and future agreements, documents and instruments related thereto (including, without limitation, any guarantees, promissory notes, letters of credit and collateral documents), as each such agreement or document may be amended, supplemented or otherwise modified from time to time, or refunded, refinanced, restructured, replaced, renewed, repaid or extended from time to time (whether with the original lender or other lenders or otherwise, and whether provided under the original Bank Credit Agreement or other credit agreements or otherwise). "Bankruptcy Law" has the meaning ascribed in Section 6.1. "Board of Directors" means, as to any Person, the board of directors of such Person or any duly authorized committee thereof. "Business Day" means each day which is not a Legal Holiday. "Capital Stock" means (a) with respect to any Person that is a corporation, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents (however designated) of capital stock, including each class of common stock and preferred stock of such Person, but excluding any debt securities convertible into such equity, and (b) with respect to any Person that is not a corporation, any and all partnership or other equity interests of such Person, in each case whether now outstanding or hereafter issued. "Capitalized Lease Obligation" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "Cash Equivalents" means (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (b) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either S&P or Moody's; (c) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (d) certificates of deposit or bankers' acceptances (or, with respect to foreign banks, similar instruments) maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank, in each case having at the date of acquisition thereof combined capital and surplus of not less than $200 million; (e) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause 4 (a) above entered into with any bank meeting the qualifications specified in clause (d) above; and (f) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (a) through (e) above. "Change of Control" means the occurrence of one or more of the following events: (a) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof (whether or not otherwise in compliance with the provisions of this Indenture); (b) the approval by the holders of Capital Stock of the Company of any plan or proposal for the liquidation or dissolution of the Company (whether or not otherwise in compliance with the provisions of this Indenture); or (c) any Person or Group (other than (i) the holders on the Issue Date of the Capital Stock of the Company or any Affiliates of such holders and (ii) the holders of the Management Stock Options (as defined in the Master Restructuring Agreement)) shall become the owner, directly or indirectly, beneficially or of record, of shares representing more than fifty percent (50%) of the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of the Company, unless the Holders of a majority of the outstanding principal amount of the Securities consents to such Person or Group becoming the owner of such shares. "Change of Control Triggering Event" means the occurrence of a Change of Control and the failure of the Securities to have a Minimum Rating on the 30th day after the occurrence of such Change of Control. "Closing" means the date of the closing of the Transactions. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral" means the collective reference to any and all property from time to time subject to security interests to secure payment or performance of the Indebtedness evidenced by the Securities or of the Guarantees pursuant to the Security Documents, subject to Article X. "Commission" means the Securities and Exchange Commission. "Company" means London Fog Industries, Inc., until a successor replaces it and, thereafter, means the successor and, for purposes of any provision contained herein and required by the TIA, each other obligor on the indenture securities. "Company Patent and Trademark Security Agreement" means the Amended and Restated Company Patent and Trademark Security Agreement, dated as of even date herewith, 5 made by the Company in favor of the Trustee, for the benefit of the Holders, substantially in the form of Exhibit C, as the same may be amended, supplemented or otherwise modified from time to time. "Company Pledge Agreement" means the Amended and Restated Company Pledge Agreement, dated as of even date herewith, made by the Company in favor of the Trustee, for the benefit of the Holders, substantially in the form of Exhibit D, as the same may be amended, supplemented or otherwise modified from time to time. "Company Security Agreement" means the Amended and Restated Company Security Agreement, dated as of even date herewith, made by the Company in favor of the Trustee, for the benefit of the Holders, substantially in the form of Exhibit E, as the same may be amended, supplemented or otherwise modified from time to time. "Consolidated EBITDA" means, with respect to any Person, for any period, the sum (without duplication) of (a) Consolidated Net Income and (b) to the extent Consolidated Net Income has been reduced thereby, (i) all income taxes of such Person and the Restricted Subsidiaries thereof paid or accrued in accordance with GAAP for such period, (ii) Consolidated Interest Expense and (iii) Consolidated Non-cash Charges. "Consolidated Fixed Charge Coverage Ratio" means, with respect to any Person, the ratio of Consolidated EBITDA of such Person during the four full fiscal quarters for which financial statements are available (the "Four Quarter Period") ending on or prior to the date of the transactions giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transactions Date") to Consolidated Fixed Charges of such Person for the Four Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect on a pro forma basis for the period of such calculation to: (a) the incurrence of any Indebtedness of such Person or any Restricted Subsidiaries thereof (and the application of the proceeds thereof) giving rise to the need to make such calculation and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof) occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transactions Date, as if such incurrence or repayment, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four Quarter Period; (b) any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or a Restricted Subsidiary thereof (including any Person who becomes a Restricted Subsidiary as a result of any Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness and also including any Consolidated EBITDA (including any pro forma expense and cost reductions that are (i) directly attributable to such transaction and (ii) factually supportable) attributable to the assets which are the subject of any Asset Acquisition or Asset Sale during the Four Quarter Period) occurring during the Four Quarter 6 Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transactions Date, as if such Asset Sale or Asset Acquisition (including the incurrence, assumption or liability for any such Indebtedness or Acquired Indebtedness) occurred on the first day of the Four Quarter Period; (c) with respect to any such Four Quarter Period commencing prior to the Transactions, the Transactions (including any pro forma expense and cost reductions related thereto that are (A) directly attributable to such transaction and (B) factually supportable) shall be deemed to have taken place on the first day of such Four Quarter Period; and (d) any Asset Sales or Asset Acquisitions (including any Consolidated EBITDA (including any pro forma expense and cost reductions that are (A) directly attributable to such transaction and (B) factually supportable) attributable to the assets which are the subject of the Asset Acquisition or Asset Sale during the Four Quarter Period) that have been made by any Person that has become a Restricted Subsidiary of the Company or has been merged with or into the Company or any Restricted Subsidiary thereof during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transactions Date that would have constituted Asset Sales or Asset Acquisitions had such transactions occurred when such Person was a Restricted Subsidiary of the Company or subsequent to such Person's merger into the Company, as if such asset sale or asset acquisition (including the incurrence, assumption or liability for any Indebtedness or Acquired Indebtedness in connection therewith) occurred on the first day of the Four Quarter Period; provided that to the extent that clause (b) or (d) of this sentence requires that pro forma effect be given to an Asset Sale or Asset Acquisition, such pro forma calculation shall be based upon the four full fiscal quarters immediately preceding the Transactions Date of the Person, or division or line of business of the Person, that is acquired or disposed for which financial information is available. If such Person or any Restricted Subsidiary thereof directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or any Restricted Subsidiary thereof had directly incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (x) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transactions Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transactions Date; (y) if interest on any Indebtedness actually incurred on the Transactions Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transactions Date will be deemed to have been in effect during the Four Quarter Period; and (z) notwithstanding clause (x) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. 7 "Consolidated Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (a) Consolidated Interest Expense (excluding amortization or write-off of debt issuance costs) plus (b) the product of (i) the amount of all dividend payments on any series of Preferred Stock of such Person (other than dividends paid in Qualified Capital Stock) times (ii) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective consolidated Federal, state and local tax rate of such Person expressed as a decimal. "Consolidated Interest Expense" means, with respect to any Person for any period, the sum of, without duplication, (a) the aggregate of all cash and non-cash interest expense with respect to all outstanding Indebtedness of such Person and the Restricted Subsidiaries thereof, including the net costs associated with Interest Swap Obligations, for such period determined on a consolidated basis in conformity with GAAP, and (b) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and the Restricted Subsidiaries thereof during such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" of the Company means, for any period, the aggregate net income (or loss) of the Company and the Restricted Subsidiaries thereof for such period on a consolidated basis, determined in accordance with GAAP; provided that there shall be excluded therefrom: (a) gains and losses from Asset Sales or abandonments or reserves relating thereto and the related tax effects according to GAAP; (b) gains and losses due solely to fluctuations in currency values and the related tax effects according to GAAP; (c) items classified as extraordinary, unusual or nonrecurring gains and losses, and the related tax effects according to GAAP; (d) the net income (or loss) of any Person acquired in a pooling of interests transaction accrued prior to the date it becomes a Restricted Subsidiary of the Company or is merged or consolidated with the Company or any Restricted Subsidiary thereof; (e) the net income of any Restricted Subsidiary of the Company to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is restricted by contract, operation of law or otherwise; (f) the net loss of any Person other than a Restricted Subsidiary of the Company; (g) the net income of any Person, other than a Restricted Subsidiary, except to the extent of cash dividends or distributions paid to the Company or a Restricted Subsidiary thereof by such Person unless, in the case of a Restricted Subsidiary of the Company who receives such dividends or distributions, such Restricted Subsidiary is subject to clause (e) above; 8 (h) non-cash compensation charges, including any arising from existing stock options resulting from any merger or recapitalization transaction; and (i) net income (or loss) from discontinued operations. "Consolidated Non-cash Charges" means, with respect to any Person for any period, the aggregate depreciation, amortization and other non-cash expenses of such Person and the Restricted Subsidiaries thereof reducing Consolidated Net Income of such Person and the Restricted Subsidiaries thereof for such period, determined on a consolidated basis in accordance with GAAP (excluding any such charges (other than charges with respect to the Deferred Compensation Plan) which require an accrual of or a reserve for cash charges for any future period). "Continuing Director" means, as of any date of determination, any member of the Board of Directors of the Company who (a) was a member of such Board of Directors on the Issue Date, (b) was elected to such Board of Directors at the first annual meeting of shareholders following the Issue Date or (c) was nominated for election or elected to such Board of Directors with, or whose election to such Board of Directors was approved by, the affirmative vote of a majority of the Continuing Directors who were members of such Board of Directors at the time of such nomination or election. "Covenant Defeasance" has the meaning ascribed in Section 8.2(c). "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any Restricted Subsidiary of the Company against fluctuations in currency values. "Custodian" has the meaning ascribed in Section 6.1. "Default" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default. "Deferred Compensation Plan" means the Deferred Compensation Plan of the Company, dated as of even date herewith, as the same may be amended, supplemented or otherwise modified from time to time. "Definitive Securities" has the meaning ascribed in Section 2.1(d). "Depository" means The Depository Trust Company, its nominees and their respective successors and assigns, or such other depository institution hereinafter appointed by the Company. "Disqualified Capital Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening of any event (a) matures or is mandatorily redeemable 9 pursuant to a sinking fund obligation or otherwise, (b) is convertible or exchangeable for Indebtedness or Disqualified Capital Stock or (c) is redeemable at the option of the holder thereof, in whole or in part, in each case on or prior to the Stated Maturity of the Securities; provided, however, that any Capital Stock that would not constitute Disqualified Capital Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an asset sale or change of control occurring on or prior to the Stated Maturity of the Securities shall not constitute Disqualified Capital Stock if the asset sale or change of control provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the provisions specified in Sections 4.6 and 4.8. "Event of Default" has the meaning ascribed in Section 6.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Notes" has the meaning ascribed in the preamble hereto. "fair market value" means, unless otherwise specified, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transactions. Fair market value shall be determined by the Board of Directors of the Company acting reasonably and in good faith and shall be evidenced by a resolution of the Board of Directors of the Company delivered to the Trustee. "GAAP" means generally accepted accounting principles in the United States of America as in effect on the Issue Date, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. "Global Security" has the meaning ascribed in Section 2.1(b). "guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (b) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. 10 "Guarantees" means the collective reference to the Subsidiary Guarantee and any additional guarantee of the Securities hereafter executed by any Subsidiary of the Company, substantially in the form of the Subsidiary Guarantee. "Guarantor Senior Indebtedness" means, with respect to any Subsidiary Guarantor, any Indebtedness of such Subsidiary Guarantor under the Bank Credit Agreement or otherwise in respect of the Senior Indebtedness, including interest thereon (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to such Subsidiary Guarantor whether or not a claim for post-filing interest is allowed in such proceeding), whether outstanding on the Issue Date or thereafter incurred. "Holder" means the Person in whose name a Security is registered on the Register. "incur" has the meaning ascribed in Section 4.3. "Indebtedness" means with respect to any Person, without duplication: (a) all obligations of such Person for borrowed money; (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) all Capitalized Lease Obligations of such Person; (d) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all obligations under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (e) all obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction; (f) guarantees and other contingent obligations in respect of Indebtedness referred to in clauses (a) through (e) above and clause (h) below; (g) all obligations of any third party of the type referred to in clauses (a) through (f) which are secured by any Lien on any property or asset of such Person but which obligations are not assumed by such Person, the amount of such obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the obligation so secured; (h) all obligations under Currency Agreements and Interest Swap Obligations of such Person; and (i) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding 11 accrued dividends, if any. For purposes hereof, (x) the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock and (y) any transfer of accounts receivable or other assets which constitute a sale for purposes of GAAP shall not constitute Indebtedness hereunder. "Indenture" means this Indenture as amended, supplemented or otherwise modified from time to time. "Initial Notes" has the meaning ascribed in the preamble hereto. "Interest Payment Date" means the two dates specified on the reverse side of the Securities on which the Company is scheduled to make semiannual interest payments. "Interest Swap Obligations" means the obligations of any Person, pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount, including, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "Investment" means, with respect to any Person, any direct or indirect loan or other extension of credit (including, without limitation, a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any Person. "Investment" shall exclude extensions of trade credit by the Company and the Restricted Subsidiaries thereof on commercially reasonable terms in accordance with normal trade practices of the Company or such Restricted Subsidiary, as the case may be. For the purposes of Section 4.4, (a) "Investment" shall include and be valued at the fair market value of the net assets of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary and shall exclude the fair market value of the net assets of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary and (b) the amount of any Investment shall be the original cost of such Investment plus the cost of all additional Investments by the Company or any Restricted Subsidiary thereof, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, reduced by the payment of dividends or distributions (including tax sharing payments) in connection with such Investment or any other amounts received in respect of such Investment; provided that no such payment of dividends or distributions or receipt of any 12 such other amounts shall reduce the amount of any Investment if such payment of dividends or distributions or receipt of any such amounts would be included in Consolidated Net Income. If the Company or any Restricted Subsidiary thereof sells or otherwise disposes of any common stock of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, the Company no longer owns, directly or indirectly, a majority of the outstanding common stock of such Restricted Subsidiary, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the common stock of such Restricted Subsidiary not sold or disposed of. "Issue Date" means the date of original issuance of the Temporary Notes. "Legal Defeasance" has the meaning ascribed in 8.2(b). "Legal Holiday" has the meaning ascribed in Section 12.8. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "Master Restructuring Agreement" means the Master Restructuring Agreement, dated as of even date herewith, among the Company, the Subsidiary Guarantors, the Lenders (as defined therein), The Chase Manhattan Bank, as agent for the Lenders and the Existing Management Holders (as defined therein), as the same may be amended, supplemented or otherwise modified from time to time. "Merger" means the merger of LFI Merger Corp., a Delaware corporation, with and into the Company pursuant to the Merger Agreement. "Merger Agreement" means the Agreement of Merger, dated as of even date herewith, between the Company and LFI Merger Corp., a Delaware corporation. "Minimum Rating" means either (a) a rating of at least BBB- (or equivalent successor rating) by S&P or (b) a rating of at least Baa3 (or equivalent successor rating) by Moody's. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (other than the portion of any such deferred payment constituting interest) received by the Company or any Subsidiary thereof from such Asset Sale net of: (a) out-of-pocket expenses and fees relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions); 13 (b) taxes paid or payable after taking into account any reduction in consolidated tax liability due to available tax credits or deductions and any tax sharing arrangements; (c) repayment of Senior Indebtedness that is required to be repaid in connection with such Asset Sale, whether or not all or any portion of the amount repaid is re-lent to the Company or any Subsidiary thereof; (d) any portion of cash proceeds which the Company determines in good faith should be reserved for post-closing adjustments, it being understood and agreed that on the day that all such post-closing adjustments have been determined, the amount (if any) by which the reserved amount in respect of such Asset Sale exceeds the actual post-closing adjustments payable by the Company or any Subsidiary thereof shall constitute Net Cash Proceeds on such date; and (e) appropriate amounts which the Company determines in good faith to be provided by the Company or any Subsidiary thereof, as the case may be, as a reserve against any liabilities associated with such Asset Sale and retained by the Company or any Subsidiary thereof, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in the Officers' Certificate delivered to the Trustee. "Net Proceeds Offer" has the meaning ascribed in Section 4.6(a). "Obligations" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness, without duplication. "Officer" means the Chairman of the Board of Directors, the President, any Vice President, the Treasurer or the Secretary, in each case of the Company, as applicable. "Officers' Certificate" means a certificate signed by two Officers. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Paying Agent" has the meaning ascribed in Section 2.3. "Permitted Indebtedness" means, without duplication: (a) the Securities and the obligations under the Guarantees; (b) Indebtedness incurred pursuant to the Bank Credit Agreement; 14 (c) other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the Issue Date reduced by the amount of any scheduled amortization payments or mandatory prepayments when actually paid or permanent reductions thereon; (d) Interest Swap Obligations of the Company or any Restricted Subsidiary thereof covering Indebtedness of the Company or any Restricted Subsidiary thereof; provided that any Indebtedness to which any such Interest Swap Obligations correspond is otherwise permitted to be incurred under this Indenture; provided, further, that such Interest Swap Obligations are entered into, in the judgment of the Company, to protect the Company and any such Restricted Subsidiary thereof from fluctuation in interest rates on their respective outstanding Indebtedness; (e) Indebtedness under Currency Agreements; (f) intercompany Indebtedness owed by the Company to any Wholly Owned Restricted Subsidiary thereof or by any Restricted Subsidiary of the Company to the Company or to any Wholly Owned Restricted Subsidiary thereof; (g) Acquired Indebtedness of the Company or any Restricted Subsidiary thereof in an aggregate principal amount outstanding not exceeding $10 million at any one time; provided that, in the case of Acquired Indebtedness of a Restricted Subsidiary of the Company, such Acquired Indebtedness was not incurred in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company; (h) guarantees by the Company and the Wholly Owned Restricted Subsidiaries thereof of each other's Indebtedness; provided that such Indebtedness is permitted to be incurred hereunder, including, with respect to guarantees by the Wholly Owned Restricted Subsidiaries of the Company, Section 4.11; (i) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or other similar instrument inadvertently drawn against insufficient funds in the ordinary course of business; provided that such Indebtedness is extinguished within five (5) Business Days of its incurrence; (j) any refinancing, modification, replacement, renewal, restatement, refunding, deferral, extension, substitution, supplement, reissuance or resale of existing or future Indebtedness, including any additional Indebtedness incurred to pay interest or premiums required by the instruments governing such existing or future Indebtedness as in effect at the time of issuance thereof ("Required Premiums") and fees in connection therewith; provided that any such event shall not (i) result in an increase in the aggregate principal amount of Permitted Indebtedness (except to the extent such increase is a result of a simultaneous incurrence of additional Indebtedness (A) to pay Required Premiums and related fees or (B) otherwise permitted to be incurred under this Indenture) of the Company and the Restricted Subsidiaries thereof (except that this subclause (i) will not apply in the event the Indebtedness being refinanced, modified, replaced, renewed, restated, refunded, deferred, 15 extended, substituted, supplemented, reissued or resold (each, such transaction, a "Refinancing") was originally incurred in reliance upon clause (b) of this definition or the Refinancing is effected under the Bank Credit Agreement) and (ii) create Indebtedness with a Weighted Average Life to Maturity at the time such Indebtedness is incurred that is less than the Weighted Average Life to Maturity at such time of the Indebtedness being refinanced, modified, replaced, renewed, restated, refunded, deferred, extended, substituted, supplemented, reissued or resold (except that this subclause (ii) will not apply in the event the Indebtedness being refinanced, modified, replaced, renewed, restated, refunded, deferred, extended, substituted, supplemented, reissued or resold was originally incurred in reliance upon clause (b), (f), (g)(i) or (o) of this definition or the Refinancing is effected under the Bank Credit Agreement); provided that no Restricted Subsidiary of the Company that is not a Subsidiary Guarantor may refinance any Indebtedness pursuant to this clause (j) other than its own Indebtedness; (k) Indebtedness (including Capitalized Lease Obligations) incurred by the Company or any Restricted Subsidiary thereof to finance the purchase, lease or improvement of property (real or personal) or equipment (whether through the direct purchase of assets or the Capital Stock of any Person owning such assets) in an aggregate principal amount outstanding not to exceed $20 million at the time of any incurrence thereof; (l) Indebtedness incurred by the Company or any Restricted Subsidiary thereof constituting reimbursement obligations (in addition to reimbursement obligations constituting Senior Indebtedness) with respect to letters of credit or bankers' acceptances issued in the ordinary course of business, including, without limitation, letters of credit in respect of workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; (m) Indebtedness arising from agreements of the Company or a Restricted Subsidiary thereof providing for indemnification, adjustment of purchase price, earn out or other similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or a Restricted Subsidiary of the Company, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition, provided that the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by the Company and the Restricted Subsidiaries thereof in connection with such disposition; (n) obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary thereof in the ordinary course of business; (o) additional Indebtedness of the Company and the Restricted Subsidiaries thereof in an aggregate principal amount not to exceed $10 million at any one time outstanding; 16 (p) the incurrence by a Receivables Entity of Indebtedness in a Qualified Receivables Transaction that is not recourse to the Company or any Subsidiary thereof (except for Standard Securitization Undertakings); and (q) Indebtedness incurred by the Company in connection with and pursuant to the put options of the Company described in Section 4.4(b)(xi) and the Deferred Compensation Plan, each as in effect on the date hereof. "Permitted Investments" means: (a) Investments by the Company or any Restricted Subsidiary thereof in any Wholly Owned Restricted Subsidiary of the Company (whether existing on the Issue Date or created thereafter) and Investments in the Company by any Restricted Subsidiary thereof; provided that, in the case of an Investment by the Company or any Restricted Subsidiary thereof in any Wholly Owned Restricted Subsidiary of the Company, such Wholly Owned Restricted Subsidiary is not restricted from making dividends or similar distributions by contract, operation of law or otherwise; (b) cash and Cash Equivalents; (c) Investments existing on the Issue Date; (d) loans and advances to employees and officers of the Company (other than as permitted under clause (m)) and the Restricted Subsidiaries thereof not in excess of $1 million at any one time outstanding; (e) accounts receivable created or acquired in the ordinary course of business; (f) Currency Agreements and Interest Swap Obligations; (g) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; (h) guarantees by the Company or any Restricted Subsidiaries thereof of Indebtedness otherwise permitted to be incurred by the Company or any of its Restricted Subsidiaries under this Indenture; (i) Investments by the Company or any Restricted Subsidiary thereof in a Person, if as a result of such Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the Company or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys all or substantially all of its assets to, or is liquidated into, the Company or a Wholly Owned Restricted Subsidiary thereof; 17 (j) additional Investments having an aggregate fair market value, taken together with all other Investments made pursuant to this clause (j) that are at the time outstanding, not exceeding $5 million at the time of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value), plus an amount equal to (i) 100% of the aggregate net cash proceeds received by the Company from any Person (other than a Subsidiary of the Company) from the issuance and sale subsequent to the Issue Date of Qualified Capital Stock of the Company (including Qualified Capital Stock issued upon the conversion of convertible Indebtedness or in exchange for outstanding Indebtedness or as capital contributions to the Company (other than from a Subsidiary)) and (ii) without duplication of any amounts included in clause (j)(i) above, 100% of the aggregate net cash proceeds of any equity contribution received by the Company from a holder of the Company's Capital Stock, that in the case of amounts described in clause (j)(i) or (j)(ii) are applied by the Company within 180 days after receipt, to make additional Permitted Investments under this clause (j) (such additional Permitted Investments being referred to collectively as "Stock Permitted Investments"); (k) Investments received by the Company or its Restricted Subsidiaries as consideration for asset sales, including Asset Sales; provided in the case of an Asset Sale, such Asset Sale is effected in compliance with Section 4.6; (l) any Investment by the Company or a Wholly Owned Subsidiary of the Company in a Receivables Entity or any Investment by a Receivables Entity in any other Person in connection with a Qualified Receivables Transaction; provided that any Investment in a Receivables Entity is in the form of a Purchase Money Note or an equity interest; and (m) loans and advances to employees and officers of the Company in the form of Option Notes pursuant to, and as defined in, the Stock Option Plan. Any net cash proceeds that are used by the Company or any of its Restricted Subsidiaries to make Stock Permitted Investments pursuant to clause (j) of this definition shall not be included in subclauses (2) and (3) of clause (C) of Section 4.4(a). "Permitted Liens" means the following types of Liens: (a) Liens securing any or all of the Senior Indebtedness, the Securities and the Guarantees; (b) Liens for taxes, assessments or governmental charges or claims either (i) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or the Restricted Subsidiaries thereof shall have set aside on its books such reserves as may be required pursuant to GAAP; (c) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary 18 course of business for sums not yet delinquent or being contested in good faith, if suchreserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (d) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (e) judgment Liens not giving rise to an Event of Default; (f) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any Restricted Subsidiary thereof; (g) any interest or title of a lessor under any Capitalized Lease Obligation; (h) purchase money Liens to finance property or assets of the Company or any Restricted Subsidiary thereof; provided, however, that (i) the related purchase money Indebtedness shall not exceed the cost of such property or assets and shall not be secured by any property or assets of the Company or any Restricted Subsidiary thereof other than the property and assets so acquired and (ii) the Lien securing such Indebtedness shall be created within ninety (90) days of such acquisition; (i) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment, or storage of such inventory or other goods; (j) Liens securing reimbursement obligations (in addition to Liens securing any reimbursement obligations constituting Senior Indebtedness) with respect to stand-by and commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (k) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or any Restricted Subsidiary thereof, including rights of offset and set-off; (l) Liens securing Interest Swap Obligations which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under this Indenture; (m) Liens securing Indebtedness under Currency Agreements; 19 (n) Liens securing Acquired Indebtedness incurred in reliance on clause (g) of the definition of Permitted Indebtedness; provided that such Liens do not extend to or cover any property or assets of the Company or of any Restricted Subsidiary thereof other than the property or assets that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Restricted Subsidiary thereof; (o) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and the Restricted Subsidiaries thereof; (p) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (q) Liens on property of a Person existing at the time such Person is acquired by, or such Person is merged into or consolidated or amalgamated with, the Company or any Restricted Subsidiary thereof; provided that such Liens were not created in contemplation of such acquisition, merger, consolidation or amalgamation and do not extend to any assets other than those of the Person acquired by, or merged into or consolidated or amalgamated with, the Company or any Restricted Subsidiary thereof; (r) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties in connection with the importation of goods; (s) Liens existing on the Issue Date, together with any Liens securing Indebtedness incurred in reliance on clause (j) of the definition of Permitted Indebtedness in order to refinance the Indebtedness secured by Liens existing on the Issue Date; provided that the Liens securing the refinancing Indebtedness (other than Senior Indebtedness) shall not extend to property other than that pledged under the Liens securing the Indebtedness being refinanced; (t) Liens of the Company or a Wholly Owned Restricted Subsidiary thereof on assets of any Subsidiary of the Company; (u) Liens on assets transferred to a Receivables Entity or on assets of a Receivables Entity, in either case incurred in connection with a Qualified Receivables Transaction; and (v) Liens on goods which the Company or a Subsidiary thereof (acting as consignee) has agreed to sell on a consignment basis in the ordinary course of business. "Person" means an individual, partnership, corporation, association, joint-stock company, unincorporated organization, trust or joint venture, government or any agency or political subdivision thereof or any other entity. "Pledge Agreements" means the collective reference to the Company Pledge Agreement, the Subsidiary Pledge Agreement and any additional pledge agreement securing the Securities or any guarantee thereof executed by any Subsidiary of the Company, substantially in the form of the Subsidiary Pledge Agreement. 20 "Preferred Stock" of any Person means any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation. "Preliminary Prospectus" means each preliminary prospectus included in a Registration Statement or in any amendment thereto prior to the date on which such Registration Statement is declared effective under the Securities Act, including any prospectus filed with the Commission pursuant to Rule 424(a) under the Securities Act. "Productive Assets" means assets (including Capital Stock) of a kind used or usable in the businesses of the Company and the Restricted Subsidiaries thereof as, or related to such business, conducted on the date of the relevant Asset Sale. "Prospectus" means each prospectus included in a Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective Registration Statement in accordance with Rule 430A under the Securities Act), together with any supplement thereto, as filed with, or transmitted for filing to, the Commission pursuant to Rule 424(b) under the Securities Act. "Purchase Money Note" means a promissory note of a Receivables Entity evidencing a line of credit, which may be irrevocable, from the Company or any Subsidiary thereof in connection with a Qualified Receivables Transaction to a Receivables Entity, which note shall be repaid from cash available to the Receivables Entity, other than amounts required to be established as reserves pursuant to agreements, amounts paid to investors in respect of interest, principal and other amounts owing to such investors and amounts owing to such investors and amounts paid in connection with the purchase of newly generated receivables. "QIB" means any "qualified institutional buyer" (as defined in Rule 144A). "Qualified Capital Stock" means any stock that is not Disqualified Capital Stock. "Qualified Receivables Transaction" means any transaction or series of transactions that may be entered into by the Company or any of its Subsidiaries pursuant to which the Company or any of its Subsidiaries may sell, convey or otherwise transfer to (a) a Receivables Entity (in the case of a transfer by the Company or any of its Subsidiaries) and (b) any other Person (in the case of a transfer by a Receivables Entity), or may grant a security interest in, any accounts receivable (whether now existing or arising in the future) of the Company or any of its Subsidiaries, and any assets related thereto including, without limitation, all collateral securing such accounts receivable, all contracts and all guarantees or other obligations in respect of such accounts receivable, proceeds of such accounts receivable and other assets which are customarily transferred or in respect of which security interests are customarily granted in connection with asset securitization transactions involving accounts receivable. "Receivables Entity" means a Wholly Owned Subsidiary of the Company (or another Person in which the Company or any Subsidiary thereof makes an Investment and to which the 21 Company or any Subsidiary thereof transfers accounts receivable and related assets) which engages in no activities other than in connection with the financing of accounts receivable and which is designated by the Board of Directors of the Company (as provided below) as a Receivables Entity (a) no portion of the Indebtedness or any other Obligations (contingent or otherwise) of which (i) is guaranteed by the Company or any Subsidiary thereof (excluding guarantees of Obligations (other than the principal of, and interest on, Indebtedness) pursuant to Standard Securitization Undertakings), (ii) is recourse to or obligates the Company or any Subsidiary thereof in any way other than pursuant to Standard Securitization Undertakings or (iii) subjects any property or asset of the Company or any other Subsidiary thereof, directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to Standard Securitization Undertakings, (b) with which neither the Company nor any other Subsidiary thereof has any material contract, agreement, arrangement or understanding other than on terms no less favorable to the Company or such Subsidiary than those that might be obtained at the time from Persons that are not Affiliates of the Company, other than fees payable in the ordinary course of business in connection with servicing accounts receivable, and (c) to which neither the Company nor any other Subsidiary thereof has any obligation to maintain or preserve such entity's financial condition or cause such entity to achieve certain levels of operating results. Any such designation by the Board of Directors of the Company shall be evidenced to the Trustee by filing with the Trustee a certified copy of the resolution of the Board of Directors of the Company giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions. "Register" has the meaning ascribed in Section 2.3. "Registrar" has the meaning ascribed in Section 2.3. "Registration Statement" means any registration statement (including the Preliminary Prospectus, the Prospectus, any amendments (including any post-effective amendments) thereof, any supplements and all exhibits thereto and any documents incorporated therein by reference pursuant to the rules and regulations of the Commission), filed by the Company with the Commission which complies with the requirements of the Securities Act and the rules and regulations of the Commission thereunder. "Registration Statement Effective Date" means the date which the Commission declares as the effective date of the Registration Statement with respect to the Exchange Notes. "Representative" means the indenture trustee or other trustee, agent or representative in respect of the Senior Indebtedness or the Guarantor Senior Indebtedness; provided that if, and for so long as, such Senior Indebtedness or the Guarantor Senior Indebtedness, as the case may be, lacks such a representative, then the Representative for such Senior Indebtedness or Guarantor Senior Indebtedness, as the case may be, shall at all times constitute the holders of a majority in outstanding principal amount of such Senior Indebtedness or Guarantor Senior Indebtedness, as the case may be. "Restricted Payment" has the meaning ascribed in Section 4.4(a). 22 "Restricted Subsidiary" of any Person means any Subsidiary of such Person which at the time of determination is not an Unrestricted Subsidiary. "Rule 144A" means Rule 144A under the Securities Act, or any successor to such Rule. "S&P" means Standard & Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc., and its successors. "Sale and Leaseback Transaction" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to the Company or a Restricted Subsidiary of any property, whether owned by the Company or any Restricted Subsidiary at the Issue Date or later acquired, which has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such Person or to any other Person from whom funds have been or are to be advanced by such Person on the security of such Property. "Secured Indebtedness" means any Indebtedness of the Company secured by a Lien. "Securities" has the meaning ascribed in the preamble hereto. "Securities Act" means the Securities Act of 1933, as amended. "Security Agreements" means the collective reference to the Company Security Agreement and the Subsidiary Security Agreement. "Security Documents" means the collective reference to the Company Patent and Trademark Security Agreement, the Company Pledge Agreement, the Company Security Agreement, the Subsidiary Patent and Trademark Security Agreement, the Subsidiary Pledge Agreement, the Subsidiary Security Agreement, the Bailment Agreement, any security agreement, pledge agreement, mortgage, deed of trust or other agreement, instrument or document which may be entered into or delivered after the date of this Indenture to secure the Indebtedness evidenced by the Securities or any guarantee of the Securities (including without limitation the Guarantees) and any other instruments, agreements or documents entered into or delivered in connection with any of the foregoing, as such agreements, instruments or documents may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof and of this Indenture. "Senior Indebtedness" means any and all obligations, liabilities and other amounts, whether outstanding on the Issue Date or thereafter incurred, at any time owed or payable by the Company or any Subsidiary thereof under or in respect of the Bank Credit Agreement, including principal, premium (if any), interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company or any Restricted Subsidiary thereof whether or not a claim for post-filing interest is allowed in such proceedings), fees, charges, expenses, reimbursement obligations, indemnities, guarantees and all other amounts payable thereunder or in respect thereof. 23 "Senior Subordinated Indebtedness" means the Securities and any other Indebtedness of the Company that specifically provides that such Indebtedness is to rank pari passu with the Securities and is not by its express terms subordinate in right of payment to any Indebtedness of the Company other than Senior Indebtedness. "Significant Subsidiary" means, as of any date of determination, for any Person, each Restricted Subsidiary of such Person which (a) for the most recent fiscal year of such Person accounted for more than 10% of consolidated revenues or consolidated net income of such Person or (b) as at the end of such fiscal year, was the owner of more than 10% of the consolidated assets of such Person. "Standard Securitization Undertakings" means representations, warranties, covenants and indemnities entered into by the Company or any Subsidiary thereof which are reasonably customary in an accounts receivable transaction. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision. "Stock Option Plan" means the 1998 Stock Option Plan of the Company, and the individual stock option agreements entered into thereunder, as each of the same may be amended, supplemented or otherwise modified from time to time. "Stock Permitted Investments" has the meaning ascribed in the definition of "Permitted Investments." "Subordinated Obligation" means any Indebtedness of the Company (whether outstanding on the Issue Date or thereafter incurred) which is expressly subordinate in right of payment to the Securities pursuant to a written agreement. "Subordination Agreement" means the Intercreditor and Subordination Agreement, dated as of even date herewith, between the Trustee and Congress Financial Corporation, acknowledged and agreed to by the Company and the Subsidiary Guarantors, substantially in the form of Exhibit K, as the same may be amended, supplemented or otherwise modified, restated or replaced from time to time. "Subsidiary" means, with respect to any Person, (a) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors under ordinary circumstances shall at the time be owned, directly or indirectly, by such Person or (b) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. "Subsidiary Guarantee" means the Amended and Restated Subsidiary Guarantee, dated as of even date herewith, made by each of the Subsidiary Guarantors in favor of the Trustee, for 24 the benefit of the Holders, substantially in the form of Exhibit F, as the same may be amended, supplemented or otherwise modified from time to time. "Subsidiary Guarantor" means (a) each of the Company's Subsidiaries existing on the Issue Date that is a borrower or has guaranteed the Indebtedness under the Bank Credit Agreement and (b) each of the Company's Subsidiaries that in the future executes a Guarantee, substantially in the form of the Subsidiary Guarantee. "Subsidiary Patent and Trademark Security Agreement" means the Amended and Restated Subsidiary Patent and Trademark Security Agreement, dated as of even date herewith, made by each of the Subsidiary Guarantors in favor of the Trustee, for the benefit of the Holders, substantially in the form of Exhibit G, as the same may be amended, supplemented or otherwise modified from time to time. "Subsidiary Pledge Agreement" means the Amended and Restated Subsidiary Pledge Agreement, dated as of even date herewith, made by each of the Subsidiary Guarantors in favor of the Trustee, for the benefit of the Holders, substantially in the form of Exhibit H, as the same may be amended, supplemented or otherwise modified from time to time. "Subsidiary Security Agreement" means the Amended and Restated Subsidiary Security Agreement, dated as of even date herewith, made by each of the Subsidiary Guarantors in favor of the Trustee, for the benefit of the Holders, substantially in the form of Exhibit I, as the same may be amended, supplemented or otherwise modified from time to time. "Successor Company" has the meaning ascribed in Section 5.1. "Temporary Notes" has the meaning ascribed in the preamble hereto. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date of this Indenture. "Transactions" means the recapitalization, Merger, restructuring and the other transactions contemplated by the Master Restructuring Agreement. "Transfer Restricted Securities" means Securities that bear or are required to bear the legend set forth in Section 2.6(f). "Trust Officer" means any officer of the Trustee assigned by the Trustee to administer this Indenture, or in the case of a successor trustee, an officer assigned to the department, division or group performing the corporate trust work of such successor and assigned to administer this Indenture. "Unrestricted Subsidiary" of any Person means (a) any Subsidiary of such Person that at the time of determination shall be or continue to be designated an Unrestricted Subsidiary by the Board of Directors of such Person in the manner provided below and (b) any Subsidiary of an 25 Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any other Subsidiary thereof that is not a Subsidiary of the Subsidiary to be so designated; provided that (x) the Company certifies to the Trustee that such designation complies with Section 4.4 and (y) each Subsidiary to be so designated and each of its Subsidiaries has not at the time of designation, and does not thereafter, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to any Indebtedness pursuant to which the lender of any such Indebtedness has recourse to any of the assets of the Company or any of its Restricted Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if (a) immediately after giving effect to such designation and treating all Indebtedness of such Unrestricted Subsidiary as being incurred on such date, the Company is able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with Section 4.3 and (b) immediately before and immediately after giving effect to such designation, no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations of, and obligations guaranteed by, the United States of America for the payment of which the full faith and credit of the United States of America is pledged. "U.S. Legal Tender" means such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "Wholly Owned Restricted Subsidiary" of any Person means any Restricted Subsidiary of such Person of which all the outstanding voting securities (other than directors' qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly Owned Restricted Subsidiary of such Person. SECTION 1.2. Incorporation by Reference of Trust Indenture Act. This Indenture is subject to the mandatory provisions of the TIA which are incorporated by reference in and made a part of this Indenture. The following TIA terms have the following meanings: "indenture securities" means the Securities. 26 "indenture security holder" means a Holder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company and any other obligor on the indenture securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by the TIA reference to another statute or defined by the Commission rule have the meanings assigned to them by such definitions. SECTION 1.3. Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) "or" is not exclusive; (d) "including" means including without limitation; (e) words in the singular include the plural and words in the plural include the singular; (f) unsecured Indebtedness shall not be deemed to be subordinate or junior to Secured Indebtedness merely by virtue of its nature as unsecured Indebtedness; (g) the principal amount of any noninterest bearing or other discount security at any date shall be the principal amount thereof that would be shown on a balance sheet of the issuer dated such date prepared in accordance with GAAP; and (h) the principal amount of any Preferred Stock shall be (i) the maximum liquidation preference of such Preferred Stock or (ii) the maximum mandatory redemption or mandatory repurchase price with respect to such Preferred Stock, whichever is greater. ARTICLE II The Securities SECTION 2.1. Form and Dating. (a) The Temporary Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A-1, which is hereby incorporated in, and expressly made a part of, this Indenture. The Initial Notes and the Trustee's 27 certificate of authentication shall be substantially in the form of Exhibit A-2, which is hereby incorporated in, and expressly made a part of, this Indenture. The Exchange Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit B, which is hereby incorporated in, and expressly made a part of, this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage, in addition to those set forth in Exhibits A-1, A-2 and B. The Company and the Trustee shall approve the forms of the Securities and any notation, endorsement or legend on them. Each Security shall be dated the date of its authentication. The terms of the Securities set forth in Exhibits A-1, A-2 and B are part of the terms of this Indenture and, to the extent applicable, the Company, and the Trustee, by their execution and delivery of this Indenture, expressly agree to be bound by such terms. (b) Global Securities. The Initial Notes are being issued by the Company pursuant to this Indenture and the Master Restructuring Agreement. Initial Notes shall be issued in the form of one or more permanent global securities in definitive, fully registered form without interest coupons with the Global Securities Legend and Restricted Securities Legend set forth in Exhibit A-2 (each, a "Global Security"), which shall be deposited on behalf of the recipients of the Initial Notes with the Trustee, at its corporate trust office, as custodian for the Depository (in such capacity, the "Securities Custodian"), and registered in the name of the Depository, duly executed by the Company and authenticated by the Trustee as provided below. The aggregate principal amount of the Global Securities may from time to time be increased or decreased by endorsements made on such Global Securities by the Trustee, the Securities Custodian or the Depository as provided below. (c) Book-Entry Provisions. This Section 2.1(c) shall apply only to Global Securities deposited with the Securities Custodian. Members of, participants in or beneficial owners of the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depository or by the Securities Custodian or under such Global Security, and the Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices of the Depository governing the exercise of the rights of a holder of a beneficial interest in any Global Security. (d) Certificated Securities. Except as provided in Section 2.6, owners of beneficial interests in Global Securities will not be entitled to receive certificated securities ("Definitive Securities"). Definitive Securities shall bear the Restricted Securities Legend set forth in Exhibits A-1 and A-2 unless removed in accordance with Section 2.6(f). 28 SECTION 2.2. Execution and Authentication. Two Officers shall sign the Securities for the Company by manual or facsimile signature. The Company's seal, if any, shall be impressed, affixed, imprinted or reproduced on the Securities and may be in facsimile form. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. A Security shall not be valid until an authorized signatory of the Trustee manually authenticates the Security. The signature of the Trustee on a Security shall be conclusive evidence that such Security has been duly and validly authenticated and issued under this Indenture. The Trustee shall authenticate and deliver: (a) Temporary Notes for original issue in an aggregate principal amount of $100 million; (b) Initial Notes for issue only in accordance with the provisions of the last paragraph of Section 2.6 and only in exchange for the Temporary Notes in an equal principal amount; and (c) Exchange Notes for issue only upon the Registration Statement Effective Date, and only in exchange for Initial Notes in an equal principal amount; in each case, upon a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company. Such order shall specify the amount of the Securities to be authenticated, the date on which the original issue of Securities is to be authenticated and whether the Securities are to be Temporary Notes, Initial Notes or Exchange Notes, as the case may be. The aggregate principal amount of Securities outstanding at any time may not exceed $100 million except as provided in Section 2.7. The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate the Securities. Unless limited by the terms of such appointment, any such authenticating agent may authenticate the Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. SECTION 2.3. Registrar and Paying Agent. The Company shall maintain an office or agency where the Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "Paying Agent"). The Registrar shall keep a register (the "Register") of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of each such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.7. The Company or any of its domestically incorporated Wholly Owned Restricted Subsidiaries may act as the Paying Agent, the Registrar or co-registrar. 29 The Company initially appoints the Trustee as the Registrar and the Paying Agent. SECTION 2.4. Paying Agent To Hold Money in Trust. By at least 10:00 a.m. (New York City time) on the date on which any principal of or interest on any Security is due and payable, the Company shall deposit with the Paying Agent a sum sufficient to pay such principal or interest when due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that such Paying Agent shall hold in trust for the benefit of the Holders and the Trustee all money held by such Paying Agent for the payment of principal of or interest on the Securities and shall notify the Trustee of any default by the Company in making any such payment. If the Company or a Wholly Owned Restricted Subsidiary thereof acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent (other than the Trustee) to pay all money held by it to the Trustee and to account for any funds disbursed by such Paying Agent. Upon complying with this Section, the Paying Agent (if other than the Company or a Wholly Owned Restricted Subsidiary thereof) shall have no further liability for the money delivered to the Trustee. Upon any bankruptcy, reorganization or similar proceeding with respect to the Company, the Trustee shall serve as Paying Agent for the Securities. SECTION 2.5. Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of the Holders and the outstanding principal amount held by each Holder. If the Trustee is not the Registrar, the Company shall furnish to the Trustee, in writing at least seven (7) Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders. SECTION 2.6. Transfer and Exchange. (a) Transfer and Exchange of Definitive Securities. When Definitive Securities are presented by a Holder to the Registrar or a co-registrar with a request: (i) to register the transfer of such Definitive Securities; or (ii) to exchange such Definitive Securities for an equal principal amount of Definitive Securities of other authorized denominations, the Registrar or co-registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that: (A) such Definitive Securities shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Registrar or co-registrar, duly executed by such Holder or its attorney duly authorized in writing; and 30 (B) if such Definitive Securities are Transfer Restricted Securities, such Definitive Securities shall also be accompanied by the following additional information and documents, as applicable: (1) if such Transfer Restricted Securities are being delivered to the Registrar or co-registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect (in the form set forth on the reverse of the Security); or (2) if such Transfer Restricted Securities are being transferred (aa) to the Company or to a QIB in accordance with Rule 144A or (bb) pursuant to an effective registration statement under the Securities Act, a certification from such Holder to that effect (in the form set forth on the reverse of the Security); or (3) if such Transfer Restricted Securities are being transferred (aa) pursuant to an exemption from registration in accordance with Rule 144 or Regulation S under the Securities Act; or (bb) to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is acquiring the security for its own account, or for the account of such an institutional accredited investor, in each case in a minimum principal amount of the Securities of $250,000 for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act; or (cc) in reliance on another exemption from the registration requirements of the Securities Act: (I) a certification to that effect from such Holder (in the form set forth on the reverse of the Security), (II) if the Company or the Trustee so requests, an Opinion of Counsel reasonably acceptable to the Company and to the Trustee to the effect that such transfer is in compliance with the Securities Act and (III) in the case of clause (bb), a signed letter from the transferee substantially in the form of Exhibit J. (b) Restrictions on Transfer of a Definitive Security for a Beneficial Interest in a Global Security. A Definitive Security may not be exchanged for a beneficial interest in a Global Security except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Definitive Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (i) certification (in the form set forth on the reverse of the Security) to the effect that such Definitive Security is being transferred to a QIB in accordance with Rule 144A; and (ii) written instructions from the Holder thereof directing the Trustee to make, or to direct the Securities Custodian to make, an endorsement on the Global Security to reflect an increase in the aggregate principal amount of the Securities represented by the Global Security, then the Trustee shall cancel such Definitive Security and cause, or direct the Securities Custodian to cause, in accordance with the standing instructions and procedures existing between 31 the Depository and the Securities Custodian, the aggregate principal amount of Securities represented by the Global Security to be increased accordingly. If no Global Securities are then outstanding, the Company shall issue and the Trustee shall authenticate, upon written order of the Company in the form of an Officers' Certificate, a new Global Security in the appropriate principal amount. The Trustee shall deliver copies of each certification and instruction received by it pursuant to clauses (i) and (ii) above to the Depository and, upon receipt thereof, the Depository shall make appropriate adjustments to its books and records to reflect the exchange of such Definitive Security for an interest in the Global Security in accordance with Section 2.6(c). (c) Transfer and Exchange of Global Securities. (i) The transfer and exchange of Global Securities or beneficial interests therein shall be effected through the Depository or the Securities Custodian in accordance with this Indenture (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Depository therefor. (ii) A Global Security deposited with the Depository or the Securities Custodian shall be transferred to the beneficial owners thereof only if such transfer complies with this Section and (A) the Depository notifies the Company that it is unwilling or unable to continue as Depository for such Global Security or if at any time such Depository ceases to be a "clearing agency" registered under the Exchange Act and a successor depositary is not appointed by the Company within ninety (90) days of such notice, or (B) an Event of Default has occurred and is continuing and the Registrar or any co-registrar has received a request from the Depository or the Trustee to issue Definitive Securities. (iii) Any Global Security that is transferable to the beneficial owners thereof pursuant to this Section shall be surrendered by the Depository to the Trustee to be so transferred, in whole or from time to time in part, without charge, and the Company shall sign and the Trustee shall authenticate and deliver, upon such transfer of each portion of such Global Security, an equal aggregate principal amount of Definitive Securities of authorized denominations. Each Definitive Security delivered in exchange for any portion of a Global Security transferred pursuant to this Section shall be executed, authenticated and delivered only in denominations of $1,000 and any integral multiple thereof and shall be registered in such names as the Depository shall direct. Any Definitive Security delivered in exchange for an interest in the Global Security shall, except as otherwise provided in Section 2.6(f), bear the Restricted Securities Legend set forth in Exhibit A-1 and A-2. (iv) Each Holder of a Global Security may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. (v) In the event of the occurrence of either of the events specified in Section 2.6(c)(ii), the Company will promptly make available to the Trustee a reasonable supply of certificated Securities in definitive, fully registered form without interest coupons. (d) Restriction on Transfer of a Beneficial Interest in a Global Security for a Definitive Security. 32 (i) Any person having a beneficial interest in a Global Security may upon request exchange such beneficial interest for a Definitive Security of the same aggregate principal amount; provided that such request is accompanied by the information specified below. Upon receipt by the Trustee of written instructions (or such other form of instructions as is customary for the Depository) from the Depository on behalf of any Holder having a beneficial interest in a Global Security and, in the case of a Transfer Restricted Security, the following additional information and documents (all of which may be submitted by facsimile): (A) if such beneficial interest is being transferred to the Person designated by the Depository as being the owner of a beneficial interest in a Global Security, a certification from such Person to that effect (in the form set forth on the reverse of the Security); or (B) if such beneficial interest is being transferred (1) to a QIB in accordance with Rule 144A and such QIB does not desire to hold such transferred interest through beneficial ownership in a Global Security or (2) pursuant to an effective registration statement under the Securities Act, a certification from such person to that effect (in the form set forth on the reverse of the Security); or (C) if such beneficial interest is being transferred (1) pursuant to an exemption from registration in accordance with Rule 144 or Regulation S under the Securities Act; or (2) to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is acquiring the security for its own account, or for the account of such an institutional accredited investor, in each case in a minimum principal amount of the Securities of $250,000 for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act; or (3) in reliance on another exemption from the registration requirements of the Securities Act: (aa) a certification to that effect from the transferee (in the form set forth on the reverse of the Security), (bb) if the Company or the Trustee so requests, an Opinion of Counsel reasonably acceptable to the Company and to the Trustee to the effect that such transfer is in compliance with the Securities Act, and (cc) in the case of clause (2), a signed letter from the transferee in the form of Exhibit J; then the Trustee shall cause, or direct the Securities Custodian to cause, in accordance with the standing instructions and procedures existing between the Depository and the Securities Custodian, the aggregate principal amount of the Securities represented by the Global Security to be reduced accordingly and, following such reduction, the Company will execute and the Trustee will authenticate and deliver to the transferee one or more Definitive Securities in accordance with clause (ii) below. (ii) Definitive Securities issued in exchange for a beneficial interest in a Global Security pursuant to this subsection (d) shall be registered in such names and in such authorized denominations as the Depository, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee in writing. The Trustee shall 33 deliver such Definitive Securities to the Persons in whose names such Definitive Securities are to be so registered in accordance with the instructions of the Depository. (e) Restrictions on Transfer and Exchange of Global Securities. Notwithstanding any other provisions of this Indenture (other than the provisions set forth in subsection (c)), a Global Security may not be transferred as a whole except by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. (f) Legend. (i) Except as permitted by the following paragraph (ii) each Security certificate, whether evidencing Global Securities or Definitive Securities (and all Securities issued in exchange therefor or substitution thereof), shall bear a legend in substantially the following form: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY, ANY SUBSIDIARY GUARANTOR OR ANY AFFILIATE OF THE COMPANY OR ANY SUBSIDIARY GUARANTOR WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A UNDER THE SECURITIES ACT, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN 34 INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) AND (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH CASE, ONLY IF A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE." (ii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Security) pursuant to Rule 144 or upon the occurrence of the Registration Statement Effective Date: (A) in the case of any Transfer Restricted Security that is a Definitive Security, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Security that does not bear the legend set forth in paragraph (i) above and shall rescind any restriction on the transfer of such Security; and (B) in the case of any such Transfer Restricted Security represented by a Global Security, such Transfer Restricted Security shall not be required to bear the legend set forth in paragraph (i) above, although it shall continue to be subject to the provisions of subsection (c); provided, however, that with respect to any request for an exchange of a Transfer Restricted Security that is represented by a Global Security for a Definitive Security that does not bear the legend set forth in paragraph (i) above, which request is made in reliance upon Rule 144, the Holder thereof shall certify in writing to the Trustee that such request is being made pursuant to Rule 144 (such certification to be in the form set forth on the reverse of the Security). (g) Cancellation or Adjustment of Global Security. At such time as all beneficial interests in a Global Security have either been exchanged for Definitive Securities, redeemed, repurchased or canceled, such Global Security shall be retained and canceled by the Trustee. At any time prior to such cancellation, if any beneficial interest in a Global Security is exchanged for Definitive Securities, redeemed, repurchased or canceled, the principal amount of Securities represented by such Global Security shall be reduced and an endorsement shall be made on such Global Security by the Securities Custodian to reflect such reduction. 35 (h) Obligations with Respect to Transfers and Exchanges of Securities. (i) To permit registrations of transfers and exchanges, the Company shall, subject to the other terms and conditions of this Article, execute and the Trustee shall authenticate Definitive Securities and Global Securities at the Registrar's or any co-registrar's request. (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company, the Registrar or any co-registrar may require payment of a sum sufficient to cover any transfer tax, assessments, or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charges payable upon exchange or transfer pursuant to Sections 4.6, 4.8 or 9.5 or pursuant to paragraph 5 of the Securities). (iii) The Registrar or any co-registrar shall not be required to register the transfer of or exchange of (A) any Definitive Security selected for redemption in whole or in part pursuant to Article III, except the unredeemed portion of any Definitive Security being redeemed in part, or (B) any Security for a period beginning (1) fifteen (15) Business Days before the mailing of a notice of an offer to repurchase or redeem Securities and ending at the close of business on the day of such mailing or (2) fifteen (15) Business Days before an interest payment date and ending at the close of business on such interest payment date. (iv) Prior to the due presentation for registration of transfer of any Security, the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar may deem and treat the person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and none of the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar shall be affected by notice to the contrary. (v) All Securities issued upon any transfer or exchange pursuant to the terms of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Securities surrendered upon such transfer or exchange. (i) No Obligation of the Trustee. (i) The Trustee shall have no responsibility or obligation to any beneficial owner of a Global Security, an Agent Member or other Person with respect to the accuracy of the records of the Depository or of any Agent Member, with respect to any ownership interest in the Securities or with respect to the delivery to any Agent Member or other Person (other than the Depository) of any notice (including any notice of redemption) or the payment of any amount or delivery of any Securities (or other security or property) under or with respect to such Securities. All notices and communications to be given to the Holders and all payments to be made to the Holders in respect of the Securities shall be given or made only to or upon the order of the Holders as reflected on the Register (which shall be the Depository in the case of a Global Security). The rights of beneficial owners in any Global 36 Security shall be exercised only through the Depository subject to the applicable rules and procedures of the Depository. The Trustee may rely and shall be fully protected in relying upon information furnished by the Depository with respect to Agent Members. (ii) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Agent Members in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. The Recitals contained herein and in the Securities, except for the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness and it shall not be responsible for the Company's use or application of the proceeds from the Securities. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes or the Security Documents, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities and perform its obligations hereunder. Notwithstanding anything to the contrary contained in this Section 2.6, on the Issue Date, the Company shall issue pursuant to the Master Restructuring Agreement, the Temporary Notes, which shall be held by the Trustee, for the benefit of the Holders, until such time as the Temporary Notes are exchanged for the Initial Notes upon written instruction delivered by the Company not later than twenty (20) days after the Issue Date. SECTION 2.7. Replacement Securities. If a mutilated Security is surrendered to the Registrar or if the Holder claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the requirements of Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies any other reasonable requirements of the Trustee. If required by the Trustee or the Company, such Holder shall furnish an indemnity bond sufficient in the judgment of the Company and the Trustee to protect the Company, the Trustee, the Paying Agent, the Registrar and any co-registrar from any loss which any of them may suffer if a Security is replaced. The Company and the Trustee may charge the Holder for their respective expenses in replacing a Security. Every replacement Security is an additional obligation of the Company. SECTION 2.8. Outstanding Securities. Securities outstanding at any time are all Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation and those described in this Section as not outstanding. A Security does not cease to be outstanding because the Company or an Affiliate thereof holds the Security. 37 If a Security is replaced pursuant to Section 2.7, it ceases to be outstanding unless the Trustee and the Company receive proof satisfactory to them that the replaced Security is held by a bona fide purchaser. If the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay all principal and interest payable on that date with respect to the Securities (or portions thereof) to be redeemed or maturing, as the case may be, and the Paying Agent is not prohibited from paying such money to the Holders on that date pursuant to the terms of this Indenture, then on and after that date such Securities (or portions thereof) cease to be outstanding and interest on them ceases to accrue. SECTION 2.9. Temporary Securities. Until Definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of Definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate Definitive Securities. After the preparation of Definitive Securities, the temporary Securities shall be exchangeable for Definitive Securities upon surrender of the temporary Securities at any office or agency maintained by the Company for that purpose and such exchange shall be without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute, and the Trustee shall authenticate and deliver in exchange therefor, one or more Definitive Securities representing an equal principal amount of Securities. Until so exchanged, the Holder of temporary Securities shall in all respects be entitled to the same benefits under this Indenture as a Holder of Definitive Securities. SECTION 2.10. Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar (or any co-registrar) and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel and destroy (subject to the record retention requirements of the Exchange Act) all Securities surrendered for registration of transfer, exchange, payment or cancellation and deliver a certificate of such destruction to the Company unless the Company directs the Trustee to deliver canceled Securities to the Company. The Company may not issue new Securities to replace Securities it has redeemed, paid or delivered to the Trustee for cancellation. SECTION 2.11. Defaulted Interest. If the Company defaults in a payment of interest on the Securities, the Company shall pay defaulted interest (plus interest on such defaulted interest to the extent lawful) in any lawful manner. The Company shall pay the defaulted interest to the Holders on a subsequent special record date. The Company shall fix or cause to be fixed (or upon the Company's failure to do so the Trustee shall fix) any such special record date and payment date to the reasonable satisfaction of the Trustee which specified record date shall not be less than ten (10) days prior to the payment date for such efaulted interest and shall promptly mail or cause to be mailed to each Holder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Security and the date of 38 the proposed payment, and concurrently therewith the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such defaulted interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when so deposited to be held in trust for the benefit of the Holders entitled to such defaulted interest as provided in this Section. SECTION 2.12. CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to the Holders, provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. ARTICLE III Redemption SECTION 3.1. Optional Redemption. The Securities will be redeemable, at the Company's option, in whole or in part, upon not less than thirty (30) nor more than sixty (60) days' prior notice mailed by first class mail to each Holder's registered address, at the following redemption prices (expressed as percentages of principal amount) if redeemed during the twelve month period commencing on February 27 of the year set forth below plus, in each case, accrued and unpaid interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date): Year Redemption Price ---- ---------------- 1998............................................................105% 1999............................................................105% 2000............................................................105% 2001............................................................103% 2002........................................................... 101% SECTION 3.2. Notices to Trustee. If the Company elects to redeem Securities pursuant to Section 3.1 hereof and paragraph 5 of the Securities, it shall notify the Trustee in writing of the redemption date and the principal amount of Securities to be redeemed. The Company shall give each notice to the Trustee provided for in this Section at least sixty (60) days before the redemption date unless the Trustee consents to a shorter period. Such notice shall be accompanied by an Officers' Certificate from the Company to the effect that such redemption will comply with the conditions herein. If fewer than all the Securities are to be redeemed, the record date relating to such redemption shall be selected by the Company and set 39 forth in the related notice given to the Trustee, which record date shall be not less than fifteen (15) days after the date of such notice. SECTION 3.3. Selection of Securities To Be Redeemed. If fewer than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata or by lot or by a method that complies with applicable legal and securities exchange requirements, if any (provided, however, that the Company shall have previously notified the Trustee in writing of any securities exchange upon which the Securities are listed), and that the Trustee shall deem to be fair and appropriate and in accordance with methods generally used at the time of selection by fiduciaries in similar circumstances. The Trustee shall make the selection from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger than $1,000. Securities and portions of them the Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company promptly of the Securities or portions of the Securities to be redeemed. SECTION 3.4. Notice of Redemption. At least thirty (30) days but not more than sixty (60) days prior to the date fixed for redemption of the Securities, the Company shall mail a notice of redemption by first-class mail, postage prepaid, to each Holder to be redeemed at the last address for such Holder then shown on the Register. The notice shall identify the Securities to be redeemed and shall state: (a) the redemption date; (b) the redemption price; (c) the name and address of the Paying Agent; (d) that the Securities called for redemption must be surrendered to the Paying Agent in order to collect the redemption price; (e) the subparagraph of the Securities pursuant to which such redemption is being made; (f) if fewer than all the outstanding Securities are to be redeemed, the identification and principal amounts of the particular Securities to be redeemed; (g) that, unless the Company defaults in making such redemption payment or the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture or the Subordination Agreement, interest on the Securities (or portion thereof) called for redemption ceases to accrue on and after the redemption date; (h) the CUSIP number, if any, printed on the Securities being redeemed; and 40 (i) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Securities; At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. In such event, the Company shall provide the Trustee with the information required by this Section. SECTION 3.5. Effect of Notice of Redemption. Once notice of redemption is mailed, the Securities called for redemption become due and payable on the redemption date and at the redemption price stated in the notice. Upon surrender to the Paying Agent, such Securities shall be paid at the redemption price stated in the notice, plus accrued interest to, but not including the redemption date; provided that if the redemption date is after a regular record date and on or prior to the interest payment date, the accrued interest shall be payable to the Holder of the redeemed Securities registered on the relevant record date. Failure to give notice or any defect in the notice to any Holder shall not affect the validity of the notice to any other Holder. SECTION 3.6. Deposit of Redemption Price. By at least 10:00 a.m. (New York City time) on the date which is at least one Business Day prior to the date on which any principal of or interest on any Security is due and payable, the Company shall deposit with the Paying Agent (or, if the Company or a Wholly Owned Restricted Subsidiary thereof is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the redemption price of and accrued interest on all Securities to be redeemed on that date other than the Securities or portions of the Securities called for redemption which are owned by the Company or a Subsidiary and have been delivered by the Company or such Subsidiary to the Trustee for cancellation. If the Company complies with the preceding paragraph, then, unless the Company defaults in the payment of such redemption price or the Paying Agent is prohibited from making such payment, interest on the Securities to be redeemed will cease to accrue on and after the applicable redemption date, whether or not such Securities are presented for payment. SECTION 3.7. Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate for the Holder (at the Company's expense) a new Security equal in a principal amount to the unredeemed portion of the Security surrendered. ARTICLE IV Covenants --------- SECTION 4.1. Payment of Securities. The Company shall promptly pay the principal of (and premium, if any) and interest on the Securities on the dates and in the manner provided in the Securities and in this Indenture. Principal (and premium, if any) and interest shall be considered paid on the date due if on such date the Trustee or the Paying Agent holds in accordance with this Indenture money sufficient to pay all principal (and premium, if any) and 41 interest then due and the Trustee or the Paying Agent, as the case may be, is not prohibited from paying such money to the Holders on that date pursuant to the terms of this Indenture or the Subordination Agreement. The Company shall pay interest on overdue principal at the rate specified therefor in the Securities, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. Notwithstanding anything to the contrary contained in this Indenture, the Paying Agent may, to the extent it is required to do so by law, deduct or withhold income or other similar taxes imposed by the United States of America from principal or interest payments hereunder. SECTION 4.2. Limitation on Liens. The Company will not, and will not permit any of its Restricted Subsidiaries to, create, incur, assume or suffer to exist any Liens of any kind against or upon any of its property or assets, or any proceeds therefrom, unless (a) in the case of Liens securing Subordinated Obligations, the Securities are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens and (b) in all other cases, the Securities are equally and ratably secured, except for Permitted Liens. SECTION 4.3. Limitation on Incurrence of Additional Indebtedness. The Company will not, and will not permit any Restricted Subsidiary thereof, directly or indirectly, to create, incur, assume, guarantee, acquire, become liable, contingently or otherwise, with respect to, or otherwise become responsible for payment of (collectively, "incur") any Indebtedness other than Permitted Indebtedness; provided, however, that if no Default or Event of Default shall have occurred and be continuing at the time or as a consequence of the incurrence of any such Indebtedness, the Company or any Subsidiary Guarantor may incur Indebtedness if on the date of the incurrence of such Indebtedness, after giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.0 to 1.0. SECTION 4.4. Limitation on Restricted Payments. (a) The Company shall not, and shall not permit any Restricted Subsidiary thereof, directly or indirectly, (i) to declare or pay any dividend or make any distribution (other than dividends or distributions payable in Qualified Capital Stock) on or in respect of shares of Capital Stock of the Company to holders of such Capital Stock, (ii) to purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock, other than the exchange of such Capital Stock for Qualified Capital Stock, or (iii) to make any Investment (other than Permitted Investments) (each of the foregoing actions set forth in clauses (i), (ii) and (iii) being referred to as a "Restricted Payment"), if at the time of such Restricted Payment or immediately after giving effect thereto, (A) a Default or an Event of Default shall have occurred and be continuing, (B) the Company is not able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with Section 4.3 or (C) the aggregate amount of Restricted Payments made subsequent to the Issue Date shall exceed the sum of: (1) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company earned subsequent to the Issue Date and on or prior to the date the Restricted Payment occurs (the 42 "Reference Date") (treating such period as a single accounting period); plus (2) 100% of the aggregate net cash proceeds received by the Company from any Person (other than a Subsidiary of the Company) from the issuance and sale subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock of the Company (including Capital Stock issued upon the conversion of convertible Indebtedness or in exchange for outstanding Indebtedness); plus (3) without duplication of any amounts included in clause (C)(2) above, 100% of the aggregate net cash proceeds of any equity contribution received by the Company from a holder of the Company's Capital Stock (excluding any net cash proceeds from such equity contribution to the extent used to redeem Securities in accordance with the optional redemption provisions of the Securities); plus (4) to the extent that any Investment (other than a Permitted Investment) that was made after the Issue Date is sold for cash or otherwise liquidated or repaid for cash, the lesser of (aa) the cash received with respect to such sale, liquidation or repayment of such Investment (less the cost of such sale, liquidation or repayment, if any) and (bb) the initial amount of such Investment. (b) Notwithstanding clause (a) above, the provisions set forth in the immediately preceding paragraph do not prohibit: (i) the payment of any dividend or the consummation of any irrevocable redemption within sixty (60) days after the date of declaration of such dividend or notice of such redemption if the dividend or payment of the redemption price, as the case may be, would have been permitted on the date of declaration or notice; (ii) if no Event of Default shall have occurred and be continuing as a consequence thereof, the acquisition of any shares of Capital Stock of the Company, either (A) solely in exchange for shares of Qualified Capital Stock of the Company, or (B) through the application of net proceeds of a substantially concurrent sale (other than to a Subsidiary of the Company) of shares of Qualified Capital Stock of the Company; (iii) payments for the purpose of and in an amount equal to the amount required to permit the Company to redeem or repurchase shares of its Capital Stock or options in respect thereof, in each case in connection with the repurchase provisions under employee stock option or stock purchase agreements or other agreements to compensate management employees; provided that such redemptions or repurchases pursuant to this clause (iii) shall not exceed $5 million (which amount shall be increased by the amount of any cash proceeds to the Company from (A) sales of its Capital Stock to management employees subsequent to the Issue Date and (B) any "key-man" life insurance policies which are used to make such redemptions or repurchases) in the aggregate; (iv) the payment of fees and compensation as permitted under clause (i) of Section 4.7(b); (v) so long as no Default or Event of Default shall have occurred and be continuing, payments not to exceed $100,000 in the aggregate, to enable the Company to make payments to holders of its Capital Stock in lieu of issuance of fractional shares of its Capital Stock; (vi) repurchases of Capital Stock deemed to occur upon the exercise of stock options if such Capital Stock represents a portion of the exercise price thereof; (vii) payments to management employees in connection with, and pursuant to, the Deferred Compensation Plan; (viii) Restricted Payments by any Subsidiary of the Company to the Company or any other Subsidiary thereof; (ix) payments for the purpose of and in an amount equal to the amount required to permit the Company to redeem or repurchase shares of its Capital Stock acquired upon the exercise of the options issued under the Stock Option Plan; (x) so long as no Default or Event of Default shall have occurred and be continuing, payments in respect of Capital Stock options of the Company, or similar rights with respect to Capital Stock of the Company, to 43 present or former officers or employees of the Company or any Subsidiary thereof in an aggregate amount not to exceed $100,000; (xi) so long as no Default or Event of Default shall have occurred and be continuing, redemption and/or repurchase, in an aggregate amount not to exceed $550,000, of certain shares and options to purchase shares of Capital Stock of the Company owned by certain employees of the Company, pursuant to the exercise of put options pursuant to the Stockholders' Agreement dated as of June 27, 1990, as amended and in effect on the date hereof; and (xii) repurchase common stock of the Company in open market transactions involving cash expenditures of not more than $100,000 in any fiscal year of the Company, where such stock is used in such fiscal year to pay directors' fees to outside directors of the Company. In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date in accordance with clause (C) of the immediately preceding paragraph, (a) amounts expended (to the extent such expenditure is in the form of cash or other property other than Qualified Capital Stock) pursuant to clauses (i), (ii) and (iii) of this Section 4.4(b) shall be included in such calculation, provided that such expenditures pursuant to clause (iii) shall not be included to the extent of cash proceeds received by the Company from any "key man" life insurance policies and (b) amounts expended pursuant to clause (iv), (v) and (vi) shall be excluded from such calculation. SECTION 4.5. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any Restricted Subsidiary thereof to, directly or indirectly, create or otherwise cause or permit to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary of the Company to (a) pay dividends or make any other distributions on or in respect of its Capital Stock; (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or any other Restricted Subsidiary thereof; or (c) transfer any of its property or assets to the Company or any other Restricted Subsidiary thereof, except for such encumbrances or restrictions existing under or by reason of: (i) applicable law; (ii) this Indenture; (iii) non-assignment provisions of any contract or any lease entered into in the ordinary course of business; (iv) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to the Company or any Restricted Subsidiary thereof, or the properties or assets of any such Person, other than the Person or the properties or assets of the Person so acquired; (v) the Bank Credit Agreement; (vi) other agreements existing on the Issue Date (including, without limitation, the Master Restructuring Agreement); (vii) restrictions on the transfer of assets subject to any Lien permitted under this Indenture imposed by the holder of such Lien; (viii) restrictions imposed by any agreement to sell assets permitted under this Indenture to any Person pending the closing of such sale; (ix) any agreement or instrument governing Capital Stock of any Person that is acquired after the Issue Date; (x) an agreement effecting a refinancing, replacement or substitution of Indebtedness issued, assumed or incurred pursuant to an agreement referred to in clause (ii), (iv), (v) or (vi) above; provided, however, that the provisions relating to such encumbrance or restriction contained in any such refinancing, replacement or substitution agreement referred to in such clause (ii), (iv) or (vi) are no less favorable to the Company or the Holders in any material respect as determined by the Board of Directors of the Company than the provisions relating to such encumbrance or restriction contained in agreements referred to in such clause (ii), (iv) or (vi); or (xi) Indebtedness or other contractual requirements of a Receivables 44 Entity in connection with a Qualified Receivables Transaction; provided that such restrictions apply only to such Receivables Entity. SECTION 4.6. Limitation on Asset Sales. (a) The Company will not, and will not permit any Restricted Subsidiary thereof to, consummate an Asset Sale unless (i) the Company or the applicable Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Company's Board of Directors), (ii) at least 75% of the consideration received by the Company or such Restricted Subsidiary, as the case may be, from such Asset Sale shall be cash or Cash Equivalents and is received at the time of such disposition; provided that the amount of (A) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet or in the notes thereto) of the Company or such Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Securities or such Restricted Subsidiary's Guarantee, if any) that are assumed by the transferee of any such assets and (B) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are immediately converted by the Company or any such Restricted Subsidiary into cash or Cash Equivalents (to the extent of the cash or Cash Equivalents received) shall be deemed to be cash for purposes of this provision; and (iii) upon the consummation of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale (A) within 365 days of receipt thereof either (1) to prepay any Senior Indebtedness or Guarantor Senior Indebtedness, whether or not the amount prepaid is subsequently re-lent to the Company or any Subsidiary thereof, and, in the case of any Senior Indebtedness under any revolving credit facility, whether or not there is a permanent reduction in the availability under such revolving credit facility, (2) to reinvest in Productive Assets, or (3) a combination of prepayment and investment permitted by the foregoing clauses (iii)(A)(1) and (iii)(A)(2) or (B) on the 366th day of receipt thereof in accordance with the next succeeding sentence. On the 366th day after an Asset Sale or such earlier date, if any, as the Board of Directors of the Company or of such Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A)(1), (iii)(A)(2) and (iii)(A)(3) of the immediately preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which have not been applied on or before such Net Proceeds Offer Trigger Date as required in clauses (iii)(A)(1), (iii)(A)(2) and (iii)(A)(3) of the immediately preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than thirty (30) nor more than forty-five (45) days following the applicable Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis that amount of Securities equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Securities to be purchased, plus accrued and unpaid interest thereon, if any, to the Net Proceeds Offer Payment Date; provided, however, that if at any time any non-cash consideration received by the Company or any Restricted Subsidiary thereof, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then such conversion or disposition shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in accordance with this Section 4.6(a). 45 Notwithstanding the foregoing, if a Net Proceeds Offer Amount is less than $5 million, the application of the Net Cash Proceeds constituting such Net Proceeds Offer Amount to a Net Proceeds Offer may be deferred until such time as such Net Proceeds Offer Amount plus the aggregate amount of all Net Proceeds Offer Amounts arising subsequent to the Net Proceeds Offer Trigger Date relating to such initial Net Proceeds Offer Amount from all Asset Sales by the Company and the Restricted Subsidiaries thereof aggregate at least $5 million, at which time the Company or such Restricted Subsidiary shall apply all Net Cash Proceeds constituting all Net Proceeds Offer Amounts that have been so deferred to make a Net Proceeds Offer (the first date the aggregate of all such deferred Net Proceeds Offer Amounts is equal to $5 million or more shall be deemed to be a Net Proceeds Offer Trigger Date). Notwithstanding the two immediately preceding paragraphs, the Company and the Restricted Subsidiaries thereof will be permitted to consummate an Asset Sale without complying with such paragraphs to the extent (a) at least 75% of the consideration for such Asset Sale constitutes Productive Assets and (b) such Asset Sale is for at least fair market value (as determined in good faith by the Company's Board of Directors); provided that any consideration not constituting Productive Assets received by the Company or any Restricted Subsidiary thereof in connection with any Asset Sale permitted to be consummated under this paragraph shall constitute Net Cash Proceeds and shall be subject to the provisions of the two preceding paragraphs; provided, that at the time of entering into such transaction or immediately after giving effect thereto, no Default or Event of Default shall have occurred or be continuing or would occur as a consequence thereof. (b) Each Net Proceeds Offer will be mailed to the Holders as shown on the Register within fifteen (15) days following the Net Proceeds Offer Trigger Date, with a copy to the Trustee, and shall comply with the procedures set forth in this Indenture. Upon receiving notice of the Net Proceeds Offer, the Holders may elect to tender their Securities in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent the Holders properly tender Securities in an amount exceeding the Net Proceeds Offer Amount, the Securities of tendering Holders will be purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open for a period of twenty (20) Business Days or such longer period as may be required by law. To the extent that the aggregate amount of the Securities tendered pursuant to a Net Proceeds Offer is less than the Net Proceeds Offer Amount, the Company may use any remaining Net Proceeds Offer Amount for general corporate purposes. Upon completion of any such Net Proceeds Offer, the Net Proceeds Offer Amount shall be reset at zero. (c) The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Securities pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with this Section 4.6, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 4.6 by virtue thereof. 46 SECTION 4.7. Limitation on Transactions with Affiliates. (a) The Company will not, and will not permit any Restricted Subsidiary thereof, directly or indirectly, to enter into or permit to exist any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any Affiliate (an "Affiliate Transaction"), other than (i) Affiliate Transactions permitted under paragraph (b) below and (ii) Affiliate Transactions on terms that are no less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate; provided, however, that for a transaction or series of related transactions with an aggregate value of $2 million or more, at the Company's option (A) such determination shall be made in good faith by a majority of the disinterested members of the Board of the Directors of the Company or (B) the Board of Directors of the Company or any such Restricted Subsidiary party to such Affiliate Transaction shall have received a favorable opinion from a nationally recognized investment banking firm, appraisal firm or accounting firm, as appropriate, that such Affiliate Transaction is on terms not materially less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate; provided, further, that for a transaction or series of related transactions with an aggregate value of $5 million or more, the Board of Directors of the Company shall have received a favorable opinion from a nationally recognized investment banking firm, appraisal firm or accounting firm, as appropriate, that such Affiliate Transaction is on terms not materially less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate. (b) The foregoing restrictions shall not apply to (i) reasonable fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any Subsidiary thereof as determined in good faith by the Company's Board of Directors or senior management (including, without limitation, the amounts paid pursuant to the Deferred Compensation Plan); (ii) transactions exclusively between or among the Company and any Restricted Subsidiary thereof or exclusively between or among the Restricted Subsidiaries of the Company, provided that such transactions are not otherwise prohibited by this Indenture; (iii) any agreement as in effect as of the Issue Date or any amendment thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) or in any replacement agreement thereto so long as any such amendment or replacement agreement is not more disadvantageous to the Holders in any material respect than the original agreement as in effect on the Issue Date; (iv) Restricted Payments permitted by this Indenture; (v) transactions effected as part of a Qualified Receivables Transaction and (vi) transactions pursuant to supply or similar agreements (including, without limitation, for the purchase of inventory) entered into in the ordinary course of business on customary terms that are not less favorable to the Company than those that would have been obtained in a comparable transaction with an unrelated Person, as determined in good faith by senior management of the Company. SECTION 4.8. Change of Control. (a) Upon the occurrence of a Change of Control Triggering Event, each Holder will have the right to require that the Company purchase all or a portion of such Holder's Securities pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% of the principal amount thereof plus accrued interest to 47 the Change of Control Payment Date (as defined below). Prior to the mailing of the notice referred to below, but in any event within thirty (30) days following any Change of Control Triggering Event, the Company covenants to (i) repay in full and terminate all commitments under the Senior Indebtedness or (ii) obtain the requisite written consents under the Bank Credit Agreement to permit the repurchase of the Securities as provided below. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase Securities pursuant to the provisions described below. (b) Within thirty (30) days following the date upon which the Change of Control Triggering Event occurred, the Company must send, by first class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. Such notice shall state, among other things, the purchase date, which must be no earlier than thirty (30) days nor later than forty-five (45) days from the date such notice is mailed, other than as may be required by law (the "Change of Control Payment Date"). The Holders electing to have a Security purchased pursuant to a Change of Control Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day prior to the Change of Control Payment Date. (c) The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Securities pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with this Section 4.8, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 4.8 by virtue thereof. SECTION 4.9. Limitation on Incurrence of Subordinated Debt Senior to the Securities. Neither the Company nor any Subsidiary Guarantor will incur or suffer to exist Indebtedness that is senior in right of payment to the Securities or such Subsidiary Guarantor's Guarantee and subordinate in right of payment to any other Indebtedness of the Company or such Subsidiary Guarantor, as the case may be. SECTION 4.10. Limitation on Preferred Stock of Subsidiaries. The Company will not permit any of its Restricted Subsidiaries to issue any Preferred Stock (other than to the Company or to a Wholly Owned Restricted Subsidiary thereof) or permit any Person (other than the Company or a Wholly Owned Restricted Subsidiary thereof) to own any Preferred Stock of any Restricted Subsidiary of the Company. SECTION 4.11. Limitation on Future Guarantees. The Company will not permit any of its Restricted Subsidiaries which is not a Subsidiary Guarantor, directly or indirectly, to incur, guarantee or secure through the granting of Liens the payment of the Senior Indebtedness or any refunding or refinancing thereof, in each case unless such Restricted Subsidiary, the Company and the Trustee also execute and deliver a Guarantee substantially in the form of the Subsidiary Guarantee evidencing such Restricted Subsidiary's guarantee of the Securities, such Guarantee to 48 be a senior subordinated secured obligation of such Restricted Subsidiary. Neither the Company nor any such Subsidiary Guarantor shall be required to make a notation on the Securities or the Guarantees to reflect any such subsequent Guarantee. Nothing in this Section shall be construed to permit any Restricted Subsidiary of the Company to incur Indebtedness otherwise prohibited by Section 4.3. Thereafter, such Restricted Subsidiary shall be a Subsidiary Guarantor for all purposes of this Indenture. SECTION 4.12. Conduct of Business. The Company and its Restricted Subsidiaries will not engage in any businesses which are not the same, similar, related or ancillary to the businesses in which the Company and the Restricted Subsidiaries thereof are engaged on the Issue Date. SECTION 4.13. Maintenance of Office or Agency. The Company shall maintain the office or agency required under Section 2.3. The Company shall give prior written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 12.2. SECTION 4.14. Corporate Existence. Except as otherwise permitted by Article V, the Company shall do or cause to be done, at its own cost and expense, all things necessary to preserve and keep in full force and effect its corporate existence and the corporate existence of each Subsidiary thereof in accordance with the respective organizational documents of each such Subsidiary and the material rights (charter and statutory) and franchises of the Company and each such Subsidiary; provided, however, that the Company shall not be required to preserve, with respect to itself, any material right or franchise and, with respect to any Subsidiary thereof, any such existence, material right or franchise, if the Board of Directors of the Company shall determine in good faith that the preservation thereof is no longer desirable in the conduct of the business of the Company and the Subsidiaries thereof, taken as a whole. SECTION 4.15. Payment of Taxes and Other Claims. The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon it or any Subsidiary thereof or properties of it or any Subsidiary thereof and (b) all material lawful claims for labor, materials and supplies that, if unpaid, might by law become a Lien upon the property of it or any Subsidiary thereof; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings properly instituted and diligently conducted for which adequate reserves, to the extent required under GAAP, have been taken. SECTION 4.16. Maintenance of Properties and Insurance. (a) The Company shall, and shall cause each Subsidiary thereof to, maintain its material properties in good working order and condition (subject to ordinary wear and tear) and make all necessary repairs, renewals, 49 replacements, additions, betterments and improvements thereto and actively conduct and carry on its business; provided, however, that nothing in this Section 4.16 shall prevent the Company or any Subsidiary thereof from discontinuing the operation and maintenance of any of their respective properties, if such discontinuance is, in the good faith judgment of the Board of Directors of the Company or such Subsidiary, as the case may be, desirable in the conduct of their respective businesses and is not disadvantageous in any material respect to the Holders. (b) The Company shall provide or cause to be provided, for itself and each Subsidiary thereof, insurance (including appropriate self-insurance) against loss or damage of the kinds that, in the good faith judgment of the Board of Directors of the Company, are adequate and appropriate for the conduct of the business of the Company and such Subsidiary in a prudent manner, with reputable insurers or with the government of the United States of America or any agency or instrumentality thereof, in such amounts, with such deductibles, and by such methods as shall be customary, in the good faith judgment of the Board of Directors of the Company, for companies similarly situated in the industry. SECTION 4.17. Compliance with Laws. The Company shall comply, and shall cause each Subsidiary thereof to comply, with all applicable statutes, rules, regulations, orders and restrictions of the United States of America, all states and municipalities thereof, and of any governmental department, commission, board, regulatory authority, bureau, agency and instrumentality of the foregoing, in respect of the conduct of their respective businesses and the ownership of their respective properties, except for such noncompliance as are not in the aggregate reasonably likely to have a material adverse effect on the financial condition or results of operations of the Company and the Subsidiaries thereof, taken as a whole. SECTION 4.18. Additional Information. The Company will deliver to the Trustee within fifteen (15) days after the filing of the same with the Commission, copies of the quarterly and annual reports and of the information, documents and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the Commission, to the extent permitted, and provide the Trustee and the Holders with such annual reports and such information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. The Company and the Subsidiary Guarantors will also comply with the other provisions of TIA ss. 314(a). SECTION 4.19. Further Instruments and Acts. Upon request of the Trustee, the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. SECTION 4.20. Compliance Certificates. The Company and each Subsidiary Guarantor shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company or such Subsidiary Guarantor an Officers' Certificate stating that in the course of the performance by the signers of their duties as Officers of the Company or such Subsidiary Guarantor they would normally have knowledge of any Default and whether or not such signers know of any 50 Default that occurred during such period. If they do, the certificate shall describe the Default, its status and what action the Company or such Subsidiary Guarantor is taking or proposes to take with respect thereto. The Company and each Subsidiary Guarantor shall also comply with TIA ss. 314(a)(4). ARTICLE V Successor Company SECTION 5.1. When Company May Merge or Transfer Assets. (a) The Company will not, in a single transaction or a series of related transactions, consolidate with or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets to, another Person or Persons unless: (i) either (A) the Company shall be the survivor of such merger or consolidation or (B) the surviving Person is a corporation existing under the laws of the United States, any state thereof or the District of Columbia and such surviving Person shall expressly assume all the obligations of the Company under the Securities and this Indenture; (ii) immediately after giving effect to such transaction (on a pro forma basis, including any Indebtedness incurred or anticipated to be incurred in connection with such transaction and including adjustments that are (A) directly attributable to such transaction and (B) factually supportable), the Company or the surviving Person is able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with Section 4.3; (iii) immediately before and immediately after giving effect to such transaction (including any Indebtedness incurred or anticipated to be incurred in connection with such transaction), no Default or Event of Default shall have occurred and be continuing; (iv) each Subsidiary Guarantor, unless it is the other party to such transaction, shall have by execution of a Guarantee substantially in the form of the Subsidiary Guarantee confirmed that after consummation of such transaction its Guarantee shall apply, as such Guarantee applied on the date it was granted to the obligations of the Company under this Indenture and the Securities, to the obligations of the Company or such Person, as the case may be, under this Indenture and the Securities; and (v) the Company has delivered to the Trustee an Officers' Certificate and Opinion of Counsel, each stating that such consolidation, merger or transfer complies with this Indenture, that the surviving Person agrees to be bound thereby, and that all conditions precedent in this Indenture relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties and assets of one or more Subsidiaries of the Company, the Capital Stock of which constitutes all or 51 substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. Notwithstanding the foregoing clauses (ii) and (iii) above, (x) any Restricted Subsidiary of the Company may consolidate with, merge into or transfer all or part of its properties and assets to the Company and (y) the Company may merge with an Affiliate incorporated solely for the purpose of reincorporating the Company in another jurisdiction. (b) Upon any consolidation, combination or merger or any transfer of all or substantially all of the assets of the Company in accordance with the foregoing, the surviving entity shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture and the Securities with the same effect as if such surviving entity had been named as such; provided that solely for purposes of computing amounts described in clause (C) of Section 4.4(a), any such surviving entity to the Company shall only be deemed to have succeeded to and be substituted for the Company with respect to periods subsequent to the effective time of such merger, consolidation, combination or transfer of assets. (c) Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose Guarantee is to be released in accordance with the terms of its Guarantee and this Indenture in connection with any transaction complying with the provisions of Section 4.6 or as otherwise provided in this Indenture) will not, and the Company will not cause or permit any Subsidiary Guarantor to, consolidate with or merge with or into any Person other than the Company or any other Subsidiary Guarantor unless: (i) the entity formed by or surviving any such consolidation or merger (if other than the Subsidiary Guarantor) or to which such sale, lease, conveyance or other disposition shall have been made is a corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia; (ii) such entity assumes by a Guarantee substantially in the form of the Subsidiary Guarantee all of the obligations of the Subsidiary Guarantor on the Guarantee; (iii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and (iv) immediately after giving effect to such transaction and the use of any net proceeds therefrom, on a pro forma basis, including adjustments that are (A) directly attributable to such transaction and (B) factually supportable, the Company could satisfy the provisions of Section 5.1(a)(ii). ARTICLE VI Defaults and Remedies SECTION 6.1. Events of Default. An "Event of Default" occurs if: (a) the Company defaults in any payment of interest on any Security when the same becomes due and payable, whether or not such payment shall be prohibited by the Subordination Agreement, and such default continues for a period of thirty (30) days; (b) the Company defaults in the payment of the principal of any Security when the same becomes due and payable at its Stated Maturity, upon optional redemption, upon required 52 repurchase pursuant to a Change of Control Offer or a Net Proceeds Offer, upon declaration or otherwise, whether or not such payment shall be prohibited by the Subordination Agreement; (c) the Company defaults in the observance or performance of any other covenant or agreement contained in this Indenture which default continues for a period of sixty (60) days after the Company receives written notice specifying the default (and demanding that such default be remedied) from the Trustee or the Holders of at least 25% of the outstanding principal amount of the Securities; (d) the Company fails to pay at final maturity (giving effect to any applicable grace periods and any extensions thereof) the principal amount of any Indebtedness of the Company or any Restricted Subsidiary thereof (other than a Receivables Entity), or the acceleration of the final stated maturity of any such Indebtedness if, in either case, the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final maturity or which has been accelerated, aggregates $10 million or more at any time; (e) one or more judgments in an aggregate amount in excess of $10 million shall have been rendered against the Company or any Significant Subsidiary thereof and such judgments remain undischarged, unpaid or unstayed for a period of sixty (60) days after such judgment or judgments become final and non-appealable, and in the event such judgment is covered by insurance, an enforcement proceeding has been commenced by any creditor upon such judgment which is not promptly stayed; (f) the Company or a Significant Subsidiary thereof pursuant to or within the meaning of any Bankruptcy Law: (i) commences a voluntary case or proceeding; (ii) consents to the entry of judgment, decree or order for relief against it in an involuntary case or proceeding; (iii) consents to the appointment of a Custodian of it or for any substantial part of its property; (iv) makes a general assignment for the benefit of its creditors; (v) consents to or acquiesces in the institution of a bankruptcy or an insolvency proceeding against it; or (vi) takes any corporate action to authorize or effect any of the foregoing; or takes any comparable action under any foreign laws relating to insolvency; (g) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: 53 (i) is for relief against the Company or any Significant Subsidiary thereof in an involuntary case; (ii) appoints a Custodian of the Company or any Significant Subsidiary thereof or for any substantial part of its property; or (iii) orders the winding up or liquidation of the Company or any Significant Subsidiary thereof; or any similar relief is granted under any foreign laws and the order, decree or relief remains unstayed and in effect for sixty (60) days; or (h) any of the Guarantees of the Subsidiary Guarantors that are also Significant Subsidiaries of the Company ceases to be in full force and effect or any of such Guarantees is declared to be null and void and unenforceable or any of such Guarantees is found to be invalid or any of such Subsidiary Guarantors denies its liability under its Guarantee (other than by reason of release of such Subsidiary Guarantor in accordance with the terms of this Indenture). The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. The term "Bankruptcy Law" means Title 11 of the United States Code, or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. The Company shall deliver to the Trustee, within thirty (30) days after the occurrence thereof, written notice in the form of an Officers' Certificate of any Event of Default under clauses (c), (e) or (h) of this Section 6.1. SECTION 6.2. Acceleration. (a) If an Event of Default (other than an Event of Default specified in 6.1(f) or (g)) occurs and is continuing, the Trustee or the Holders of at least 25% in outstanding principal amount of Securities may declare the principal of and accrued interest on all the Securities to be due and payable by notice in writing to the Company and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration," and the same shall become immediately due and payable. (b) If an Event of Default specified in Sections 6.1(f) or (g) occurs and is continuing, then the principal of and accrued interest on all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. (c) At any time after a declaration of acceleration with respect to the Securities as described in Section 6.2(a) or (b) above, the Holders of a majority in principal amount of the 54 Securities may rescind and cancel such declaration and its consequences (i) if the rescission would not conflict with any judgment or decree of a court of competent jurisdiction, (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration, (iii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid, (iv) if the Company has paid the Trustee its reasonable compensation and reimbursed the Trustee for its expenses, disbursements and advances and (v) in the event of the cure or waiver of an Event of Default of the type described in Section 6.1(f), (g) or (h), the Trustee shall have received an Officers' Certificate and an Opinion of Counsel that such Event of Default has been cured or waived; provided, however, that the declaration of the acceleration of the Securities shall be automatically annulled if the holders of any Indebtedness described in Section 6.1(d) have rescinded the declaration of the acceleration in respect of such Indebtedness within ten days of the declaration of the acceleration of the Securities. SECTION 6.3. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.4. Waiver of Past Defaults. The Holders of not less than a majority in outstanding principal amount of the Securities may, by written notice to the Trustee, waive any existing Default or Event of Default under this Indenture, and its consequences, except (a) a default in the payment when due of the principal of or interest on any Security or (b) a Default or Event of Default in respect of a provision that under Section 9.2 cannot be amended without the consent of each Holder affected thereby. When a Default or Event of Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any consequent right. SECTION 6.5. Control by Majority. The Holders of a majority in outstanding principal amount of the Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.1, that the Trustee determines is unduly prejudicial to the rights of other Holders or would involve the Trustee in personal liability, it being understood that (subject to Section 7.1) the Trustee shall have no duty to ascertain whether or not such actions or forbearance are unduly prejudicial to such Holders; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. 55 SECTION 6.6. Limitation on Suits. A Holder may not pursue any remedy with respect to this Indenture or the Securities unless: (a) the Holder gives to the Trustee written notice stating that an Event of Default has occurred and is continuing; (b) the Holders of at least 25% in outstanding principal amount of the Securities make a written request to the Trustee to pursue the remedy; (c) such Holder or Holders offers or offer to the Trustee reasonable security or indemnity against any loss, liability or expense; (d) the Trustee does not comply with the request within forty-five (45) days after receipt of the request and the offer of security or indemnity; and (e) the Holders of a majority in outstanding principal amount of the Securities do not give the Trustee a direction inconsistent with the request during such forty-five (45) day period. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. SECTION 6.7. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, but nevertheless subject to the provisions of the Subordination Agreement, the right of any Holder to receive payment of principal of and interest on the Securities held by such Holder, on or after the respective due dates expressed in the Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder (except as to the postponement of an interest payment which may be consented to as permitted in TIA ss. 3.16(a)(2)). SECTION 6.8. Collection Suit by Trustee. If an Event of Default specified in Section 6.1(a) or (b) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount then due and owing (together with interest on any unpaid interest to the extent lawful) and the amounts provided for in Section 7.7. SECTION 6.9. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Holders allowed in any judicial proceedings relative to the Company, the Subsidiaries thereof or their respective creditors or properties and, unless prohibited by law or applicable regulations, may vote on behalf of the Holders in any election of a trustee in bankruptcy or other Person performing similar functions, and any Custodian appointed for the Company in any such judicial proceeding is hereby authorized by each Holder to make payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the 56 compensation, expenses, disbursements and advances of the Trustee, its agents and its counsel, and any other amounts due the Trustee under Section 7.7. SECTION 6.10. Priorities. If the Trustee collects any money or property pursuant to this Article, it shall pay out the money or property in the following order: FIRST: to the Trustee for amounts due under Section 7.7; SECOND: to holders of Senior Indebtedness and Guarantor Senior Indebtedness; THIRD: to Holders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and FOURTH: to the Company or any other obligors on the Securities as their interests may appear, or as a court of competent jurisdiction may direct. The Trustee may fix a record date and payment date for any payment to Holders pursuant to this Section. At least fifteen (15) days before such record date, the Trustee shall mail to each Holder and the Company a notice that states the record date, the payment date and amount to be paid. SECTION 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7 or a suit by Holders of more than 10% in outstanding principal amount of the Securities. ARTICLE VII Trustee SECTION 7.1. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent Person would exercise or use under the circumstances in the conduct of such Person's own affairs. (b) Other than during the continuance of an Event of Default: 57 (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine such certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. (f) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law or by the Subordination Agreement. (g) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (h) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and to the provisions of the TIA. SECTION 7.2. Rights of Trustee. (a) The Trustee may rely on and shall be protected in acting or refraining from acting upon (whether in its original or facsimile form) any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be 58 genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel which shall conform to Section 12.5. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents or attorneys and shall not be responsible for the misconduct or negligence of such agents or attorneys appointed with due care and shall not be responsible for their suspension. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; provided, however, that the Trustee's conduct does not constitute wilful misconduct or negligence. (e) The Trustee may consult with counsel of its choice, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Securities shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in reliance on the advice or opinion of such counsel. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders of the Securities pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to the Trustee against the costs, losses, expenses and liabilities which might be incurred by it in compliance with such request or direction. SECTION 7.3. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or any Affiliate thereof with the same rights it would have if it were not the Trustee. Any Paying Agent, Registrar or co-registrar may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.4. Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Company in this Indenture or in any document issued in connection with the sale of the Securities or in the Securities other than the Trustee's certificate of authentication. SECTION 7.5. Notice of Defaults. If a Default or Event of Default occurs and is continuing and if a Trust Officer has actual knowledge thereof, the Trustee shall mail to each 59 Holder notice of the Default or Event of Default within sixty (60) days after it occurs. Except in the case of a Default or Event of Default in payment of principal of or interest on any Security (including payments pursuant to the optional redemption or required repurchase provisions of such Security, if any) or in the payment of any sinking or purchase fund installment, the Trustee may withhold the notice if and so long as its Board of Directors, the Executive Committee of its Board of Directors or a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of the Holders. SECTION 7.6. Reports by Trustee to Holders. As promptly as practicable after each May 15 beginning with the May 15 following the date of this Indenture, and in any event prior to July 15 of each calendar year, the Trustee shall mail to each Holder a brief report dated as of such May 15 that complies with TIA ss. 313(a); provided, however, that no such report need be transmitted if none of the events enumerated in TIA ss. 313(a) have occurred. The Trustee also shall comply with TIA ss. 313(b) and transmit by mail all reports required by TIA ss. 313(c). A copy of each report at the time of its mailing to Holders shall be filed with the Commission if required by law and each stock exchange (if any) on which the Securities are listed. The Company agrees to notify promptly the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof. SECTION 7.7. Compensation and Indemnity. The Company shall pay to the Trustee from time to time such compensation as shall be agreed to in writing between the Company and the Trustee for all services rendered by it hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall promptly reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred or made by it, including costs of collection, costs of preparing and reviewing reports, certificates and other documents, costs of preparation and mailing of notices to the Holders and reasonable costs of counsel retained by the Trustee in connection with the delivery of an Opinion of Counsel or otherwise, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Trustee's agents, consultants, counsel, accountants and experts. The Company shall indemnify the Trustee and its officers, directors, stockholders, agents and employees against any and all loss, liability or expense (including reasonable attorneys' fees) incurred by it in connection with the administration of this trust and the performance of its duties hereunder, including the costs and expenses of enforcing this Indenture (including this Section 7.7) and of defending itself against any claims (whether asserted by any Holder, the Company or otherwise). The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Trustee may have separate counsel and the Company shall pay the fees and expenses of such counsel. The Company need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee through the Trustee's own wilful misconduct, negligence or bad faith. To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee other than 60 money or property held in trust to pay principal of and interest on particular Securities. The Trustee's right to receive payment of any amounts due under this Section 7.7 shall not be subordinate to any other liability or indebtedness of the Company, other than Senior Indebtedness, and the Company shall not enter into any agreement with any third party (other than holders of Senior Indebtedness or their Representative) in which the rights of the Trustee to receive payment pursuant to this Section 7.7 are subordinated or are attempted to be subordinated. The Company's payment obligations pursuant to this Section shall survive the discharge of this Indenture. When the Trustee incurs expenses after the occurrence of a Default specified in Section 6.1(f) or (g) with respect to the Company, the expenses are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 7.8. Replacement of Trustee. The Trustee may resign at any time by so notifying the Company. The Holders of a majority in outstanding principal amount of the Securities may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee. The Company shall remove the Trustee if: (a) the Trustee fails to comply with Section 7.10; (b) the Trustee is adjudged bankrupt or insolvent under any Bankruptcy Law; (c) a Custodian takes charge of the Trustee or its property; or (d) the Trustee otherwise becomes incapable of acting. If the Trustee resigns or is removed by the Company or by the Holders of a majority in outstanding principal amount of the Securities and such Holders do not reasonably promptly appoint a successor Trustee, or if a vacancy exists in the office of Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Company shall promptly appoint a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Upon receipt of such acceptance by the retiring Trustee, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.7. If a successor Trustee does not take office within sixty (60) days after the retiring Trustee resigns or is removed, the retiring Trustee or the Holders of ten percent (10%) in outstanding principal amount of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. 61 If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding the replacement of the Trustee pursuant to this Section, the Company's obligations under Section 7.7 shall continue for the benefit of the retiring Trustee. SECTION 7.9. Successor Trustee by Merger. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee. In case at the time such successor or successors by merger, conversion, consolidation or transfer to the Trustee shall succeed to the trusts created by this Indenture, any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have. SECTION 7.10. Eligibility; Disqualification. The Trustee shall at all times satisfy the requirements of TIA ss. 310(a). The Trustee shall have a combined capital and surplus of at least $50 million as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA ss. 310(b); provided, however, that there shall be excluded from the operation of TIA ss. 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA ss. 310(b)(1) are met. SECTION 7.11. Preferential Collection of Claims Against Company. The Trustee shall comply with TIA ss. 311(a), excluding any creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be subject to TIA ss. 311(a) to the extent indicated. ARTICLE VIII Discharge of Indenture; Defeasance SECTION 8.1. Discharge of Liability on Securities. (a) The Company may terminate its obligations under the Securities and this Indenture, except those obligations referred to in Section 8.1(b), if all Securities previously authenticated and delivered (other than destroyed, lost or stolen Securities which have been replaced or paid or Securities for whose payment money has theretofore been deposited with the Trustee or the Paying Agent in trust or segregated and held in trust by the Company and thereafter repaid to the Company, as provided in Section 8.5) have 62 been delivered to the Trustee for cancellation and the Company has paid all sums payable by it hereunder, or if: (i) either (A) pursuant to Article III, the Company shall have given notice to the Trustee and mailed a notice of redemption to each Holder of the redemption of all of the Securities under arrangements satisfactory to the Trustee for the giving of such notice or (B) all Securities have otherwise become due and payable hereunder; (ii) the Company shall have irrevocably deposited or caused to be deposited with the Trustee or a trustee satisfactory to the Trustee, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, as trust funds in trust solely for the benefit of the Holders for that purpose, money in such amount as is sufficient without consideration of reinvestment of such money, to pay principal of, premium on, if any, and interest on the outstanding Securities to maturity or redemption, as the case may be; provided that the Trustee shall have been irrevocably instructed to apply such money to the payment of said principal, premium, if any, and interest with respect to the Securities and, provided, further, that from and after the time of deposit, the money deposited shall not be subject to the rights of holders of Senior Indebtedness pursuant to the provisions of the Subordination Agreement; (iii) no Default or Event of Default with respect to this Indenture or the Securities shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company is a party or by which it is bound; (iv) the Company shall have paid all other sums payable by it hereunder; and (v) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent providing for the termination of the Company's obligations under the Securities and this Indenture have been satisfied. Such Opinion of Counsel shall also state that such satisfaction and discharge does not result in a default under the Bank Credit Agreement (if then in effect) or any other agreement or instrument then known to such counsel that binds or affects the Company. (b) Notwithstanding the foregoing paragraph, the Company's obligations in Sections 2.2, 2.5, 2.6, 2.7, 2.8, 4.1, 4.13, 4.14, 4.15, 4.17, 7.7, 8.4, 8.5 and 8.6 shall survive until the Securities are no longer outstanding pursuant to the last paragraph of Section 2.8. After the Securities are no longer outstanding, the Company's obligations in Sections 7.7, 8.4, 8.5 and 8.6 shall survive. After such delivery or irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Securities and this Indenture except for those surviving obligations specified above. 63 SECTION 8.2. Legal Defeasance and Covenant Defeasance. (a) The Company may, at its option by resolution of its Board of Directors, at any time, elect to have either paragraph (b) or (c) below applied to all outstanding Securities upon compliance with the conditions set forth in Section 8.3. (b) Upon the Company's exercise under paragraph (a) hereof of the option applicable to this paragraph (b), the Company and the Subsidiary Guarantors, if any, shall, subject to the satisfaction of the conditions set forth in Section 8.3, be deemed to have been discharged from its obligations with respect to all outstanding Securities on the date the conditions set forth in Section 8.3 are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Securities, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.4 and the other Sections of this Indenture referred to in (i) through (iv) below, and to have satisfied all its other obligations under such Securities and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), and the following provisions shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of outstanding Securities to receive solely from the trust fund described in Sections 8.3 and 8.4, and as more fully set forth in such Sections, payments in respect of the principal of (and premium, if any, on) and interest on such Securities when such payments are due, (ii) the Company's obligations with respect to such Securities under Article II and Section 4.13, (iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Company's obligations in connection therewith and (iv) this Article. Provided all requisite written consents have been obtained under the Subordination Agreement and the Bank Credit Agreement, upon satisfaction of all of the conditions under Section 8.3, the Holders and any amounts deposited under Section 8.3 shall cease to be subject to any obligations to, or the rights of, any holder of Senior Indebtedness or Guarantor Senior Indebtedness under the Subordination Agreement or otherwise. Subject to compliance with this Article, the Company may exercise its option under this paragraph (b) notwithstanding the prior exercise of its option under paragraph (c) hereof. (c) Upon the Company's exercise under paragraph (a) hereof of the option applicable to this paragraph (c), the Company shall, subject to the satisfaction of the conditions set forth in Section 8.3 hereof, be released from its obligations under the covenants contained in Sections 4.2 through 4.12 and Article V with respect to the outstanding Securities on and after the date the conditions set forth in Section 8.3 are satisfied (hereinafter, "Covenant Defeasance"), and the Securities shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of the Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Securities shall not be deemed outstanding for accounting purposes). Provided all requisite written consents have been obtained under the Subordination Agreement and the Bank Credit Agreement, upon satisfaction of all of the conditions under Section 8.3, the Holders and any amounts deposited under Sections 8.3 and 8.4 hereof shall cease to be subject to any obligations to, or the rights of, any holder of Senior Indebtedness or Guarantor Senior Indebtedness under the Subordination Agreement or otherwise. For this purpose, such Covenant Defeasance means that, with respect to the outstanding 64 Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.1(c) hereof, but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby. SECTION 8.3. Conditions to Defeasance. The Company may exercise its Legal Defeasance option or its Covenant Defeasance option only if: (a) the Company irrevocably deposits with the Trustee, in trust, for the benefit of the Holders cash in U.S. dollars, non-callable U.S. Government Obligations, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay the principal of, premium, if any, and interest on the Securities on the stated date for payment thereof or on the applicable redemption date, as the case may be; provided that the Trustee shall have received an irrevocable written order from the Company instructing the Trustee to apply such cash in U.S. dollars or the proceeds of such U.S. Government Obligations to said payments with respect to the Securities; (b) in the case of a Legal Defeasance, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (c) in the case of a Covenant Defeasance, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that the Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such Covenant Defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (d) no Default or Event of Default or event which with notice or lapse of time or both would become a Default or an Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default with respect to this Indenture resulting from the incurrence of Indebtedness, all or a portion of which will be used to defease the Securities concurrently with such 65 incurrence) or insofar as Sections 6.1(f) and 6.1(g) hereof are concerned, at any time in the period ending on the ninety-first (91st) day after the date of such deposit; (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under this Indenture or any other material agreement or instrument to which the Company or any Subsidiary thereof is a party or by which the Company or any Subsidiary thereof is bound (including, without limitation, the Subordination Agreement and the Bank Credit Agreement); (f) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; (g) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Securities and this Indenture as contemplated by this Article have been complied with; (h) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that (i) the trust funds will not be subject to any rights of holders of Indebtedness of the Company other than the Securities and (ii) assuming no intervening bankruptcy of the Company between the date of deposit and the ninety- first (91st) day following the deposit and that no Holder is an insider of the Company, after the ninety-first (91st) day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; and (i) the Company delivers to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940. Before or after a deposit, the Company may make arrangements satisfactory to the Trustee for the redemption of Securities at a future date in accordance with Article III. SECTION 8.4. Application of Trust Money. The Trustee or the Paying Agent shall hold in trust U.S. Legal Tender or U.S. Government Obligations deposited with it pursuant to this Article, and shall apply the deposited U.S. Legal Tender and the money from U.S. Government Obligations in accordance with this Indenture to the payment of principal of, premium, if any, and interest on the Securities. The Trustee shall be under no obligation to invest said U.S. Legal Tender or U.S. Government Obligations except as it may agree with the Company. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Legal Tender or U.S. Government Obligations deposited pursuant to Section 8.3 hereof or the principal, premium, if any, and interest received in respect 66 thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Securities. Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the Company's request any U.S. Legal Tender or U.S. Government Obligations held by it as provided in Section 8.3 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.5. Repayment to Company or the Subsidiary Guarantors. Subject to this Article, the Trustee and the Paying Agent shall promptly pay to the Company, or if deposited with the Trustee by any Subsidiary Guarantor, to such Subsidiary Guarantor, upon request (a) any excess U.S. Legal Tender or U.S. Government Obligations held by them at any time and thereupon shall be relieved from all liability with respect to such money and (b) any money held by them for the payment of principal or interest that remains unclaimed for two years; provided that, in the case of clause (b), the Trustee or such Paying Agent, before being required to make any payment, may at the expense of the Company cause to be published once in a newspaper of general circulation in the City of New York or mail to each Holder entitled to such money notice that such money remains unclaimed and that after a date specified therein which shall be at least thirty (30) days from the date of such publication or mailing any unclaimed balance of such money then remaining will be repaid to the Company or such Subsidiary Guarantor. After payment to the Company or such Subsidiary Guarantor, as the case may be, the Holders entitled to such money must look to the Company for payment as general creditors unless an applicable law designates another Person. SECTION 8.6. Reinstatement. If the Trustee or the Paying Agent is unable to apply any U.S. Legal Tender or U.S. Government Obligations in accordance with this Article by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities (and each Subsidiary Guarantor's obligations under a Guarantee) shall be revived and reinstated as though no deposit had occurred pursuant to this Article until such time as the Trustee or the Paying Agent is permitted to apply all such U.S. Legal Tender or U.S. Government Obligations in accordance with this Article; provided that if the Company or any such Subsidiary Guarantor, as the case may be, has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company or any such Subsidiary Guarantor, as the case may be, shall be subrogated to the rights of the Holders of such Securities to receive such payment from the U.S. Legal Tender or U.S. Government Obligations held by the Trustee or the Paying Agent. SECTION 8.7. Release of Lien. Upon compliance with this Article VIII and upon a written request signed in the name of the Company by an officer of the Company with actual authority to bind the Company on such matters, delivered to the Trustee and authorized by a Board Resolution, the Lien created hereby and by the Security Documents shall cease and be released and discharged (except with respect to U.S. Legal Tender or U.S. Government 67 Obligations deposited pursuant to this Article VIII and held pursuant to Section 8.4) and the Trustee shall, at the expense of the Company, execute and deliver a statement and such other instruments of release and discharge as may be necessary and shall pay, assign, transfer and deliver to the Company all cash, securities and other personal property then held by it hereunder as a part of the Collateral. SECTION 8.8. Indemnity for Government Obligations. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against U.S. Government Obligations deposited with the Trustee pursuant hereto or the principal and interest received on such U.S. Government Obligations. ARTICLE IX Amendments SECTION 9.1. Without Consent of Holders. The Company and the Trustee may amend this Indenture, the Securities, any Guarantee, any Security Document or the Subordination Agreement without notice to or consent of any Holder: (a) to cure any ambiguity, omission, defect or inconsistency; provided that such amendment does not in the opinion of the Trustee, adversely affect the rights of any Holder in any material respect; (b) to comply with Article V; (c) to provide for uncertificated Securities in addition to or in place of certificated Securities; provided, however, that the uncertificated Securities are issued in registered form for purposes of Section 163(f) of the Code or in a manner such that the uncertificated Securities are described in Section 163(f)(2)(B) of the Code; (d) to make any change in the Subordination Agreement that would limit or terminate the benefits of any holder of Senior Indebtedness or Guarantor Senior Indebtedness (or Representatives therefor) under the Subordination Agreement; (e) to add Guarantees with respect to the Securities or to provide additional security for the Securities; (f) to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; (g) to comply with any requirements of the Commission in connection with qualifying this Indenture under the TIA; (h) to make any change that does not adversely affect the rights of any Holder; 68 (i) to provide for the issuance of the Exchange Notes, which will have terms substantially identical in all material respects to the Initial Notes (except that the transfer restrictions contained in the Initial Notes will be modified or eliminated, as appropriate), and which will be treated, together with any outstanding Initial Notes, as a single issue of securities; or (j) to correct or amplify the description of any assets subject to any Security Document or to subject additional assets to any Security Document. An amendment under this Section may not make any change that adversely affects the rights under the Subordination Agreement of any holder of Senior Indebtedness or Guarantor Senior Indebtedness then outstanding unless the holders of such Senior Indebtedness or Guarantor Senior Indebtedness (or any group or representative thereof authorized to give a consent) consent in a signed writing to such change. After an amendment under this Section becomes effective, the Company shall mail to the Holders a notice briefly describing such amendment. The failure to give such notice to all Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 9.2. With Consent of Holders. The Company and the Trustee may amend this Indenture, the Securities, any Guarantee, any Security Document or the Subordination Agreement without notice to any Holder but with the written consent of the Holders of at least a majority in outstanding principal amount of the Securities. However, without the consent of each Holder affected, an amendment may not: (a) reduce the amount of Securities whose Holders must consent to an amendment; (b) reduce the rate of or change or have the effect of changing the time for payment of interest, including defaulted interest, on any Security; (c) reduce the principal of or change or have the effect of changing the Stated Maturity of any Security, or change the date on which any Securities may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor; (d) make any Security payable in money other than that stated in the Security; (e) make any change in provisions of this Indenture protecting the right of each Holder to receive payment of principal of, premium, if any, and interest on such Security on or after the due date thereof or to bring suit to enforce such payment, or permitting holders of a majority in outstanding principal amount of the Securities to waive Defaults or Events of Default (other than Defaults or Events of Default with respect to the payment of principal of, premium, if any, or interest on the Securities); 69 (f) modify the Subordination Agreement to affect the ranking of the Securities or the priority of the claims of the Holders in and to the Collateral in a manner adversely affecting the Holders in any material respect; or (g) release any Subsidiary Guarantor that is a Significant Subsidiary of the Company from any of its obligations under its Guarantee or this Indenture otherwise than in accordance with the terms of this Indenture. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. An amendment under this Section may not make any change that adversely affects the rights under the Subordination Agreement of any holder of Senior Indebtedness or Guarantor Senior Indebtedness then outstanding unless the holders of such Senior Indebtedness or Guarantor Senior Indebtedness (or any group or representative thereof authorized to give a consent) consent in a signed writing to such change. After an amendment under this Section becomes effective, the Company shall mail to the Holders a notice briefly describing such amendment. The failure to give such notice to all Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 9.3. Compliance with Trust Indenture Act. Every amendment to this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 9.4. Revocation and Effect of Consents and Waivers. A consent to an amendment or a waiver by a Holder of a Security shall bind the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent or waiver is not made on the Security. However, any such Holder or subsequent Holder may revoke the consent or waiver as to such Holder's Security or portion of the Security if the Trustee receives a notice of revocation before the date the amendment or waiver becomes effective. After an amendment or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (a) through (h) of Section 9.2, in which case, the amendment or waiver shall bind only each Holder who has consented to it and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder; provided that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of, premium, if any, and interest on a Security, on or after the respective due dates expressed in such Security, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed, then 70 notwithstanding the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such Persons continue to be Holders after such record date. No such consent shall become valid or effective more than 120 days after such record date. SECTION 9.5. Notation on or Exchange of Securities. If an amendment changes the terms of a Security, the Trustee may require the Holder of such Security to deliver it to the Trustee. The Trustee may place an appropriate notation on such Security regarding the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for such Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment. SECTION 9.6. Trustee To Sign Amendments. The Trustee shall sign any amendment authorized pursuant to this Article if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may but need not sign it. In signing such amendment the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and to receive, and (subject to Section 7.1) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture. ARTICLE X Security Documents SECTION 10.1. Collateral and Security Documents. (a) In order to secure the due and punctual payment of the Securities, the Company, each Subsidiary Guarantor and the Trustee have entered into or will enter into, as the case may be, the Security Documents to create the security interests thereunder and for related matters. The Trustee, the Company and each Subsidiary Guarantor hereby agree that the Trustee holds the Collateral in trust for the benefit of the Holders and the Trustee pursuant to the terms of the Security Documents, in each case pursuant to the terms of this Indenture and the Security Documents, and the Company and the Subsidiary Guarantors, pursuant to this Indenture and the Security Agreements, hereby grant to the Trustee, for the benefit of the Holders, a security interest in the Collateral. (b) Each Holder, by accepting a Security, agrees to all of the terms and provisions of the Security Documents, as the same may be amended from time to time pursuant to the provisions of the Security Documents and this Indenture. 71 (c) The Trustee and each Holder, by accepting a Security, acknowledge that, as more fully set forth in the Security Documents and the Subordination Agreement, all Liens and rights of the holders of the Senior Indebtedness and the Representative (if any) of such holders in and to the Collateral and remedies thereagainst are senior in priority to the Liens and rights of the Holders and the Trustee, on behalf of the Holders, in and to the Collateral and the remedies thereagainst. (d) As amongst the Holders, the Collateral as now or hereafter constituted shall be held for the equal and ratable benefit of the Holders without preference, priority or distinction of any thereof over any other by reason of difference in time of issuance, sale or otherwise, as security for the Securities. SECTION 10.2. Recording, Deposit of Pledged Securities, etc. The Company shall furnish to the Trustee: (a) promptly after the execution and delivery of each of the Security Documents or other instrument of further assurance, an Opinion of Counsel stating that, in the opinion of such Counsel, the Security Documents and other instruments of further assurance have been properly recorded, endorsed, registered and filed, or have been received for record, registration or filing, to the extent necessary to make effective the Lien intended to be created by the Security Documents, and reciting the details of such action or stating that, in the Opinion of such Counsel no such action is necessary to make such Liens effective; and (b) within thirty (30) days after December 31 in each year beginning with the year 1998, an Opinion of Counsel, dated as of such date, either stating that, in the opinion of such Counsel, such action has been taken with respect to the recording, registering, filing, rerecording, re-registering and re-filing of the Security Documents, financing statements, continuation statements or other instruments of further assurance as is necessary to maintain the Lien of the Security Documents and reciting the details of such action, or stating that, in the Opinion of Counsel, no such action is necessary to maintain such Lien. SECTION 10.3. Disposition of Inventory and Accounts Without Release. (a) Notwithstanding the provisions of Section 10.4, the Company and each Subsidiary Guarantor, as the case may be, may without any release or consent by the Trustee, sell, exchange or otherwise dispose of Inventory and Accounts (as defined in the Security Agreements) in the ordinary course of the Company's or such Subsidiary Guarantor's business. Notwithstanding the foregoing and the terms of the Security Agreements, the Company's right to rely upon this paragraph (a) for each six-month period beginning on January 1 and July 1 (a "Six-Month Period") shall be conditioned upon the Company delivering to the Trustee and the Trustee, within thirty (30) days following the end of such Six-Month Period, an Officers' Certificate to the effect that all sales, exchanges or other dispositions of Inventory and Accounts by the Company or any Subsidiary Guarantor, as the case may be, during such Six-Month Period were in the ordinary course of the Company's or such Subsidiary Guarantor's business and that all proceeds 72 therefrom were used by the Company or such Subsidiary Guarantor in connection with its business or to make other cash payments permitted by this Indenture. (b) In the event that the Company or any of its Subsidiaries has sold, exchanged or otherwise disposed of or proposes to sell, exchange or otherwise dispose of any item of Inventory or Accounts which under the provisions of this Section 10.3 may be sold, exchanged or otherwise disposed of by the Company or such Subsidiary without any release or consent of the Trustee, and the Company requests the Trustee to furnish a written disclaimer, release or quitclaim of any interest in such property under this Indenture and the Security Documents, the Trustee shall execute such an instrument upon delivery to the Trustee of (i) an Officers' Certificate reciting the sale, exchange or other disposition made or proposed to be made, describing in reasonable detail the property affected thereby, and stating that such property may be sold, exchanged or otherwise disposed of by the Company or such Subsidiary without any release or consent of the Trustee in compliance with the provisions of this Section 10.3 and (ii) an Opinion of Counsel to the effect that the sale, exchange or other disposition made or proposed to be made by the Company or such Subsidiary is in compliance with the provisions of this Section 10.3. (c) Any release of Collateral made in compliance with the provisions of this Section 10.3 shall be deemed not to impair the Liens granted pursuant to the terms of the Security Documents and this Indenture in contravention of the provisions of this Indenture. SECTION 10.4. Release of Collateral. To the extent applicable, without limitation, the Company and each obligor on the Securities shall cause TIA ss. 314(d) relating to the release of property or securities from the Liens of the Security Documents to be complied with. SECTION 10.5. Trust Indenture Act Requirements. The release of any Collateral from the terms of any of the Security Documents or the release, in whole or in part, of the Liens created by any of the Security Documents, will not be deemed to impair the Liens pursuant to the terms of the Security Documents and this Indenture in contravention of the provisions of this Indenture if and to the extent the Collateral or Liens are released pursuant to, and in accordance with, the applicable Security Documents and pursuant to, and in accordance with, the terms hereof, or are released as required by the Subordination Agreement. As set forth in Section 10.4, to the extent applicable, without limitation, the Company and each obligor on the Securities shall cause TIA ss. 314(d) relating to the release of property or securities from the Liens of the Security Documents to be complied with. Any certificate or opinion required by TIA ss. 314(d) may be made by two Officers who are knowledgeable about the fair value of the subject matter of such certificate or opinion, except in cases which Trust Indenture Act ss. 314(d) requires that such certificate or opinion be made by an independent person. SECTION 10.6. Suits to Protect the Collateral. 73 Subject to the provisions of the Security Documents, the Trustee shall have power to institute and to maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral by any acts which may be unlawful or in violation of any of the Security Documents or this Indenture and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the Liens granted pursuant to the terms of the Security Documents and this Indenture or be prejudicial to the interests of the Holders or the Trustee). SECTION 10.7. Determinations Relating to Collateral. In the event (a) the Trustee shall receive any written request from the Company or a Subsidiary Guarantor under any Security Document for consent or approval with respect to any matter or thing relating to any Collateral or the Company's or such Subsidiary Guarantor's obligations with respect thereto or (b) there shall be due to or from the Trustee under the provisions of any Security Document any material performance or the delivery of any material instrument or (c) the Trustee shall become aware of any nonperformance by the Company or a Subsidiary Guarantor of any covenant or any breach of any representation or warranty of the Company or such Subsidiary Guarantor set forth in any Security Document, then, in each such event, the Trustee shall be entitled to hire experts, consultants, agents and attorneys to advise the Trustee on the manner in which the Trustee should respond to such request or render any requested performance or respond to such nonperformance or breach. The Trustee shall be fully protected in the taking of any action recommended or approved by any such expert, consultant, agent or attorney or agreed to by the Holders of a majority in outstanding principal amount of the Securities pursuant to Section 6.5. SECTION 10.8. Impairment of Security Interests. The Company will not, and will not permit any of its Restricted Subsidiaries to, take or omit to take any action which might or would have the result of affecting or impairing the Liens granted pursuant to the terms of the Security Documents and this Indenture with respect to the Collateral in contravention of this Indenture, unless required or permitted under the Subordination Agreement, and the Company shall not (and shall cause its Restricted Subsidiaries not to) grant to, or suffer to exist in favor of, any Person (other than the Trustee, the holders of the Senior Indebtedness and any Representative of such holders) any interest whatsoever in the Collateral except as permitted by the Security Documents or this Indenture. The Company will not, and will not permit any of its Restricted Subsidiaries to, enter into any agreement or instrument that by its terms expressly requires that the proceeds received from the sale of any Collateral be applied to repay, redeem or otherwise retire any Indebtedness of any Person other than the Senior Indebtedness (whether or not the amount repaid is subsequently re-lent to the Company or any Subsidiary thereof) as set forth in this Article and in the Security Documents. 74 ARTICLE XI Ancillary Documents SECTION 11.1. Security Documents and Guarantees. The parties hereto acknowledge that simultaneously with the execution hereof, the Security Documents and the Guarantees are being entered into, to provide additional security for the Securities. Each Holder, by accepting a Security, agrees to all of the terms and provisions of the Security Documents and the Guarantees, as the same may be amended from time to time pursuant to the provisions thereof and this Indenture. SECTION 11.2. Subordination Agreement. The parties hereto further acknowledge that simultaneously with the execution hereof, the Trustee and the holders of the Senior Indebtedness are entering into the Subordination Agreement, dated the date hereof, between the Trustee, for itself in that capacity and on behalf of the Holders, and the holder of the Senior Indebtedness on the Issue Date in the form of Exhibit K, acknowledged and agreed to by the Company and the Subsidiary Guarantors, which sets forth the relative rights of the Trustee and the Holders, on the one hand, and such holder of the Senior Indebtedness, on the other hand, as to the priority of payment of the Senior Indebtedness over the Securities and related obligations, the priority of the Liens and rights in and to the Collateral in favor of such holder of Senior Indebtedness over the Liens and rights in and to the Collateral in favor of the Trustee and the Holders, and certain limitations on the rights and remedies of the Trustee and the Holders and related requirements. Each Holder, by accepting a Security, agrees to all of the terms and provisions of the Subordination Agreement, as the same may be amended from time to time pursuant to the provisions thereof and this Indenture. Without limiting the foregoing, each Holder, by accepting a Security, acknowledges and agrees that its rights to payment of the obligations evidenced by the Securities and the Guarantees are subordinated in favor of the Senior Indebtedness, that its and the Trustee's Liens and rights in and to the Collateral are subordinated in priority to the Liens and rights in and to the Collateral in favor of the holders of the Senior Indebtedness, and that other rights and remedies of such Holder and the Trustee are subject to certain limitations and related requirements, as provided in the Subordination Agreement, and further agrees that the Trustee is irrevocably authorized and directed to execute, deliver and perform the Subordination Agreement in accordance with its terms. The Trustee agrees that in the event of any conflict between this Indenture and the Subordination Agreement, the provisions of the Subordination Agreement shall control. In the event that the Senior Indebtedness existing on the Issue Date is refunded or refinanced such that the holder of the Senior Indebtedness on the Issue Date is no longer the holder of the Senior Indebtedness, then the Trustee shall enter into an intercreditor and subordination agreement or a supplemental indenture, in either case substantially on the terms and conditions contained in Exhibit K. The provisions of this Section shall be expressly for the benefit of the holders of the Senior Indebtedness (without thereby limiting any other provisions of this Indenture or elsewhere provided for their benefit). 75 ARTICLE XII Miscellaneous SECTION 12.1. Notices. Any notice or communication shall be in writing and delivered in person or mailed by first-class mail addressed as follows: if to the Company: London Fog Industries, Inc. 1332 Londontown Boulevard Eldersburg, Maryland 21784 Attention: Edward M. Krell with a copy to: London Fog Industries, Inc. 8 West 40th Street New York, New York 10018 Attention: Stuart B. Fisher, Esq. if to the Trustee: IBJ Schroder Bank & Trust Company One State Street New York, New York 10004 Attention: Corporate Trust Administration The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Holder shall be mailed to such Holder at such Holder's address as it appears on the Register and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 12.2. Communication by Holders with other Holders. Holders may communicate pursuant to TIA ss. 312(b) with other Holders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA ss. 312(c). 76 SECTION 12.3. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take or refrain from taking any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 12.4. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (a) a statement that the individual making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such individual, such individual has made such examination or investigation as is necessary to enable such individual to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such individual, such covenant or condition has been complied with. SECTION 12.5. When Securities Disregarded. In determining whether the Holders of the required principal amount of the Securities have concurred in any direction, waiver or consent, the Securities owned by the Company or any Affiliate thereof shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee knows are so owned shall be so disregarded. Also, subject to the foregoing, only Securities outstanding at the time shall be considered in any such determination. SECTION 12.6. Rules by Trustee, Paying Agent and Registrar. The Trustee may make reasonable rules for action by or a meeting of Holders. The Registrar and the Paying Agent may make reasonable rules for their functions. SECTION 12.7. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions are not required to be open in the State of New York or in the state in which the corporate trust office of the Trustee is located. If a payment date is a Legal Holiday, 77 payment shall be made on the next succeeding day that is not a Legal Holiday. If a regular record date is a Legal Holiday, the record date shall not be affected. SECTION 12.8. Governing Law. This Indenture and the Securities shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. Each of the parties hereto agrees to submit to the jurisdiction of the Courts of the State of New York and the courts of the United States of America for the Southern District of New York, in each case sitting in the borough of Manhattan, and waives any objection as to venue or forum non conveniens. SECTION 12.9. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Holder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. SECTION 12.10. Successors. All agreements of the Company and the Subsidiary Guarantors in this Indenture and the Securities shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 12.11. Multiple Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. SECTION 12.12. Variable Provisions. The Company initially appoints the Trustee as Paying Agent and Registrar and Securities Custodian with respect to any Global Securities. SECTION 12.13. Qualification of Indenture. The Company shall qualify this Indenture under the TIA in accordance with the terms and conditions of the Registration Statement and the Master Restructuring Agreement and shall pay all reasonable costs and expenses (including attorneys' fees for the Company, the Trustee and the Holders) incurred in connection therewith, including, but not limited to, costs and expenses of qualification of this Indenture and the Securities and printing this Indenture and the Securities. The Trustee shall be entitled to receive from the Company any such Officers' Certificates, Opinions of Counsel or other documentation as it may reasonably request in connection with any such qualification of this Indenture under the TIA. SECTION 12.14. Table of Contents; Headings. The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. 78 SECTION 12.15. Severability. In case any provision in or obligation under this Indenture shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction shall not in any way be affected or impaired thereby. SECTION 12.16. The Trustee. Where this Indenture provides that action may be taken by the Trustee, such action may be taken by either the Trustee or a Trust Officer. Where this Indenture provides that notices be given to or a delivery (or some other action) is to be to the Trustee, it is sufficient to give such notice or make such delivery to the Trustee. Where applicable state law prohibits the Trustee from acting, this Indenture shall be interpreted as if the Trust Officer were the only Trustee. SECTION 12.17. Nonrecourse. The obligations of the Trustee hereunder are undertaken solely in its capacity as Trustee under the Indenture. The Company agrees and acknowledges that the Company shall have no recourse hereunder to either the Trustee or any Trust Officer except in their capacities as Trustees under this Indenture. SECTION 12.18. Counterparts. This Indenture may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Indenture. 79 IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. Company: -------- LONDON FOG INDUSTRIES INC. By: ------------------------------ Edward M. Krell Chief Financial Officer Trustee: -------- IBJ SCHRODER BANK & TRUST COMPANY, not in its individual capacity, but solely as Trustee By: ------------------------------ Stephen J. Giurlando Assistant Vice President EXHIBIT A-1 FORM OF TEMPORARY NOTE THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY, ANY GUARANTOR OR ANY AFFILIATE OF THE COMPANY OR ANY GUARANTOR WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) AND (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH CASE, ONLY IF A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. 2 THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, ACKNOWLEDGES AND AGREES THAT ITS RIGHTS TO PAYMENT OF THE INDEBTEDNESS EVIDENCED HEREBY AND ITS AND THE TRUSTEE'S SECURITY INTERESTS AND RIGHTS IN THE COLLATERAL AND THE GUARANTEES THEREFOR, AND OTHER RIGHTS AND REMEDIES OF SUCH HOLDER AND THE TRUSTEE ARE SUBJECT AND SUBORDINATE TO THE RIGHTS TO PAYMENT OF THE HOLDERS OF THE SENIOR INDEBTEDNESS, AND THE SECURITY INTERESTS IN THE COLLATERAL THEREFOR, AND OTHER RIGHTS AND REMEDIES OF THE HOLDERS OF THE SENIOR INDEBTEDNESS. 3 LONDON FOG INDUSTRIES, INC. No. __ Principal Amount $__________ 10% Senior Subordinated Note due 2003 London Fog Industries, Inc., a Delaware corporation, promises to pay to _____________________, or registered assigns, the principal sum of _____________________________________________ Dollars on February 27, 2003. Scheduled Interest Payment Dates: March 1 and September 1. Record Dates: February 15 and August 15. Additional provisions of this Security are set forth on the other side of this Security. IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers and a facsimile of its corporate seal to be affixed hereto and imprinted hereon. Dated: LONDON FOG INDUSTRIES, INC. --------------------------- By: ---------------------------- Edward M. Krell Chief Financial Officer By: ---------------------------- Stuart B. Fisher Secretary TRUSTEE'S CERTIFICATE OF AUTHENTICATION IBJ SCHRODER BANK & TRUST COMPANY, as Trustee, certifies that this is one of the Securities referred to in the Indenture. By: -------------------------------- Authorized Signatory 4 10% Senior Subordinated Note due 2003 1. Interest London Fog Industries, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on March 1 and September 1 of each year, commencing September 1, 1998. Interest on the Securities will accrue from the most recent date to which interest has been paid on the Securities or, if no interest has been paid, from February 27, 1998. The Company shall pay interest on overdue principal or premium, if any, and interest at the rate borne by the Securities to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment By at least 10:00 a.m. (New York City time) on the date on which any principal of or interest on any Security is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay such principal, premium, if any, and/or interest. The Company will pay interest (except defaulted interest) to the Persons who are registered Holders at the close of business on the February 15 or August 15 immediately preceding the interest payment date even if the Securities are cancelled, repurchased or redeemed after the record date and on or before the interest payment date. Holders must surrender the Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal and interest by check payable in such money. It may mail an interest check to a Holder's registered address. 3. Paying Agent and Registrar Initially, IBJ Schroder Bank & Trust Company, a New York banking corporation (the "Trustee"), will act as the Paying Agent and the Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Holder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as the Paying Agent, the Registrar or co-registrar. 5 4. Indenture The Company issued the Securities under an Indenture dated as of February 27, 1998 (as it may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof, the "Indenture"), between the Company and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all such terms, and Holders are referred to the Indenture and the Act for a statement of those terms. The Securities are secured senior subordinated obligations of the Company limited to $100 million aggregate principal amount (subject to Section 2.7 of the Indenture). This Security is the Temporary Note referred to in the Indenture. The Securities include the Temporary Note, the Initial Notes issued in exchange for the Temporary Note pursuant to the Indenture, and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture and the Registration Statement. The Temporary Note, the Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends and other distributions on the Capital Stock of the Company and its Restricted Subsidiaries, the purchase or redemption of Capital Stock of the Company and Capital Stock of such Restricted Subsidiaries, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, the investments of the Company, its Subsidiaries and transactions with Affiliates, Liens, dividends and other payment restrictions affecting Subsidiaries, incurrence of senior subordinated Indebtedness senior to the Securities, preferred stock of Subsidiaries, future guarantees and conduct of business. In addition, the Indenture limits the ability of the Company and its Restricted Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. To guarantee the due and punctual payment of the principal, premium, if any, and interest on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Subsidiary Guarantors will have, jointly and severally, unconditionally guaranteed such obligations on a senior subordinated basis pursuant to the terms of the Indenture and the Guarantees. 5. Optional Redemption The Securities will be redeemable, at the Company's option, in whole or in part, upon not less than thirty (30) nor more than sixty (60) days' prior notice mailed by first class mail to each Holder's registered address, at the following redemption prices (expressed as percentages of principal amount) if redeemed during the twelve month period commencing on February 27 of the year set forth below plus, in each case, accrued and unpaid interest to the redemption date 6 (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date):
Year Redemption Price ---- ---------------- 1998......................................................................105% 1999......................................................................105% 2000......................................................................105% 2001......................................................................103% 2002......................................................................101%
6. Notice of Redemption Notice of redemption will be mailed at least thirty (30) days but not more than sixty (60) days before the redemption date to each Holder to be redeemed at such Holder's registered address. If fewer than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata or by lot or by a method that complies with applicable legal and securities exchange requirements, if any, and that the Trustee considers fair and appropriate and in accordance with methods generally used at the time of selection by fiduciaries in similar circumstances. 7. Option of Holder to Elect Purchase Upon a Change of Control Triggering Event, any Holder will have the right to require that the Company purchase all or a portion of such Holder's Securities pursuant to the Indenture at a purchase price equal to 101% of the principal amount thereof plus accrued interest to the date of repurchase as provided in, and subject to the terms of, the Indenture. Under certain circumstances, in the event the Net Cash Proceeds received by the Company or a Restricted Subsidiary from an Asset Sale are not used (a) to prepay any Senior Indebtedness or Guarantor Senior Indebtedness, whether or not the amount prepaid is subsequently re-lent, and, in the case of any Senior Indebtedness under any revolving credit facility, whether or not there is a permanent reduction in the availability under such revolving credit facility, (b) to reinvest in Productive Assets or (c) a combination of prepayment and investment permitted by the foregoing clauses (a) and (b), then such aggregate amount of Net Cash Proceeds which have not been applied on or before such Net Proceeds Offer Trigger Date shall be applied by the Company or such Restricted Subsidiary to make an offer to purchase on a date not less than thirty (30) nor more than forty-five (45) days following the applicable Net Proceeds Offer Trigger Date from all Holders on a pro rata basis that amount of Securities equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Securities to be purchased, plus accrued and unpaid interest thereon. 7 8. Subordination The Securities and Guarantees are subordinated in right of payment to the Senior Indebtedness. To the extent provided in the Indenture and the Subordination Agreement, the Senior Indebtedness must be paid before the Securities may be paid. The security interests in the Collateral securing the Securities and the Guarantees are subordinate in priority to the security interests in the Collateral securing the Senior Indebtedness and the rights and remedies of the Trustee and the Holders are subject to the limitations and requirements for the benefit of the holders of the Senior Indebtedness as set forth in the Subordination Agreement. The Company agrees, and each Holder by accepting a Security agrees, to the subordination provisions contained in the Indenture and the Subordination Agreement and authorizes the Trustee to give them effect and appoints the Trustee as attorney-in-fact for such purpose. 9. Denominations; Transfer; Exchange The Securities are in registered form without coupons in denominations of principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange of any Security for a period beginning (a) fifteen (15) Business Days before the mailing of a notice of an offer to repurchase or redeem Securities and ending at the close of business on the day of such mailing or (b) fifteen (15) Business Days before an interest payment date and ending on such interest payment date. 10. Persons Deemed Owners The registered holder of this Security may be treated as the owner of it for all purposes. 11. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two (2) years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 8 12. Defeasance Subject to certain conditions set forth in the Indenture, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee U.S. Legal Tender or U.S. Government Obligations for the payment of principal of, premium, if any, and interest on the Securities to redemption or maturity, as the case may be. 13. Amendment; Waiver Subject to certain exceptions set forth in the Indenture, (a) the Indenture, the Securities, any Guarantee, any Security Document or the Subordination Agreement may be amended with the written consent of the Holders of at least a majority in principal amount of the outstanding Securities and (b) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount of the outstanding Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Holder, the Company and the Trustee may amend the Indenture or the Securities to cure any ambiguity, omission, defect or inconsistency, or to comply with Article V of the Indenture, or to provide for uncertificated Securities in addition to or in place of certificated Securities, or to make any change in the Subordination Agreement to limit or terminate the benefits of any holder of Senior Indebtedness or Guarantor Senior Indebtedness thereunder, or to add guarantees with respect to the Securities or to provide additional security for the Securities, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the Commission in connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Holder, or to provide for the issuance of the Exchange Notes, or to correct or amplify the description of any Collateral in the Security Documents. 14. Defaults and Remedies Under the Indenture, Events of Default include (a) default for thirty (30) days in payment when due of interest on the Securities; (b) default in payment of principal on the Securities at maturity, upon redemption pursuant to Section 3.1 of the Indenture and paragraph 5 of the Securities, upon required repurchase, upon declaration or otherwise; (c) failure by the Company to comply with other agreements in the Indenture or the Securities, in certain cases subject to notice and lapse of time; (d) failure to pay at final maturity (giving effect to any applicable grace period and any extensions thereof) the principal amount of any Indebtedness of the Company or any Restricted Subsidiary of the Company (other than a Receivables Entity), or the acceleration of the final maturity of any such Indebtedness, if, in either case, the aggregate principal amount of any such Indebtedness, together with the principal amount of any such other Indebtedness in default for failure to pay principal at final maturity or which has been 9 accelerated, aggregates $10 million or more at any time; (e) certain final, non-appealable judgments or decrees for the payment of money in excess of $10 million against the Company or any Significant Subsidiary; (f) certain events of bankruptcy or insolvency with respect to the Company or any Significant Subsidiary; and (g) any Guarantee by a Significant Subsidiary ceases to be in full force and effect (except as contemplated by the terms of the Indenture) or any Subsidiary Guarantor that is a Significant Subsidiary denies or disaffirms its obligations under the Indenture or its Guarantee. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in outstanding principal amount of the Securities may declare all the Securities to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Securities being due and payable immediately upon the occurrence of such Events of Default. Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in outstanding principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 15. Trustee Dealings with the Company Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 16. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Holder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 17. Authentication This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent acting on its behalf) manually signs the certificate of authentication on the other side of this Security. 10 18. Abbreviations Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act). 19. CUSIP Numbers Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 20. Governing Law This Security shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. The Company will furnish to any Holder upon written request and without charge to such Holder a copy of the Indenture which has in it the text of this Security in larger type. Requests may be made to: London Fog Industries, Inc., 8 West 40th Street, New York, New York 10018, Attention: Stuart B. Fisher, Esq. ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to ---------------------------------------------------- --------------------------------------------------- --------------------------------------------------- (Print or type assignee's name, address and zip code) --------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: Your Signature: -------------------- ------------------- Signature Guarantee: ------------------------------ (Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee.) Sign exactly as your name appears on the other side of this Security. In connection with any transfer or exchange of any of the Securities evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Securities and the last date, if any, on which such Securities were owned by the Company or any Affiliate thereof, the undersigned confirms that such Securities are being: CHECK ONE BOX BELOW: (1) [ ] acquired for the undersigned's own account, without transfer (in satisfaction of Section 2.6(a)(ii)(A) or Section 2.6(d)(i)(A) of the Indenture); or (2) [ ] transferred to the Company; or (3) [ ] transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or (4) [ ] transferred pursuant to an effective registration statement under the Securities Act of 1933; or 2 (5) [ ] transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or (6) [ ] transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter appears as Exhibit C to the Indenture); or (7) [ ] transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (5), (6) or (7) is checked, the Trustee or the Company may require, prior to registering any such transfer of the Securities, in their sole discretion, such legal opinions, certifications and other information as the Trustee or the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. ------------------------------ Signature Signature Guarantee: - ------------------------- ------------------------------ Signature (Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee.) - ------------------------------------------------------------ SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY The following increases or decreases in this Global Security have been made:
Amount of decrease in Amount of increase in Principal Amount of this Signature of authorized officer Date of Principal Amount of this Principal Amount of this Global Security following such of Trustee or Securities Exchange Global Security Global Security decrease or increase Custodian - -------- --------------- --------------- ------------------------------ ----------------------------
OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, check the box: [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount in principal amount (must be integral multiple of $1,000): $ Date: Your Signature ---------- -------------------------------------- (Sign exactly as your name appears on the other side of the Security) Signature Guarantee: --------------------------------------- (Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee.) EXHIBIT A-2 FORM OF INITIAL NOTE (Face of Security) [Global Securities Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. [Restricted Securities Legend] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY, ANY GUARANTOR OR ANY AFFILIATE OF THE COMPANY OR ANY GUARANTOR WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER 2 THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) AND (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH CASE, ONLY IF A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, ACKNOWLEDGES AND AGREES THAT ITS RIGHTS TO PAYMENT OF THE INDEBTEDNESS EVIDENCED HEREBY AND ITS AND THE TRUSTEE'S SECURITY INTERESTS AND RIGHTS IN THE COLLATERAL AND THE GUARANTEES THEREFOR, AND OTHER RIGHTS AND REMEDIES OF SUCH HOLDER AND THE TRUSTEE ARE SUBJECT AND SUBORDINATE TO THE RIGHTS TO PAYMENT OF THE HOLDERS OF THE SENIOR INDEBTEDNESS, AND THE SECURITY INTERESTS IN THE COLLATERAL THEREFOR, AND OTHER RIGHTS AND REMEDIES OF THE HOLDERS OF THE SENIOR INDEBTEDNESS. 3 LONDON FOG INDUSTRIES, INC. No. __ Principal Amount $_____________ CUSIP NO. _________ 10% Senior Subordinated Note due 2003 London Fog Industries, Inc., a Delaware corporation, promises to pay to __________, or registered assigns, the principal sum of ___________________________ Dollars on February 27, 2003. Scheduled Interest Payment Dates: March 1 and September 1. Record Dates: February 15 and August 15. Additional provisions of this Security are set forth on the other side of this Security. IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers and a facsimile of its corporate seal to be affixed hereto and imprinted hereon. Dated: March __, 1998 LONDON FOG INDUSTRIES, INC. By: ------------------------ Name: Title: By: ------------------------ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION IBJ SCHRODER BANK & TRUST COMPANY, not in its individual capacity, butsolely as Trustee, certifies that this is one of the Securities referred to in the Indenture. By: ________________________________ Authorized Signatory 4 (Reverse of Security) 10% Senior Subordinated Note due 2003 1. Interest London Fog Industries, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on March 1 and September 1 of each year, commencing September 1, 1998. Interest on the Securities will accrue from the most recent date to which interest has been paid on the Securities or, if no interest has been paid, from February 27, 1998. The Company shall pay interest on overdue principal or premium, if any, and interest at the rate borne by the Securities to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment By at least 10:00 a.m. (New York City time) on the date on which any principal of or interest on any Security is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay such principal, premium, if any, and/or interest. The Company will pay interest (except defaulted interest) to the Persons who are registered Holders at the close of business on the February 15 or August 15 immediately preceding the interest payment date even if the Securities are cancelled, repurchased or redeemed after the record date and on or before the interest payment date. Holders must surrender the Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal and interest by check payable in such money. It may mail an interest check to a Holder's registered address. 3. Paying Agent and Registrar Initially, IBJ Schroder Bank & Trust Company, a New York banking corporation (the "Trustee"), will act as the Paying Agent and the Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Holder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as the Paying Agent, the Registrar or co-registrar. 5 4. Indenture The Company issued the Securities under an Indenture dated as of February 27, 1998 (as it may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof, the "Indenture"), between the Company and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all such terms, and Holders are referred to the Indenture and the Act for a statement of those terms. The Securities are secured senior subordinated obligations of the Company limited to $100 million aggregate principal amount (subject to Section 2.7 of the Indenture). This Security is one of the Initial Notes referred to in the Indenture. The Securities include the Temporary Note, the Initial Notes issued in exchange for the Temporary Note pursuant to the Indenture, and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture and the Registration Statement. The Temporary Note, the Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends and other distributions on the Capital Stock of the Company and its Restricted Subsidiaries, the purchase or redemption of Capital Stock of the Company and Capital Stock of such Restricted Subsidiaries, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, the investments of the Company, its Subsidiaries and transactions with Affiliates, Liens, dividends and other payment restrictions affecting Subsidiaries, incurrence of senior subordinated Indebtedness senior to the Securities, preferred stock of Subsidiaries, future guarantees and conduct of business. In addition, the Indenture limits the ability of the Company and its Restricted Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. To guarantee the due and punctual payment of the principal, premium, if any, and interest on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Subsidiary Guarantors will have, jointly and severally, unconditionally guaranteed such obligations on a senior subordinated basis pursuant to the terms of the Indenture and the Guarantees. 5. Optional Redemption The Securities will be redeemable, at the Company's option, in whole or in part, upon not less than thirty (30) nor more than sixty (60) days' prior notice mailed by first class mail to each Holder's registered address, at the following redemption prices (expressed as percentages of principal amount) if redeemed during the twelve month period commencing on February 27 of the year set forth below plus, in each case, accrued and unpaid interest to the redemption date 6 (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date): Year Redemption Price 1998..............................................105% 1999..............................................105% 2000..............................................105% 2001..............................................103% 2002..............................................101% 6. Notice of Redemption Notice of redemption will be mailed at least thirty (30) days but not more than sixty (60) days before the redemption date to each Holder to be redeemed at such Holder's registered address. If fewer than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata or by lot or by a method that complies with applicable legal and securities exchange requirements, if any, and that the Trustee considers fair and appropriate and in accordance with methods generally used at the time of selection by fiduciaries in similar circumstances. 7. Option of Holder to Elect Purchase Upon a Change of Control Triggering Event, any Holder will have the right to require that the Company purchase all or a portion of such Holder's Securities pursuant to the Indenture at a purchase price equal to 101% of the principal amount thereof plus accrued interest to the date of repurchase as provided in, and subject to the terms of, the Indenture. Under certain circumstances, in the event the Net Cash Proceeds received by the Company or a Restricted Subsidiary from an Asset Sale are not used (a) to prepay any Senior Indebtedness or Guarantor Senior Indebtedness, whether or not the amount prepaid is subsequently re-lent, and, in the case of any Senior Indebtedness under any revolving credit facility, whether or not there is a permanent reduction in the availability under such revolving credit facility, (b) to reinvest in Productive Assets or (c) a combination of prepayment and investment permitted by the foregoing clauses (a) and (b), then such aggregate amount of Net Cash Proceeds which have not been applied on or before such Net Proceeds Offer Trigger Date shall be applied by the Company or such Restricted Subsidiary to make an offer to purchase on a date not less than thirty (30) nor more than forty-five (45) days following the applicable Net Proceeds Offer Trigger Date from all Holders on a pro rata basis that amount of Securities equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Securities to be purchased, plus accrued and unpaid interest thereon. 7 8. Subordination The Securities and Guarantees are subordinated in right of payment to the Senior Indebtedness. To the extent provided in the Indenture and the Subordination Agreement, the Senior Indebtedness must be paid before the Securities may be paid. The security interests in the Collateral securing the Securities and the Guarantees are subordinate in priority to the security interests in the Collateral securing the Senior Indebtedness and the rights and remedies of the Trustee and the Holders are subject to the limitations and requirements for the benefit of the holders of the Senior Indebtedness as set forth in the Subordination Agreement. The Company agrees, and each Holder by accepting a Security agrees, to the subordination provisions contained in the Indenture and the Subordination Agreement and authorizes the Trustee to give them effect and appoints the Trustee as attorney-in-fact for such purpose. 9. Denominations; Transfer; Exchange The Securities are in registered form without coupons in denominations of principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange of any Security for a period beginning (a) fifteen (15) Business Days before the mailing of a notice of an offer to repurchase or redeem Securities and ending at the close of business on the day of such mailing or (b) fifteen (15) Business Days before an interest payment date and ending on such interest payment date. 10. Persons Deemed Owners The registered holder of this Security may be treated as the owner of it for all purposes. 11. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two (2) years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 8 12. Defeasance Subject to certain conditions set forth in the Indenture, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee U.S. Legal Tender or U.S. Government Obligations for the payment of principal of, premium, if any, and interest on the Securities to redemption or maturity, as the case may be. 13. Amendment; Waiver Subject to certain exceptions set forth in the Indenture, (a) the Indenture, the Securities, any Guarantee, any Security Document or the Subordination Agreement may be amended with the written consent of the Holders of at least a majority in principal amount of the outstanding Securities and (b) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount of the outstanding Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Holder, the Company and the Trustee may amend the Indenture or the Securities to cure any ambiguity, omission, defect or inconsistency, or to comply with Article V of the Indenture, or to provide for uncertificated Securities in addition to or in place of certificated Securities, or to make any change in the Subordination Agreement to limit or terminate the benefits of any holder of Senior Indebtedness or Guarantor Senior Indebtedness thereunder, or to add guarantees with respect to the Securities or to provide additional security for the Securities, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the Commission in connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Holder, or to provide for the issuance of the Exchange Notes, or to correct or amplify the description of any Collateral in the Security Documents. 14. Defaults and Remedies Under the Indenture, Events of Default include (a) default for thirty (30) days in payment when due of interest on the Securities; (b) default in payment of principal on the Securities at maturity, upon redemption pursuant to Section 3.1 of the Indenture and paragraph 5 of the Securities, upon required repurchase, upon declaration or otherwise; (c) failure by the Company to comply with other agreements in the Indenture or the Securities, in certain cases subject to notice and lapse of time; (d) failure to pay at final maturity (giving effect to any applicable grace period and any extensions thereof) the principal amount of any Indebtedness of the Company or any Restricted Subsidiary of the Company (other than a Receivables Entity), or the acceleration of the final maturity of any such Indebtedness, if, in either case, the aggregate principal amount of any such Indebtedness, together with the principal amount of any such other Indebtedness in default for failure to pay principal at final maturity or which has been 9 accelerated, aggregates $10 million or more at any time; (e) certain final, non-appealable judgments or decrees for the payment of money in excess of $10 million against the Company or any Significant Subsidiary; (f) certain events of bankruptcy or insolvency with respect to the Company or any Significant Subsidiary; and (g) any Guarantee by a Significant Subsidiary ceases to be in full force and effect (except as contemplated by the terms of the Indenture) or any Subsidiary Guarantor that is a Significant Subsidiary denies or disaffirms its obligations under the Indenture or its Guarantee. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in outstanding principal amount of the Securities may declare all the Securities to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Securities being due and payable immediately upon the occurrence of such Events of Default. Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in outstanding principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 15. Trustee Dealings with the Company Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 16. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Holder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 17. Authentication This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent acting on its behalf) manually signs the certificate of authentication on the other side of this Security. 10 18. Abbreviations Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act). 19. CUSIP Numbers Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 20. Governing Law This Security shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. The Company will furnish to any Holder upon written request and without charge to such Holder a copy of the Indenture which has in it the text of this Security in larger type. Requests may be made to: London Fog Industries, Inc., 8 West 40th Street, New York, New York 10018, Attention: Stuart B. Fisher, Esq. ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- (Print or type assignee's name, address and zip code) ----------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. - -------------------------------------------------------------------------------- Date: ____________________ Your Signature: ___________________ Signature Guarantee: ______________________________ (Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee.) - -------------------------------------------------------------------------------- Sign exactly as your name appears on the other side of this Security. In connection with any transfer or exchange of any of the Securities evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Securities and the last date, if any, on which such Securities were owned by the Company or any Affiliate thereof, the undersigned confirms that such Securities are being: CHECK ONE BOX BELOW: (1) [ ] acquired for the undersigned's own account, without transfer (in satisfaction of Section 2.6(a)(ii)(A) or Section 2.6(d)(i)(A) of the Indenture); or (2) [ ] transferred to the Company; or (3) [ ] transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or (4) [ ] transferred pursuant to an effective registration statement under the Securities Act of 1933; or 2 (5) [ ] transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or (6) [ ] transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter appears as Exhibit J to the Indenture); or (7) [ ] transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (5), (6) or (7) is checked, the Trustee or the Company may require, prior to registering any such transfer of the Securities, in their sole discretion, such legal opinions, certifications and other information as the Trustee or the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. ------------------------------ Signature Signature Guarantee: - ------------------------- ------------------------------ Signature (Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee.) - ------------------------------------------------------------ SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY The following increases or decreases in this Global Security have been made:
Amount of decrease in Amount of increase in Principal Amount of this Signature of authorized officer Date of Principal Amount of this Principal Amount of this Global Security following of Trustee or Securities Exchange Global Security Global Security such decrease or increase Custodian - ------- ------------------------ ------------------------ ------------------------- -------------------------------
OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, check the box: [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount in principal amount (must be integral multiple of $1,000): $ Date: __________ Your Signature __________________________________________ (Sign exactly as your name appears on the other side of the Security) Signature Guarantee: _______________________________________ (Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee.) EXHIBIT B FORM OF EXCHANGE NOTE (Face of Security) [Global Securities Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, ACKNOWLEDGES AND AGREES THAT ITS RIGHTS TO PAYMENT OF THE INDEBTEDNESS EVIDENCED HEREBY AND ITS AND THE TRUSTEE'S SECURITY INTERESTS AND RIGHTS IN THE COLLATERAL AND THE GUARANTEES THEREFOR, AND OTHER RIGHTS AND REMEDIES OF SUCH HOLDER AND THE TRUSTEE ARE SUBJECT AND SUBORDINATE TO THE RIGHTS TO PAYMENT OF THE HOLDERS OF THE SENIOR INDEBTEDNESS, AND THE SECURITY INTERESTS IN THE COLLATERAL THEREFOR, AND OTHER RIGHTS AND REMEDIES OF THE HOLDERS OF THE SENIOR INDEBTEDNESS. 2 LONDON FOG INDUSTRIES, INC. No. __ Principal Amount $_____________ CUSIP NO. ___________ 10% Senior Subordinated Note due 2003 London Fog Industries, Inc., a Delaware corporation, promises to pay to __________, or registered assigns, the principal sum of ___________________________ Dollars on February 27, 2003. Scheduled Interest Payment Dates: March 1 and September 1. Record Dates: February 15 and August 15. Additional provisions of this Security are set forth on the other side of this Security. IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers and a facsimile of its corporate seal to be affixed hereto and imprinted hereon. Dated: _________ __, 1998 LONDON FOG INDUSTRIES, INC. By: --------------------------------------- Name: Title: By: -------------------------------------- Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION IBJ SCHRODER BANK & TRUST COMPANY, not in its individual capacity, but solely as Trustee, certifies that this is one of the Securities referred to in the Indenture. By: ------------------------------- Authorized Signatory 3 (Reverse of Security) 10% Senior Subordinated Note due 2003 1. Interest -------- London Fog Industries, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on March 1 and September 1 of each year, commencing September 1, 1998. Interest on the Securities will accrue from the most recent date to which interest has been paid on the Securities or, if no interest has been paid, from February 27, 1998. The Company shall pay interest on overdue principal or premium, if any, and interest at the rate borne by the Securities to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment ----------------- By at least 10:00 a.m. (New York City time) on the date on which any principal of or interest on any Security is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay such principal, premium, if any, and/or interest. The Company will pay interest (except defaulted interest) to the Persons who are registered Holders at the close of business on the February 15 or August 15 immediately preceding the interest payment date even if the Securities are cancelled, repurchased or redeemed after the record date and on or before the interest payment date. Holders must surrender the Securities to the Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal and interest by check payable in such money. It may mail an interest check to a Holder's registered address. 3. Paying Agent and Registrar -------------------------- Initially, IBJ Schroder Bank & Trust Company, a New York banking corporation (the "Trustee"), will act as the Paying Agent and the Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Holder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as the Paying Agent, the Registrar or co-registrar. 4 4. Indenture --------- The Company issued the Securities under an Indenture dated as of February 27, 1998 (as it may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof, the "Indenture"), between the Company and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all such terms, and Holders are referred to the Indenture and the Act for a statement of those terms. The Securities are secured senior subordinated obligations of the Company limited to $100 million aggregate principal amount (subject to Section 2.7 of the Indenture). This Security is one of the Exchange Notes referred to in the Indenture. The Securities include Temporary Note, the Initial Notes issued in exchange for the Temporary Note pursuant to the Indenture and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture and the Registration Statement. The Temporary Note, the Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends and other distributions on the Capital Stock of the Company and its Restricted Subsidiaries, the purchase or redemption of Capital Stock of the Company and Capital Stock of such Restricted Subsidiaries, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, the investments of the Company, its Subsidiaries and transactions with Affiliates, Liens, dividends and other payment restrictions affecting Subsidiaries, incurrence of senior subordinated Indebtedness senior to the Securities, preferred stock of Subsidiaries, future guarantees and conduct of business. In addition, the Indenture limits the ability of the Company and its Restricted Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. To guarantee the due and punctual payment of the principal, premium, if any, and interest on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Subsidiary Guarantors will have, jointly and severally, unconditionally guaranteed such obligations on a senior subordinated basis pursuant to the terms of the Indenture and the Guarantees. 5. Optional Redemption ------------------- The Securities will be redeemable, at the Company's option, in whole or in part, upon not less than thirty (30) nor more than sixty (60) days' prior notice mailed by first class mail to each Holder's registered address, at the following redemption prices (expressed as percentages of principal amount) if redeemed during the twelve month period commencing on February 27 of the year set forth below plus, in each case, accrued and unpaid interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date): 5 Year Redemption Price ---- ---------------- 1998...................................................105% 1999...................................................105% 2000...................................................105% 2001...................................................103% 2002...................................................101% 6. Notice of Redemption -------------------- Notice of redemption will be mailed at least thirty (30) days but not more than sixty (60) days before the redemption date to each Holder to be redeemed at such Holder's registered address. If fewer than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata or by lot or by a method that complies with applicable legal and securities exchange requirements, if any, and that the Trustee considers fair and appropriate and in accordance with methods generally used at the time of selection by fiduciaries in similar circumstances. 7. Option of Holder to Elect Purchase ---------------------------------- Upon a Change of Control Triggering Event, any Holder will have the right to require that the Company purchase all or a portion of such Holder's Securities pursuant to the Indenture at a purchase price equal to 101% of the principal amount thereof plus accrued interest to the date of repurchase as provided in, and subject to the terms of, the Indenture. Under certain circumstances, in the event the Net Cash Proceeds received by the Company or a Restricted Subsidiary from an Asset Sale are not used (a) to prepay any Senior Indebtedness or Guarantor Senior Indebtedness, whether or not the amount prepaid is subsequently re-lent, and, in the case of any Senior Indebtedness under any revolving credit facility, whether or not there is permanent reduction in the availability under such revolving credit facility, (b) to reinvest in Productive Assets or (c) a combination of prepayment and investment permitted by the foregoing clauses (a) and (b), then such aggregate amount of Net Cash Proceeds which have not been applied on or before such Net Proceeds Offer Trigger Date shall be applied by the Company or such Restricted Subsidiary to make an offer to purchase on a date not less than thirty (30) nor more than forty-five (45) days following the applicable Net Proceeds Offer Trigger Date from all Holders on a pro rata basis that amount of Securities equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Securities to be purchased, plus accrued and unpaid interest thereon. 6 8. Subordination ------------- The Securities and the Guarantees are subordinated in right of payment to the Senior Indebtedness. To the extent provided in the Indenture and the Subordination Agreement, the Senior Indebtedness must be paid before the Securities may be paid. The security interests in the Collateral securing the Securities and the Guarantees are subordinate in priority to the security interests in the Collateral securing the Senior Indebtedness and the rights and remedies of the Trustee and the Holders are subject to the limitations and requirements for the benefit of the holders of the Senior Indebtedness as set forth in the Subordination Agreement. The Company agrees, and each Holder by accepting a Security agrees, to the subordination provisions contained in the Indenture and the Subordination Agreement and authorizes the Trustee to give them effect and appoints the Trustee as attorney-in-fact for such purpose. 9. Denominations; Transfer; Exchange --------------------------------- The Securities are in registered form without coupons in denominations of principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange of any Security for a period beginning (a) fifteen (15) Business Days before the mailing of a notice of an offer to repurchase or redeem Securities and ending at the close of business on the day of such mailing or (b) fifteen (15) Business Days before an interest payment date and ending on such interest payment date. 10. Persons Deemed Owners --------------------- The registered holder of this Security may be treated as the owner of it for all purposes. 11. Unclaimed Money --------------- If money for the payment of principal or interest remains unclaimed for two (2) years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 7 12. Defeasance ---------- Subject to certain conditions set forth in the Indenture, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee U.S. Legal Tender or U.S. Government Obligations for the payment of principal of, premium, if any, and interest on the Securities to redemption or maturity, as the case may be. 13. Amendment; Waiver ----------------- Subject to certain exceptions set forth in the Indenture, (a) the Indenture, the Securities, any Guarantee, any Security Document or the Subordination Agreement may be amended with the written consent of the Holders of at least a majority in principal amount of the outstanding Securities and (b) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount of the outstanding Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Holder, the Company and the Trustee may amend the Indenture or the Securities to cure any ambiguity, omission, defect or inconsistency, or to comply with Article V of the Indenture or to provide for uncertificated Securities in addition to or in place of certificated Securities, or to make any change in the Subordination Agreement to limit or terminate the benefits of any holder of Senior Indebtedness or Guarantor Senior Indebtedness thereunder, or to add guarantees with respect to the Securities or to provide additional security for the Securities, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the Commission in connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Holder, or to provide for the issuance of the Exchange Notes, or to correct or amplify the description of any Collateral in the Security Documents. 14. Defaults and Remedies --------------------- Under the Indenture, Events of Default include (a) default for thirty (30) days in payment when due of interest on the Securities; (b) default in payment of principal on the Securities at maturity, upon redemption pursuant to Section 3.1 of the Indenture and paragraph 5 of the Securities, upon required repurchase, upon declaration or otherwise; (c) failure by the Company to comply with other agreements in the Indenture or the Securities, in certain cases subject to notice and lapse of time; (d) failure to pay at final maturity (giving effect to any applicable grace period and any extensions thereof) the principal amount of any Indebtedness of the Company or any Restricted Subsidiary of the Company (other than a Receivables Entity), or the acceleration of the final maturity of any such Indebtedness, if, in either case, the aggregate principal amount of any such Indebtedness, together with the principal amount of any such other Indebtedness in default for failure to pay principal at final maturity or which has been accelerated, aggregates $10 million or more at any time; (e) certain final, non-appealable judgments or decrees for the payment of money in excess of $10 million against the Company or 8 any Significant Subsidiary; (f) certain events of bankruptcy or insolvency with respect to the Company or any Significant Subsidiary; and (g) any Guarantee by a Significant Subsidiary ceases to be in full force and effect (except as contemplated by the terms of the Indenture) or any Subsidiary Guarantor that is a Significant Subsidiary denies or disaffirms its obligations under the Indenture or its Guarantee. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in outstanding principal amount of the Securities may declare all the Securities to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Securities being due and payable immediately upon the occurrence of such Events of Default. Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in outstanding principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 15. Trustee Dealings with the Company --------------------------------- Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 16. No Recourse Against Others -------------------------- A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Holder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 17. Authentication -------------- This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent acting on its behalf) manually signs the certificate of authentication on the other side of this Security. 9 18. Abbreviations ------------- Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act). 19. CUSIP Numbers ------------- Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 20. Governing Law ------------- This Security shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. The Company will furnish to any Holder upon written request and without charge to such Holder a copy of the Indenture which has in it the text of this Security in larger type. Requests may be made to: London Fog Industries, Inc., 8 West 40th Street, New York, New York 10018, Attention: Stuart B. Fisher, Esq. ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to ------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- (Print or type assignee's name, address and zip code) ------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. - -------------------------------------------------------------------------------- Date: Your Signature: ----------------------- ----------------------- Signature Guarantee:_____________________________________ (Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee.) - -------------------------------------------------------------------------------- Sign exactly as your name appears on the other side of this Security. SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY The following increases or decreases in this Global Security have been made:
Amount of decrease in Principal Amount of increase in Principal Date of Amount of this Global Security Amount of this Global Security Exchange ------------------------------- ------------------------------ -------- Principal Amount of this Global Signature of authorized officer Security following such of Trustee or Securities decrease or increase Custodian ------------------------------- -------------------------------
OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, check the box: [ ]1 If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount in principal amount (must be integral multiple of $1,000): $ Date: __________ Your Signature ________________________________________________ (Sign exactly as your name appears on the other side of the Security) Signature Guarantee: _______________________________________________ (Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee.) EXHIBIT C AMENDED AND RESTATED COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT AMENDED AND RESTATED COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT, dated as of February 27, 1998, made by London Fog Industries, Inc., a Delaware corporation (the "Company"), in favor of IBJ Schroder Bank & Trust Company, as trustee (in such capacity, the "Trustee") for the Holders under, and as defined in, the Indenture, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Indenture"), between the Company and the Trustee. W I T N E S S E T H : WHEREAS, pursuant to the Credit Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Credit Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Original Agent") for the several banks and other financial institutions from time to time parties thereto (the "Original Lenders") and the Original Lenders, the Original Lenders made certain loans and other extensions of credit to the Company; WHEREAS, in connection with the execution and delivery of the Original Credit Agreement, the Company executed and delivered to the Original Agent, for the benefit of the Original Lenders, the Borrower Patent and Trademark Security Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Patent and Trademark Security Agreement"), pursuant to which the Company pledged to the Original Agent, for the benefit of the Original Lenders, all of the Collateral (as defined in the Original Patent and Trademark Security Agreement) as collateral security for the Obligations (as defined in the Original Patent and Trademark Security Agreement); WHEREAS, the Company, the Original Agent and the Original Lenders agreed to restructure the obligations of the Company under the Original Credit Agreement by means of, among other things, the execution and delivery of the Master Restructuring Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Existing MRA"), among the Company, the Original Agent and the Original Lenders, among others; WHEREAS, in connection with the execution and the delivery of the Existing MRA, the Company executed and delivered (a) the Term Loan Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Term Loan Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Term Loan Agent") for the several banks and other financial institutions from time to time parties thereto (the "Term Loan Lenders") and the Term 2 Loan Lenders and (b) the Note Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Note Agreement" and, together with the Term Loan Agreement, collectively, the "Existing Agreements"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity and also in its capacity as the Term Loan Agent, the "Agent") for the several banks and other financial institutions from time to time parties thereto (the "Note Lenders" and, together with the Term Loan Lenders, collectively, the "Lenders") and the Note Lenders, pursuant to which the Lenders made certain loans to the Company; WHEREAS, in connection with the execution and delivery of the Existing MRA and the Existing Agreements, the Company executed and delivered to the Agent, for the benefit of the Lenders, Amendment No. 1 to the Borrower Patent and Trademark Security Agreement, dated as of May 31, 1995 (the Original Patent and Trademark Security Agreement as amended, supplemented or otherwise modified by such Amendment No. 1, the "Existing Patent and Trademark Security Agreement"), pursuant to which the Company granted to the Agent, for the benefit of the Lenders, a security interest in all of the Collateral (as defined in the Existing Patent and Trademark Security Agreement) as collateral security for the Obligations (as defined in the Existing Patent and Trademark Security Agreement); WHEREAS, the Company, the Agent and the Lenders have agreed to restructure the obligations of the Company under the Existing Agreements by means of, among other things, the execution and delivery of the Indenture and the Master Restructuring Agreement, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "MRA"), among the Company, the Agent and the Lenders, among others; and WHEREAS, it is a condition precedent to the effectiveness of the MRA and the obligation of the Agent and the Lenders to consummate the restructuring contemplated thereby, that, among other things, the Company shall have executed and delivered this Agreement to the Trustee, for the benefit of the Holders. NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Lenders to restructure the obligations of the Company under the Existing Agreements and to induce the Trustee to enter into the Indenture, the Company hereby agrees with the Trustee, for the benefit of the Holders, that the Existing Patent and Trademark Security Agreement shall be and hereby is amended and restated in its entirety as follows: 1. Defined Terms. (a) Unless otherwise defined herein, capitalized terms defined in the Indenture are used herein as defined therein. The following terms shall have the following meanings: "Agreement": this Amended and Restated Company Patent and Trademark Security Agreement, as the same may be amended, supplemented, waived or otherwise modified from time to time. 3 "Code": the Uniform Commercial Code as from time to time in effect in the State of New York. "Collateral": as defined in Section 2 of this Agreement. "General Intangibles": as defined in Section 9-106 of the Code, including, without limitation, all Patents and Trademarks now or hereafter owned by the Company to the extent such Patents and Trademarks would be included in General Intangibles under the Code. "Obligations": as defined in the Company Security Agreement. "Patent Licenses": all license agreements with any other Person in connection with any of the Patents or such other Person's patents, whether the Company is a licensor or a licensee under any such license agreement, including, without limitation, the license agreements listed on Schedule 1 attached hereto and made a part hereof, subject, in each case, to the terms of such license agreements, and the right to prepare for sale, sell and advertise for sale, all Inventory (as defined in the Company Security Agreement) now or hereafter covered by such licenses. "Patents": all patents, patent applications and patentable inventions, including, without limitation, all patents and patent applications identified in Schedule 1 attached hereto and made a part hereof, and including without limitation (a) all inventions and improvements described and claimed therein, and patentable inventions, (b) the right to sue or otherwise recover for any and all past, present and future infringements and misappropriations thereof, (c) all income, royalties, damages and other payments now and hereafter due and/or payable with respect thereto (including, without limitation, payments under all licenses entered into in connection therewith, and damages and payments for past or future infringements thereof), and (d) all rights corresponding thereto and all reissues, divisions, continuations, continuations-in-part, substitutes, renewals, and extensions thereof, all improvements thereon, and all other rights of any kind whatsoever of the Company accruing thereunder or pertaining thereto (Patents and Patent Licenses being, collectively, the "Patent Collateral"). "Trademark Licenses": all license agreements with any other Person in connection with any of the Trademarks or such other Person's names or trademarks, whether the Company is a licensor or a licensee under any such license agreement, including, without limitation, the license agreements listed on Schedule 2 attached hereto and made a part hereof, subject, in each case, to the terms of such license agreements, and the right to prepare for sale, sell and advertise for sale, all Inventory (as defined in the Company Security Agreement) now or hereafter covered by such licenses. 4 "Trademarks": all trademarks, service marks, trade names, trade dress or other indicia of trade origin, trademark and service mark registrations, and applications for trademark or service mark registrations, and any renewals thereof, including, without limitation, each registration and application identified in Schedule 2 attached hereto and made a part hereof, and including without limitation (a) the right to sue or otherwise recover for any and all past, present and future infringements and misappropriations thereof, (b) all income, royalties, damages and other payments now and hereafter due and/or payable with respect thereto (including, without limitation, payments under all licenses entered into in connection therewith, and damages and payments for past or future infringements thereof), and (c) all rights corresponding thereto and all other rights of any kind whatsoever of the Company accruing thereunder or pertaining thereto, together in each case with the goodwill of the business connected with the use of, and symbolized by, each such trademark, service mark, trade name, trade dress or other indicia of trade origin (Trademarks and Trademark Licenses being, collectively, the "Trademark Collateral"). (b) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section and paragraph references are to this Agreement unless otherwise specified. (c) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 2. Grant of Security Interest. The Company hereby confirms and reaffirms its grant of a security interest in the Collateral (as defined in the Existing Patent and Trademark Security Agreement) pursuant to the Existing Patent and Trademark Security Agreement, which security interest is hereby amended and restated to be solely in favor of the Trustee, for the ratable benefit of the Holders, and shall secure only the Obligations, and which Existing Patent and Trademark Security Agreement is replaced hereby. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, the Company hereby assigns, pledges and grants to the Trustee, for the ratable benefit of the Holders, a security interest in all of the following property now owned or at any time hereafter acquired by the Company or in which the Company now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"): (a) all Trademarks; (b) all Trademark Licenses; (c) all Patents; (d) all Patent Licenses; 5 (e) all General Intangibles connected with the use of or symbolized by the Trademarks and Patents; and (f) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing and all collateral security and guarantees given by any person with respect to any of the foregoing. 3. Company Remains Liable; Limitations on Trustee's and Holders' Obligations. Anything herein to the contrary notwithstanding, (a) the Company shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Trustee of any of the rights hereunder shall not release the Company from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) neither the Trustee nor any Holder shall have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Trustee or any Holder be obligated to perform any of the obligations or duties of the Company thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 4. Trustee's Appointment as Attorney-in-Fact. (a) Powers. The Company hereby irrevocably constitutes and appoints the Trustee and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Company and in the name of the Company or in its own name, from time to time in the Trustee's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, the Company hereby gives the Trustee the power and right, on behalf of the Company, without notice to or assent by the Company, to do the following: (i) to execute and deliver any and all agreements, instruments, documents, and papers as the Trustee may reasonably request to evidence the Trustee's and the Holders' security interest in any of the Collateral; (ii) in the name of the Company or its own name, or otherwise, to take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any General Intangible (to the extent that any of the foregoing constitute Collateral) or with respect to any other Collateral and to file any claim or to take any other action or institute any proceeding in any court of law or equity or otherwise deemed appropriate by the Trustee for the purpose of collecting any and all such moneys due under any such General Intangible or with respect to any such other Collateral whenever payable; 6 (iii) to pay or discharge Liens placed on the Collateral, other than Liens permitted under this Agreement or Permitted Liens; and (iv) (A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Trustee or as the Trustee shall direct; (B) to ask for, or demand, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any of the Collateral; (C) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any applications, suits, actions or proceedings at law or in equity in any court of competent jurisdiction or in the United States Patent and Trademark Office to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Company with respect to any of the Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Trustee may deem appropriate; (G) subject to any pre-existing rights or licenses, to assign any Patent or Trademark constituting Collateral (along with the goodwill of the business to which any such Trademark pertains), for such term or terms, on such conditions, and in such manner, as the Trustee shall in its sole discretion determine; and (H) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Trustee were the absolute owner thereof for all purposes, and to do, at the Trustee's option and the Company's expense, at any time, or from time to time, all acts and things which the Trustee deems necessary to protect, preserve or realize upon the Collateral and the Trustee's and the Holders' Liens thereon and to effect the intent of this Agreement, all as fully and effectively as the Company might do. The Company hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable until payment in full of the Securities and the other Obligations then due and owing. (b) Other Powers. The Company also authorizes the Trustee to execute, in connection with any sale provided for in Section 7 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) No Duty on the Part of Trustee or Holders. The powers conferred on the Trustee and the Holders hereunder are solely to protect the Trustee's and the Holders' interests in the Collateral and shall not impose any duty upon the Trustee or any Holder to exercise any such powers. The Trustee and the Holders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to the Company for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. 7 5. Performance by Trustee of Company's Obligations. If the Company fails to perform or comply with any of its agreements contained herein and the Trustee, as provided for by the terms of this Agreement, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the reasonable expenses of the Trustee incurred in connection with such performance or compliance, together with interest thereon at a rate per annum equal to 12%, shall be payable by the Company to the Trustee on demand and shall constitute Obligations secured hereby. 6. Proceeds. It is agreed that if an Event of Default shall occur and be continuing, (a) all Proceeds of any Collateral received by the Company consisting of cash, checks and other near-cash items shall be held by the Company in trust for the Trustee and the Holders, segregated from other funds of the Company, and at the request of the Trustee shall, forthwith upon receipt by the Company, be turned over to the Trustee in the exact form received by the Company (duly indorsed by the Company to the Trustee, if required by the Trustee), and (b) any and all such Proceeds received by the Trustee (whether from the Company or otherwise) may, in the sole discretion of the Trustee, be held by the Trustee, for the ratable benefit of the Holders, as collateral security for the Obligations (whether matured or unmatured), and/or then or at any time thereafter may be applied by the Trustee against, the Obligations then due and owing. Any balance of such Proceeds remaining after the payment in full of the Securities and any other Obligations then due and owing shall be paid over to the Company or to whomsoever may be lawfully entitled to receive the same. 7. Remedies. If an Event of Default shall occur and be continuing, the Trustee, on behalf of the Holders, may exercise all rights and remedies of a secured party under the Code, and, to the extent permitted by law, all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations. Without limiting the generality of the foregoing, the Trustee, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Company or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances, to the extent permitted by law, forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Trustee or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Trustee or any Holder shall have the right, to the extent permitted by law, upon any such sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Company, which right or equity is hereby waived or released. The Company further agrees, at the Trustee's request, upon the occurrence and during the continuance of an Event of Default, to assemble the Collateral and make it available to the Trustee at places which the Trustee shall reasonably select, whether at the Company's premises or elsewhere. In the event of any sale, assignment, or other disposition of any of the Collateral, the goodwill of the business connected with and symbolized by any Trademark Collateral subject to such disposition shall be included, and the 8 Company shall supply to the Trustee or its designee the Company's know-how and expertise relating to the Collateral subject to such disposition, and the Company's notebooks, studies, reports, records, documents and things embodying the same or relating to the inventions, processes or ideas covered by, and to the manufacture of any products under or in connection with, the Collateral subject to such disposition, and the Company's customer's lists, studies and surveys and other records and documents relating to the distribution, marketing, advertising and sale of products relating to the Collateral subject to such disposition. The Trustee shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Trustee and the Holders hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations then due and owing, and only after such application and after the payment by the Trustee of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Trustee account for the surplus, if any, to the Company. To the extent permitted by applicable law, the Company waives all claims, damages and demands it may acquire against the Trustee or any Holder arising out of the repossession, retention or sale of the Collateral, other than any such claims, damages and demands that may arise from the gross negligence or willful misconduct of any of them. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition. The Company shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the then outstanding Obligations, including the reasonable fees and disbursements of any attorneys employed by the Trustee or any Holder to collect such deficiency. 8. Limitation on Duties Regarding Preservation of Collateral. The Trustee's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Trustee deals with similar property for its own account. None of the Trustee, any Holder, nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Company or any other Person. 9. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are powers coupled with an interest and are irrevocable until payment in full of the Securities and any other Obligations then due and owing. 10. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9 11. Section Headings. The Section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 12. No Waiver; Cumulative Remedies. None of the Trustee nor any Holder shall by any act (except pursuant to Section 13 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Trustee or any Holder, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Trustee or any Holder of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Trustee or such Holder would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 13. Amendments in Writing; Successors and Assigns. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Article IX of the Indenture. This Agreement shall be binding upon the successors and assigns of the Company and shall inure to the benefit of the Trustee and the Holders and their respective successors and assigns, except that the Company may not assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Trustee. 14. Notices. All notices, requests and demands to or upon the respective parties hereto shall be made in accordance with Section 12.2 of the Indenture. 15. Authority of Trustee. The Company acknowledges that the rights and responsibilities of the Trustee under this Agreement with respect to any action taken by the Trustee or the exercise or non-exercise by the Trustee of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as among the Trustee and the Holders, be governed by the Indenture and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Trustee and the Company, the Trustee shall be conclusively presumed to be acting as trustee for the Holders with full and valid authority so to act or refrain from acting, and the Company shall not be under any obligation to make any inquiry respecting such authority. 16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 17. Release of Collateral and Termination. (a) At such time as the payment in full of the Securities and other Obligations then due and owing shall have occurred, the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations 10 (other than those expressly stated to survive such termination) of the Trustee and the Company hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the Company unless such reversion would be inconsistent with the Subordination Agreement. Upon request of the Company following any such termination, the Trustee shall deliver (at the sole cost and expense of the Company) to the Company any Collateral held by the Trustee hereunder, and execute and deliver (at the sole cost and expense of such Company) to the Company such documents as the Company shall reasonably request to evidence such termination. (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by the Company in a transaction permitted by the Indenture and the Bank Credit Agreement, then the Trustee shall execute and deliver to the Company (at the sole cost and expense of the Company) all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. 18. Subordination. Each of the Company and the Trustee (for itself in that capacity and on behalf of the Holders) acknowledge that the security interests in the Collateral granted, confirmed and/or reaffirmed pursuant to this Agreement or otherwise held by the Trustee or any Holder are subordinated in priority to the security interests in the Collateral held by the holder of the Senior Indebtedness as provided in, and the rights (including the right to payment) and remedies of the Trustee hereunder and of the Holders, are subordinated and subject to the terms and provisions of, the Subordination Agreement. 19. Inconsistent Provisions. In the event of any inconsistency or conflict between the provisions of this Agreement and the provisions of the Company Security Agreement, the provisions of the Company Security Agreement shall govern. 20. Counterparts. This Amendment may be executed by the parties hereto in any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 21. Incorporation of Certain Indenture Provisions. All provisions of Article VII of the Indenture shall be construed as extending to and including all of the rights, duties and obligations imposed upon the Trustee under this Agreement as fully and for all purposes as if said Article VII were contained in this Agreement. 11 IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and delivered as of the date first above written. LONDON FOG INDUSTRIES, INC. By: --------------------------------- Name: Edward M. Krell Title: Chief Financial Officer Schedule 1 PATENTS AND PATENT LICENSES Schedule 2 TRADEMARKS AND TRADEMARK LICENSES EXHIBIT D AMENDED AND RESTATED COMPANY PLEDGE AGREEMENT AMENDED AND RESTATED COMPANY PLEDGE AGREEMENT, dated as of February 27, 1998, made by London Fog Industries, Inc., a Delaware corporation (the "Company"), in favor of IBJ Schroder Bank & Trust Company, as trustee (in such capacity, the "Trustee") for the Holders under, and as defined in, the Indenture, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Indenture"), between the Company and the Trustee. W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Credit Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Original Agent") for the several banks and other financial institutions from time to time parties thereto (the "Original Lenders") and the Original Lenders, the Original Lenders made certain loans and other extensions of credit to the Company; WHEREAS, in connection with the execution and delivery of the Original Credit Agreement, the Company executed and delivered to the Original Agent, for the benefit of the Original Lenders, the Borrower Pledge Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Pledge Agreement"), pursuant to which the Company pledged to the Original Agent, for the benefit of the Original Lenders, the Collateral (as defined in the Original Pledge Agreement) as collateral security for the Obligations (as defined in the Original Pledge Agreement); WHEREAS, the Company, the Original Agent and the Original Lenders agreed to restructure the obligations of the Company under the Original Credit Agreement by means of, among other things, the execution and delivery of the Master Restructuring Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Existing MRA"), among the Company, the Original Agent and the Original Lenders, among others; WHEREAS, in connection with the execution and the delivery of the Existing MRA, the Company executed and delivered (a) the Term Loan Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Term Loan Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Term Loan Agent") for the several banks and other financial institutions from time to time parties thereto (the "Term Loan Lenders") and the Term 2 Loan Lenders and (b) the Note Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Note Agreement" and, together with the Term Loan Agreement, collectively, the "Existing Agreements"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity and also in its capacity as the Term Loan Agent, the "Agent") for the several banks and other financial institutions from time to time parties thereto (the "Note Lenders" and, together with the Term Loan Lenders, collectively, the "Lenders") and the Note Lenders, pursuant to which the Lenders made certain loans to the Company; WHEREAS, in connection with the execution and delivery of the Existing MRA and the Existing Agreements, the Company executed and delivered to the Agent, for the benefit of the Lenders, Amendment No. 1 to the Borrower Pledge Agreement, dated as of May 31, 1995 (the Original Pledge Agreement as amended, supplemented or otherwise modified by such Amendment No. 1, the "Existing Pledge Agreement"), pursuant to which the Company pledged to the Agent, for the benefit of the Lenders, the Collateral (as defined in the Existing Pledge Agreement) as collateral security for the Obligations (as defined in the Existing Pledge Agreement); WHEREAS, the Company, the Agent and the Lenders have agreed to restructure the obligations of the Company under the Existing Agreements by means of, among other things, the execution and delivery of the Indenture and the Master Restructuring Agreement, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "MRA"), among the Company, the Agent and the Lenders, among others; and WHEREAS, it is a condition precedent to the effectiveness of the MRA and the obligation of the Agent and the Lenders to consummate the restructuring contemplated thereby, that, among other things, the Company shall have executed and delivered this Agreement to the Trustee, for the benefit of the Holders. NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Lenders to restructure the obligations of the Company under the Existing Agreements and to induce the Trustee to enter into the Indenture, the Company hereby agrees with the Trustee, for the benefit of the Holders, that the Existing Pledge Agreement shall be and hereby is amended and restated in its entirety as follows: 1. Defined Terms. (a) Unless otherwise defined herein, terms defined in the Indenture and used herein shall have the meanings given to them in the Indenture. (b) The following terms shall have the following meanings: "Agreement": this Amended and Restated Company Pledge Agreement, as the same may be amended, modified or otherwise supplemented from time to time. 3 "Code": the Uniform Commercial Code from time to time in effect in the State of New York. "Collateral": the Pledged Securities and all Proceeds. "Collateral Account": any account established to hold money Proceeds, maintained under the sole dominion and control of the Trustee, subject to withdrawal by the Trustee for the account of the Holders only as provided in Subsection. "Foreign Subsidiary": any Subsidiary of the Company organized under the laws of any jurisdiction outside the United States of America. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Intercompany Note": promissory notes evidencing intercompany loans made by (a) the Company in favor of any of its Subsidiaries, (b) any Subsidiary of the Company in favor of the Company or (c) any Subsidiary of the Company in favor of any other Subsidiary of the Company. "Issuers": the collective reference to the companies identified on Schedule 1 attached hereto as the issuers of the Pledged Stock and the Pledged Notes; individually, each an "Issuer." "Obligations": as defined in the Company Security Agreement. "Pledged Notes": all Intercompany Notes at any time issued to the Company and all other promissory notes issued to or held by the Company (other than promissory notes issued in connection with extensions of trade credit by the Company in the ordinary course of business). "Pledged Securities": all of the Pledged Stock and Pledged Notes. "Pledged Stock": the shares of capital stock listed on Schedule 1 hereto, together with all stock certificates, options or rights of any nature whatsoever that may be issued or granted by any Issuer to the Company while this Agreement is in effect; provided that in no event shall more than 65% of the issued and outstanding shares of capital stock of any Foreign Subsidiary be Pledged Stock. "Proceeds": all "proceeds" as such term is defined in Section 9-306(1) of the Uniform Commercial Code in effect in the State of New York on the date hereof and, in any event, shall include, without limitation, all dividends or other income from the Pledged Securities, collections thereon or distributions with respect thereto. 4 "Requirement of Law": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. (c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 2. Pledge; Grant of Security Interest. The Company hereby confirms and reaffirms its grant of a security interest in the Collateral (as defined in the Existing Pledge Agreement) pursuant to the Existing Pledge Agreement, which security interest is hereby amended and restated to be solely in favor of the Trustee, for the ratable benefit of the Holders, and shall secure only the Obligations, and which Existing Pledge Agreement is replaced hereby. The Company hereby delivers to the Trustee, for the ratable benefit of the Holders, all the Pledged Securities and hereby grants to the Trustee, for the ratable benefit of the Holders, a security interest in the Collateral, prior and superior in right to any other Person, other than the holders of the Senior Indebtedness as set forth in the Subordination Agreement and the Bank Credit Agreement, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. 3. Stock Powers and Endorsements. Concurrently with the delivery to the Trustee of each certificate representing one or more shares of Pledged Stock to the Trustee, the Company shall deliver an undated stock power covering such certificate, duly executed in blank by the Company with, if the Trustee so requests, signature guaranteed. All Pledged Notes, when delivered, shall be duly endorsed in blank. 4. Representations and Warranties. The Company represents and warrants that: (a) The shares of Pledged Stock constitute all the issued and outstanding shares of all classes of the capital stock of each Issuer. (b) All the shares of the Pledged Stock have been duly and validly issued and are fully paid and nonassessable. (c) Each of the Pledged Notes constitutes the legal, valid and binding obligation of the obligor with respect thereto, enforceable in accordance with its terms, except to the extent that the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium 5 or similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law). (d) The Company is the record and beneficial owner of, and has good and marketable title to, the Pledged Securities, free of any and all Liens or options in favor of, or claims of, any other Person, except the security interest created by this Agreement and the Bank Credit Agreement. (e) Upon delivery to the Trustee of the stock certificates and instruments evidencing the Pledged Securities, the security interest created by this Agreement will constitute a valid, perfected security interest in the Collateral, prior and superior in right to any other Person other than the holders of the Senior Indebtedness as set forth in the Subordination Agreement and the Bank Credit Agreement, enforceable in accordance with its terms against all creditors of the Company and any Persons purporting to purchase any Collateral from the Company. 5. Covenants. The Company covenants and agrees with the Trustee and the Holders that, from and after the date of this Agreement until this Agreement is terminated and the security interests created hereby are released: (a) If the Company shall, as a result of its ownership of the Pledged Stock, become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any shares of the Pledged Stock, or otherwise in respect thereof, the Company shall accept the same as the agent of the Trustee and the Holders, hold the same in trust for the Trustee and the Holders and deliver the same forthwith to the Trustee in the exact form received, duly indorsed by the Company to the Trustee, if required, together with an undated stock power covering such certificate duly executed in blank by the Company and with, if the Trustee so requests, signature guaranteed, to be held by the Trustee, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of the Pledged Securities, upon the liquidation or dissolution of any Issuer shall be paid over to the Trustee, to be held by it hereunder as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of the Pledged Securities or any property shall be distributed upon or with respect to the Pledged Securities pursuant to the recapitalization or reclassification of the capital of any Issuer or pursuant to the reorganization thereof, the property so distributed shall be delivered to the Trustee to be held by it hereunder as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of the Pledged Securities shall be received by the Company, the Company shall, until such money or property is paid or delivered to the Trustee, hold such money or property in trust for the Holders, segregated from other funds of the Company, as additional collateral security for the Obligations. 6 (b) Without the prior written consent of the Trustee, the Company will not (i) vote to enable, or take any other action to permit, any Issuer to issue any stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock or other equity securities of any nature of any Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Collateral, (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Collateral, or any interest therein, except for the security interests created by this Agreement and the Bank Credit Agreement or (iv) enter into any agreement or undertaking restricting the right or ability of the Company or the Trustee to sell, assign or transfer any of the Collateral. (c) The Company shall maintain the security interest created by this Agreement as a perfected security interest in the Collateral, prior and superior in right to any other Person, other than the holders of the Senior Indebtedness as set forth in the Subordination Agreement and the Bank Credit Agreement, and shall defend such security interest against claims and demands of all Persons whomsoever. At any time and from time to time, upon the written request of the Trustee, and at the sole expense of the Company, the Company will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Trustee may reasonably request for the purposes of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Trustee, duly endorsed in a manner satisfactory to the Trustee, to be held as Collateral pursuant to this Agreement. (d) The Company shall pay, and save the Trustee and the Holders harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement. 6. Cash Dividends; Voting Rights. Unless an Event of Default shall have occurred and be continuing and the Trustee shall have given notice to the Company of the Trustee's intent to exercise its corresponding rights pursuant to Section below, the Company shall be permitted to receive all cash dividends in respect of the Pledged Stock and all payments in respect of the Pledged Notes, in each case (a) paid in the normal course of business of each Issuer and (b) consistent with past practice, to the extent permitted by the Indenture, and to exercise all voting and corporate rights with respect to the Pledged Securities; provided, however, that no vote shall be cast or corporate right exercised or other action taken which, in the Trustee's reasonable judgment, would impair the Collateral or which would be inconsistent with or result in any violation of any provision of this Agreement, the Indenture or any Security Document. 7 7. Rights of the Holders and the Trustee. (a) All money Proceeds received by the Trustee hereunder shall be held by the Trustee for the benefit of the Holders in a Collateral Account. All Proceeds while held by the Trustee in a Collateral Account (or by the Company in trust for the Trustee and the Holders) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in subsection . (b) If an Event of Default shall occur and be continuing and the Trustee shall give notice of its intent to exercise such rights to the Company, (i) the Trustee shall have the right to receive any and all cash dividends or other amounts paid in respect of the Pledged Securities and make application thereof to the Obligations in such order as the Trustee may determine, and (ii) all shares of the Pledged Securities shall be registered in the name of the Trustee or its nominee, and the Trustee or its nominee may thereafter exercise (A) all voting, corporate and other rights pertaining to such shares of the Pledged Securities at any meeting of shareholders of any Issuer or otherwise and (B) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to such shares of the Pledged Securities as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of any Issuer, or upon the exercise by the Company or the Trustee of any right, privilege or option pertaining to such shares of the Pledged Securities, and in connection therewith, the right to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Trustee may determine), all without liability except to account for property actually received by it, but the Trustee shall have no duty to the Company to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. 8. Remedies. (a) If an Event of Default shall have occurred and be continuing, at any time at the Trustee's election, the Trustee may apply all or any part of Proceeds held in any Collateral Account in payment of the Obligations in such order as the Trustee may elect. (b) If an Event of Default shall have occurred and be continuing, the Trustee, on behalf of the Holders, may exercise, in addition to all other rights and remedies granted in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Trustee, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Company or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of the Trustee or any Holder or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery 8 without assumption of any credit risk. The Trustee or any Holder shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Company, which right or equity is hereby waived and released. The Trustee shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Trustee and the Holders hereunder, including, without limitation, reasonable attorneys' fees and disbursements of counsel to the Trustee, to the payment in whole or in part of the Obligations, in such order as the Trustee may elect, and only after such application and after the payment by the Trustee of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Trustee account for the surplus, if any, to the Company. To the extent permitted by applicable law, the Company waives all claims, damages and demands it may acquire against the Trustee or any Holder arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition. The Company shall remain liable for any deficiency if the proceeds of any sale or other disposition of Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by the Trustee or any Holder to collect such deficiency. 9. Registration Rights; Private Sales. (a) If the Trustee shall determine to exercise its right to sell any or all of the Pledged Stock pursuant to Section hereof, and if in the opinion of the Trustee it is necessary or advisable to have the Pledged Stock, or that portion thereof to be sold, registered under the provisions of the Securities Act, the Company will cause each Issuer thereof to (i) execute and deliver, and cause the directors and officers of such Issuer to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts as may be, in the opinion of the Trustee, necessary or advisable to register the Pledged Stock, or that portion thereof to be sold, under the provisions of the Securities Act, (ii) to use its best efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of the Pledged Stock, or that portion thereof to be sold, and (iii) to make all amendments thereto and/or to the related prospectus which, in the opinion of the Trustee, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Commission applicable thereto. The Company agrees to cause the Issuers to comply with the provisions of the securities or "Blue Sky" laws of any and all jurisdictions which the Trustee shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) which will satisfy the provisions of subsection 11(a) of the Securities Act. (b) The Company recognizes that the Trustee may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, 9 among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Company acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Trustee shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit each Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so. (c) The Company further agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Stock pursuant to this Section 9 valid and binding and in compliance with any and all other applicable Requirements of Law. The Company further agrees that a breach of any of the covenants contained in this Section 9 will cause irreparable injury to the Trustee and the Holders, that the Trustee and the Holders have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 9 shall be specifically enforceable against the Company, and the Company hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under the Indenture. 10. Irrevocable Authorization and Instruction to the Issuers. The Company hereby authorizes and instructs each Issuer to comply with any instruction received by it from the Trustee in writing that (a) states that an Event of Default has occurred and (b) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from the Company, and the Company agrees that each Issuer shall be fully protected in so complying. 11. Trustee's Appointment as Attorney-in-Fact. (a) The Company hereby irrevocably constitutes and appoints the Trustee and any officer or agent of the Trustee, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Company and in the name of the Company or in the Trustee's own name, from time to time in the Trustee's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, including, without limitation, any financing statements, endorsements, assignments or other instruments of transfer. (b) The Company hereby ratifies all that said attorneys shall lawfully do or cause to be done pursuant to the power of attorney granted in subsection . All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released. 12. Duty of Trustee. The Trustee's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of 10 the Code or otherwise, shall be to deal with it in the same manner as the Trustee deals with similar securities and property for its own account, except that the Trustee shall have no obligation to invest funds held in any Collateral Account and may hold the same as demand deposits. Neither the Trustee, any Holder nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Company or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. 13. Execution of Financing Statements. Pursuant to Section 9-402 of the Code, the Company authorizes the Trustee to file financing statements with respect to the Collateral without the signature of the Company in such form and in such filing offices as the Trustee reasonably determines appropriate to perfect the security interests of the Trustee under this Agreement. A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 14. Authority of Trustee. The Company acknowledges that the rights and responsibilities of the Trustee under this Agreement with respect to any action taken by the Trustee or the exercise or non-exercise by the Trustee of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Trustee and the Holders, be governed by the Indenture and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Trustee and the Company, the Trustee shall be conclusively presumed to be acting as agent for the Holders with full and valid authority so to act or refrain from acting, and neither the Company nor the Issuers shall be under any obligation, or entitlement, to make any inquiry respecting such authority. 15. Notices. All notices, requests and demands to or upon the respective parties hereto shall be made in accordance with Section 12.2 of the Indenture. 16. Integration. This Agreement represents the agreement of the Company with respect to the subject matter hereof and there are no promises or representations by the Trustee or any Holder relative to the subject matter hereof not reflected herein. 17. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 18. Amendments in Writing; No Waiver; Cumulative Remedies. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Article IX of the Indenture. This Agreement shall be binding upon the successors and assigns of the Company and shall inure to the benefit of the 11 Trustee and the Holders and their respective successors and assigns, except that the Company may not assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Trustee. 19. Section Headings. The section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 20. Successors and Assigns. This Agreement shall be binding upon the successors and assigns of the Company and shall inure to the benefit of the Trustee and the Holders and their successors and assigns. 21. Release of Collateral and Termination. (a) At such time as the payment in full of the Securities and the other Obligations then due or owing shall have occurred, the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Trustee and the Company hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the Company, unless such reversion would be inconsistent with the Subordination Agreement. Upon request of the Company following any such termination, the Trustee shall deliver (at the sole cost and expense of the Company) to the Company any Collateral held by the Trustee hereunder, and execute and deliver (at the sole cost and expense of such Company) to the Company such documents as the Company shall reasonably request to evidence such termination. (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by the Company in a transaction permitted by the Indenture and the Bank Credit Agreement, then the Trustee shall execute and deliver to the Company (at the sole cost and expense of the Company) all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. 22. Subordination. Each of the Company and the Trustee (for itself in that capacity and on behalf of the Holders) acknowledge that the security interests in the Collateral granted, confirmed and/or reaffirmed pursuant to this Agreement or otherwise held by the Trustee or any Holder are subordinated in priority to the security interests in the Collateral held by the holder of the Senior Indebtedness as provided in, and the rights (including the right to payment) and remedies of the Trustee hereunder and of the Holders are subordinated and subject to the terms and provisions of, the Subordination Agreement. 23. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 24. Incorporation of Certain Indenture Provisions. All provisions of Article VII of the Indenture shall be construed as extending to and including all of the rights, duties and 12 obligations imposed upon the Trustee under this Agreement as fully and for all purposes as if said Article VII were contained in this Agreement. 13 IN WITNESS WHEREOF, the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written. LONDON FOG INDUSTRIES, INC. By: ------------------------------ Name: Edward M. Krell Title: Chief Financial Officer ACKNOWLEDGEMENT AND CONSENT Each of the undersigned hereby acknowledges receipt of a copy of the Amended and Restated Company Pledge Agreement, dated as of February 27, 1998, made by London Fog Industries, Inc. in favor of IBJ Schroder Bank & Trust Company, as trustee (in such capacity, the "Trustee") for the Holders (as defined in the Pledge Agreement). Each of the undersigned agrees for the benefit of the Trustee and the Holders as follows: 25. The undersigned will be bound by the terms of the Pledge Agreement and will comply with such terms insofar as such terms are applicable to the undersigned. 26. The undersigned will notify the Trustee promptly in writing of the occurrence of any of the events described in subsection of the Pledge Agreement. 27. The terms of subsections 9(a) and of the Pledge Agreement shall apply to it, mutatis mutandis, with respect to all actions that may be required of it under or pursuant to or arising out of Section of the Pledge Agreement. CLIPPER MIST, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 2 LONDON FOG RAINCOATS, LIMITED By: ---------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 LONDON FOG SPORTSWEAR, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 MATTHEW MANUFACTURING CO., INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 3 PTI TOP COMPANY, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 THE SCRANTON OUTLET CORPORATION By: ---------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 STAR SPORTSWEAR MANUFACTURING CORP. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 Schedule 1 DESCRIPTION OF PLEDGED STOCK
Class of Stock Certificate Issuer Stock* No. No. of Shares - ----------------------------------------- -------------------- ------------------------ --------------------
- -------- * Stock is assumed to be common stock unless otherwise indicated. EXHIBIT E AMENDED AND RESTATED COMPANY SECURITY AGREEMENT AMENDED AND RESTATED COMPANY SECURITY AGREEMENT, dated as of February 27, 1998, made by London Fog Industries, Inc., a Delaware corporation (the "Company") in favor of IBJ Schroder Bank & Trust Company, as trustee (in such capacity, the "Trustee") for the Holders under, and as defined in, the Indenture, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Indenture"), between the Company and the Trustee. W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Credit Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Original Agent") for the several banks and other financial institutions from time to time parties thereto (the "Original Lenders") and the Original Lenders, the Original Lenders made certain loans and other extensions of credit to the Company; WHEREAS, in connection with the execution and delivery of the Original Credit Agreement, the Company executed and delivered to the Original Agent, for the benefit of the Original Lenders, the Borrower Security Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Security Agreement"), pursuant to which the Company pledged to the Original Agent, for the benefit of the Original Lenders, all of the Collateral (as defined in the Original Security Agreement) as collateral security for the Obligations (as defined in the Original Security Agreement); WHEREAS, the Company, the Original Agent and the Original Lenders agreed to restructure the obligations of the Company under the Original Credit Agreement by means of, among other things, the execution and delivery of the Master Restructuring Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Existing MRA"), among the Company, the Original Agent and the Original Lenders, among others; WHEREAS, in connection with the execution and the delivery of the Existing MRA, the Company executed and delivered (a) the Term Loan Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Term Loan Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Term Loan Agent") for the several banks and other 2 financial institutions from time to time parties thereto (the "Term Loan Lenders") and the Term Loan Lenders and (b) the Note Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Note Agreement" and, together with the Term Loan Agreement, collectively, the "Existing Agreements"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity and also in its capacity as the Term Loan Agent, the "Agent") for the several banks and other financial institutions from time to time parties thereto (the "Note Lenders" and, together with the Term Loan Lenders, collectively, the "Lenders") and the Note Lenders, pursuant to which the Lenders made certain loans to the Company; WHEREAS, in connection with the execution and delivery of the Existing MRA and the Existing Agreements, the Company executed and delivered to the Agent, for the benefit of the Lenders, Amendment No. 1 to the Borrower Security Agreement, dated as of May 31, 1995 (the Original Security Agreement as amended, supplemented or otherwise modified by such Amendment No. 1, the "Existing Security Agreement"), pursuant to which the Company granted to the Agent, for the benefit of the Lenders, a security interest in all the Collateral (as defined in the Existing Security Agreement) as collateral security for the Obligations (as defined in the Existing Security Agreement); WHEREAS, the Company, the Agent and the Lenders have agreed to restructure the obligations of the Company under the Existing Agreements by means of, among other things, the execution and delivery of the Indenture and the Master Restructuring Agreement, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "MRA"), among the Company, the Agent and the Lenders, among others; and WHEREAS, it is a condition precedent to the effectiveness of the MRA and the obligation of the Agent and the Lenders to consummate the restructuring contemplated thereby, that, among other things, the Company shall have executed and delivered this Agreement to the Trustee, for the benefit of the Holders. NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Lenders to restructure the obligations of the Company under the Existing Agreements and to induce the Trustee to enter into the Indenture, the Company hereby agrees with the Trustee, for the benefit of the Holders, that the Existing Security Agreement shall be and hereby is amended and restated in its entirety as follows: 1 Defined Terms. 1.1 Definitions. (a) Unless otherwise defined herein, terms defined in the Indenture and used herein shall have the meanings given to them in the Indenture, and the following terms which are defined in the Uniform Commercial Code in effect in the State of New York on the date hereof are used herein as so defined: Accounts, Chattel Paper, Documents, Equipment, Farm Products, General Intangibles, Instruments, Inventory, Investment Property and Proceeds. 3 (b) The following terms shall have the following meanings: "Agreement": this Amended and Restated Company Security Agreement, as the same may be amended, modified or otherwise supplemented from time to time. "Code": the Uniform Commercial Code as from time to time in effect in the State of New York. "Collateral": as defined in Section 2 hereof. "Collateral Account": any collateral account established by the Trustee as provided in subsection or subsection hereof. "Contracts": all contracts, agreements, instruments and indentures in any form, and portions thereof, to which the Company is a party or under which the Company has any right, title or interest or to which the Company or any property of the Company is subject, as the same may from time to time be amended, supplemented or otherwise modified, including, without limitation, (a) all rights of the Company to receive moneys due and to become due to it thereunder or in connection therewith, (b) all rights of the Company to damages arising out of, or for, breach or default in respect thereof and (c) all rights of the Company to perform and to exercise all remedies thereunder, in each case to the extent the grant by the Company of a security interest pursuant to this Agreement in its right, title and interest in such contract, agreement, instrument or indenture is not prohibited by such contract, agreement, instrument or indenture without the consent of any other party thereto, would not give any other party to such contract, agreement, instrument or indenture the right to terminate its obligations thereunder, or is permitted with consent if all necessary consents to such grant of a security interest have been obtained from the other parties thereto (it being understood that the foregoing shall not be deemed to obligate the Company to obtain such consents); provided, that the foregoing limitation shall not affect, limit, restrict or impair the grant by the Company of a security interest pursuant to this Agreement in any Account or any money or other amounts due or to become due under any such contract, agreement, instrument or indenture. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Obligations": the unpaid principal of and interest on (including, without limitation, interest accruing after the Stated Maturity of the Securities and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Company, whether or not a claim for post- filing or post-petition interest is allowed in such proceeding) the Securities and all other obligations and liabilities of the Company to the Trustee or to any Holder, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, the Indenture, the MRA, the other Restructuring Documents (as defined in the MRA) or any other document made, delivered or given in 4 connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees, charges and disbursements of counsel to the Trustee or one counsel selected by the Holders that are required to be paid by the Company pursuant hereto and thereto) or otherwise. "Patent Licenses": all license agreements with any other Person in connection with any of the Patents or such other Person's patents, whether the Company is a licensor or a licensee under any such license agreement, including, without limitation, the license agreements listed on Schedule 1 attached hereto and made a part hereof, subject, in each case, to the terms of such license agreements, and the right to prepare for sale, sell and advertise for sale, all Inventory now or hereafter covered by such licenses. "Patents": all patents, patent applications and patentable inventions, including, without limitation, all patents and patent applications identified in Schedule 1 attached hereto and made a part hereof, and including, without limitation, (a) all inventions and improvements described and claimed therein, and patentable inventions, (b) the right to sue or otherwise recover for any and all past, present and future infringements and misappropriations thereof, (c) all income, royalties, damages and other payments now and hereafter due and/or payable with respect thereto (including, without limitation, payments under all licenses entered into in connection therewith, and damages and payments for past or future infringements thereof) and (d) all rights corresponding thereto and all reissues, divisions, continuations, continuations-in- part, substitutes, renewals, and extensions thereof, all improvements thereon, and all other rights of any kind whatsoever of the Company accruing thereunder or pertaining thereto (Patents and Patent Licenses being, collectively, the "Patent Collateral"). "Requirement of Law": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Trademark Licenses": all license agreements with any other Person in connection with any of the Trademarks or such other Person's names or trademarks, whether the Company is a licensor or a licensee under any such license agreement, including, without limitation, the license agreements listed on Schedule 2 attached hereto and made a part hereof, subject, in each case, to the terms of such license agreements, and the right to prepare for sale, sell and advertise for sale, all Inventory now or hereafter covered by such licenses. "Trademarks": all trademarks, service marks, trade names, trade dress or other indicia of trade origin, trademark and service mark registrations, and applications for trademark or service mark registrations, and any renewals thereof, including, without limitation, each registration and application identified in Schedule 2 attached hereto and made a part hereof, and including, without limitation, (a) the right to sue or otherwise recover for any and all past, present and future infringements and misappropriations thereof, (b) all income, royalties, damages and other payments now and hereafter due and/or payable with respect thereto 5 (including, without limitation, payments under all licenses entered into in connection therewith, and damages and payments for past or future infringements thereof) and (c) all rights corresponding thereto and all other rights of any kind whatsoever of the Company accruing thereunder or pertaining thereto, together in each case with the goodwill of the business connected with the use of, and symbolized by, each such trademark, service mark, trade name, trade dress or other indicia of trade origin (Trademarks and Trademark Licenses being, collectively, the "Trademark Collateral"). 1.2 Other Definitional Provisions. (a) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section references are to this Agreement unless otherwise specified. (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 2 Grant of Security Interest. The Company hereby confirms and reaffirms its grant of a security interest in the Collateral (as defined in the Existing Security Agreement) pursuant to the Existing Security Agreement, which security interest is hereby amended and restated to be solely in favor of the Trustee, for the ratable benefit of the Holders, and shall secure only the Obligations, and which Existing Security Agreement is replaced hereby. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, the Company hereby grants to the Trustee for the ratable benefit of the Holders a security interest in all of the following property now owned or at any time hereafter acquired by the Company or in which the Company now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"): (a) all Accounts; (b) all Chattel Paper; (c) all Contracts; (d) all Documents; (e) all Equipment; (f) all General Intangibles; (g) all Instruments; (h) all Inventory; (i) all Investment Property; 6 (j) all Patent Licenses; (k) all Patents; (l) all Trademark Licenses; (m) all Trademarks; (n) all books and records pertaining to the Collateral; and (o) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing. 3 Representations and Warranties. The Company hereby represents and warrants that: 3.1 Title; No Other Liens. Except for the security interest granted to the Trustee for the ratable benefit of the Holders pursuant to this Agreement and Liens existing on the Issue Date (the "Existing Liens"), the Company owns each item of the Collateral free and clear of any and all Liens or claims of others. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the Trustee for the ratable benefit of the Holders pursuant to this Agreement or as have been filed or recorded in connection with Existing Liens. 3.2 Perfected Liens. The security interests granted pursuant to this Agreement (a) upon completion of the filings and other actions specified on Schedule 3 attached hereto will constitute perfected security interests in the Collateral in favor of the Trustee, for the ratable benefit of the Holders, (b) are prior to all other Liens on the Collateral in existence on the date hereof except for the Existing Liens and (c) are enforceable as such against (i) all creditors of and purchasers from the Company (except purchasers of Inventory in the ordinary course of business) and (ii) any Person having any interest in the real property where any of the Equipment is located, except in each case as enforceability is affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. 3.3 Inventory and Equipment. The Inventory and the Equipment are kept at the locations listed on Schedule 4 hereto. 3.4 Chief Executive Office. The Company's chief executive office and chief place of business is located at 1332 Londontown Boulevard, Eldersburg, Maryland 21784. 3.5 Farm Products. None of the Collateral constitutes, or is the Proceeds of, Farm Products. 7 4 Covenants. The Company covenants and agrees with the Trustee and the Holders that, from and after the date of this Agreement until this Agreement is terminated and the security interests created hereby are released: 4.1 Delivery of Instruments and Chattel Paper. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper shall be immediately delivered to the Trustee, duly indorsed in a manner satisfactory to the Trustee, to be held as Collateral pursuant to this Agreement. 4.2 Marking of Records. The Company will mark its books and records pertaining to the Collateral to evidence this Agreement and the security interests created hereby. 4.3 Maintenance of Insurance. (a) The Company will maintain, with financially sound and reputable companies, insurance policies (i) insuring the Inventory and Equipment against loss by fire, explosion, theft and such other casualties as may be reasonably satisfactory to the Trustee and (ii) insuring the Company and the Trustee, for the benefit of the Holders, against liability for personal injury and property damage relating to such Inventory and Equipment, such policies to be in such form and amounts and having such coverage as may be reasonably satisfactory to the Trustee, with losses payable to the Company and the Trustee, for the benefit of the Holders, as their respective interests may appear. (b) All such insurance shall (i) provide that no cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least thirty (30) days after receipt by the Trustee of written notice thereof, (ii) name the Trustee, for the benefit of the Holders, as insured parties and (iii) be reasonably satisfactory in all other respects to the Trustee. (c) The Company shall deliver to the Trustee a report of a reputable insurance broker with respect to such insurance during the month of January in each calendar year and such supplemental reports with respect thereto as the Trustee may from time to time reasonably request. 4.4 Payment of Obligations. The Company will pay and discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of income or profits therefrom, as well as all claims of any kind (including, without limitation, claims for labor, materials and supplies) against or with respect to the Collateral, except that no such charge need be paid if the amount or validity thereof is currently being contested in good faith by appropriate proceedings, reserves in conformity with GAAP with respect thereto have been provided on the books of the Company and such proceedings do not involve any material danger of the sale, forfeiture or loss of any of the Collateral or any interest therein. 4.5 Maintenance of Perfected Security Interest; Further Documentation. (a) The Company shall maintain the security interest created by this Agreement as a perfected security 8 interest subject only to Permitted Liens and shall defend such security interest against claims and demands of all Persons whomsoever. (b) At any time and from time to time, upon the written request of the Trustee, and at the sole expense of the Company, the Company will promptly and duly execute and deliver such further instruments and documents and take such further action as the Trustee may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the security interests created hereby. 4.6 Changes in Locations, Name, etc. The Company will not, except upon thirty (30) days' prior written notice to the Trustee and delivery to the Trustee of (x) a written supplement to Schedule 4 showing the additional location or locations at which Inventory or Equipment shall be kept and (y) all additional executed financing statements and other documents reasonably requested by the Trustee to maintain the validity, perfection and priority of the security interests provided for herein: (a) permit any of the Inventory or Equipment to be kept at a location other than those listed on Schedule 4 hereto; (b) change the location of its chief executive office and chief place of business from that specified in subsection hereof; or (c) change its name, identity or corporate structure to such an extent that any financing statement filed by the Trustee in connection with this Agreement would become seriously misleading. 4.7 Further Identification of Collateral. The Company will furnish to the Trustee from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Trustee may reasonably request, all in reasonable detail. 4.8 Notices. The Company will advise the Trustee promptly, in reasonable detail, at its address set forth in the Indenture of: (a) any Lien (other than security interests created hereby or the Existing Liens) on, or claim asserted against, any of the Collateral; and (b) the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the security interests created hereby. 4.9 Compliance with Laws. The Company will comply in all material respects with all Requirements of Law applicable to the Collateral or any part thereof, except to the extent 9 that failure to so comply would not be reasonably expected to materially adversely affect, in the aggregate, the rights of the Trustee or the Holders hereunder, the priority of their Liens on the Collateral or the value of the Collateral. 4.10 Indemnification. The Company agrees to pay, and to save the Trustee and the Holders harmless from, any and all liabilities, costs and expenses (including, without limitation, legal fees and expenses) (a) with respect to, or resulting from any delay in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral, (b) with respect to, or resulting from, any delay in complying with any Requirement of Law applicable to any of the Collateral and (c) in connection with any of the transactions contemplated by this Agreement. 5 Provisions Relating to Accounts. 5.1 Company Remains Liable under Accounts. Anything herein to the contrary notwithstanding, the Company shall remain liable under each of the Accounts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account. Neither the Trustee nor any Holder shall have any obligation or liability under any Account (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Trustee or any Holder of any payment relating to such Account pursuant hereto, nor shall the Trustee or any Holder be obligated in any manner to perform any of the obligations of the Company under or pursuant to any Account (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto), to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 5.2 Analysis of Accounts. The Trustee shall have the right to make test verifications of the Accounts in any manner and through any medium that it reasonably considers advisable, and the Company shall furnish all such assistance and information as the Trustee may require in connection with such test verifications. At any time and from time to time, upon the Trustee's request and at the expense of the Company, the Company shall cause independent public accountants or others satisfactory to the Trustee to furnish to the Trustee reports showing reconciliations, aging and test verifications of, and trial balances for, the Accounts. The Trustee in its own name or in the name of others may communicate with account debtors on the Accounts to verify with them to the Trustee's satisfaction the existence, amount and terms of any Accounts. 5.3 Collections on Accounts. (a) The Trustee hereby authorizes the Company to collect the Accounts, subject to the Trustee's direction and control, and at any time when an Event of Default shall have occurred and be continuing the Trustee may curtail or terminate said authority. If required by the Trustee at any time when an Event of Default shall have occurred and be continuing, any payments of Accounts, when collected by the Company, (i) shall be 10 forthwith (and, in any event, within two (2) Business Days) deposited by the Company in the exact form received, duly indorsed by the Company to the Trustee if required, in a Collateral Account maintained under the sole dominion and control of the Trustee, subject to withdrawal by the Trustee for the account of the Holders only as provided in subsection hereof, and (ii) until so turned over, shall be held by the Company in trust for the Trustee and the Holders, segregated from other funds of the Company. (b) Each such deposit of Proceeds of Accounts shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit. (c) At the Trustee's request, the Company shall deliver to the Trustee all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Accounts, including, without limitation, all original orders, invoices and shipping receipts. 5.4 Representations and Warranties. (a) No amount payable to the Company under or in connection with any Account is evidenced by any Instrument or Chattel Paper which has not been delivered to the Trustee. (b) The place where the Company keeps its records concerning the Accounts is 1332 Londontown Boulevard, Eldersburg, Maryland 21784. (c) None of the obligors on any Accounts is a Governmental Authority. 5.5 Covenants. (a) The amount represented by the Company to the Trustee from time to time as owing by each account debtor or by all account debtors in respect of the Accounts will at such time be correct in all material respects. (b) The Company will not amend, modify, terminate or waive any agreement giving rise to an Account in any manner which could reasonably be expected to materially adversely affect the value of such Account as Collateral. (c) The Company will not fail to exercise promptly and diligently each and every material right which it may have under each agreement giving rise to an Account (other than any right of termination). (d) The Company will not fail to deliver to the Trustee a copy of each material demand, notice or document received by it relating in any way to any agreement giving rise to an Account. (e) Other than in the ordinary course of business as generally conducted by the Company over a period of time, the Company will not grant any extension of the time of payment of any of the Accounts, compromise, compound or settle the same for less than the full amount thereof, release, wholly or partially, any Person liable for the payment thereof, or allow any credit or discount whatsoever thereon. 11 (f) The Company will not remove its books and records from the location specified in subsection hereof. (g) In any suit, proceeding or action brought by the Trustee under any Account for any sum owing thereunder, or to enforce any provisions of any Contract, the Company will save, indemnify and keep the Trustee harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the account debtor thereunder, arising out of a breach by the Company of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or its successors from the Company. 6 Provisions Relating to Contracts. 6.1 Company Remains Liable under Contracts. Anything herein to the contrary notwithstanding, the Company shall remain liable under each of its Contracts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with and pursuant to the terms and provisions of each such Contract. Neither the Trustee nor any Holder shall have any obligation or liability under any Contract by reason of or arising out of this Agreement or the receipt by the Trustee or any Holder of any payment relating to such Contract pursuant hereto, nor shall the Trustee or any Holder be obligated in any manner to perform any of the obligations of the Company under or pursuant to any Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 6.2 Communication With Contracting Parties. The Trustee in its own name or in the name of others may communicate with parties to the Contracts to verify with them to the Trustee's satisfaction the existence, amount and terms of any Contracts. 6.3 Indemnity. In any suit, proceeding or action brought by the Trustee under any Contract for any sum owing thereunder, or to enforce any provisions of any Contract, the Company will save, indemnify and keep harmless the Trustee from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the obligor thereunder, arising out of a breach by the Company of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such obligor or its successors from the Company. 7 Provisions Relating to Patents and Trademarks. The Company represents and warrants as to itself and its Collateral as follows: 7.1 Representations and Warranties. (a) Except for the Liens granted to the Trustee, for the ratable benefit of the Holders, pursuant to this Agreement and Permitted Liens, the Company is (or, in the case of after-acquired Collateral, will be) the sole, legal and beneficial owner of the entire right, title and interest in and to the Patents set forth on Schedule 1 hereto and 12 the Trademarks set forth on Schedule 2 hereto free and clear of any and all Liens. No security agreement, financing statement or other public notice similar in effect with respect to all or any part of the Collateral is on file or of record in any public office (including, without limitation, the United States Patent and Trademark Office), except such as may have been filed in favor of the Trustee for the ratable benefit of the Holders pursuant to this Agreement or Permitted Liens. (b) No consent of any party (other than the Company) to any Patent License or Trademark License constituting Collateral is required, or purports to be required, to be obtained by or on behalf of the Company in connection with the execution, delivery and performance of this Agreement that has not been obtained. Each Patent License and Trademark License constituting Collateral is in full force and effect and constitutes a valid and legally enforceable obligation of the Company and (to the knowledge of the Company) each other party thereto except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditor's rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law) and except to the extent the failure of any such Patent License or Trademark License constituting Collateral to be in full force and effect or valid or legally enforceable would not be reasonably expected, in the aggregate, to have a material adverse effect on the value of the Collateral. No consent or authorization of, filing with or other act by or in respect of any Governmental Authority is required in connection with the execution, delivery, performance, validity or enforceability of any of the Patent Licenses or Trademark Licenses constituting Collateral by any party thereto other than those which have been duly obtained, made or performed and are in full force and effect and those the failure of which to make or obtain would not be reasonably expected, in the aggregate, to have a material adverse effect on the value of the Collateral. Neither the Company nor (to the knowledge of the Company) any other party to any Patent License or Trademark License constituting Collateral is in default in the performance or observance of any of the terms thereof, except for such defaults as would not reasonably be expected, in the aggregate, to have a material adverse effect on the value of the Collateral. The right, title and interest of the Company in, to and under each Patent License and Trademark License constituting Collateral are not subject to any defense, offset, counterclaim or claim which would be reasonably expected, either individually or in the aggregate, to have a material adverse effect on the value of the Collateral (as defined in the Indenture). (c) Set forth in Schedule 1 and Schedule 2 is a complete and accurate list of all of the Patents and Trademarks owned by the Company as of the date hereof. The Company has made all necessary filings and recordations to protect and maintain its interest in the Patents and Trademarks set forth in Schedule 1 and Schedule 2, including, without limitation, all necessary filings and recordings, and payments of all maintenance fees, in the United States Patent and Trademark Office. (d) As of the date hereof, each Patent and patent application of the Company set forth in Schedule 1 is subsisting and has not been adjudged invalid, unpatentable or unenforceable, in whole or in part, and, to the best of the Company's knowledge, is valid, patentable and enforceable. As of the date hereof, each of the Patent Licenses set forth in Schedule 1 is validly subsisting and has not been adjudged invalid or unenforceable, in whole or 13 in part, and, to the best of the Company's knowledge, is valid and enforceable. As of the date hereof, the Company has notified the Trustee in writing of all uses of any item of Patent Collateral material to the Company's business of which the Company is aware which could reasonably be expected to lead to such item becoming invalid or unenforceable. (e) As of the date hereof, each trademark registration and trademark application of the Company set forth in Schedule 2 is subsisting as of the date hereof and has not been adjudged invalid, unregisterable or unenforceable, in whole or in part, and, to the best of the Company's knowledge, is valid, registrable and enforceable. As of the date hereof, each of the Trademark Licenses set forth in Schedule 2 is validly subsisting and has not been adjudged invalid or unenforceable, in whole or in part, and, to the best of the Company's knowledge, is valid and enforceable. As of the date hereof, set forth on Schedule 2 are all uses of any item of Trademark Collateral material to the Company's business of which the Company is aware which could reasonably be expected to lead to such item becoming invalid or unenforceable, including unauthorized uses by third parties and uses which were not supported by the goodwill of the business connected with such Collateral. (f) As of the date hereof, the Company has not made a previous assignment, sale, transfer or agreement constituting a present or future assignment, sale, transfer or encumbrance of any of the Collateral, except with respect to exclusive licenses granted in the ordinary course of business or as permitted by this Agreement, the Indenture, the Security Documents or the Bank Credit Agreement. As of the date hereof, the Company has not granted any license, shop right, release, covenant not to sue, or non-assertion assurance to any Person with respect to any part of the Collateral except in the ordinary course of business. (g) The Company has marked its products with the trademark registration symbol (R), the numbers of all appropriate patents, the common law trademark symbol (TM), or the designation "patent pending," as the case may be, to the extent that it is reasonably and commercially practicable. (h) Except for the Patent Licenses and Trademark Licenses listed in Schedule 1 and Schedule 2 hereto, the Company has no knowledge of the existence of any material right or any material claim (other than as provided by this Agreement, the Indenture, the Security Documents or the Bank Credit Agreement) that is likely to be made under or against any item of Collateral contained on Schedule 1 and Schedule 2. (i) No material claim has been made and is continuing or, to the best of the Company's knowledge, threatened that the use by the Company of any item of Collateral is invalid or unenforceable or that the use by the Company of any Collateral does or may violate the rights of any Person. To the best of the Company's knowledge, there is currently no material infringement or unauthorized use of any item of Collateral contained on Schedule 1 and Schedule 2. 14 7.2 Covenants. The Company covenants and agrees with the Trustee and the Holders that, from and after the date of this Agreement until the payment in full of the Securities and the other Obligations then due and owing: (a) At any time and from time to time, upon the written request of the Trustee or the Company, as the case may be, and at the sole expense of the Company, the Company or the Trustee, as the case may be, will promptly and duly execute and deliver such further instruments and documents and take such further action as the Trustee or the Company may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Liens created hereby. The Company also hereby authorizes the Trustee to file any such financing or continuation statement without the signature of the Company to the extent permitted by applicable law. A carbon, photostatic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. The Trustee agrees to notify the Company and the Company agrees to notify the Trustee of any financing or continuation statement filed by it pursuant to this subsection 7.2(a), provided that any failure to give any such notice shall not affect the validity or effectiveness of any such filing. (b) The Company agrees to pay, and to save the Trustee and the Holders harmless from, any and all liabilities and reasonable costs and expenses (including, without limitation, reasonable legal fees and expenses) (i) with respect to, or resulting from, any delay by the Company in complying with any material Requirement of Law applicable to any of the Collateral, or (ii) in connection with any of the transactions contemplated by this Agreement, provided that such indemnity shall not, as to the Trustee or any Holder, be available to the extent that such liabilities, costs and expenses resulted from the gross negligence or willful misconduct of the Trustee or such Holder, as the case may be. In any suit, proceeding or action brought by the Trustee or any Holder under any of the Collateral for any sum owing thereunder, or to enforce any of the Collateral, the Company will save, indemnify and keep the Trustee and such Holder harmless from and against all expense, loss or damage suffered by reason of any defense or counterclaim raised in any such suit, proceeding or action. (c) The Company will keep and maintain at its own cost and expense reasonably satisfactory and complete records of the Collateral, and shall mark such records to evidence this Agreement and the Liens and the security interests created hereby. For the Trustee's and the Holders' further security, the Trustee, for the ratable benefit of the Holders, shall have a security interest in all of the Company's books and records pertaining to the Collateral, and the Company shall permit the Trustee or its representatives to review such books and records upon reasonable advance notice during normal business hours at the location where such books and records are kept and at the reasonable request of the Trustee. (d) Upon reasonable advance notice to the Company and at reasonable intervals, or at any time and from time to time after the occurrence and during the continuance of an Event of Default, the Trustee and its representatives shall have reasonable access during normal business hours to all the books, correspondence and records of the Company, and the Trustee and 15 its representatives may examine the same, and to the extent reasonable take extracts therefrom and make photocopies thereof, and the Company agrees to render to the Trustee, at the Company's reasonable cost and expense, such clerical and other assistance as may be reasonable requested with regard thereto. (e) The Company will comply in all material respects with all Requirements of Law applicable to the Collateral or any part thereof, except to the extent that the failure to so comply would not be reasonably expected to materially adversely affect in the aggregate the Trustee's or the Holders' rights hereunder, the priority of their Liens on the Collateral or the value of the Collateral. (f) The Company will furnish to the Trustee from time to time such statements and schedules further identifying and describing the Collateral, and such other reports in connection with the Collateral, as the Trustee may reasonably request, all in reasonable detail. (g) The Company agrees that, should it obtain an ownership interest in any Patent Collateral or Trademark Collateral, which is not now a part of the Collateral, (i) the provisions of Section 2 shall automatically apply thereto, (ii) any such Patent Collateral and Trademark Collateral shall automatically become part of the Collateral, and (iii) with respect to any ownership interest in any Patent Collateral or Trademark Collateral that the Company should obtain which the Company reasonably deems is material to its business, it shall give notice thereof to the Trustee in writing, in reasonable detail, at its address set forth in the Indenture within thirty (30) business days after acquiring such ownership interest. The Company authorizes the Trustee to modify this Agreement by amending Schedule 1 and Schedule 2 (and will cooperate reasonably with the Trustee in effecting any such amendment) to include on Schedule 1 any Patent or Patent License and on Schedule 2 any Trademark and Trademark License of which it receives notice under this Section. (h) The Company agrees to take all necessary steps, including, without limitation, in the United States Patent and Trademark Office or in any court, to (i) maintain each Patent and each Patent License identified on Schedule 1 hereto, and (ii) pursue each patent application, now or hereafter identified in Schedule 1 hereto, including, without limitation, the filing of divisional, continuation, continuation-in-part and substitute applications, the filing of applications for reissue, renewal or extensions, the payment of maintenance fees, and the participation in interference, reexamination, opposition, infringement and misappropriation proceedings, except, in each case in which the Company has reasonably determined that any of the foregoing is not of material economic value to it. The Company agrees to take corresponding steps with respect to each new or acquired patent, patent application, or any rights obtained under any Patent License, in each case, which it is now or later becomes entitled, except in each case in which the Company has reasonably determined that any of the foregoing is not of material economic value to it. Any expenses incurred in connection with such activities shall be borne by the Company. (i) The Company agrees to take all necessary steps, including, without limitation, in the United States Patent and Trademark Office or in any court, to (i) maintain each trademark registration and each Trademark License identified on Schedule 2 hereto, and (ii) pursue each 16 trademark application now or hereafter identified in Schedule 2 hereto, including, without limitation, the filing of responses to office actions issued by the United States Patent and Trademark Office, the filing of applications for renewal, the filing of affidavits under Sections 8 and 15 of the United States Trademark Act, and the participation in opposition, cancellation, infringement and misappropriation proceedings, except, in each case in which the Company has reasonably determined that any of the foregoing is not of material economic value to it. The Company agrees to take corresponding steps with respect to each new or acquired trademark registration, trademark application or any rights obtained under any Trademark License, in each case, which it is now or later becomes entitled, except in each case in which the Company has reasonably determined that any of the foregoing is not of material economic value to it. Any expenses incurred in connection with such activities shall be borne by the Company. (j) The Company shall not abandon any trademark registration, patent or any pending trademark or patent application, without the written consent of the Trustee, unless the Company shall have previously determined that such use or the pursuit or maintenance of such trademark registration, patent or pending trademark or patent application is not of material economic value to it, in which case, the Company will, at least annually, give notice of any such abandonment to the Trustee in writing, in reasonable detail, at its address set forth in the Indenture. (k) In the event that the Company becomes aware that any item of the Collateral which the Company has reasonably determined to be material to its business is infringed or misappropriated by a third party, the Company shall notify the Trustee promptly and in writing, in reasonable detail, at its address set forth in the Indenture, and shall take such actions as the Company or the Trustee deems reasonably appropriate under the circumstances to protect such Collateral, including, without limitation, suing for infringement or misappropriation and for an injunction against such infringement or misappropriation. Any expense incurred in connection with such activities shall be borne by the Company. The Company will advise the Trustee promptly and in writing, in reasonable detail, at its address set forth in the Indenture, of any adverse determination or the institution of any proceeding (including, without limitation, the institution of any proceeding in the United States Patent and Trademark Office or any court) regarding any item of the Collateral which has a material adverse effect on (i) the business, operations, property, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole or (ii) the validity or enforceability of this Agreement, any of the other Security Documents or the Indenture or the rights or remedies of the Trustee or the Holders hereunder or thereunder. (l) The Company shall mark its products with the trademark registration symbol (R), the numbers of all appropriate patents, the common law trademark symbol (TM), or the designation "patent pending," as the case may be, to the extent that it is reasonably and commercially practicable. (m) The Company will not create, incur or permit to exist, will defend the Collateral against, and will take such other action as is reasonably necessary to remove, any Lien or material adverse claim on or to any of the Collateral, other than non-exclusive licenses granted 17 in the ordinary course of business, the Liens created by this Agreement and Permitted Liens and will defend the right, title and interest of the Trustee and the Holders in and to any of the Collateral against the claims and demands of all Persons whomsoever. (n) Without the prior written consent of the Trustee, the Company will not sell, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to, the Collateral, or attempt, offer or contract to do so, except with respect to non-exclusive licenses in the ordinary course of business or as expressly permitted by the Indenture and the Security Documents or as permitted under the Bank Credit Agreement. (o) The Company will advise the Trustee promptly, in reasonable detail, at its address set forth in the Indenture, (i) of any Lien (other than Liens created hereby or Permitted Liens) on, or material adverse claim asserted against, Patents or Trademarks and (ii) of the occurrence of any other event which would reasonably be expected in the aggregate to have a material adverse effect on the aggregate value of the Collateral or the Liens created hereunder. 8 Remedies. 8.1 Notice to Account Debtors and Contract Parties. Upon the request of the Trustee at any time after the occurrence and during the continuance of an Event of Default, the Company shall notify account debtors on the Accounts and parties to the Contracts that the Accounts and the Contracts have been assigned to the Trustee for the ratable benefit of the Holders and that payments in respect thereof shall be made directly to the Trustee. 8.2 Proceeds to be Turned Over To Trustee. In addition to the rights of the Trustee and the Holders specified in subsection hereof with respect to payments of Accounts, if an Event of Default shall occur and be continuing, all Proceeds received by the Company consisting of cash, checks and other near-cash items shall be held by the Company in trust for the Trustee and the Holders, segregated from other funds of the Company, and shall, forthwith upon receipt by the Company, be turned over to the Trustee in the exact form received by the Company (duly indorsed by the Company to the Trustee, if required) and held by the Trustee in a Collateral Account maintained under the sole dominion and control of the Trustee. All Proceeds while held by the Trustee in a Collateral Account (or by the Company in trust for the Trustee and the Holders) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in subsection hereof. 8.3 Application of Proceeds. At such intervals as may be agreed upon by the Company and the Trustee, or, if an Event of Default shall have occurred and be continuing, at any time at the Trustee's election, the Trustee may apply all or any part of Proceeds held in any Collateral Account in payment of the Obligations in such order as the Trustee may elect, and any part of such funds which the Trustee elects not so to apply and deems not required as collateral security for the Obligations shall be paid over from time to time by the Trustee to the Company or to whomsoever may be lawfully entitled to receive the same. Any balance of such Proceeds remaining after the Obligations shall have been paid in full shall be paid over to the Company or to whomsoever may be lawfully entitled to receive the same. 18 8.4 Code Remedies. If an Event of Default shall occur and be continuing, the Trustee, on behalf of the Holders may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Trustee, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Company or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Trustee or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Trustee or any Holder shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Company, which right or equity is hereby waived or released. The Company further agrees, at the Trustee's request, to assemble the Collateral and make it available to the Trustee at places which the Trustee shall reasonably select, whether at the Company's premises or elsewhere. The Trustee shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Trustee and the Holders hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Trustee may elect, and only after such application and after the payment by the Trustee of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Trustee account for the surplus, if any, to the Company. To the extent permitted by applicable law, the Company waives all claims, damages and demands it may acquire against the Trustee or any Holder arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition. 8.5 Deficiency. The Company shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by the Trustee or any Holder to collect such deficiency. 9 Trustee's Appointment as Attorney-in-Fact; Trustee's Performance of Company's Obligations. 9.1 Powers. The Company hereby irrevocably constitutes and appoints the Trustee and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Company 19 and in the name of the Company or in its own name, from time to time in the Trustee's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, the Company hereby gives the Trustee the power and right, on behalf of the Company, without notice to or assent by the Company, to do the following: (a) in the case of any Account, at any time when the authority of the Company to collect the Accounts has been curtailed or terminated pursuant to subsection hereof, or in the case of any other Collateral, at any time when any Event of Default shall have occurred and is continuing, in the name of the Company or its own name, or otherwise, to take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Account, Instrument, General Intangible or Contract or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Trustee for the purpose of collecting any and all such moneys due under any Account, Instrument, General Intangible or Contract or with respect to any other Collateral whenever payable; (b) in the case of any Patents or Trademarks, to execute and deliver any and all agreements, instruments, documents, and papers as the Trustee may request to evidence the Trustee's and the Holders' security interest in any Patent or Trademark and the goodwill and general intangibles of the Company relating thereto or represented thereby; (c) to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Agreement and to pay all or any part of the premiums therefor and the costs thereof; (d) to execute, in connection with the sale provided for in subsection hereof, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and (e) upon the occurrence and during the continuance of any Event of Default, (i) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Trustee or as the Trustee shall direct; (ii) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (iii) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (iv) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (v) to defend any suit, action or proceeding brought against the Company with respect to any Collateral; (vi) to settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, to give such discharges or releases as the Trustee may deem appropriate; (vii) to assign any Patent or Trademark (along with the goodwill of the business to which any such Patent or Trademark 20 pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Trustee shall in its sole discretion determine; and (viii) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Trustee were the absolute owner thereof for all purposes, and to do, at the Trustee's option and the Company's expense, at any time, or from time to time, all acts and things which the Trustee deems necessary to protect, preserve or realize upon the Collateral and the Trustee's and the Holders' security interests therein and to effect the intent of this Agreement, all as fully and effectively as the Company might do. 9.2 Performance by Trustee of Company's Obligations. If the Company fails to perform or comply with any of its agreements contained herein, the Trustee, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement. 9.3 Company's Reimbursement Obligation. The expenses of the Trustee incurred in connection with actions undertaken as provided in this Section 9, together with interest thereon at a rate per annum equal to the 12%, from the date of payment by the Trustee to the date reimbursed by the Company, shall be payable by the Company to the Trustee on demand. 9.4 Ratification; Power Coupled With An Interest. The Company hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released. 10 Duty of Trustee. The Trustee's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Trustee deals with similar property for its own account. Neither the Trustee, any Holder nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Company or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Trustee and the Holders hereunder are solely to protect the Trustee's and the Holders' interests in the Collateral and shall not impose any duty upon the Trustee or any Holder to exercise any such powers. The Trustee and the Holders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to the Company for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. 11 Execution of Financing Statements. Pursuant to Section 9-402 of the Code, the Company authorizes the Trustee to file financing statements with respect to the Collateral without the signature of the Company in such form and in such filing offices as the Trustee reasonably determines appropriate to perfect the security interests of the Trustee under this 21 Agreement. A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 12 Authority of Trustee. The Company acknowledges that the rights and responsibilities of the Trustee under this Agreement with respect to any action taken by the Trustee or the exercise or non-exercise by the Trustee of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Trustee and the Holders, be governed by the Indenture and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Trustee and the Company, the Trustee shall be conclusively presumed to be acting as trustee for the Holders with full and valid authority so to act or refrain from acting, and the Company shall be under no obligation, or entitlement, to make any inquiry respecting such authority. 13 Notices. All notices, requests and demands to or upon the respective parties hereto shall be made in accordance with subsection 12.2 of the Indenture. 14 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15 Amendments in Writing; No Waiver; Cumulative Remedies. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Article IX of the Indenture. This Agreement shall be binding upon the successors and assigns of the Company and shall inure to the benefit of the Trustee and the Holders and their respective successors and assigns, except that the Company may not assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Trustee. 16 Section Headings. The section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 17 Successors and Assigns. This Agreement shall be binding upon the successors and assigns of the Company and shall inure to the benefit of the Trustee and the Holders and their successors and assigns. 18 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 19 Release of Collateral and Termination. (a) At such time as the payment in full of the Securities and the other Obligations then due and owing shall have occurred, the 22 Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Trustee and the Company hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the Company unless such reversion would be inconsistent with the Subordination Agreement. Upon request of the Company following any such termination, the Trustee shall deliver (at the sole cost and expense of the Company) any Collateral held by the Trustee hereunder, and execute and deliver (at the sole cost and expense of the Company) to the Company such documents as the Company shall reasonably request to evidence such termination. (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by the Company in a transaction permitted by the Indenture or the Bank Credit Agreement, then the Trustee shall execute and deliver to the Company (at the sole cost and expense of the Company) all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. 20 Subordination. Each of the Company and the Trustee (for itself in that capacity and on behalf of the Holders) acknowledge that the security interests in the Collateral granted, confirmed and/or reaffirmed pursuant to this Agreement or otherwise held by the Trustee or any Holder are subordinated in priority to the security interests in the Collateral held by the holder of the Senior Indebtedness as provided in, and the rights (including the right to payment) and remedies of the Trustee hereunder and of the Holders are subordinated and subject to the terms and provisions of, the Subordination Agreement. 21 Incorporation of Certain Indenture Provisions. All provisions of Article VII of the Indenture shall be construed as extending to and including all of the rights, duties and obligations imposed upon the Trustee under this Agreement as fully and for all purposes as if said Article VII were contained in this Agreement. 23 IN WITNESS WHEREOF, the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written. LONDON FOG INDUSTRIES, INC. By: ------------------------------ Name: Edward M. Krell Title: Chief Financial Officer Schedule 1 PATENTS AND PATENT LICENSES Schedule 2 TRADEMARKS AND TRADEMARK LICENSES Schedule 3 FILINGS AND OTHER ACTIONS REQUIRED TO PERFECT SECURITY INTERESTS Uniform Commercial Code Filings COMPANY JURISDICTION London Fog Industries, Inc. Secretary of State, CALIFORNIA Clerk of SAN BERNADINO COUNTY, California Clerk of SANTA CLARA COUNTY, California Clerk of SOLANO COUNTY, California Clerk of the Superior Court, BANKS COUNTY, Georgia Clerk of HENRY COUNTY, Georgia Clerk of the Superior Court, CHATHAM COUNTY, Georgia Clerk of the Superior Court, GORDON COUNTY,Georgia Clerk of the Superior Court, LOWDENS COUNTY, Georgia Clerk of the Superior Court, WHITE COUNTY, Georgia Clerk of the Superior Court, WILKES COUNTY, Georgia Secretary of State, ILLINOIS 2 COMPANY JURISDICTION Clerk of DOUGLASS COUNTY, Illinois 3 COMPANY JURISDICTION London Fog Industries, Inc. Department of Assessments and Taxation, MARYLAND Clerk of the Circuit Court, BALTIMORE CITY, Maryland Clerk of the Circuit Court, CARROLL COUNTY, Maryland Clerk of the Circuit Court, WASHINGTON COUNTY, Maryland Secretary of the Commonwealth, MASSACHUSETTS Registry of Deeds, BARNSTABLE COUNTY, Massachusetts Clerk of the Town, BOURNE, Massachusetts Clerk of the Town, SAGAMORE, Massachusetts Registry of Deeds, BERKSHIRE COUNTY, Massachusetts Clerk of the Town, LENOX, Massachusetts Registry of Deeds, BRISTOL COUNTY, Massachusetts Clerk of the Town, FALL RIVER, Massachusetts Clerk of the Town, NEW BEDFORD, Massachusetts Clerk of the Town, TAUNTO, Massachusetts Secretary of State, NEW YORK 4 COMPANY JURISDICTION County Clerk, CLINTON COUNTY, New York London Fog Industries, Inc. County Clerk, DUCHESS COUNTY, New York County Clerk, NIAGARA COUNTY, New York County Clerk, ONEIDA COUNTY, New York County Clerk, ORANGE COUNTY, New York County Clerk, STEUBEN COUNTY, New York County Clerk, SULLIVAN COUNTY, New York County Clerk, WARREN COUNTY, New York City Register, NEW YORK COUNTY, New York Secretary of State, TENNESSEE Clerk of CUMBERLAND COUNTY, Tennessee Secretary of State, TEXAS Clerk of HAYS COUNTY, Texas Secretary of Commonwealth, VIRGINIA State Corporation Commission, VIRGINIA Clerk of the Circuit Court, AUGUSTA COUNTY, Virginia 5 COMPANY JURISDICTION Clerk of the Circuit Court, JAMES CITY COUNTY, Virginia London Fog Industries, Inc. Clerk of the Circuit Court, PRINCE WILLIAM COUNTY, Virginia Clerk of the Circuit Court, WYTHE COUNTY, Virginia Secretary of State, WASHINGTON Patent and Trademark Filings UCC filings and filing of the Borrower Patent and Trademark Security Agreement with the United States Patent and Trademark Office. Other Actions None. Schedule 4 LOCATION OF INVENTORY AND EQUIPMENT Item Location EXHIBIT F AMENDED AND RESTATED SUBSIDIARY GUARANTEE AMENDED AND RESTATED SUBSIDIARY GUARANTEE, dated as of February 27, 1998, made by each of the corporations that are signatories hereto (the "Guarantors"), in favor of IBJ Schroder Bank & Trust Company as trustee (in such capacity, the "Trustee") for the Holders under, and as defined in, the Indenture, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Indenture"), between London Fog Industries, Inc., a Delaware corporation (the "Company"), and the Trustee. W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Credit Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Original Agent") for the several banks and other financial institutions from time to time parties thereto (the "Original Lenders") and the Original Lenders, the Original Lenders made certain loans and other extensions of credit to the Company; WHEREAS, in connection with the execution and delivery of the Original Credit Agreement, the Guarantors executed and delivered to the Original Agent, for the benefit of the Original Lenders, the Subsidiary Guarantee, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Guarantee"), pursuant to which each Guarantor, jointly and severally for the benefit of the Original Agent and the Original Lenders, guaranteed the prompt and complete payment and performance by the Company of the Obligations (as defined in the Original Guarantee); WHEREAS, the Company, the Original Agent and the Original Lenders agreed to restructure the obligations of the Company under the Original Credit Agreement by means of, among other things, the execution and delivery of the Master Restructuring Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Existing MRA"), among the Company, the Original Agent and the Original Lenders, among others; WHEREAS, in connection with the execution and the delivery of the Existing MRA, the Company executed and delivered (a) the Term Loan Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Term Loan Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Term Loan Agent") for the several banks and other financial institutions from time to time parties thereto (the "Term Loan Lenders") and the Term Loan Lenders and (b) the Note Agreement, dated as of May 31, 1995 (as heretofore amended, 2 supplemented or otherwise modified, the "Note Agreement" and, together with the Term Loan Agreement, collectively, the "Existing Agreements"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity and also in its capacity as the Term Loan Agent, the "Agent") for the several banks and other financial institutions from time to time parties thereto (the "Note Lenders" and, together with the Term Loan Lenders, collectively, the "Lenders") and the Note Lenders, pursuant to which the Lenders made certain loans to the Company; WHEREAS, in connection with the execution and delivery of the Existing MRA and the Existing Agreements, the Guarantors executed and delivered to the Agent, for the benefit of the Lenders, Amendment No. 1 to the Subsidiary Guarantee, dated as of May 31, 1995 (the Original Guarantee as amended, supplemented or otherwise modified by such Amendment No. 1, the "Existing Guarantee"), pursuant to which the Guarantors, jointly and severally for the benefit of the Agent and the Lenders, guaranteed the prompt and complete payment and performance by the Company of the Obligations (as defined in the Existing Guarantee); WHEREAS, the Company, the Agent and the Lenders have agreed to restructure the obligations of the Company under the Existing Agreements by means of, among other things, the execution and delivery of the Indenture and the Master Restructuring Agreement, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "MRA"), among the Company, the Agent and the Lenders, among others; and WHEREAS, it is a condition precedent to the effectiveness of the MRA and the obligation of the Agent and the Lenders to consummate the restructuring contemplated thereby, that, among other things, the Guarantors shall have executed and delivered this Guarantee to the Trustee, for the benefit of the Holders. NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Lenders to restructure the obligations of the Company under the Existing Agreements and to induce the Trustee to enter into the Indenture, the Guarantors hereby agree with the Trustee, for the benefit of the Holders, that the Existing Guarantee shall be and hereby is amended and restated in its entirety as follows: 1. Defined Terms. (a) Unless otherwise defined herein, terms defined in the Indenture and used herein shall have the meanings given to them in the Indenture. The following terms shall have the following meanings: "Guarantee": this Amended and Restated Subsidiary Guarantee, as the same may be amended, supplemented, waived or otherwise modified from time to time. "Obligations" as used herein means the unpaid principal of and interest on (including, without limitation, interest accruing after the Stated Maturity of the Securities and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Company, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Securities and all other obligations and liabilities of the Company to the Trustee or to any 3 Holder, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Guarantee, the Indenture, the MRA, the other Restructuring Documents (as defined in the MRA) or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees, charges and disbursements of counsel to the Trustee or one counsel selected by the Holders that are required to be paid by the Company pursuant to this Guarantee or the Indenture) or otherwise. (b) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Guarantee shall refer to this Guarantee as a whole and not to any particular provision of this Guarantee, and section references are to this Guarantee unless otherwise specified. (c) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 2. Guarantee (a) Each of the Guarantors hereby confirms and reaffirms its guarantee of the Obligations (as defined in the Existing Guarantee) pursuant to the Existing Guarantee, which Existing Guarantee is replaced hereby. Subject to the provisions of Section , each of the Guarantors hereby, jointly and severally, unconditionally and irrevocably, guarantees to the Trustee, for the ratable benefit of the Holders and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Company when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. (b) Anything herein or in the Indenture or any Security Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the Indenture and the Security Documents shall in no event exceed the amount which can be guaranteed by such Guarantor under applicable federal and state laws relating to the insolvency of debtors. (c) Each Guarantor further agrees to pay any and all expenses (including, without limitation, all fees and disbursements of counsel) which may be paid or incurred by the Trustee or any Holder in enforcing, or obtaining advice of counsel in respect of, any rights with respect to, or collecting, any or all of the Obligations and/or enforcing any rights with respect to, or collecting against, such Guarantor under this Guarantee. This Guarantee shall remain in full force and effect until the Obligations are paid in full. (d) Each Guarantor agrees that the Obligations may at any time and from time to time exceed the amount of the liability of such Guarantor hereunder without impairing this Guarantee or affecting the rights and remedies of the Trustee or any Holder hereunder. (e) No payment or payments made by the Company, any of the Guarantors, any other guarantor or any other Person or received or collected by the Trustee or any Holder from the Company, any of the Guarantors, any other guarantor or any other Person by virtue of any 4 action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment or payments other than payments made by such Guarantor in respect of the Obligations or payments received or collected from such Guarantor in respect of the Obligations, remain liable for the Obligations up to the maximum liability of such Guarantor hereunder until the Obligations are paid in full. (f) Each Guarantor agrees that whenever, at any time, or from time to time, it shall make any payment to the Trustee or any Holder on account of its liability hereunder, it will notify the Trustee in writing that such payment is made under this Guarantee for such purpose. 3. Right of Contribution. Each Guarantor hereby agrees that to the extent that a Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor hereunder who has not paid its proportionate share of such payment. Each Guarantor's right of contribution shall be subject to the terms and conditions of Section hereof. The provisions of this Section 3 shall in no respect limit the obligations and liabilities of any Guarantor to the Trustee and the Holders, and each Guarantor shall remain liable to the Trustee and the Holders for the full amount guaranteed by such Guarantor hereunder. 4. Right of Set-off. Each Guarantor hereby irrevocably authorizes the Trustee and each Holder at any time and from time to time without notice to such Guarantor or any other Guarantor, any such notice being expressly waived by each Guarantor, to set-off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by the Trustee or such Holder to or for the credit or the account of such Guarantor, or any part thereof in such amounts as the Trustee or such Holder may elect, against and on account of the obligations and liabilities of such Guarantor to the Trustee or such Holder hereunder and claims of every nature and description of the Trustee or such Holder against such Guarantor, in any currency, whether arising hereunder, under the Indenture, any Security Document or otherwise, as the Trustee or such Holder may elect, whether or not the Trustee or any Holder has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The Trustee and each Holder shall notify such Guarantor promptly of any such set-off and the application made by the Trustee or such Holder, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Trustee and each Holder under this Section 4 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Trustee or such Holder may have. 5. No Subrogation. Notwithstanding any payment or payments made by any of the Guarantors hereunder or any set-off or application of funds of any of the Guarantors by any Trustee, no Guarantor shall be entitled to be subrogated to any of the rights of the Trustee or any Holder against the Company or any other Guarantor or any collateral security or guarantee or right of offset held by any Holder for the payment of the Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Company or any other 5 Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Trustee and the Holders by the Company on account of the Obligations are paid in full. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for the Trustee and the Holders, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Trustee in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Trustee, if required), to be applied against the Obligations, whether matured or unmatured, in such order as the Trustee may determine. 6. Amendments, etc. with respect to the Obligations; Waiver of Rights. Each Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against any Guarantor and without notice to or further assent by any Guarantor, any demand for payment of any of the Obligations made by the Trustee or any Holder may be rescinded by such party and any of the Obligations continued, and the Obligations, or the liability of any other party upon or for any part thereof, or any collateral security, or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Trustee, and the Indenture and the Security Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, in accordance with Article IX of the Indenture, and any collateral security, guarantee or right of offset at any time held by the Trustee or any Holder for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. Neither the Trustee nor any Holder shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Obligations or for this Guarantee or any property subject thereto. When making any demand hereunder against any of the Guarantors, the Trustee or any Holder may, but shall be under no obligation to, make a similar demand on the Company or any other Guarantor or guarantor, and any failure by the Trustee or any Holder to make any such demand or to collect any payments from the Company or any such other Guarantor or guarantor or any release of the Company or such other Guarantor or guarantor shall not relieve any of the Guarantors in respect of which a demand or collection is not made or any of the Guarantors not so released of their several obligations or liabilities hereunder, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Trustee or any Holder against any of the Guarantors. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 7. Guarantee Absolute and Unconditional. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Trustee or any Holder upon this Guarantee or acceptance of this Guarantee, the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Guarantee; and all dealings between the Company and any of the Guarantors, on the one hand, and the Trustee and the Holders, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Guarantee. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Company or any of the Guarantors with respect to the Obligations. Each Guarantor 6 understands and agrees that this Guarantee shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity, regularity or enforceability of the Indenture, any other Guarantee, any Security Document, any of the Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Trustee or any Holder, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Company against the Trustee or any Holder, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Company or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Company for the Obligations, or of such Guarantor under this Guarantee, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against any Guarantor, the Trustee and any Holder may, but shall be under no obligation to, pursue such rights and remedies as it may have against the Company or any other Person or against any collateral security or guarantee for the Obligations or any right of offset with respect thereto, and any failure by the Trustee or any Holder to pursue such other rights or remedies or to collect any payments from the Company or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Company or any such other Person or any such collateral security, guarantee or right of offset, shall not relieve such Guarantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Trustee and the Holders against such Guarantor. This Guarantee shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon each Guarantor and the successors and assigns thereof, and shall inure to the benefit of the Trustee and the Holders, and their respective successors, indorsees, transferees and assigns, until all the Obligations and the obligations of each Guarantor under this Guarantee shall have been satisfied by payment in full. 8. Reinstatement. This Guarantee shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Trustee or any Holder upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Company or any Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made. 9. Payments. Each Guarantor hereby guarantees that payments hereunder will be paid to the Trustee without set-off or counterclaim in U.S. Legal Tender at the office of the Trustee set forth in Section 12.2 of the Indenture. 10. Representations and Warranties; Covenants. (a) Each Guarantor hereby represents and warrants that the representations and warranties set forth in Section 6 of the MRA as they relate to such Guarantor or the Restructuring Documents (as defined in the MRA) or the Security Documents to which such Guarantor is a party, each of which is hereby incorporated herein by reference, are true and correct, and the Trustee and each Holder shall be entitled to rely on each of them as if they were fully set forth herein, provided that each reference in each such representation and warranty to the Company's knowledge shall, for the purposes of this paragraph (a), be deemed to be a reference to such Guarantor's knowledge. 7 (b) Each Guarantor hereby covenants and agrees with the Trustee and each Holder that, from and after the date of this Guarantee until the Obligations are paid in full, such Guarantor shall take, or shall refrain from taking, as the case may be, all actions that are necessary to be taken or not taken so that no violation of any provision, covenant or agreement contained in Article IV of the Indenture, and so that no Default or Event of Default, is caused by any act or failure to act of such Guarantor or any of its Subsidiaries. 11. Authority of Trustee. Each Guarantor acknowledges that the rights and responsibilities of the Trustee under this Guarantee with respect to any action taken by the Trustee or the exercise or non-exercise by the Trustee of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Guarantee shall, as between the Trustee and the Holders, be governed by the Indenture and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Trustee and such Guarantor, the Trustee shall be conclusively presumed to be acting as Trustee for the Holders with full and valid authority so to act or refrain from acting, and no Guarantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority. 12. Notices. All notices, requests and demands pursuant hereto shall be made in accordance with subsection 12.2 of the Indenture, provided, that any such notice, request or demand to or upon any Guarantor shall be addressed to such Guarantor at the notice address set forth under its signature below. 13. Counterparts. This Guarantee may be executed by one or more of the Guarantors on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the counterparts of this Guarantee signed by all the Guarantors shall be lodged with the Trustee. 14. Severability. Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. Integration. This Guarantee represents the agreement of each Guarantor with respect to the subject matter hereof and there are no promises or representations by the Trustee or any Holder relative to the subject matter hereof not reflected herein. 16. Amendments in Writing; No Waiver; Cumulative Remedies; Successors and Assigns. None of the terms or provisions of this Guarantee may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the affected Guarantor(s) and the Trustee in accordance with Article IX of the Indenture. This Guarantee shall be binding upon the successors and assigns of each Guarantor and shall inure to the benefit of the Trustee and the Holders and their respective successors and assigns, except that no Guarantor may assign, transfer or delegate any of its rights or obligations under this Guarantee without the prior written consent of the Trustee. 8 17. Section Headings. The section headings used in this Guarantee are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 18. Successors and Assigns. This Guarantee shall be binding upon the successors and assigns of each Guarantor and shall inure to the benefit of the Trustee and the Holders and their successors and assigns. 19. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 20. Termination. This Guarantee shall remain in full force and effect and be binding upon each Guarantor and the successors and assigns thereof, and shall inure to the benefit of the Trustee and the Holders, and their respective successors, indorsees, transferees and assigns, until all the Obligations and the obligations of each Guarantor under this Guarantee shall have been satisfied by payment in full. At the request and expense of the Company, a Guarantor shall be released from its obligations hereunder in the event that all the capital stock of such Guarantor shall be sold, transferred or otherwise disposed of in accordance with the terms of the Indenture and the Bank Credit Agreement; provided that the Company shall have delivered to the Trustee, at least ten (10) Business Days prior to the date of the proposed release, a written request for release identifying the relevant Guarantor and the terms of the sale or other disposition in reasonable detail, including the price thereof and any expenses in connection therewith, together with a certification by the Company stating that such transaction is in compliance with the Indenture and the Bank Credit Agreement. 21. Subordination. Each of the Guarantors and the Trustee (for itself in that capacity and on behalf of the Holders) acknowledge that all liabilities and obligations of the Guarantors provided, confirmed and/or reaffirmed pursuant to this Guarantee are subordinated in right of payment to the Senior Indebtedness pursuant to, and the rights and remedies of the Trustee hereunder, are subject to the terms and provisions of, the Subordination Agreement. 22. Submission To Jurisdiction; Waivers. Each Guarantor hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Guarantee, the Indenture and the Security Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; 9 (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, at its address set forth under its signature below; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section 21 any special, exemplary, punitive or consequential damages. 23. WAIVERS OF JURY TRIAL. EACH GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE THE INDENTURE OR ANY SECURITY DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 24. Incorporation of Certain Indenture Provisions. All provisions of Article VII of the Indenture shall be construed as extending to and including all of the rights, duties and obligations imposed upon the Trustee under this Guarantee as fully and for all purposes as if said Article VII were contained in this Guarantee. 10 IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee to be duly executed and delivered by its duly authorized officer as of the day and year first above written. CLIPPER MIST, INC. By: --------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 LONDON FOG SPORTSWEAR, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 MATTHEW MANUFACTURING CO., INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 11 PACIFIC TRAIL, INC. By: ----------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 PTI HOLDING CORP. By: ----------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 PTI TOP COMPANY, INC. By: ----------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 12 STAR SPORTSWEAR MANUFACTURING CORP. By: ----------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 THE MOUNGER CORPORATION By: ---------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 THE SCRANTON OUTLET CORPORATION By: ----------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 13 WASHINGTON HOLDING COMPANY By: ----------------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 EXHIBIT G AMENDED AND RESTATED SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT AMENDED AND RESTATED SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT, dated as of February 27, 1998, made by each of the corporations signatories hereto (the "Pledgors"), in favor of IBJ Schroder Bank & Trust Company, as trustee (in such capacity, the "Trustee") for the Holders under, and as defined in, the Indenture, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Indenture") between London Fog Industries, Inc., a Delaware corporation (the "Company"), and the Trustee. W I T N E S S E T H : WHEREAS, pursuant to the Credit Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Credit Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Original Agent") for the several banks and other financial institutions from time to time parties thereto (the "Original Lenders") and the Original Lenders, the Original Lenders made certain loans and other extensions of credit to the Company; WHEREAS, in connection with the execution and delivery of the Original Credit Agreement, the Pledgors executed and delivered to the Original Agent, for the benefit of the Original Lenders, the Subsidiary Patent and Trademark Security Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Patent and Trademark Security Agreement"), pursuant to which the Pledgors pledged to the Original Agent, for the benefit of the Original Lenders, the Collateral (as defined in the Original Patent and Trademark Security Agreement) as collateral security for the Obligations (as defined in the Original Patent and Trademark Security Agreement); WHEREAS, the Company, the Original Agent and the Original Lenders agreed to restructure the obligations of the Company under the Original Credit Agreement by means of, among other things, the execution and delivery of the Master Restructuring Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Existing MRA"), among the Company, the Original Agent and the Original Lenders, among others; WHEREAS, in connection with the execution and the delivery of the Existing MRA, the Company executed and delivered (a) the Term Loan Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Term Loan Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical 2 Bank), as agent (in such capacity, the "Term Loan Agent") for the several banks and other financial institutions from time to time parties thereto (the "Term Loan Lenders") and the Term Loan Lenders and (b) the Note Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise, the "Note Agreement" and, together with the Term Loan Agreement, collectively, the "Existing Agreements"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity and also in its capacity as the Term Loan Agent, the "Agent") for the several banks and other financial institutions from time to time parties thereto (the "Note Lenders" and, together with the Term Loan Lenders, collectively, the "Lenders") and the Note Lenders, pursuant to which the Lenders made certain loans to the Company; WHEREAS, in connection with the execution and delivery of the Existing MRA and the Existing Agreements, the Pledgors executed and delivered to the Agent, for the benefit of the Lenders, Amendment No. 1 to the Subsidiary Patent and Trademark Security Agreement, dated as of May 31, 1995 (the Original Patent and Trademark Security Agreement as amended, supplemented or otherwise modified by such Amendment No. 1, the "Existing Patent and Trademark Security Agreement"), pursuant to which the Pledgors granted to the Agent, for the benefit of the Lenders, a security interest in all the Collateral (as defined in the Existing Patent and Trademark Security Agreement) as collateral security for the Obligations (as defined in the Existing Patent and Trademark Security Agreement); WHEREAS, the Company, the Agent and the Lenders have agreed to restructure the obligations of the Company under the Existing Agreements by means of, among other things, the execution and delivery of the Indenture and the Master Restructuring Agreement, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "MRA"), among the Company, the Agent and the Lenders, among others; and WHEREAS, it is a condition precedent to the effectiveness of the MRA and the obligation of the Agent and the Lenders to consummate the restructuring contemplated thereby, that, among other things, the Pledgors shall have executed and delivered this Agreement to the Trustee, for the benefit of the Holders. NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Lenders to restructure the obligations of the Company under the Existing Agreements and to induce the Trustee to enter into the Indenture, the Pledgors hereby agree with the Trustee, for the benefit of the Holders, that the Existing Patent and Trademark Security Agreement shall be and hereby is amended and restated in its entirety as follows: 1. Defined Terms. (a) Unless otherwise defined herein, capitalized terms defined in the Indenture are used herein as defined therein. The following terms shall have the following meanings: 3 "Agreement": this Amended and Restated Subsidiary Patent and Trademark Security Agreement, as the same may be amended, supplemented, waived or otherwise modified from time to time. "Code": the Uniform Commercial Code as from time to time in effect in the State of New York. "Collateral": as defined in Section 2 of this Agreement. "General Intangibles": as defined in Section 9-106 of the Code, including, without limitation, all Patents and Trademarks now or hereafter owned by any Pledgor to the extent such Patents and Trademarks would be included in General Intangibles under the Code. "Patent Licenses": all license agreements with any other Person in connection with any of the Patents or such other Person's patents, whether the relevant Pledgor is a licensor or a licensee under any such license agreement, including, without limitation, the license agreements listed on Schedule 1 attached hereto and made a part hereof, subject, in each case, to the terms of such license agreements, and the right to prepare for sale, sell and advertise for sale, all Inventory (as defined in the Subsidiary Security Agreement) now or hereafter covered by such licenses. "Patents": all patents, patent applications and patentable inventions, including, without limitation, all patents and patent applications identified in Schedule 1 attached hereto and made a part hereof, and including without limitation (a) all inventions and improvements described and claimed therein, and patentable inventions, (b) the right to sue or otherwise recover for any and all past, present and future infringements and misappropriations thereof, (c) all income, royalties, damages and other payments now and hereafter due and/or payable with respect thereto (including, without limitation, payments under all licenses entered into in connection therewith, and damages and payments for past or future infringements thereof), and (d) all rights corresponding thereto and all reissues, divisions, continuations, continuations-in-part, substitutes, renewals, and extensions thereof, all improvements thereon, and all other rights of any kind whatsoever of any Pledgor accruing thereunder or pertaining thereto (Patents and Patent Licenses being, collectively, the "Patent Collateral"). "Secured Obligations": as defined in the Subsidiary Security Agreement. "Trademark Licenses": all license agreements with any other Person in connection with any of the Trademarks or such other Person's names or trademarks, whether the relevant Pledgor is a licensor or a licensee under any such license agreement, including, without limitation, the license agreements listed on Schedule 2 attached hereto and made a part hereof, subject, in each case, to the terms of such license agreements, and the right to prepare for sale, sell and advertise for sale, all Inventory (as defined in the Subsidiary Security Agreement) now or hereafter covered by such licenses. 4 "Trademarks": all trademarks, service marks, trade names, trade dress or other indicia of trade origin, trademark and service mark registrations, and applications for trademark or service mark registrations, and any renewals thereof, including, without limitation, each registration and application identified in Schedule 2 attached hereto and made a part hereof, and including without limitation (a) the right to sue or otherwise recover for any and all past, present and future infringements and misappropriations thereof, (b) all income, royalties, damages and other payments now and hereafter due and/or payable with respect thereto (including, without limitation, payments under all licenses entered into in connection therewith, and damages and payments for past or future infringements thereof), and (c) all rights corresponding thereto and all other rights of any kind whatsoever of any Pledgor accruing thereunder or pertaining thereto, together in each case with the goodwill of the business connected with the use of, and symbolized by, each such trademark, service mark, trade name, trade dress or other indicia of trade origin (Trademarks and Trademark Licenses being, collectively, the "Trademark Collateral"). (b) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section and paragraph references are to this Agreement unless otherwise specified. (c) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 2. Grant of Security Interest. Each of the Pledgors hereby confirms and reaffirms its grant of a security interest in the Collateral (as defined in the Existing Patent and Trademark Security Agreement) pursuant to the Existing Patent and Trademark Security Agreement, which security interest is hereby amended and restated to be solely in favor of the Trustee, for the ratable benefit of the Holders, and shall secure only the Obligations, and which Existing Patent and Trademark Security Agreement is replaced hereby. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations each Pledgor hereby assigns, pledges and grants to the Trustee, for the ratable benefit of the Holders, a security interest in all of the following property now owned or at any time hereafter acquired by such Pledgor or in which such Pledgor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"): (a) all Patents; (b) all Patent Licenses; (c) all Trademarks; (d) all Trademark Licenses; 5 (e) all General Intangibles connected with the use of or symbolized by the Patents and Trademarks; and (f) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing. 3. Pledgors Remain Liable; Limitations on Trustee's and Holders' Obligations. Anything herein to the contrary notwithstanding, (a) each Pledgor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Trustee of any of the rights hereunder shall not release any Pledgor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) neither the Trustee nor any Holder shall have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Trustee or any Holder be obligated to perform any of the obligations or duties of any Pledgor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 4. Trustee's Appointment as Attorney-in-Fact. (a) Powers. Each Pledgor hereby irrevocably constitutes and appoints the Trustee and any officer or Trustee thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Pledgor and in the name of such Pledgor or in its own name, from time to time in the Trustee's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, such Pledgor hereby gives the Trustee the power and right, on behalf of such Pledgor, without notice to or assent by such Pledgor, to do the following: (i) to execute and deliver any and all agreements, instruments, documents, and papers as the Trustee may reasonably request to evidence the Trustee's and the Holders' security interest in any of the Collateral; (ii) in the name of such Pledgor or its own name, or otherwise, to take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any General Intangible (to the extent that any of the foregoing constitute Collateral) or with respect to any other Collateral and to file any claim or to take any other action or institute any proceeding in any court of law or equity or otherwise deemed appropriate by the Trustee for the purpose of collecting any and all such moneys due under any such General Intangible or with respect to any such other Collateral whenever payable; (iii) to pay or discharge Liens placed on the Collateral, other than Liens permitted under this Agreement or Permitted Liens; and 6 (iv) (A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Trustee or as the Trustee shall direct; (B) to ask for, or demand, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any of the Collateral; (C) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any applications, suits, actions or proceedings at law or in equity in any court of competent jurisdiction or in the United States Patent and Trademark Office to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against such Pledgor with respect to any of the Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Trustee may deem appropriate; (G) subject to any pre-existing rights or licenses, to assign any Trademark constituting Collateral (along with the goodwill of the business to which any such Trademark pertains), for such term or terms, on such conditions, and in such manner, as the Trustee shall in its sole discretion determine; and (H) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Trustee were the absolute owner thereof for all purposes, and to do, at the Trustee's option and such Pledgor's expense, at any time, or from time to time, all acts and things which the Trustee deems necessary to protect, preserve or realize upon the Collateral and the Trustee's and the Holders' Liens thereon and to effect the intent of this Agreement, all as fully and effectively as such Pledgor might do. Each Pledgor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable until payment in full of the Securities and the other Secured Obligations then due and owing. (b) Other Powers. Each Pledgor also authorizes the Trustee to execute, in connection with any sale provided for in Section 7 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) No Duty on the Part of Trustee or Holders. The powers conferred on the Trustee and the Holders hereunder are solely to protect the Trustee's and the Holders' interests in the Collateral and shall not impose any duty upon the Trustee or any Holder to exercise any such powers. The Trustee and the Holders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Pledgor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. 5. Performance by Trustee of Pledgors' Secured Obligations. If any Pledgor fails to perform or comply with any of its agreements contained herein and the Trustee, as provided for by the terms of this Agreement, shall itself perform or comply, or otherwise cause 7 performance or compliance, with such agreement, the reasonable expenses of the Trustee incurred in connection with such performance or compliance, together with interest thereon at a rate per annum equal to 12%, shall be payable by any such Pledgor to the Trustee on demand and shall constitute Secured Obligations secured hereby. 6. Proceeds. It is agreed that if an Event of Default shall occur and be continuing, (a) all Proceeds of any Collateral received by any Pledgor consisting of cash, checks and other near-cash items shall be held by such Pledgor in trust for the Trustee and the Holders, segregated from other funds of such Pledgor, and at the request of the Trustee shall, forthwith upon receipt by such Pledgor, be turned over to the Trustee in the exact form received by such Pledgor (duly indorsed by such Pledgor to the Trustee, if required by the Trustee), and (b) any and all such Proceeds received by the Trustee (whether from such Pledgor or otherwise) may, in the sole discretion of the Trustee, be held by the Trustee, for the ratable benefit of the Holders, as collateral security for the Secured Obligations (whether matured or unmatured), and/or then or at any time thereafter may be applied by the Trustee against, the Secured Obligations then due and owing. Any balance of such Proceeds remaining after the payment in full of the Securities and the other Secured Obligations then due and owing shall be paid over to such Pledgor or to whomsoever may be lawfully entitled to receive the same. 7. Remedies. If an Event of Default shall occur and be continuing, the Trustee, on behalf of the Holders, may exercise all rights and remedies of a secured party under the Code, and, to the extent permitted by law, all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations. Without limiting the generality of the foregoing, the Trustee, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Pledgor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances, to the extent permitted by law, forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Trustee or any Holder or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Trustee or any Holder shall have the right, to the extent permitted by law, upon any such sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Pledgor, which right or equity is hereby waived or released. Each Pledgor further agrees, at the Trustee's request, upon the occurrence and during the continuance of an Event of Default, to assemble the Collateral and make it available to the Trustee at places which the Trustee shall reasonably select, whether at such Pledgor's premises or elsewhere. In the event of any sale, assignment, or other disposition of any of the Collateral, the goodwill of the business connected with and symbolized by any Trademark Collateral subject to such disposition shall be included, and the Pledgor thereof shall supply to the Trustee or its designee such Pledgor's know-how and expertise relating to the Collateral subject to such disposition, and such Pledgor's notebooks, studies, reports, records, documents and things embodying the same or relating to the inventions, 8 processes or ideas covered by, and to the manufacture of any products under or in connection with, the Collateral subject to such disposition, and such Pledgor's customer's lists, studies and surveys and other records and documents relating to the distribution, marketing, advertising and sale of products relating to the Collateral subject to such disposition. The Trustee shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Trustee and the Holders hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Secured Obligations then due and owing, and only after such application and after the payment by the Trustee of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Trustee account for the surplus, if any, to such Pledgor. To the extent permitted by applicable law, each Pledgor waives all claims, damages and demands it may acquire against the Trustee or any Holder arising out of the repossession, retention or sale of the Collateral, other than any such claims, damages and demands that may arise from the gross negligence or willful misconduct of any of them. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition. Each Pledgor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the then outstanding Secured Obligations, including the reasonable fees and disbursements of any attorneys employed by the Trustee or any Holder to collect such deficiency. 8. Limitation on Duties Regarding Preservation of Collateral. The Trustee's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Trustee deals with similar property for its own account. None of the Trustee, any Holder, nor any of their respective directors, officers, employees or trustees shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Pledgor or any other Person. 9. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are powers coupled with an interest and are irrevocable until payment in full of the Securities and the other Secured Obligations then due and owing. 10. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11. Section Headings. The Section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 9 12. No Waiver; Cumulative Remedies. None of the Trustee nor any Holder shall by any act (except pursuant to Section 13 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Trustee or any Holder, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Trustee or any Holder of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Trustee or such Holder would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 13. Amendments in Writing; Successors and Assigns. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Article IX of the Indenture. This Agreement shall be binding upon the successors and assigns of the Pledgors and shall inure to the benefit of the Trustee and the Holders and their respective successors and assigns, except that no Pledgor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Trustee. 14. Notices. All notices, requests and demands pursuant hereto shall be made in accordance with Section 12 of the Subsidiary Guarantee. 15. Authority of Trustee. Each Pledgor acknowledges that the rights and responsibilities of the Trustee under this Agreement with respect to any action taken by the Trustee or the exercise or non-exercise by the Trustee of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as among the Trustee and the Holders, be governed by the Indenture and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Trustee and each Pledgor, the Trustee shall be conclusively presumed to be acting as Trustee for the Holders with full and valid authority so to act or refrain from acting, and such Pledgor shall not be under any obligation to make any inquiry respecting such authority. 16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 17. Release of Collateral and Termination. (a) At such time as the payment in full of the Securities and the other Secured Obligations then due and owing shall have occurred, the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Trustee and each Pledgor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to such Pledgor unless such reversion would be inconsistent with the Subordination Agreement. Upon request of any 10 Pledgor following any such termination, the Trustee shall deliver (at the sole cost and expense of such Pledgor) to such Pledgor any Collateral held by the Trustee hereunder, and execute and deliver (at the sole cost and expense of such Pledgor) to such Pledgor such documents as such Pledgor shall reasonably request to evidence such termination. (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by the Pledgor in a transaction permitted by the Indenture and the Bank Credit Agreement, then the Trustee shall execute and deliver to such Pledgor (at the sole cost and expense of such Pledgor) all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. 18. Subordination. Each of the Pledgors and the Trustee (for itself in that capacity and on behalf of the Holders) acknowledge that the security interests in the Collateral granted, confirmed and/or reaffirmed pursuant to this Agreement or otherwise held by the Trustee or any Holder are subordinated in priority to the security interests in the Collateral held by the holder of the Senior Indebtedness as provided in, and the rights (including the right to payment) and remedies of the Trustee hereunder and of the Holders are subordinated and subject to the terms and provisions of, the Subordination Agreement. 19. Inconsistent Provisions. In the event of any inconsistency or conflict between the provisions of this Agreement and the provisions of the Subsidiary Security Agreement, the provisions of the Subsidiary Security Agreement shall govern. 20. Counterparts. This Agreement may be executed by the parties hereto in any number of separate counterparts, and all of said counterparts taken together shall be deemed, to constitute one and the same instrument. 21. Incorporation of Certain Indenture Provisions. All provisions of Article VII of the Indenture shall be construed as extending to and including all of the rights, duties and obligations imposed upon the Trustee under this Agreement as fully and for all purposes as if said Article VII were contained in this Agreement. 11 IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written. CLIPPER MIST, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary LONDON FOG SPORTSWEAR, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary MATTHEW MANUFACTURING CO., INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary PACIFIC TRAIL, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary PTI HOLDING CORP. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary 12 PTI TOP COMPANY, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary STAR SPORTSWEAR MANUFACTURING CORP. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary THE MOUNGER CORPORATION By: ---------------------------- Name: Stuart B. Fisher Title: Secretary THE SCRANTON OUTLET CORPORATION By: ---------------------------- Name: Stuart B. Fisher Title: Secretary WASHINGTON HOLDING COMPANY By: ---------------------------- Name: Stuart B. Fisher Title: Secretary Schedule 1 PATENTS AND PATENT LICENSES Schedule 2 TRADEMARKS AND TRADEMARK LICENSES EXHIBIT H AMENDED AND RESTATED SUBSIDIARY PLEDGE AGREEMENT AMENDED AND RESTATED SUBSIDIARY PLEDGE AGREEMENT, dated as of February 27, 1998, made by each of the corporations signatories hereto (the "Pledgors"), in favor of IBJ Schroder Bank & Trust Company, as trustee (in such capacity, the "Trustee") for the Holders under, and as defined in, the Indenture, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Indenture"), between London Fog Industries, Inc., a Delaware corporation (the "Company"), and the Trustee. W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Credit Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Original Agent") for the several banks and other financial institutions from time to time parties thereto (the "Original Lenders") and the Original Lenders, the Original Lenders made certain loans and other extensions of credit to the Company; WHEREAS, in connection with the execution and delivery of the Original Credit Agreement, the Pledgors executed and delivered to the Original Agent, for the benefit of the Original Lenders, the Subsidiary Pledge Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Pledge Agreement"), pursuant to which the Pledgors pledged to the Original Agent, for the benefit of the Original Lenders, the Collateral (as defined in the Original Pledge Agreement) as collateral security for the Obligations (as defined in the Original Pledge Agreement); WHEREAS, the Company, the Original Agent and the Original Lenders agreed to restructure the obligations of the Company under the Original Credit Agreement by means of, among other things, the execution and delivery of the Master Restructuring Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Existing MRA"), among the Company, the Original Agent and the Original Lenders, among others; WHEREAS, in connection with the execution and the delivery of the Existing MRA, the Company executed and delivered (a) the Term Loan Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Term Loan Agreement"), among London Fog Industries, Inc., a Delaware Corporation (the "Company"), The 2 Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Term Loan Agent") for the several banks and other financial institutions from time to time parties thereto (the "Term Loan Lenders") and the Term Loan Lenders and (b) the Note Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Note Agreement" and, together with the Term Loan Agreement, collectively, the "Existing Agreements"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity and also in its capacity as the Term Loan Agent, the "Agent") for the several banks and other financial institutions from time to time parties thereto (the "Note Lenders" and, together with the Term Loan Lenders, collectively, the "Lenders") and the Note Lenders, pursuant to which the Lenders made certain loans to the Company; WHEREAS, in connection with the execution and delivery of the Existing MRA and the Existing Agreements, the Pledgors executed and delivered to the Agent, for the benefit of the Lenders, Amendment No. 1 to the Subsidiary Pledge Agreement, dated as of May 31, 1995 (the Original Pledge Agreement as amended, supplemented or otherwise modified by such Amendment No. 1, the "Existing Pledge Agreement"), pursuant to which the Pledgors pledged to the Agent, for the benefit of the Lenders, the Collateral (as defined in the Existing Pledge Agreement) as collateral security for the Obligations (as defined in the Existing Pledge Agreement); WHEREAS, the Company, the Agent and the Lenders have agreed to restructure the obligations of the Company under the Existing Agreements by means of, among other things, the execution and delivery of the Indenture and the Master Restructuring Agreement, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "MRA"), among the Company, the Agent and the Lenders, among others; WHEREAS, it is a condition precedent to the effectiveness of the MRA and the obligation of the Agent and the Lenders to consummate the restructuring contemplated thereby, that, among other things, the Pledgors guarantee payment and performance of the Company's obligations under the Indenture; WHEREAS, in satisfaction of such condition, the Pledgors have entered into an Amended and Restated Subsidiary Guarantee of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Guarantee") for the benefit of the Trustee and the Holders; and WHEREAS, it is a further condition precedent to the effectiveness of the MRA and the obligation of the Agent and the Lenders to consummate the restructuring contemplated thereby, that, among other things, the Pledgors shall have executed and delivered this Agreement to secure the payment and performance of the Pledgors' obligations under the Guarantee to the Trustee, for the benefit of the Holders. 3 NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Lenders to restructure the obligations of the Company under the Existing Agreements and to induce the Trustee to enter into the Indenture, the Pledgors hereby agree with the Trustee, for the benefit of the Holders, that the Existing Pledge Agreement shall be and hereby is amended and restated in it entirety as follows: 1. Defined Terms. (a) Unless otherwise defined herein, terms defined in the Indenture and used herein shall have the meanings given to them in the Indenture. (b) The following terms shall have the following meanings: "Agreement": this Amended and Restated Subsidiary Pledge Agreement, as the same may be amended, modified or otherwise supplemented from time to time. "Code": the Uniform Commercial Code from time to time in effect in the State of New York. "Collateral": the Pledged Securities and all Proceeds. "Collateral Account": any account established to hold money Proceeds, maintained under the sole dominion and control of the Trustee, subject to withdrawal by the Trustee for the account of the Holders only as provided in Section. "Foreign Subsidiary": any Subsidiary of the Company organized under the laws of any jurisdiction outside the United States of America. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Intercompany Note": promissory notes evidencing intercompany loans made by (a) the Company in favor of any of its Subsidiaries, (b) any Subsidiary of the Company in favor of the Company or (c) any Subsidiary of the Company in favor of any other Subsidiary of the Company. "Issuers": the collective reference to the companies identified on Schedule 1 attached hereto as the issuers of the Pledged Stock and the Pledged Notes; individually, each an "Issuer." "Pledged Notes": all Intercompany Notes at any time issued to any Pledgor and all other promissory notes issued to or held by any Pledgor (other than promissory notes issued in connection with extensions of trade credit by any Pledgor in the ordinary course of business). 4 "Pledged Securities": all of the Pledged Stock and Pledged Notes. "Pledged Stock": the shares of capital stock listed on Schedule 1 hereto, together with all stock certificates, options or rights of any nature whatsoever that may be issued or granted by each Issuer to any Pledgor while this Agreement is in effect; provided that in no event shall more than 65% of the issued and outstanding shares of capital stock of any Foreign Subsidiary be Pledged Stock. "Proceeds": all "proceeds" as such term is defined in Section 9-306(1) of the Uniform Commercial Code in effect in the State of New York on the date hereof and, in any event, shall include, without limitation, all dividends or other income from the Pledged Securities, collections thereon or distributions with respect thereto. "Requirement of Law": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Secured Obligations": as defined in the Subsidiary Security Agreement. (c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 2. Pledge; Grant of Security Interest. Each of the Pledgors hereby confirms and reaffirms its grant of a security interest in the Collateral (as defined in the Existing Pledge Agreement) pursuant to the Existing Pledge Agreement, which security interest is hereby amended and restated to be solely in favor of the Trustee, for the ratable benefit of the Holders, and shall secure only the Obligations, and which Existing Pledge Agreement is replaced hereby. The Pledgors hereby deliver to the Trustee, for the ratable benefit of the Holders, all the Pledged Securities and hereby grant to the Trustee, for the ratable benefit of the Holders, a security interest in the Collateral, prior and superior in right to any other Person other than the holders of the Senior Indebtedness as set forth in the Subordination Agreement and the Bank Credit Agreement, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations. 3. Stock Powers and Endorsements. Concurrently with the delivery to the Trustee of each certificate representing one or more shares of Pledged Stock to the Trustee, the 5 relevant Pledgor shall deliver an undated stock power covering such certificate, duly executed in blank by such Pledgor with, if the Trustee so requests, signature guaranteed. All Pledged Notes, when delivered, shall be duly endorsed in blank. 4. Representations and Warranties. Each Pledgor represents and warrants that: (a) The shares of Pledged Stock constitute all the issued and outstanding shares of all classes of the capital stock of each Issuer. (b) All the shares of the Pledged Stock have been duly and validly issued and are fully paid and nonassessable. (c) Each of the Pledged Notes constitutes the legal, valid and binding obligation of the obligor with respect thereto, enforceable in accordance with its terms, except to the extent that the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law). (d) Each Pledgor is the record and beneficial owner of, and has good and marketable title to, the Pledged Securities pledged by it, free of any and all Liens or options in favor of, or claims of, any other Person, except the security interest created by this Agreement and the Bank Credit Agreement. (e) Upon delivery to the Trustee of the stock certificates and instruments evidencing the Pledged Securities, the security interest created by this Agreement will constitute a valid security interest in the Collateral, prior and superior in right to any other Person other than the holders of the Senior Indebtedness as set forth in the Subordination Agreement and the Bank Credit Agreement, enforceable in accordance with its terms against all creditors of such Pledgor and any Persons purporting to purchase any Collateral from such Pledgor. 5. Covenants. Each Pledgor covenants and agrees with the Trustee and the Holders that, from and after the date of this Agreement until this Agreement is terminated and the security interests created hereby are released: (a) If such Pledgor shall, as a result of its ownership of its Pledged Stock, become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any shares of the Pledged Stock, or otherwise in respect thereof, such Pledgor shall accept the same as the agent of the Trustee and the Holders, hold the same in trust for the Trustee and the Holders and deliver the same forthwith to the Trustee in the exact form received, duly indorsed by such Pledgor to the Trustee, if required, together with an undated stock power covering such 6 certificate duly executed in blank by such Pledgor and with, if the Trustee so requests, signature guaranteed, to be held by the Trustee, subject to the terms hereof, as additional collateral security for the Secured Obligations. Any sums paid upon or in respect of the Pledged Securities upon the liquidation or dissolution of any Issuer shall be paid over to the Trustee, to be held by it hereunder as additional collateral security for the Secured Obligations, and in case any distribution of capital shall be made on or in respect of the Pledged Securities or any property shall be distributed upon or with respect to the Pledged Securities pursuant to the recapitalization or reclassification of the capital of any Issuer or pursuant to the reorganization thereof, the property so distributed shall be delivered to the Trustee, to be held by it hereunder as additional collateral security for the Secured Obligations. If any sums of money or property so paid or distributed in respect of the Pledged Securities shall be received by any Pledgor, such Pledgor shall, until such money or property is paid or delivered to the Trustee, hold such money or property in trust for the Holders, segregated from other funds of such Pledgor, as additional collateral security for the Secured Obligations. (b) Without the prior written consent of the Trustee, none of the Pledgors will (i) vote to enable, or take any other action to permit, any Issuer to issue any stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock or other equity securities of any nature of any Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Collateral, (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Collateral, or any interest therein, except for the security interests created by this Agreement and the Bank Credit Agreement or (iv) enter into any agreement or undertaking restricting the right or ability of any Pledgor or the Trustee to sell, assign or transfer any of the Collateral. (c) Each Pledgor shall maintain the security interest created by this Agreement as a perfected security interest in the Collateral, prior and superior in right to any other Person other than the holders of the Senior Indebtedness as set forth in the Subordination Agreement and the Bank Credit Agreement, and shall defend such security interest against claims and demands of all Persons whomsoever. At any time and from time to time, upon the written request of the Trustee to any Pledgor, and at the sole expense of any such Pledgor, such Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Trustee may reasonably request for the purposes of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Trustee, duly endorsed in a manner satisfactory to the Trustee, to be held as Collateral pursuant to this Agreement. (d) Each Pledgor shall pay, and save the Trustee and the Holders harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to 7 any of the Collateral or in connection with any of the transactions contemplated by this Agreement. 6. Cash Dividends; Voting Rights. Unless an Event of Default shall have occurred and be continuing and the Trustee shall have given notice to any Pledgor of the Trustee's intent to exercise its corresponding rights pursuant to Section below, such Pledgor shall be permitted to receive all cash dividends in respect of the Pledged Stock and all payments in respect of the Pledged Notes, in each case (a) paid in the normal course of business of each Issuer and (b) consistent with past practice, to the extent permitted by the Indenture, and to exercise all voting and corporate rights with respect to the Pledged Securities; provided, however, that no vote shall be cast or corporate right exercised or other action taken which, in the Trustee's reasonable judgment, would impair the Collateral or which would be inconsistent with or result in any violation of any provision of this Agreement, the Indenture or any Security Document. 7. Rights of the Holders and the Trustee. (a) All money Proceeds received by the Trustee hereunder shall be held by the Trustee for the benefit of the Holders in a Collateral Account. All Proceeds while held by the Trustee in a Collateral Account (or by any Pledgor in trust for the Trustee and the Holders) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in subsection. (b) If an Event of Default shall occur and be continuing and the Trustee shall give notice of its intent to exercise such rights to any Pledgor, (i) the Trustee shall have the right to receive any and all cash dividends or other amounts paid in respect of the Pledged Securities pledged by such Pledgor hereunder and make application thereof to the Secured Obligations in such order as the Trustee may determine, and (ii) all shares of the Pledged Securities shall be registered in the name of the Trustee or its nominee, and the Trustee or its nominee may thereafter exercise (A) all voting, corporate and other rights pertaining to such shares of the Pledged Securities at any meeting of shareholders of any Issuer or otherwise and (B) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to such shares of the Pledged Securities as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of any Issuer, or upon the exercise by any such Pledgor or the Trustee of any right, privilege or option pertaining to such shares of the Pledged Securities, and in connection therewith, the right to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Trustee may determine), all without liability except to account for property actually received by it, but the Trustee shall have no duty to any such Pledgor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. 8 8. Remedies. (a) If an Event of Default shall have occurred and be continuing, at any time at the Trustee's election, the Trustee may apply all or any part of Proceeds held in any Collateral Account in payment of the Secured Obligations in such order as the Trustee may elect. (b) If an Event of Default shall occur and be continuing, the Trustee, on behalf of the Holders, may exercise, in addition to all other rights and remedies granted in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Trustee, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Pledgor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of the Trustee or any Holder or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Trustee or any Holder shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Pledgor, which right or equity is hereby waived and released. The Trustee shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Trustee and the Holders hereunder, including, without limitation, reasonable attorneys' fees and disbursements of counsel to the Trustee, to the payment in whole or in part of the Secured Obligations, in such order as the Trustee may elect, and only after such application and after the payment by the Trustee of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Trustee account for the surplus, if any, to any Pledgor. To the extent permitted by applicable law, each Pledgor waives all claims, damages and demands it may acquire against the Trustee or any Holder arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition. (c) Each Pledgor waives and agrees not to assert any rights or privileges which it may acquire under Section 9-112 of the Code. Each Pledgor shall remain liable for any deficiency if the proceeds of any sale or other disposition of Collateral are insufficient to pay the Secured Obligations and the fees and disbursements of any attorneys employed by the Trustee or any Holder to collect such deficiency. 9 9. Registration Rights; Private Sales. (a) If the Trustee shall determine to exercise its right to sell any or all of the Pledged Stock pursuant to Section hereof, and if in the opinion of the Trustee it is necessary or advisable to have the Pledged Stock, or that portion thereof to be sold, registered under the provisions of the Securities Act, the relevant Pledgors will cause each relevant Issuer thereof (i) to execute and deliver, and cause the directors and officers of such Issuer to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts as may be, in the opinion of the Trustee, necessary or advisable to register the Pledged Stock, or that portion thereof to be sold, under the provisions of the Securities Act, (ii) to use its best efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of the Pledged Stock, or that portion thereof to be sold, and (iii) to make all amendments thereto and/or to the related prospectus which, in the opinion of the Trustee, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Commission applicable thereto. Each Pledgor agrees to cause each relevant Issuer to comply with the provisions of the securities or "Blue Sky" laws of any and all jurisdictions which the Trustee shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) which will satisfy the provisions of subsection 11(a) of the Securities Act. (b) Each Pledgor recognizes that the Trustee may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Trustee shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so. (c) Each Pledgor further agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Stock pursuant to this Section 9 valid and binding and in compliance with any and all other applicable Requirements of Law. Each Pledgor further agrees that a breach of any of the covenants contained in this Section will cause irreparable injury to the Trustee and the Holders, that the Trustee and the Holders have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section shall be specifically enforceable against each Pledgor, and each Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under the Indenture. 10 10. Irrevocable Authorization and Instruction to the Issuers. Each Pledgor hereby authorizes and instructs each Issuer to comply with any instruction received by it from the Trustee in writing that (a) states that an Event of Default has occurred and (b) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Pledgor, and such Pledgor agrees that each Issuer shall be fully protected in so complying. 11. No Subrogation. Notwithstanding anything to the contrary in this Agreement, each Pledgor hereby irrevocably waives all rights which may have risen in connection with such Pledgor to be subrogated to any of the rights (whether contractual, under Title 11 of the United States Code, including Section 509 thereof, under common law or otherwise) of the Trustee or the Holders against the Company or against any collateral security or guarantee or right of offset held by the Trustee or the Holders for the payment of the Secured Obligations. Each Pledgor hereby further irrevocably waives all contractual, common law, statutory or other rights of reimbursement, contribution, exoneration or indemnity (or any similar right) from or against the Company or any other Person which may have arisen in connection with this Agreement. So long as the Secured Obligations remain outstanding, if any amount shall be paid or on behalf of the Company to any Pledgor on account of any of the rights waived in this Section, such amount shall be held by such Pledgor in trust, segregated from other funds of such Pledgor, and shall, forthwith upon receipt by such Pledgor, be turned over to the Trustee for the ratable benefit of the Holders in the exact form received by such Pledgor (duly indorsed by such Pledgor to the Trustee, if required), to be applied against the Secured Obligations, whether matured or unmatured, in such order as the Trustee may determine. The provisions of this Section shall survive the term of this Agreement and the payment in full of the Secured Obligations. 12. Amendments, etc. with respect to the Secured Obligations; Waiver of Rights. Each Pledgor shall remain obligated hereunder, and the Collateral shall remain subject to the security interests granted hereby, notwithstanding that, without any reservation of rights against any Pledgor, and without notice to or further assent by any Pledgor, any demand for payment of any of the Secured Obligations made by the Trustee may be rescinded by the Trustee and any of the Secured Obligations continued, and the Secured Obligations, or the liability of the Company or any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered, or released by the Trustee, and the Indenture, the Security Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or part, in accordance with Article IX of the Indenture, and any guarantee, right of offset or other collateral security at any time held by the Trustee for the payment of the Secured Obligations may be sold, exchanged, waived, surrendered or released. Neither the Trustee nor any Holder shall have any obligation to protect, secure, perfect or insure any other Lien at any time held by it as security for the Secured Obligations or any property subject thereto. Each Pledgor waives any and all notice of the creation, renewal, extension or accrual of any of the Secured Obligations and notice of or proof of reliance by the Trustee or any Holder upon this 11 Agreement; the Secured Obligations, and any of them, shall be deemed conclusively to have been created, contracted or incurred in reliance upon this Agreement; and all dealings between the Company and each Pledgor, on the one hand, and the Trustee and the Holders, on the other, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Agreement. Each Pledgor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Company or such Pledgor with respect to the Secured Obligations. When pursuing its rights and remedies hereunder against any Pledgor, the Trustee and any Holder may, but shall be under no obligation to, pursue such rights and remedies as it may have against the Company or any other Person or against any collateral security or guarantee for the Secured Obligations or any right of offset with respect thereto, and any failure by the Trustee or any Holder to pursue such other rights or remedies or to collect any payments from the Company or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Company or any such other Person or of any such collateral security, guarantee or right of offset, shall not relieve any such Pledgor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Trustee or any Holder against any such Pledgor or the Collateral. 13. Trustee's Appointment as Attorney-in-Fact. (a) Each Pledgor hereby irrevocably constitutes and appoints the Trustee and any officer or agent of the Trustee, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Pledgor and in the name of such Pledgor or in the Trustee's own name, from time to time in the Trustee's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, including, without limitation, any financing statements, endorsements, assignments or other instruments of transfer. (b) Each Pledgor hereby ratifies all that said attorneys shall lawfully do or cause to be done pursuant to the power of attorney granted in subsection . All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released. 14. Duty of Trustee. The Trustee's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Trustee deals with similar securities and property for its own account, except that the Trustee shall have no obligation to invest funds held in any Collateral Account and may hold the same as demand deposits. Neither the Trustee, any Holder nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise 12 dispose of any Collateral upon the request of any Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. 15. Execution of Financing Statements. Pursuant to Section 9-402 of the Code, each Pledgor authorizes the Trustee to file financing statements with respect to the Collateral without the signature of such Pledgor in such form and in such filing offices as the Trustee reasonably determines appropriate to perfect the security interests of the Trustee under this Agreement. A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 16. Authority of Trustee. Each Pledgor acknowledges that the rights and responsibilities of the Trustee under this Agreement with respect to any action taken by the Trustee or the exercise or non-exercise by the Trustee of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Trustee and the Holders, be governed by the Indenture and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Trustee and such Pledgor, the Trustee shall be conclusively presumed to be acting as agent for the Holders with full and valid authority so to act or refrain from acting, and neither any such Pledgor nor any Issuer shall be under any obligation, or entitlement, to make any inquiry respecting such authority. 17. Notices. All notices, requests and demands pursuant hereto shall be made in accordance with Section 12 of the Subsidiary Guarantee. 18. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 19. Integration. This Agreement represents the agreement of each Pledgor with respect to the subject matter hereof and there are no promises or representations by the Trustee or any Holder relative to the subject matter hereof not reflected herein. 20. Amendments in Writing; No Waiver; Cumulative Remedies. (a) None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Article IX of the Indenture. This Agreement shall be binding upon the successors and assigns of each of the Pledgors and shall inure to the benefit of the Trustee and the Holders and their respective successors and assigns, except that no Pledgor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Trustee. 13 21. Section Headings. The section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 22. Successors and Assigns. This Agreement shall be binding upon the successors and assigns of each Pledgor and shall inure to the benefit of the Trustee and the Holders and their successors and assigns. 23. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 24. Release of Collateral and Termination. (a) At such time the payment in full of the Securities and other Secured Obligations then due and owing shall have occurred, the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Trustee and each Pledgor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to each such Pledgor unless reversion would be inconsistent with the Subordination Agreement. Upon request of any Pledgor following any such termination, the Trustee shall deliver (at the sole cost and expense of such Pledgor) to such Pledgor any Collateral held by the Trustee hereunder, and execute and deliver (at the sole cost and expense of such Pledgor) to such Pledgor such documents as such Pledgor shall reasonably request to evidence such termination. (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by any Pledgor in a transaction permitted by the Indenture and the Bank Credit Agreement, then the Trustee shall execute and deliver to such Pledgor (at the sole cost and expense of such Pledgor) all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. 25. Subordination. Each of the Pledgors and the Trustee (for itself in that capacity and on behalf of the Holders) acknowledge that the security interests in the Collateral granted, confirmed and/or reaffirmed pursuant to this Agreement or otherwise held by the Trustee or any Holder are subordinated in priority to the security interests in the Collateral held by the holder of the Senior Indebtedness as provided in, and the rights (including the right to payment) and remedies of the Trustee hereunder and of the Holders are subordinated and subject to the terms and provisions of, the Subordination Agreement. 26. Counterparts. This Agreement may be executed by the parties hereto in any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 14 27. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 28. Incorporation of Certain Indenture Provisions. All provisions of Article VII of the Indenture shall be construed as extending to and including all of the rights, duties and obligations imposed upon the Trustee under this Agreement as fully and for all purposes as if said Article VII were contained in this Agreement. 15 IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written. CLIPPER MIST, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary LONDON FOG SPORTSWEAR, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary MATTHEW MANUFACTURING CO., INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary PACIFIC TRAIL, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary PTI HOLDING CORP. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary 16 PTI TOP COMPANY, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary STAR SPORTSWEAR MANUFACTURING CORP. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary THE MOUNGER CORPORATION By: ---------------------------- Name: Stuart B. Fisher Title: Secretary THE SCRANTON OUTLET CORPORATION By: ---------------------------- Name: Stuart B. Fisher Title: Secretary WASHINGTON HOLDING COMPANY By: ---------------------------- Name: Stuart B. Fisher Title: Secretary ACKNOWLEDGEMENT AND CONSENT Each of the undersigned hereby acknowledges receipt of a copy of the Amended and Restated Subsidiary Pledge Agreement, dated as of February 27, 1998 (the "Pledge Agreement"), made by each of the corporations signatories thereto in favor of IBJ Schroder Bank & Trust Company, as trustee (in such capacity, the "Trustee") for the Holders (as defined in the Pledge Agreement). Each of the undersigned agrees for the benefit of the Trustee and the Holders as follows: 1. The undersigned will be bound by the terms of the Pledge Agreement and will comply with such terms insofar as such terms are applicable to the undersigned. 2. The undersigned will notify the Trustee promptly in writing of the occurrence of any of the events described in subsection of the Pledge Agreement. 3. The terms of subsections 9(a) and of the Pledge Agreement shall apply to it, mutatis mutandis, with respect to all actions that may be required of it under or pursuant to or arising out of Section of the Pledge Agreement. PACIFIC TRAIL, INC. By: ----------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 2 PTI HOLDING CORP. By: ----------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 THE MOUNGER CORPORATION By: ----------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 WASHINGTON HOLDING COMPANY By: ----------------------- Name: Stuart B. Fisher Title: Secretary Address for Notices: 1332 Londontown Boulevard Eldersburg, MD 21784 Fax: (410) 549-6448 Schedule 1 DESCRIPTION OF PLEDGED STOCK
Class Stock Certificate Issuer of Stock* No. No. of Shares - ----------------------------------------- -------------------- ------------------------ --------------------
- ---------- * Stock is assumed to be common stock unless otherwise indicated. EXHIBIT I AMENDED AND RESTATED SUBSIDIARY SECURITY AGREEMENT AMENDED AND RESTATED SUBSIDIARY SECURITY AGREEMENT, dated as of February 27, 1998, made by each of the corporations signatories hereto (the "Pledgors"), in favor of IBJ Schroder Bank & Trust Company, as trustee (in such capacity, the "Trustee") for the Holders under, and as defined in, the Indenture, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Indenture"), between London Fog Industries, Inc., a Delaware corporation (the "Company"), and the Trustee. W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Credit Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Original Agent") for the several banks and other financial institutions from time to time parties thereto (the "Original Lenders") and the Original Lenders, the Original Lenders made certain loans and other extensions of credit to the Company; WHEREAS, in connection with the execution and delivery of the Original Credit Agreement, the Pledgors executed and delivered to the Original Agent, for the benefit of the Original Lenders, the Subsidiary Security Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Security Agreement"), pursuant to which the Pledgors pledged to the Original Agent, for the benefit of the Original Lenders, all of the Collateral (as defined in the Original Security Agreement) as collateral security for the Obligations (as defined in the Original Security Agreement); WHEREAS, the Company, the Original Agent and the Original Lenders agreed to restructure the obligations of the Company under the Original Credit Agreement by means of, among other things, the execution and delivery of the Master Restructuring Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Existing MRA"), among the Company, the Original Agent and the Original Lenders, among others; WHEREAS, in connection with the execution and the delivery of the Existing MRA, the Company executed and delivered (a) the Term Loan Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified from time to time, the "Term Loan Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Term Loan Agent") for the several banks and 2 other financial institutions from time to time parties thereto (the "Term Loan Lenders") and the Term Loan Lenders and (b) the Note Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified from time to time, the "Note Agreement" and, together with the Term Loan Agreement, collectively, the "Existing Agreements"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity and also in its capacity as the Term Loan Agent, the "Agent") for the several banks and other financial institutions from time to time parties thereto (the "Note Lenders" and, together with the Term Loan Lenders, collectively, the "Lenders") and the Note Lenders, pursuant to which the Lenders made certain loans to the Company; WHEREAS, in connection with the execution and delivery of the Existing MRA and the Existing Agreements, the Pledgors executed and delivered to the Agent, for the benefit of the Lenders, Amendment No. 1 to the Subsidiary Security Agreement, dated as of May 31, 1995 (the Original Security Agreement as amended, supplemented or otherwise modified by such Amendment No. 1, the "Existing Security Agreement"), pursuant to which the Pledgors granted to the Agent, for the benefit of the Lenders, a security interest in all the Collateral (as defined in the Existing Security Agreement) as collateral security for the Obligations (as defined in the Existing Security Agreement); WHEREAS, the Company, the Agent and the Lenders have agreed to restructure the obligations of the Company under the Existing Agreements by means of, among other things, the execution and delivery of the Indenture and the Master Restructuring Agreement, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "MRA"), among the Company, the Agent and the Lenders, among others; WHEREAS, it is a condition precedent to the effectiveness of the MRA and the obligation of the Agent and the Lenders to consummate the restructuring contemplated thereby, that, among other things, the Pledgors guarantee payment and performance of the Company's obligations under the Indenture; WHEREAS, in satisfaction of such condition, the Pledgors have entered into an Amended and Restated Subsidiary Guarantee of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Guarantee") for the benefit of the Trustee and the Holders; and WHEREAS, it is a further condition precedent to the effectiveness of the MRA and the obligation of the Agent and the Lenders to consummate the restructuring contemplated thereby, that, among other things, the Pledgors shall have executed and delivered this Agreement to secure the payment and performance of the Pledgors' obligations under the Guarantee to the Trustee, for the benefit of the Holders. NOW, THEREFORE, in consideration of the premises and to induce the Trustee and the Holders to restructure the obligations of the Company under the Existing Agreements and to induce the Trustee to enter into the Indenture, the Pledgors hereby agree with the Trustee, 3 for the benefit of the Holders, that the Existing Security Agreement shall be and hereby is amended and restated in its entirety as follows: 1. Defined Terms. 1.1 Definitions. (a) Unless otherwise defined herein, terms defined in the Indenture and used herein shall have the meanings given to them in the Indenture and the following terms which are defined in the Uniform Commercial Code in effect in the State of New York on the date hereof are used herein as so defined: Accounts, Chattel Paper, Documents, Equipment, Farm Products, General Intangibles, Instruments, Inventory, Investment Property and Proceeds. (b) The following terms shall have the following meanings: "Agreement": this Amended and Restated Subsidiary Security Agreement, as the same may be amended, modified or otherwise supplemented from time to time. "Code": the Uniform Commercial Code as from time to time in effect in the State of New York. "Collateral": as defined in Section hereof. "Collateral Account": any collateral account established by the Trustee as provided in subsection or subsection hereof. "Contracts": with respect to any Pledgor, all contracts, agreements, instruments and indentures in any form, and portions thereof, to which such Pledgor is a party or under which such Pledgor has any right, title or interest or to which such Pledgor or any property of such Pledgor is subject, as the same may from time to time be amended, supplemented or otherwise modified, including, without limitation, (a) all rights of such Pledgor to receive moneys due and to become due to it thereunder or in connection therewith, (b) all rights of such Pledgor to damages arising out of, or for, breach or default in respect thereof and (c) all rights of such Pledgor to perform and to exercise all remedies thereunder, in each case to the extent the grant by such Pledgor of a security interest pursuant to this Agreement in its right, title and interest in such contract, agreement, instrument or indenture is not prohibited by such contract, agreement, instrument or indenture without the consent of any other party thereto, would not give any other party to such contract, agreement, instrument or indenture the right to terminate its obligations thereunder, or is permitted with consent if all necessary consents to such grant of a security interest have been obtained from the other parties thereto (it being understood that the foregoing shall not be deemed to obligate such Pledgor to obtain such consents); provided, that the foregoing limitation shall not affect, limit, restrict or impair the grant by such Pledgor of a security interest pursuant to this Agreement in any Account or any money or other amounts due or to become due under any such contract, agreement, instrument or indenture. 4 "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Obligations": as defined in the Subsidiary Guarantee. "Patent Licenses": all license agreements with any other Person in connection with any of the Patents or such other Person's patents, whether the relevant Pledgor is a licensor or a licensee under any such license agreement, including, without limitation, the license agreements listed on Schedule 1 attached hereto and made a part hereof, subject, in each case, to the terms of such license agreements, and the right to prepare for sale, sell and advertise for sale, all Inventory now or hereafter covered by such licenses. "Patents": all patents, patent applications and patentable inventions, including, without limitation, all patents and patent applications identified in Schedule 1 attached hereto and made a part hereof, and including, without limitation, (a) all inventions and improvements described and claimed therein, and patentable inventions, (b) the right to sue or otherwise recover for any and all past, present and future infringements and misappropriations thereof, (c) all income, royalties, damages and other payments now and hereafter due and/or payable with respect thereto (including, without limitation, payments under all licenses entered into in connection therewith, and damages and payments for past or future infringements thereof) and (d) all rights corresponding thereto and all reissues, divisions, continuations, continuations-in- part, substitutes, renewals, and extensions thereof, all improvements thereon, and all other rights of any kind whatsoever of any Pledgor accruing thereunder or pertaining thereto (Patents and Patent Licenses being, collectively, the "Patent Collateral"). "Requirement of Law": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Secured Obligations": the collective reference to (a) the Obligations and (b) all obligations and liabilities of a Pledgor which may arise in connection with this Agreement, the Indenture, the Guarantees, the Security Documents, the MRA or any other Restructuring Document (as defined in the MRA) to which such Pledgor is a party, whether on account of reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Trustee or to the Holders that are required to be paid by such Pledgor pursuant to the terms of this Agreement, the Indenture, the 5 Guarantees, the Security Documents, the MRA or any other Restructuring Document (as defined in the MRA)). "Trademark License": all license agreements with any other Person in connection with any of the Trademarks or such other Person's names or trademarks, whether the relevant Pledgor is a licensor or a licensee under any such license agreement, including, without limitation, the license agreements listed on Schedule 2 attached hereto and made a part hereof, subject, in each case, to the terms of such license agreements, and the right to prepare for sale, sell and advertise for sale, all Inventory now or hereafter covered by such licenses. "Trademarks": all trademarks, service marks, trade names, trade dress or other indicia of trade origin, trademark and service mark registrations, and applications for trademark or service mark registrations, and any renewals thereof, including, without limitation, each registration and application identified in Schedule 2 attached hereto and made a part hereof, and including, without limitation, (a) the right to sue or otherwise recover for any and all past, present and future infringements and misappropriations thereof, (b) all income, royalties, damages and other payments now and hereafter due and/or payable with respect thereto (including, without limitation, payments under all licenses entered into in connection therewith, and damages and payments for past or future infringements thereof) and (c) all rights corresponding thereto and all other rights of any kind whatsoever of any Pledgor accruing thereunder or pertaining thereto, together in each case with the goodwill of the business connected with the use of, and symbolized by, each such trademark, service mark, trade name, trade dress or other indicia of trade origin (Trademarks and Trademark Licenses being, collectively, the "Trademark Collateral"). 1.2 Other Definitional Provisions. (a) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section and Section references are to this Agreement unless otherwise specified. (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 2. Grant of Security Interest. Each of the Pledgors hereby confirms and reaffirms its grant of a security interest in the Collateral (as defined in the Existing Security Agreement) pursuant to the Existing Security Agreement, which security interest is hereby amended and restated to be solely in favor of the Trustee, for the ratable benefit of the Holders, and shall secure only the Obligations, and which Existing Security Agreement is replaced hereby. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations, each Pledgor hereby grants to the Trustee for the ratable benefit of the Holders a security interest in all of the following property now owned or at any time hereafter acquired by such Pledgor or in which such Pledgor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"): 6 (a) all Accounts; (b) all Chattel Paper; (c) all Contracts; (d) all Documents; (e) all Equipment; (f) all General Intangibles; (g) all Instruments; (h) all Inventory; (i) all Investment Property; (j) all Patent Licenses; (k) all Patents; (l) all Trademark Licenses; (m) all Trademarks; (n) all books and records pertaining to the Collateral; and (o) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing. 3. Representations and Warranties. Each Pledgor hereby represents and warrants that: 3.1 Power and Authority. Such Pledgor has the corporate power and authority and the legal right to execute and deliver, to perform its obligations under, and to grant the security interest in the Collateral pursuant to, this Agreement and has taken all necessary corporate action to authorize its execution, delivery and performance of, and grant of the security interest in the Collateral pursuant to, this Agreement. 3.2 Title; No Other Liens. Except for the security interest granted to the Trustee for the ratable benefit of the Holders pursuant to this Agreement and the Liens existing on the Issue Date (the "Existing Liens"), such Pledgor owns each item of the Collateral free and clear of 7 any and all Liens or claims of others. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the Trustee for the ratable benefit of the Holders pursuant to this Agreement, or as have been filed or recorded in connection with Existing Liens. 3.3 Enforceable Obligation; Perfected, Security Interests. This Agreement constitutes a legal, valid and binding obligation of such Pledgor, enforceable in accordance with its terms, and the security interests granted pursuant to this Agreement (a) upon completion of the filings and other actions specified on Schedule 3 attached hereto will constitute perfected security interests on the Collateral in favor of the Trustee, for the ratable benefit of the Holders, (b) are prior to all other Liens on the Collateral in existence on the date hereof except for the Existing Liens and (c) are enforceable as such against (i) all creditors of and purchasers from such Pledgor (except purchasers of Inventory in the ordinary course of business) and (ii) any Person having any interest in the real property where any of the Equipment is located, except in each case as enforceability is affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. 3.4 No Violation. The execution, delivery and performance of this Agreement will not violate any provision of any Requirement of Law or Contractual Obligation of such Pledgor and will not result in the creation or imposition of any Lien on any of the properties or revenues of such Pledgor pursuant to any Requirement of Law or Contractual Obligation of such Pledgor, except the security interests created hereby. 3.5 No Consents Required. No consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder or creditor of such Pledgor), is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement, except consents obtained in connection with or pursuant to the Indenture, the MRA, the Bank Credit Agreement and the Subordination Agreement and in full force and effect. 3.6 No Litigation. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of such Pledgor, threatened by or against such Pledgor or against any of its properties or revenues with respect to this Agreement or any of the transactions contemplated hereby. 3.7 Inventory and Equipment. The Inventory and the Equipment are kept at the locations listed on Schedule 4 hereto. 3.8 Chief Executive Office. The chief executive office and chief place of business of each of the Pledgors is located at the addresses set forth on Schedule 5 hereto. 8 3.9 Farm Products. None of the Collateral constitutes, or is the Proceeds of, Farm Products. 4. Covenants. Each Pledgor covenants and agrees with the Trustee and the Holders that, from and after the date of this Agreement until this Agreement is terminated and the security interests created hereby are released: 4.1 Delivery of Instruments and Chattel Paper. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper shall be immediately delivered to the Trustee, duly indorsed in a manner satisfactory to the Trustee, to be held as Collateral pursuant to this Agreement. 4.2 Maintenance of Property. Such Pledgor will keep the Equipment and Inventory in good working order and condition. 4.3 Inspection of Property; Books and Records; Discussions. Such Pledgor will keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to the Collateral. Such Pledgor will permit representatives of the Trustee to visit and inspect any of such Pledgor's properties where any of the Collateral or any of such Pledgor's books and records relating to the Collateral are located and to inspect the Collateral and to examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the condition and operation of the Collateral with officers and employees of such Pledgor and with its independent certified public accountants. 4.4 Marking of Records. Such Pledgor will mark its books and records pertaining to the Collateral to evidence this Agreement and the security interests created hereby. 4.5 Maintenance of Insurance. (a) Such Pledgor will maintain, with financially sound and reputable companies, insurance policies (i) insuring the Inventory and Equipment against loss by fire, explosion, theft and such other casualties as may be reasonably satisfactory to the Trustee and (ii) insuring such Pledgor and the Trustee, for the benefit of the Holders, against liability for personal injury and property damage relating to such Inventory and Equipment, such policies to be in such form and amounts and having such coverage as may be reasonably satisfactory to the Trustee, with losses payable to such Pledgor and the Trustee, for the benefit of the Holders, as their respective interests may appear. (b) All such insurance shall (i) provide that no cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least 30 days after receipt by the Trustee of written notice thereof, (ii) name the Trustee, for the benefit of the Holders, as insured parties and (iii) be reasonably satisfactory in all other respects to the Trustee. 9 (c) Such Pledgor shall deliver to the Trustee a report of a reputable insurance broker with respect to such insurance during the month of January in each calendar year and such supplemental reports with respect thereto as the Trustee may from time to time reasonably request. 4.6 Payment of Secured Obligations. Such Pledgor will pay and discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of income or profits therefrom, as well as all claims of any kind (including, without limitation, claims for labor, materials and supplies) against or with respect to the Collateral, except that no such charge need be paid if the amount or validity thereof is currently being contested in good faith by appropriate proceedings, reserves in conformity with GAAP with respect thereto have been provided on the books of such Pledgor and such proceedings do not involve any material danger of the sale, forfeiture or loss of any of the Collateral or any interest therein. 4.7 Maintenance of Perfected Security Interest; Further Documentation. (a) Such Pledgor shall maintain the security interest created by this Agreement as a perfected security interest subject only to Permitted Liens and shall defend such security interest against claims and demands of all Persons whomsoever. (b) At any time and from time to time, upon the written request of the Trustee, and at the sole expense of such Pledgor, such Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further action as the Trustee may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the security interests created hereby. 4.8 Changes in Locations, Name, etc. Such Pledgor will not, except upon thirty (30) days' prior written notice to the Trustee and delivery to the Trustee of (x) a written supplement to Schedule 4 showing the additional location or locations at which Inventory or Equipment shall be kept, and (y) all additional executed financing statements and other documents reasonably requested by the Trustee to maintain the validity, perfection and priority of the security interests provided for herein: (a) permit any of the Inventory or Equipment to be kept at a location other than those listed on Schedule 4 hereto; or (b) change the location of its chief executive office and chief place of business from that specified in subsection hereof; (c) change its name, identity or corporate structure to such an extent that any financing statement filed by the Trustee in connection with this Agreement would become seriously misleading. 10 4.9 Further Identification of Collateral. Such Pledgor will furnish to the Trustee from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Trustee may reasonably request, all in reasonable detail. 4.10 Notices. Such Pledgor will advise the Trustee promptly, in reasonable detail, at its address set forth in the Indenture of: (a) any Lien (other than security interests created hereby or the Existing Liens) on, or claim asserted against, any of the Collateral; and (b) the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the security interests created hereby. 4.11 Compliance with Laws. Such Pledgor will comply in all material respects with all Requirements of Law applicable to the Collateral or any part thereof, except to the extent that failure to so comply would not be reasonably expected to materially adversely affect, in the aggregate, the rights of the Trustee or the Holders hereunder, the priority of their Liens on the Collateral or the value of the Collateral. 4.12 Indemnification. Such Pledgor agrees to pay, and to save the Trustee and the Holders harmless from, any and all liabilities, costs and expenses (including, without limitation, legal fees and expenses) (a) with respect to, or resulting from any delay in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral, (b) with respect to, or resulting from, any delay in complying with any Requirement of Law applicable to any of the Collateral and (c) in connection with any of the transactions contemplated by this Agreement. 5. Provisions Relating to Accounts. 5.1 Pledgors Remains Liable under Accounts. Anything herein to the contrary notwithstanding, each Pledgor shall remain liable under each of the Accounts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account. Neither the Trustee nor any Holder shall have any obligation or liability under any Account (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Trustee or any Holder of any payment relating to such Account pursuant hereto, nor shall the Trustee or any Holder be obligated in any manner to perform any of the obligations of any Pledgor under or pursuant to any Account (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto), to present or file any claim, to take any action to enforce any performance or 11 to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 5.2 Analysis of Accounts. The Trustee shall have the right to make test verifications of the Accounts in any manner and through any medium that it reasonably considers advisable, and the Pledgors shall furnish all such assistance and information as the Trustee may require in connection with such test verifications. At any time and from time to time, upon the Trustee's request and at the expense of any such Pledgor, such Pledgor shall cause independent public accountants or others satisfactory to the Trustee to furnish to the Trustee reports showing reconciliations, aging and test verifications of, and trial balances for, the Accounts. The Trustee in its own name or in the name of others may communicate with account debtors on the Accounts to verify with them to the Trustee's satisfaction the existence, amount and terms of any Accounts. 5.3 Collections on Accounts. (a) The Trustee hereby authorizes the Pledgors to collect the Accounts, subject to the Trustee's direction and control, and at any time when an Event of Default shall have occurred and be continuing the Trustee may curtail or terminate said authority, any payments of Accounts, when collected by each such Pledgor, (i) shall be forthwith (and, in any event, within two Business Days) deposited by such Pledgor in the exact form received, duly indorsed by such Pledgor to the Trustee if required, in a Collateral Account maintained under the sole dominion and control of the Trustee, subject to withdrawal by the Trustee for the account of the Holders only as provided in subsection hereof, and (ii) until so turned over, shall be held by such Pledgor in trust for the Trustee and the Holders, segregated from other funds of such Pledgor. (b) Each such deposit of Proceeds of Accounts shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit. (c) At the Trustee's request, the Pledgors shall deliver to the Trustee all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Accounts, including, without limitation, all original orders, invoices and shipping receipts. 5.4 Representations and Warranties. (a) No amount payable to any Pledgor under or in connection with any Account is evidenced by any Instrument or Chattel Paper which has not been delivered to the Trustee. (b) The place where each Pledgor keeps its records concerning the Accounts is at its address set forth on Schedule 5 hereto. (c) None of the obligors on any Accounts is a Governmental Authority. 5.5 Covenants. (a) The amount represented by any Pledgor to the Trustee from time to time as owing by each account debtor or by all account debtors in respect of the Accounts will at such time be correct in all material respects. 12 (b) No Pledgor will amend, modify, terminate or waive any agreement giving rise to an Account in any manner which could reasonably be expected to materially adversely affect the value of such Account as Collateral. (c) No Pledgor will fail to exercise promptly and diligently each and every material right which it may have under each agreement giving rise to an Account (other than any right of termination). (d) No Pledgor will fail to deliver to the Trustee a copy of each material demand, notice or document received by it relating in any way to any agreement giving rise to an Account. (e) Other than in the ordinary course of business as generally conducted by each Pledgor over a period of time, no Pledgor will grant any extension of the time of payment of any of the Accounts, compromise, compound or settle the same for less than the full amount thereof, release, wholly or partially, any Person liable for the payment thereof, or allow any credit or discount whatsoever thereon. (f) No Pledgor will remove its books and records from the location specified in subsection hereof. (g) In any suit, proceeding or action brought by the Trustee under any Account for any sum owing thereunder, or to enforce any provisions of any Contract, each Pledgor will save, indemnify and keep the Trustee harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the account debtor thereunder, arising out of a breach by such Pledgor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or its successors from such Pledgor. 6. Provisions Relating to Contracts. 6.1 Pledgors Remain Liable under Contracts. Anything herein to the contrary notwithstanding, each Pledgor shall remain liable under each of the Contracts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with and pursuant to the terms and provisions of each Contract. Neither the Trustee nor any Holder shall have any obligation or liability under any Contract by reason of or arising out of this Agreement or the receipt by the Trustee or any such Holder of any payment relating to such Contract pursuant hereto, nor shall the Trustee or any Holder be obligated in any manner to perform any of the obligations of any Pledgor under or pursuant to any Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 13 6.2 Communication With Contracting Parties. The Trustee in its own name or in the name of others may communicate with parties to the Contracts to verify with them to the Trustee's satisfaction the existence, amount and terms of any Contracts. 6.3 Indemnity. In any suit, proceeding or action brought by the Trustee under any Contract for any sum owing thereunder, or to enforce any provisions of any Contract, each Pledgor will save, indemnify and keep the Trustee harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the obligor thereunder, arising out of a breach by any such Pledgor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such obligor or its successors from such Pledgor. 7. Provisions Relating to Patents and Trademarks. 7.1 Representations and Warranties. (a) Except for the Liens granted to the Trustee for the ratable benefit of the Holders pursuant to this Agreement and Permitted Liens, each respective Pledgor is (or, in the case of after-acquired Collateral, will be) the sole, legal and beneficial owner of the entire right, title and interest in and to the Patents set forth opposite its name on Schedule 1 hereto and the Trademarks set forth opposite its name in Schedule 2 hereto free and clear of any and all Liens. No security agreement, financing statement or other public notice similar in effect with respect to all or any part of the Collateral is on file or of record in any public office (including, without limitation, the United States Patent and Trademark Office), except such as may have been filed in favor of the Trustee, for the ratable benefit of the Holders, pursuant to this Agreement or Permitted Liens. (b) No consent of any party (other than the respective Pledgors) to any Patent License or Trademark License constituting Collateral is required, or purports to be required, to be obtained by or on behalf of any Pledgor in connection with the execution, delivery and performance of this Agreement that has not been obtained. Each Patent License and Trademark License constituting Collateral is in full force and effect and constitutes a valid and legally enforceable obligation of the relevant Pledgor and (to the knowledge of Pledgor) each other party thereto except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditor's rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law) and except to the extent the failure of any such Patent License or Trademark License constituting Collateral to be in full force and effect or valid or legally enforceable would not be reasonably expected, in the aggregate, to have a material adverse effect on the value of the Collateral. No consent or authorization of, filing with or other act by or in respect of any Governmental Authority is required in connection with the execution, delivery, performance, validity or enforceability of any of the Patent Licenses or Trademark Licenses constituting Collateral by any party thereto other than those which have been duly obtained, made or performed and are in full force and effect and those the failure of which to make or obtain would not be reasonably expected, in the aggregate, to have a material adverse effect on the value of the Collateral. Neither the respective Pledgor nor (to the knowledge of such Pledgor) any other party to any Patent License or Trademark License 14 constituting Collateral is in default in the performance or observance of any of the terms thereof, except for such defaults as would not reasonably be expected, in the aggregate, to have a material adverse effect on the value of the Collateral. The right, title and interest of each respective Pledgor in, to and under each Patent License and Trademark License constituting Collateral are not subject to any defense, offset, counterclaim or claim which would be reasonably expected, either individually or in the aggregate, to have a material adverse effect on the value of the Collateral. (c) Set forth in Schedule 1 and Schedule 2 is a complete and accurate list of all of the Patents and Trademarks owned by each Pledgor as of the date hereof. Each Pledgor has made all necessary filings and recordations to protect and maintain its interest in the Patents and Trademarks set forth in Schedule 1 and Schedule 2, including, without limitation, all necessary filings and recordings, and payments of all maintenance fees, in the United States Patent and Trademark Office. (d) As of the date hereof, each Patent and patent application of each respective Pledgor set forth in Schedule 1 is subsisting and has not been adjudged invalid, unpatentable or unenforceable, in whole or in part, and, to the best of such Pledgor's knowledge, is valid, patentable and enforceable. As of the date hereof, each of the Patent Licenses set forth in Schedule 1 is validly subsisting and has not been adjudged invalid or unenforceable, in whole or in part, and, to the best of such Pledgor's knowledge, is valid and enforceable. As of the date hereof, each Pledgor has notified the Trustee in writing of all uses of any item of Patent Collateral material to such Pledgor's business of which such Pledgor is aware which could reasonably be expected to lead to such item becoming invalid or unenforceable. (e) As of the date hereof, each trademark registration and trademark application of each respective Pledgor set forth in Schedule 2 is subsisting as of the date hereof and has not been adjudged invalid, unregisterable or unenforceable, in whole or in part, and, to the best of such Pledgor's knowledge, is valid, registrable and enforceable. As of the date hereof, each of the Trademark Licenses set forth in Schedule 2 is validly subsisting and has not been adjudged invalid or unenforceable, in whole or in part, and, to the best of such Pledgor's knowledge, is valid and enforceable. As of the date hereof, set forth below each Pledgor's name on Schedule 2 are all uses of any item of Trademark Collateral material to each such Pledgor's business of which such Pledgor is aware which could reasonably be expected to lead to such item becoming invalid or unenforceable, including unauthorized uses by third parties and uses which were not supported by the goodwill of the business connected with such Collateral. (f) As of the date hereof, no Pledgor has made a previous assignment, sale, transfer or agreement constituting a present or future assignment, sale, transfer or encumbrance of any of the Collateral, except with respect to exclusive licenses granted in the ordinary course of business or as permitted by this Agreement, the Indenture, the Security Documents or the Bank Credit Agreement. As of the date hereof, no Pledgor has granted any license, shop right, release, covenant not to sue, or non-assertion assurance to any Person with respect to any part of the Collateral except in the ordinary course of business. 15 (g) Each Pledgor has marked its products with the trademark registration symbol (R), the numbers of all appropriate patents, the common law trademark symbol (TM), or the designation "patent pending," as the case may be, to the extent that it is reasonably and commercially practicable. (h) Except for the Patent Licenses and Trademark Licenses listed in Schedule 1 and Schedule 2 hereto, no Pledgor has knowledge of the existence of any material right or any material claim (other than as provided by this Agreement, the Indenture, the Security Documents or the Bank Credit Agreement) that is likely to be made under or against any item of Collateral contained on Schedule 1 and Schedule 2. (i) No material claim has been made and is continuing or, to the best of any Pledgor's knowledge, threatened that the use by such Pledgor of any item of Collateral is invalid or unenforceable or that the use by such Pledgor of any Collateral does or may violate the rights of any Person. To the best of the relevant Pledgor's knowledge, there is currently no material infringement or unauthorized use of any item of Collateral contained on Schedule 1 and Schedule 2. 7.2 Covenants. Each Pledgor covenants and agrees with the Trustee and the Holders that, from and after the date of this Agreement until the payment in full of the Securities and the other Secured Obligations then due and owing: (a) At any time and from time to time, upon the written request of the Trustee or such Pledgor, as the case may be, and at the sole expense of such Pledgor, such Pledgor or the Trustee, as the case may be, will promptly and duly execute and deliver such further instruments and documents and take such further action as the Trustee or such Pledgor may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Liens created hereby. Each Pledgor also hereby authorizes the Trustee to file any such financing or continuation statement without the signature of such Pledgor to the extent permitted by applicable law. A carbon, photostatic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. The Trustee agrees to notify such Pledgor and such Pledgor agrees to notify the Trustee of any financing or continuation statement filed by it pursuant to this subsection 7.2(a), provided that any failure to give any such notice shall not affect the validity or effectiveness of any such filing. (b) Such Pledgor agrees to pay, and to save the Trustee and the Holders harmless from, any and all liabilities and reasonable costs and expenses (including, without limitation, reasonable legal fees and expenses) (i) with respect to, or resulting from, any delay by such Pledgor in complying with any material Requirement of Law applicable to any of the Collateral, or (ii) in connection with any of the transactions contemplated by this Agreement, provided that such indemnity shall not, as to the Trustee or any Holder, be available to the extent that such liabilities, costs and expenses resulted from the gross negligence or willful misconduct of the 16 Trustee or any Holder. In any suit, proceeding or action brought by the Trustee or any Holder under any of the Collateral for any sum owing thereunder, or to enforce any of the Collateral, such Pledgor will save, indemnify and keep the Trustee and such Holder harmless from and against all expense, loss or damage suffered by reason of any defense or counterclaim raised in any such suit, proceeding or action. (c) Such Pledgor will keep and maintain at its own cost and expense reasonably satisfactory and complete records of the Collateral, and shall mark such records to evidence this Agreement and the Liens and the security interests created hereby. For the Trustee's and the Holders' further security, the Trustee, for the ratable benefit of the Holders, shall have a security interest in all of such Pledgor's books and records pertaining to the Collateral, and such Pledgor shall permit the Trustee or its representatives to review such books and records upon reasonable advance notice during normal business hours at the location where such books and records are kept and at the reasonable request of the Trustee. (d) Upon reasonable advance notice to such Pledgor and at reasonable intervals, or at any time and from time to time after the occurrence and during the continuance of an Event of Default and the Trustee and its representatives shall have reasonable access during normal business hours to all the books, correspondence and records of such Pledgor, and the Trustee and its representatives may examine the same, and to the extent reasonable take extracts therefrom and make photocopies thereof, and such Pledgor agrees to render to the Trustee, at such Pledgor's reasonable cost and expense, such clerical and other assistance as may be reasonable requested with regard thereto. (e) Such Pledgor will comply in all material respects with all Requirements of Law applicable to the Collateral or any part thereof, except to the extent that the failure to so comply would not be reasonably expected to materially adversely affect in the aggregate the Trustee's or the Holders' rights hereunder, the priority of their Liens on the Collateral or the value of the Collateral. (f) Such Pledgor will furnish to the Trustee from time to time such statements and schedules further identifying and describing the Collateral, and such other reports in connection with the Collateral, as the Trustee may reasonably request, all in reasonable detail. (g) Such Pledgor agrees that, should it obtain an ownership interest in any Patent Collateral or Trademark Collateral, which is not now a part of the Collateral, (i) the provisions of Section 2 shall automatically apply thereto, (ii) any such Patent Collateral and Trademark Collateral shall automatically become part of the Collateral, and (iii) with respect to any ownership interest in any Patent Collateral or Trademark Collateral that such Pledgor should obtain which such Pledgor reasonably deems is material to its business, it shall give notice thereof to the Trustee in writing, in reasonable detail, at its address set forth in the Indenture within thirty (30) business days after acquiring such ownership interest. Such Pledgor authorizes the Trustee to modify this Agreement by amending Schedule 1 and Schedule 2 (and will cooperate reasonably with the Trustee in effecting any such amendment) to include on Schedule 17 1 any Patent or Patent License and on Schedule 2 any Trademark and Trademark License of which it receives notice under this Section. (h) Such Pledgor agrees to take all necessary steps, including, without limitation, in the United States Patent and Trademark Office or in any court, to (i) maintain each Patent and each Patent License identified on Schedule 1 hereto, and (ii) pursue each patent application, now or hereafter identified in Schedule 1 hereto, including, without limitation, the filing of divisional, continuation, continuation-in-part and substitute applications, the filing of applications for reissue, renewal or extensions, the payment of maintenance fees, and the participation in interference, reexamination, opposition, infringement and misappropriation proceedings, except, in each case in which such Pledgor has reasonably determined that any of the foregoing is not of material economic value to it. Such Pledgor agrees to take corresponding steps with respect to each new or acquired patent, patent application, or any rights obtained under any Patent License, in each case, which it is now or later becomes entitled, except in each case in which such Pledgor has reasonably determined that any of the foregoing is not of material economic value to it. Any expenses incurred in connection with such activities shall be borne by such Pledgor. (i) Such Pledgor agrees to take all necessary steps, including, without limitation, in the United States Patent and Trademark Office or in any court, to (i) maintain each trademark registration and each Trademark License identified on Schedule 2 hereto, and (ii) pursue each trademark application now or hereafter identified in Schedule 2 hereto, including, without limitation, the filing of responses to office actions issued by the United States Patent and Trademark Office, the filing of applications for renewal, the filing of affidavits under Sections 8 and 15 of the United States Trademark Act, and the participation in opposition, cancellation, infringement and misappropriation proceedings, except, in each case in which such Pledgor has reasonably determined that any of the foregoing is not of material economic value to it. Such Pledgor agrees to take corresponding steps with respect to each new or acquired trademark registration, trademark application or any rights obtained under any Trademark License, in each case, which it is now or later becomes entitled, except in each case in which such Pledgor has reasonably determined that any of the foregoing is not of material economic value to it. Any expenses incurred in connection with such activities shall be borne by such Pledgor. (j) Such Pledgor shall not abandon any trademark registration, patent or any pending trademark or patent application, without the written consent of the Trustee, unless such Pledgor shall have previously determined that such use or the pursuit or maintenance of such trademark registration, patent or pending trademark or patent application is not of material economic value to it, in which case, such Pledgor will, at least annually, give notice of any such abandonment to the Trustee in writing, in reasonable detail, at its address set forth in the Indenture. (k) In the event that such Pledgor becomes aware that any item of the Collateral which such Pledgor has reasonably determined to be material to its business is infringed or misappropriated by a third party, such Pledgor shall notify the Trustee promptly and in writing, in reasonable detail, at its address set forth in the Indenture, and shall take such actions as such 18 Pledgor or the Trustee deems reasonably appropriate under the circumstances to protect such Collateral, including, without limitation, suing for infringement or misappropriation and for an injunction against such infringement or misappropriation. Any expense incurred in connection with such activities shall be borne by such Pledgor. Such Pledgor will advise the Trustee promptly and in writing, in reasonable detail, at its address set forth in the Indenture, of any adverse determination or the institution of any proceeding (including, without limitation, the institution of any proceeding in the United States Patent and Trademark Office or any court) regarding any item of the Collateral which has a material adverse effect on (a) the business, operations, property, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole or (b) the validity or enforceability of this Agreement, any of the other Security Documents or the Indenture or the rights or remedies of the Trustee or the Holders hereunder or thereunder. (l) Such Pledgor shall mark its products with the trademark registration symbol (R), the numbers of all appropriate patents, the common law trademark symbol (TM), or the designation "patent pending," as the case may be, to the extent that it is reasonably and commercially practicable. (m) Such Pledgor will not create, incur or permit to exist, will defend the Collateral against, and will take such other action as is reasonably necessary to remove, any Lien or material adverse claim on or to any of the Collateral, other than non-exclusive licenses granted in the ordinary course of business, the Liens created by this Agreement and Permitted Liens, and will defend the right, title and interest of the Trustee and the Holders in and to any of the Collateral against the claims and demands of all Persons whomsoever. (n) Without the prior written consent of the Trustee, such Pledgor will not sell, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to, the Collateral, or attempt, offer or contract to do so, except with respect to non-exclusive licenses in the ordinary course of business or as expressly permitted by the Indenture and the Security Documents or as permitted under the Bank Credit Agreement. (o) Such Pledgor will advise the Trustee promptly, in reasonable detail, at its address set forth in the Indenture, (i) of any Lien (other than Liens created hereby or Permitted Liens) on, or material adverse claim asserted against, Patents or Trademarks and (ii) of the occurrence of any other event which would reasonably be expected in the aggregate to have a material adverse effect on the aggregate value of the Collateral or the Liens created hereunder. 8. Remedies. 8.1 Notice to Account Debtors and Contract Parties. Upon the request of the Trustee at any time after the occurrence and during the continuance of an Event of Default, each Pledgor shall notify account debtors on the Accounts and parties to the Contracts that the Accounts and the Contracts have been assigned to the Trustee for the ratable benefit of the Holders and that payments in respect thereof shall be made directly to the Trustee. 1 19 8.2 Proceeds to be Turned Over To Trustee. In addition to the rights of the Trustee and the Holders specified in subsection hereof with respect to payments of Accounts, if an Event of Default shall occur and be continuing, all Proceeds received by each Pledgor consisting of cash, checks and other near-cash items shall be held by such Pledgor in trust for the Trustee and the Holders, segregated from other funds of such Pledgor, and shall, forthwith upon receipt by such Pledgor, be turned over to the Trustee in the exact form received by such Pledgor (duly indorsed by such Pledgor to the Trustee, if required) and held by the Trustee in a Collateral Account maintained under the sole dominion and control of the Trustee. All Proceeds while held by the Trustee in a Collateral Account (or by such Pledgor in trust for the Trustee and the Holders) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in subsection hereof. 8.3 Application of Proceeds. At such intervals as may be agreed upon by each respective Pledgor and the Trustee, or, if an Event of Default shall have occurred and be continuing, at any time at the Trustee's election, the Trustee may apply all or any part of Proceeds held in any Collateral Account in payment of the Secured Obligations in such order as the Trustee may elect, and any part of such funds which the Trustee elects not so to apply and deems not required as collateral security for the Secured Obligations shall be paid over from time to time by the Trustee to such Pledgor or to whomsoever may be lawfully entitled to receive the same. Any balance of such Proceeds remaining after the Secured Obligations shall have been paid in full shall be paid over to such Pledgor or to whomsoever may be lawfully entitled to receive the same. 8.4 Code Remedies. If an Event of Default shall occur and be continuing, the Trustee, on behalf of the Holders may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Trustee, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Pledgor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Trustee or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Trustee or any Holder shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Pledgor, which right or equity is hereby waived or released. Each Pledgor further agrees, at the Trustee's request, to assemble the Collateral and make it available to the Trustee at places which the Trustee shall reasonably select, whether at such Pledgor's premises or elsewhere. The Trustee shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or 20 sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Trustee and the Holders hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Secured Obligations, in such order as the Trustee may elect, and only after such application and after the payment by the Trustee of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Trustee account for the surplus, if any, to any Pledgor. To the extent permitted by applicable law, each Pledgor waives all claims, damages and demands it may acquire against the Trustee or any Holder arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition. 8.5 Waiver; Deficiency. Each Pledgor waives and agrees not to assert any rights or privileges which it may acquire under Section 9-112 of the Code. Each Pledgor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Secured Obligations and the fees and disbursements of any attorneys employed by the Trustee or any Holder to collect such deficiency. 9. Trustee's Appointment as Attorney-in-Fact; Trustee's Performance of Pledgors' Secured Obligations. 9.1 Powers. Each Pledgor hereby irrevocably constitutes and appoints the Trustee and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Pledgor and in the name of such Pledgor or in its own name, from time to time in the Trustee's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Pledgor hereby gives the Trustee the power and right, on behalf of such Pledgor, without notice to or assent by such Pledgor, to do the following: (a) in the case of any Account, at any time when the authority of such Pledgor to collect the Accounts has been curtailed or terminated pursuant to subsection 5.3(a) hereof, or in the case of any other Collateral, at any time when any Event of Default shall have occurred and is continuing, in the name of such Pledgor or its own name, or otherwise, to take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Account, Instrument, General Intangible or Contract or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Trustee for the purpose of collecting any and all such moneys due under any Account, Instrument, General Intangible or Contract or with respect to any other Collateral whenever payable; 21 (b) in the case of any Patents or Trademarks, to execute and deliver any and all agreements, instruments, documents, and papers as the Trustee may request to evidence the Trustee's and the Holders' security interest in any Patent or Trademark and the goodwill and general intangibles of such Pledgor relating thereto or represented thereby; (c) to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Agreement and to pay all or any part of the premiums therefor and the costs thereof; (d) to execute, in connection with the sale provided for in subsection hereof, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and (e) upon the occurrence and during the continuance of any Event of Default, (i) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Trustee or as the Trustee shall direct; (ii) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (iii) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (iv) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (v) to defend any suit, action or proceeding brought against such Pledgor with respect to any Collateral; (vi) to settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, to give such discharges or releases as the Trustee may deem appropriate; (vii) to assign any Patent or Trademark (along with the goodwill of the business to which any such Patent or Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Trustee shall in its sole discretion determine; and (viii) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Trustee were the absolute owner thereof for all purposes, and to do, at the Trustee's option and such Pledgor's expense, at any time, or from time to time, all acts and things which the Trustee deems necessary to protect, preserve or realize upon the Collateral and the Trustee's and the Holders' security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Pledgor might do. 9.2 Performance by Trustee of Pledgors' Secured Obligations. If any Pledgor fails to perform or comply with any of its agreements contained herein, the Trustee, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement. 9.3 Pledgors' Reimbursement Obligation. The expenses of the Trustee incurred in connection with actions undertaken as provided in this Section 9, together with interest 22 thereon at a rate per annum equal to 12% from the date of payment by the Trustee to the date reimbursed by the relevant Pledgor, shall be payable by such Pledgor to the Trustee on demand. 9.4 Ratification; Power Coupled With An Interest. Each Pledgor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released. 10. Duty of Trustee. The Trustee's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Trustee deals with similar property for its own account. Neither the Trustee, any Holder nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Trustee and the Holders hereunder are solely to protect the Trustee's and the Holders' interests in the Collateral and shall not impose any duty upon the Trustee or any Holder to exercise any such powers. The Trustee and the Holders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Pledgor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. 11. Execution of Financing Statements. Pursuant to Section 9-402 of the Code, each Pledgor authorizes the Trustee to file financing statements with respect to the Collateral without the signature of such Pledgor in such form and in such filing offices as the Trustee reasonably determines appropriate to perfect the security interests of the Trustee under this Agreement. A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 12. Authority of Trustee. Each Pledgor acknowledges that the rights and responsibilities of the Trustee under this Agreement with respect to any action taken by the Trustee or the exercise or non-exercise by the Trustee of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Trustee and the Holders, be governed by the Indenture and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Trustee and such Pledgor, the Trustee shall be conclusively presumed to be acting as trustee for the Holders with full and valid authority so to act or refrain from acting, and such Pledgor shall be under no obligation, or entitlement, to make any inquiry respecting such authority. 13. Notices. All notices, requests and demands pursuant hereto shall be made in accordance with Section 12 of the Guarantee. 23 14. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. Amendments in Writing; No Waiver; Cumulative Remedies. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Article IX of the Indenture. This Agreement shall be binding upon the successors and assigns of each Pledgor and shall inure to the benefit of the Trustee and the Holders and their respective successors and assigns, except that no Pledgor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Trustee. 15.1 Remedies Cumulative. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 16. Section Headings. The Section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 17. Successors and Assigns. This Agreement shall be binding upon the successors and assigns of each Pledgor and shall inure to the benefit of the Trustee and the Holders and their successors and assigns. 18. Governing Law. This Agreement shall be governed by, and construed and interpreted in accordance with, the law of the State of New York. 19. Release of Collateral and Termination. (a) At such time as the payment in full of the Securities and the other Secured Obligations then due and owing shall have occurred, the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Trustee and each Pledgor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to each such Pledgor unless such reversion would be inconsistent with the Subordination Agreement. Upon request of any Pledgor following any such termination, the Trustee shall deliver (at the sole cost and expense of such Pledgor) any Collateral held by the Trustee hereunder, and execute and deliver (at the sole cost and expense of such Pledgor) to such Pledgor such documents as such Pledgor shall reasonably request to evidence such termination. (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by any Pledgor in a transaction permitted by the Indenture or the Bank Credit Agreement, then the Trustee shall execute and deliver to such Pledgor (at the sole cost and expense of such 24 Pledgor) all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. 20. Subordination. Each of the Pledgors and the Trustee (for itself in that capacity and on behalf of the Holders) acknowledge that the security interests in the Collateral granted, confirmed and/or reaffirmed pursuant to this Agreement or otherwise held by the Trustee or any Holder are subordinated in priority to the security interests in the Collateral held by the holder of the Senior Indebtedness as provided in, and the rights (including the right to payment) and remedies of the Trustee hereunder and of the Holders are subordinated and subject to the terms and provisions of, the Subordination Agreement. 21. Incorporation of Certain Indenture Provisions. All provisions of Article VII of the Indenture shall be construed as extending to and including all of the rights, duties and obligations imposed upon the Trustee under this Agreement as fully and for all purposes as if said Article VII were contained in this Agreement. 25 IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written. CLIPPER MIST, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary LONDON FOG SPORTSWEAR, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary MATTHEW MANUFACTURING CO., INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary PACIFIC TRAIL, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary PTI HOLDING CORP. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary 26 PTI TOP COMPANY, INC. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary STAR SPORTSWEAR MANUFACTURING CORP. By: ---------------------------- Name: Stuart B. Fisher Title: Secretary THE MOUNGER CORPORATION By: ---------------------------- Name: Stuart B. Fisher Title: Secretary THE SCRANTON OUTLET CORPORATION By: ---------------------------- Name: Stuart B. Fisher Title: Secretary WASHINGTON HOLDING COMPANY By: ---------------------------- Name: Stuart B. Fisher Title: Secretary Schedule 1 PATENTS AND PATENT LICENSES Schedule 2 TRADEMARKS AND TRADEMARK LICENSES Schedule 3 FILINGS AND OTHER ACTIONS REQUIRED TO PERFECT SECURITY INTERESTS Uniform Commercial Code Filings COMPANY JURISDICTION Clipper Mist, Inc. Department of Assessments and Taxation, MARYLAND Clerk of the Circuit Court, CARROLL COUNTY, Maryland Secretary of State, WASHINGTON London Fog Sportswear, Inc. Department of Assessments and Taxation, MARYLAND Clerk of the Circuit Court, CARROLL COUNTY, Maryland Secretary of State, WASHINGTON Matthew Manufacturing Co., Inc. Department of Assessments and Taxation, MARYLAND Clerk of the Circuit Court, CARROLL COUNTY, Maryland Secretary of State, WASHINGTON Pacific Trail, Inc. Secretary of State, NEW YORK City Registrar, NEW YORK COUNTY, New York Secretary of State, WASHINGTON PTI Holding Corp. Secretary of State, WASHINGTON PTI Top Company, Inc. Secretary of State, ILLINOIS 2 COMPANY JURISDICTION Secretary of State, WASHINGTON Star Sportswear Manufacturing Corp. Clerk of the Superior Court, WILKES COUNTY, Georgia Department of Assessments and Taxation, MARYLAND Clerk of the Circuit Court, CARROLL COUNTY, Maryland Secretary of State, WASHINGTON The Mounger Corporation Secretary of State, WASHINGTON The Scranton Outlet Corporation Secretary of State, ALABAMA Secretary of State, ARIZONA Secretary of State, COLORADO Clerk, LARIMER COUNTY, Colorado Secretary of State, DELAWARE Secretary of State, FLORIDA Clerk of DADE COUNTY, Florida Clerk of LEE COUNTY, Florida Clerk of INDIAN RIVER COUNTY, Florida Secretary of State, IDAHO Clerk of ADA COUNTY, Idaho Secretary of State, INDIANA Clerk STEUBEN COUNTY, Indiana Clerk of JACKSON COUNTY, Indiana 3 COMPANY JURISDICTION Secretary of State, IOWA Secretary of State, KANSAS Secretary of State, KENTUCKY County Court Clerk, HART COUNTY, Kentucky County Court Clerk, LYON COUNTY, Kentucky County Court Clerk, PULASKI COUNTY, Kentucky Secretary of State, LOUISIANA Clerk of Court, ASCENSION PARISH, Louisiana Secretary of State, MAINE Secretary of State, MICHIGAN Secretary of State, MISSOURI Recorder of Deeds, CAMDEN COUNTY, Missouri Recorder of Deeds, SCOTT COUNTY, Missouri Recorder of Deeds, TANEY COUNTY, Missouri Secretary of State, NEBRASKA Secretary of State, NEVADA Secretary of State, NEW HAMPSHIRE Clerk of Town, CONWAY, New Hampshire 4 COMPANY JURISDICTION Clerk of Town, LACONIA, New Hampshire Clerk of Town, LINCOLN, New Hampshire Clerk of Town, NORTH CONWAY, New Hampshire Clerk of the Town, TILTON, New Hampshire Secretary of State, NEW JERSEY County Clerk, HUDSON, New Jersey Secretary of State, NEW MEXICO Secretary of State, NORTH CAROLINA Register of Deeds, ALAMANCE COUNTY, North Carolina Register of Deeds, BUNCOMBE COUNTY, North Carolina Register of Deeds, DARE COUNTY, North Carolina Register of Deeds, JOHNSTON COUNTY, North Carolina Register of Deeds, WATAUGA COUNTY, North Carolina County Clerk of OKLAHOMA COUNTY, Oklahoma Secretary of State, OREGON Secretary of State, PENNSYLVANIA County Prothonotary, BERKS COUNTY, Pennsylvania 5 COMPANY JURISDICTION County Prothonotary, CLINTON COUNTY, Pennsylvania County Prothonotary, LACAWANA COUNTY, Pennsylvania County Prothonotary, LANCASTER COUNTY, Pennsylvania County Prothonotary, MONROE COUNTY, Pennsylvania Secretary of State, SOUTH CAROLINA Secretary of State, UTAH Secretary of State, VERMONT Clerk of the Town, BENNINGTON, Vermont Secretary of State, WASHINGTON Secretary of State, WEST VIRGINIA Secretary of State, WISCONSIN Secretary of State, WYOMING County Clerk, TETON COUNTY, Wyoming Washington Holding Company Clerk of the Superior Court, WILKES COUNTY, Georgia Secretary of State, WASHINGTON 6 Patent and Trademark Filings UCC filings and filing of the Borrower Patent and Trademark Security Agreement with the United States Patent and Trademark Office. Other Actions None. Schedule 4 INVENTORY AND EQUIPMENT Item Location Schedule 5 ADDRESSES OF PLEDGORS Pacific Trail, Inc. 1700 Westlake Avenue, North Suite 200 Seattle, WA 98109 For all others: 1332 Londontown Boulevard Eldersburg, MD 21784 EXHIBIT J FORM OF TRANSFEREE LETTER OF REPRESENTATION London Fog Industries, Inc. c/o IBJ Schroder Bank & Trust Company, Trustee One State Street New York, New York 10004 Ladies and Gentlemen: This certificate is delivered to request a transfer of $ in principal amount of the 10% Senior Subordinated Notes due 2003 (the "Notes") of London Fog Industries, Inc. (the "Company"). Upon transfer, the Notes would be registered in the name of the new beneficial owner as follows: Name: -------------------- Address: ------------------ Taxpayer ID Number: ---------------- The undersigned represents and warrants to you that: 1. It is an institutional "accredited investor" (as defined in rule 501(a)(1), (2), (3) and (7) under the Securities Act of 1933, as amended (the "Securities Act")), purchasing for its own account or for the account of such an institutional "accredited investor" at least $250,000 principal amount of the Notes, and it is acquiring the Notes not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act. It has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment in the Notes and invest in or purchase securities similar to the Notes in the normal course of its business. It and any accounts for which it is acting are each able to bear the economic risk of its investment. 2. It understands that the Notes have not been registered under the Securities Act and, unless so registered, may not be sold except as permitted in the following sentence. It agrees on its own behalf and on behalf of any investor account for which it is purchasing the Notes to offer, sell or otherwise transfer such Notes prior to the date which is two years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Notes (or any predecessor thereto) (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement which has 2 been declared effective under the Securities Act, (c) in a transaction complying with the requirements of Rule 144A under the Securities Act to a person it reasonably believes is a qualified institutional buyer under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the United States within the meaning of Regulation S under the Securities Act, (e) to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) and (7) under the Securities Act that is purchasing for its own account or for the account of such an institutional "accredited investor," in each case in a minimum principal amount of Notes of $250,000, or (f) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of its property or the property of such investor account or accounts be at all times within our or their control and in compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Notes is proposed to be made pursuant to clause (e) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the Company and the Trustee, which shall provide, among other things, that the transferee is an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) and (7) under the Securities Act and that it is acquiring such Notes for investment purposes and not for distribution in violation of the Securities Act. Each transferee acknowledges that the Company and the Trustee reserve the right prior to the offer, sale or other transfer prior to the Resale Restriction Termination Date of the Notes pursuant to clause (d), (e) or (f) above to require the delivery of an opinion of counsel, certifications or other information satisfactory to the Company and the Trustee. TRANSFEREE: ------------------ BY: -------------------------- EXHIBIT K INTERCREDITOR AND SUBORDINATION AGREEMENT THIS INTERCREDITOR AND SUBORDINATION AGREEMENT (this "Agreement"), dated as of February 27, 1998, is by and between CONGRESS FINANCIAL CORPORATION, a California corporation ("Senior Lender", as hereinafter further defined), and IBJ SCHRODER BANK & TRUST COMPANY, a New York banking corporation, not in its individual capacity, but only as Trustee under the Subordinated Note Indenture (as hereinafter defined) and the Subordinated Security Documents (as hereinafter defined) (the "Subordinated Note Trustee"). W I T N E S S E T H: WHEREAS, London Fog Industries, Inc., a Delaware corporation ("LFI", as hereinafter further defined) has or is about to enter into the Subordinated Note Indenture pursuant to which LFI is issuing the Subordinated Notes (as hereinafter defined), which Subordinated Notes are secured by certain assets and properties of LFI and certain of its subsidiaries; and WHEREAS, Senior Lender has entered into certain financing arrangements with LFI and its subsidiaries, pursuant to which Senior Lender has agreed, upon certain terms and conditions, to make loans and provide other financial accommodations to LFI and certain of its subsidiaries secured by certain assets and properties of LFI and its subsidiaries; and WHEREAS, the parties desire to enter into this Agreement to (i) confirm the relative priority of the security interests of Senior Lender, on the one hand, and the Subordinated Note Trustee, for itself and the ratable benefit of the holders of the Subordinated Obligations (as hereinafter defined), on the other hand, in the assets and properties of LFI and its subsidiaries, (ii) provide for the orderly sharing between the Senior Lender, on the one hand, and the Subordinated Note Trustee, for itself and the ratable benefit of the holders of the Subordinated Obligations, on the other hand, in accordance with such priorities, of proceeds of such assets and properties upon any foreclosure thereon or other disposition thereof, and (iii) agree upon the terms of the subordination in favor of Senior Lender of the obligations of LFI and its subsidiaries to the Subordinated Note Trustee and the holders of the Subordinated Obligations, and related matters; NOW THEREFORE, in consideration of the mutual benefits accruing hereunder to the Senior Lender, the Subordinated Note Trustee and the other holders of the Subordinated Obligations (as hereinafter defined) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows: 1. Certain Definitions. (a) The following terms shall have the following meanings: "Blockage Notice": a written notice from the Senior Lender under the W/C Facility Agreement to the Borrower, a copy of which is sent to the Subordinated Note Trustee, that a Non- Payment Event of Default has occurred and is continuing. "Blockage Period": any period commencing on the date a Blockage Notice is given and ending on the earlier to occur of: (a) the date when the Event of Default that was the basis for such notice has been cured or waived in a writing signed by Senior Lender; and (b) one hundred eighty (180) days after the date such Blockage Notice is given, unless, prior to the expiration of such one hundred eighty (180) day period, Senior Lender commences and thereafter takes reasonable steps to continue a Senior Liquidation, in which case, the date upon which all Senior Obligations have been indefeasibly paid and satisfied and the Senior Loan Documents have all been terminated. "Borrower": individually and collectively, LFI, Pacific Trail, Inc., a Washington corporation, and The Scranton Outlet Corporation, a Delaware corporation, and their successors and assigns, including, without limitation, a receiver, trustee or debtor-in-possession on behalf of any such person or any such successor or assign. "Business Day": shall have the meaning set forth in the Subordinated Note Indenture. "Collateral": the collective reference to any and all property from time to time subject to security interests to secure payment or performance of the Senior Obligations or the Subordinated Obligations or the Trustee's Fees and Expenses. "Event of Default": an Event of Default under the W/C Facility Agreement; provided that any requirement for the giving of notice, the lapse of time, or both, or any other conditions, has been satisfied. "Excess Availability": as defined in the W/C Facility Agreement as in effect on the date hereof, it being agreed and acknowledged that certain of the components of the calculation of Excess Availability pursuant to such definition are subject to determination by Senior Lender according to, among other things, discretionary criteria or formulas subject to change from time to time. -2- "Excess Availability Test": as to any payment that is otherwise a Permitted Payment, the requirement that, for the period of thirty (30) consecutive days immediately preceding the earlier of the date of such payment or the date monies are deposited with the Subordinated Note Trustee for such payment, and after giving effect to such payment or, if earlier, the deposit of monies with the Subordinated Note Trustee for such payment, the Borrower shall have Excess Availability in an aggregate amount of not less than $5,000,000. "Insolvency Event": (a) any of the entities comprising the Borrower or any of their Subsidiaries commences any case, proceeding or other action (i) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship or relief of debtors, seeking to have an order for relief entered with respect to it, or (ii) seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (iii) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or any of the entities comprising the Borrower or any of their Subsidiaries makes a general assignment for the benefit of its creditors; or (b) there is commenced against any of the entities comprising the Borrower or any of their Subsidiaries any case, proceeding or other action of a nature referred to in clause (a) above, which (i) results in the entry of an order for relief or any such adjudication or appointment, or (ii) remains undismissed, undischarged or unbonded for a period of sixty (60) days; or (c) there is commenced against any of the entities comprising the Borrower or any of their Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal for any period of thirty (30) days following the entry thereof; or (d) any of the entities comprising the Borrower or any of their Subsidiaries takes any action in furtherance of, or indicates its consent to, approval of, or acquiescence in, any of the acts set forth in clause (a), (b) or (c) above. "LFI": London Fog Industries, Inc., a Delaware corporation, as successor corporation of the merger of LFI Merger Corp. with and into London Fog Industries Inc., and its successors and assigns. "1998 Master Restructuring Agreement": the Master Restructuring Agreement, dated as of the date hereof, among LFI, certain of LFI's subsidiaries, the "Agent" and "Lenders" under the "Old Debt Agreements" (as such quoted terms are defined therein), and certain members of senior management of LFI, as the -3- same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. "Non-Payment Event of Default": any state of facts or event (other than a Payment Event of Default or an Insolvency Event) the existence or occurrence of which entitles the Senior Lender to accelerate the maturity of any of the Senior Obligations and which has not been waived or cured in a writing signed by Senior Lender. "Payment Event of Default": any default in the payment of any or all of the Senior Obligations (whether upon maturity, mandatory prepayment, acceleration or otherwise), or any default arising from a failure to reduce direct borrowings and/or provide cash collateral for contingent obligations in respect of letters of credit under the W/C Facility Agreement in the amounts required pursuant to any clean-up provision, in each case beyond any applicable grace period with respect thereto and which has not been waived or cured in a writing signed by Senior Lender. "Permitted Payments": as defined in Section 2(b)(ii) hereof. "Person" or "person": any individual, sole proprietorship, partnership, corporation (including, without limitation, any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), limited liability partnership, limited liability company, business trust, unincorporated association, joint stock company, trust, joint venture, or other entity or any government or any agency or instrumentality or political subdivision thereof. "Security Interest" or "security interest": any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, right of set-off, security interest, encumbrance (including, but not limited to, easements, rights of way and the like), lien (statutory or other), security agreement or transfer intended as security, including, without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a capital lease or any financing lease having substantially the same economic effect as any of the foregoing. "Senior Guarantees": the collective reference to the guarantees that from time to time support payment or performance of all or any portion of the Senior Obligations, including, without limitation, the guarantees made by PTI Holding Corp., PTI Top Company, Inc., Star Sportswear Manufacturing Corp., Matthew Manufacturing Co., Inc., Washington Holding Company, Clipper Mist, Inc., The Mounger Corporation and London Fog Sportswear, Inc. -4- "Senior Guarantors": the persons executing and delivering the Senior Guarantees, and their successors and assigns. "Senior Lender": the collective reference to the holder or holders from time to time of Senior Obligations. "Senior Liquidation": the conduct by Senior Lender of enforcement actions or remedies following acceleration of the Senior Loans, or the conduct by Senior Lender of any other plan or program for the sale or other realization upon the Collateral with a view to the full collection and payment and satisfaction of the Senior Loans, whether or not Senior Lender makes any Senior Loans from time to time during the conduct of any of the foregoing. "Senior Loan Documents": the collective reference to the W/C Facility Agreement, the other Senior Security Documents, the Senior Notes, the Senior Guarantees and all other documents or instruments that from time to time evidence all or any portion of the Senior Obligations or secure or support payment or performance thereof. "Senior Loans": the loans, letters of credit, banker's acceptances and other financial accommodations made or provided to or for the account of the Borrower pursuant to the W/C Facility Agreement or any other Senior Loan Document. "Senior Notes": the promissory notes of the Borrower (if any) outstanding from time to time under the W/C Facility Agreement. "Senior Obligations": the collective reference to the unpaid principal of and interest on the Senior Loans and all other existing and future obligations and liabilities of the Borrower or any guarantors to the Senior Lender which arise under, out of, or in connection with, the W/C Facility Agreement, the other Senior Security Documents, the Senior Notes, the Senior Guarantees, this Agreement, or any other Senior Loan Document (including, without limitation, the interest and fees accruing at the then-applicable rates provided in the W/C Facility Agreement after an Event of Default under or the maturity of the Senior Loans and interest and fees accruing at the then-applicable rates provided in the W/C Facility Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to any of the entities comprising the Borrower or any guarantor, whether or not a claim for post-filing or post-petition interest or fees is allowed or allowable in such proceeding in whole or in part), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, in each case whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of -5- counsel to the Senior Lender that are required to be paid by the Borrower or Senior Guarantors pursuant to the terms of the Senior Loan Documents or are incurred or payable under or in connection with this Agreement). "Senior Security Documents": the collective reference to the W/C Facility Agreement and all other documents and instruments, now existing or hereafter arising, which create or purport to create a security interest in property to secure payment or performance of all or any portion of the Senior Obligations. "Specified Payment": as defined in Section 2(b)(ii) hereof. "Subordinated Debt Documents": the collective reference to the 1998 Master Restructuring Agreement, the Subordinated Note Indenture, the Subordinated Notes, the Subordinated Security Documents, the Subordinated Guarantees, and all other documents or instruments that from time to time evidence the Subordinated Obligations or secure or support payment or performance thereof. "Subordinated Debtholders": the holders from time to time of the Subordinated Obligations, other than the Subordinated Note Trustee acting in its capacity as Trustee and Collateral Agent under the Subordinated Note Indenture and Subordinated Security Documents. "Subordinated Guarantees": the collective reference to the guarantees that from time to time support payment or performance of the Subordinated Notes. "Subordinated Guarantors": Star Sportswear Manufacturing Corp., Washington Holding Company, The Scranton Outlet Corporation, PTI Top Company, Inc., Clipper Mist, Inc., PTI Holding Corp., London Fog Sportswear, Inc., The Mounger Corporation, Matthew Manufacturing Co., Inc. and Pacific Trail, Inc. "Subordinated Note Indenture": the Indenture, dated as of the date hereof, between LFI and the Subordinated Note Trustee with respect to the Subordinated Notes. "Subordinated Notes": the collective reference to the 10% Subordinated Notes due 2003 issued by LFI pursuant to the Subordinated Note Indenture, as the "Temporary Notes" or as the "Initial Notes" in the aggregate original principal amount of $100,000,000, and any "Exchange Notes" issued in respect of such notes as defined and provided in the Subordinated Note Indenture as in effect on the date hereof, as the foregoing may be amended, supplemented, renewed, extended, exchanged, restated or replaced. -6- "Subordinated Note Trustee": shall mean IBJ Schroder Bank & Trust Company, a New York banking corporation, as Trustee for the benefit of the holders of the Subordinated Notes, and any successor or replacement Trustee and/or collateral agent appointed pursuant to the terms and conditions of the Subordinated Note Indenture or any of the Subordinated Security Agreements. "Subordinated Obligations": the collective reference to the unpaid principal of and interest on the Subordinated Notes and all other obligations and liabilities of LFI and any guarantors to the Subordinated Note Trustee and/or the holders of the Subordinated Notes, and/or any of their successors and assigns (including, without limitation, interest accruing at the then-applicable rate provided in the Subordinated Note Indenture after the maturity of the Subordinated Notes and interest accruing at the then-applicable rate provided in the Subordinated Note Indenture after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower or any guarantor, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, whether arising under, out of, or in connection with, the Subordinated Note Indenture, the Subordinated Notes, this Agreement, any other Subordinated Debt Document, or otherwise, in each case whether related to a debt or any equity interest or other claim, right or interest, and whether on account of principal, interest, reimbursement obligations, fees, indemnities, claims for breach or damages, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel (including the allocated fees and expenses of in-house counsel) to the Subordinated Note Trustee or the holders of the Subordinated Notes that are required to be paid by LFI or any guarantor pursuant to the terms of the Subordinated Debt Documents, or are incurred or payable under or in connection with this or any other Subordinated Debt Document); provided, however, that the Subordinated Obligations shall not include the annual administrative fees and expenses of the Subordinated Note Trustee in an aggregate amount not to exceed $50,000, payable in any fiscal year of LFI (the "Trustee's Fees and Expenses"). "Subordinated Security Documents": the collective reference to all documents and instruments, now existing or hereafter arising, which purport to create a security interest in property to secure payment or performance of the Subordinated Obligations or the Trustee's Fees and Expenses. "Subsidiary" or "subsidiary": any corporation, association or organization, active or inactive, as to which more than fifty (50%) percent of the outstanding voting stock or shares or interests shall now or hereafter be owned or -7- controlled, directly or indirectly, by a Person, any subsidiary of a Person, or any subsidiary of such subsidiary. "W/C Facility Agreement": the Loan and Security Agreement, dated as of May 15, 1997, among Congress Financial Corporation and the entities comprising the Borrower, as amended through the date hereof and as the same may hereafter be amended, modified, supplemented, renewed, restated, refinanced or replaced. (b) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section and paragraph references are to this Agreement unless otherwise specified. (c) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. All terms defined in the Uniform Commercial Code as in effect in the State of New York, unless otherwise defined herein, shall have the meanings set forth therein. 2. Subordination. (a) The Borrower, the Subordinated Guarantors and the Subordinated Note Trustee, for itself and on behalf of each existing and future Subordinated Debtholder, agree that the Subordinated Obligations are expressly "subordinate and junior in right of payment" (as that phrase is defined in Section 2(b)) to all Senior Obligations. (b) "subordinate and junior in right of payment" means that: (i) no part of the Subordinated Obligations shall have any claim to the assets of the Borrower or any Senior Guarantor on a parity with or prior to the claim of the Senior Obligations (subject to the provisions contained in Section 2(b)(ii) below); and (ii) unless and until the Senior Obligations have been indefeasibly paid and satisfied in full and all obligations of Senior Lender to provide further financing under the Senior Loan Documents have been terminated or all such obligations have expired in accordance with their terms, without the express prior written consent of the Senior Lender thereunder, the Subordinated Trustee will not, and no Subordinated Debtholder will take, demand or receive from any person that is a Borrower or Senior Guarantor, and no person that is a Borrower or a Senior Guarantor will make, give or permit, directly or indirectly, by set-off, redemption, purchase or in any other manner, any payment of or security for the whole or any part of the -8- Subordinated Obligations, including, without limitation, any letter of credit or similar credit support facility to support payment of the Subordinated Obligations; provided, however, that at any time, except during a Blockage Period or when a Payment Event of Default or Insolvency Event has occurred and is continuing, LFI and any Subordinated Guarantor may make, and the holders of the Subordinated Notes may receive scheduled semi-annual payments on March 1 and September 1 in each year commencing September 1, 1998, on account of interest on the Subordinated Notes at the pre-default rate set forth in the Subordinated Notes as in effect on the date hereof ("Subordinated Interest"), in each case in accordance with the terms of the Subordinated Note Indenture as in effect on the date hereof (each such payment, a "Specified Payment"), plus any Postponed Payments (as defined below) when due; provided, further that, except as limited by Section 2(c) below, the Excess Availability Test is satisfied with respect to each such payment otherwise permitted to be made hereunder (such permitted payments satisfying the applicable conditions hereof, the "Permitted Payments"). (c) If any Specified Payment is not a Permitted Payment by virtue of the failure to meet the Excess Availability Test hereunder with respect thereto, then the due date of such Specified Payment (a "Postponed Payment") shall be automatically postponed one month at a time to the first day of the month following the original due date for such Specified Payment upon which all the conditions to payment of such Postponed Payment contained in each of the provisos to Section 2(b)(ii) hereof are satisfied; provided, however, that if the original due date of any Specified Payment is postponed twice solely by reason of the failure to meet the Excess Availability Test with respect thereto, the Excess Availability Test shall not be applicable to such Specified Payment or to any other Specified Payments or Postponed Payments becoming due on or after the first day of the second month next following the original due date of such Specified Payment, except, that, after all Specified Payments and Postponed Payments due on or prior to the first day of a given month have been paid, the Excess Availability Test shall again become applicable for subsequent Specified Payments and Postponed Payments as provided in Section 2(b)(ii), subject to the reapplication of this Section 2(c). (d) Upon the termination of any Blockage Period or if any Payment Event of Default or Insolvency Event has been cured or waived in a writing signed by Senior Lender, the rights of the holders of the Subordinated Notes and of the Subordinated Note Trustee to receive payments as provided in Section 2(b)(ii) shall be reinstated, and LFI and the Subordinated Guarantors may resume making such Permitted Payments to such Subordinated Debtholders or to the Subordinated Note Trustee on their behalf, subject to -9- the subsequent application or re-application of the provisions of this Section 2 in accordance with its terms. (e) No more than one Blockage Notice may be given within any consecutive 365-day period. (f) Notwithstanding the provisions of this Section 2 or any other provision of this Agreement: (i) the Subordinated Note Trustee shall not at any time be charged with knowledge of the existence of any facts (other than an Insolvency Event involving a case under the U.S. Bankruptcy Code by or against LFI) which would prohibit the making of any Specified Payment to or by the Subordinated Note Trustee, unless and until the Subordinated Note Trustee shall have received written notice thereof; (ii) except if a Blockage Period is in effect, or an Insolvency Event has occurred of which the Subordinated Note Trustee has received written notice (if such notice is required under clause (i) of this Section), the parties agree that unless, on or before 1:30 p.m., New York City time, on the first Business Day prior to the date on which any monies deposited with the Subordinated Note Trustee shall be payable as a Specified Payment (such notice to be supplemented by telephonic notice to the Corporate Trust Department of the Subordinated Note Trustee on or before 1:30 p.m., New York City time, if such notice is given on such first prior Business Day), the Subordinated Note Trustee has received written notice of a Payment Event of Default or other written notice that such Specified Payment is not a Permitted Payment by reason of the provisions of this Agreement, then the Subordinated Note Trustee shall have full power and authority to apply such monies to the Specified Payment, and shall not be affected as to such Specified Payment by any notice to the contrary which may be received by it after such time on such date, without, however, limiting any rights that the Senior Lender may have to recover any such Specified Payment from the Subordinated Debtholders in accordance with the provisions of this Agreement; and (iii) all monies required to be deposited with the Subordinated Note Trustee for purposes of making Permitted Payments shall be deposited no earlier than one (1) Business Day prior to the due date, unless Senior Lender shall otherwise consent in writing. -10- 3. Additional Provisions Concerning Subordination. (a) The Subordinated Note Trustee, for itself and on behalf of the existing and future Subordinated Debtholders, the Borrower and the Subordinated Guarantors agree in favor of Senior Lender that, upon the occurrence of any Insolvency Event: (i) all Senior Obligations shall be indefeasibly paid and satisfied in full before any direct or indirect payment or distribution is made with respect to the Subordinated Obligations; and (ii) any direct or indirect payment or distribution of assets of the Borrower or any Subordinated Guarantor, whether in cash, property or securities, to which any Subordinated Debtholder or the Subordinated Note Trustee would be entitled except for the provisions hereof (including by way of the sale or other disposition of any Collateral), shall be paid or delivered by the Borrower or such Subordinated Guarantor, or any receiver, trustee in bankruptcy, liquidating trustee, disbursing agent or other Person making such payment or distribution, directly to the Senior Lender, to the extent necessary to indefeasibly pay and satisfy in full all Senior Obligations (including the provision of cash collateral for all contingent Senior Obligations), before any payment or distribution shall be made to any Subordinated Debtholder or the Subordinated Note Trustee. (b) If any direct or indirect payment or distribution, whether consisting of money, property or securities, be collected or received by any Subordinated Debtholder or the Subordinated Note Trustee in respect of the Subordinated Obligations (including by way of the sale or other disposition of Collateral held by or on behalf of Subordinated Debtholders), except payments permitted to be made at the time of payment as provided in Section 2(b) or, only as to Subordinated Note Trustee, if payment is made as permitted in Section 2(f), then the Subordinated Note Trustee or any Subordinated Debtholder so collecting or receiving any of the foregoing shall forthwith deliver the same to the Senior Lender, in the form received, duly indorsed to the Senior Lender, if required, to be applied to the payment or prepayment of the Senior Obligations and to provide cash collateral for any contingent Senior Obligations until the Senior Obligations are paid and satisfied in full and all of the Senior Loan Documents have been terminated. Until so delivered, such payment or distribution shall be held by the Subordinated Note Trustee or any holder of the Subordinated Notes as the case may be, as the property of the Senior Lender, segregated from other funds and property held by the Subordinated Note Trustee or any such Subordinated Debtholder, as the case may be. -11- (c) In order to enable the Senior Lender to enforce its rights under this Section 3, but only to the extent any Subordinated Debtholder or the Subordinated Note Trustee fails to take or to take in a timely fashion or before the loss of any right becomes imminent, any of the following actions, or takes or is about to take any such action in a manner inconsistent with the provisions hereof, and provided Senior Lender gives such prior written notice to the Subordinated Note Trustee as is practicable without jeopardizing the rights and interests of Senior Lender, Senior Lender is hereby irrevocably authorized and empowered (in its own name or as assignee of the Subordinated Note Trustee or any such Subordinated Debtholder), but shall have no obligation to, enforce claims comprising any of the Subordinated Obligations by proof of debt, proof of claim, suit or otherwise and take generally any action which Subordinated Note Trustee or any such Subordinated Debtholder might otherwise be entitled to take, as Senior Lender may deem necessary or advisable for the enforcement of its rights or interests hereunder. (d) To the extent necessary for the Senior Lender to realize the benefits of the subordination of the Subordinated Obligations provided for herein (including the right to receive any payment and distributions which might otherwise be payable or deliverable in respect of the Subordinated Obligations in any proceeding described in this Section 3 or otherwise), the Subordinated Note Trustee shall execute and deliver to Senior Lender, and shall on behalf of each Subordinated Debtholder deliver to Senior Lender, such instruments or documents (together with such assignments or endorsements as Senior Lender shall deem necessary), as may be reasonably requested by Senior Lender. (e) No specific legend, further assignment or endorsement or delivery of notes, guarantees or instruments shall be necessary to subject any Subordinated Obligations to the subordination thereof contained in this Agreement. 4. Rights in Collateral; Standstill. (a) Notwithstanding anything to the contrary contained in the W/C Facility Agreement, any Senior Security Document, any other Senior Loan Document or any Subordinated Security Document or other Subordinated Debt Document and irrespective of: (i) the time, order or method of attachment or perfection of the security interests created by any Senior Security Document or any Subordinated Security Document or the non-perfection or any lapse in perfection thereof, (ii) the time or order of filing or recording financing statements or other documents filed or recorded to perfect security interests in any Collateral, -12- (iii) anything contained in any filing or agreement to which any Senior Lender or any Subordinated Debtholder or the Subordinated Note Trustee now or hereafter may be a party, and (iv) the rules for determining priority under the Uniform Commercial Code or any other law governing the relative priorities of secured creditors, any security interest in any Collateral pursuant to any Senior Security Document has and shall have priority, to the extent of any unpaid Senior Obligations at any time and from time to time outstanding, over any security interest in such Collateral pursuant to any Subordinated Security Document. (b) Any monetary proceeds realized, or monetary proceeds received in respect of property or securities realized, upon the sale, disposition or other realization upon all or any part of the Collateral after Senior Lender has commenced a Senior Liquidation, shall be applied in the following order: First, to the payment in full of all costs and expenses (including, without limitation, attorneys' fees and disbursements) paid or incurred by Senior Lender in connection with such realization on the Collateral or the protection of rights and interests therein; Second, to the payment and satisfaction in full of all Senior Obligations in such order as the Senior Lender may elect in its sole discretion, including, as and to the extent Senior Lender so requires, the cash collateralization of undrawn letters of credit and all other contingent Senior Obligations, subject in all events to Senior Lender's determination whether to relend or otherwise make available to Borrower during such Senior Liquidation any such amounts so applied in payment of any Senior Obligations; Third, to the payment in full, in accordance with Subordinated Note Indenture, of all Subordinated Obligations and Trustee's Fees and Expenses then due and which are secured by such Collateral or as a court of competent jurisdiction may direct; and Fourth, to pay to the Borrower, the Senior Guarantors or Subordinated Guarantors (as the case may be) or their representatives or as a court of competent jurisdiction may direct, any surplus then remaining. (c) The priorities of security interests provided in this Section 4 shall not be altered or otherwise affected by any amendment, modification, supplement, extension, renewal, restatement or refinancing of either the Senior Obligations or -13- the Subordinated Obligations, nor by any action or inaction which Senior Lender may take or fail to take in respect of the Collateral. (d) The Subordinated Note Trustee, for itself and on behalf of each Subordinated Debtholder, agrees that neither it nor any Subordinated Debtholder will contest the validity or enforceability of the Senior Obligations or the validity, perfection, priority or enforceability of the security interests held by Senior Lender upon the Collateral and that as between Senior Lender, on the one hand, and Subordinated Note Trustee and Subordinated Debtholders, on the other hand, the terms of this Agreement shall govern even if part or all of the Senior Obligations or the security interests securing payment and performance thereof are avoided, disallowed, set aside or otherwise invalidated in any judicial proceeding or otherwise. Senior Lender agrees that it will not contest the validity or, subject to the terms hereof, enforceability of the Subordinated Obligations or the validity, perfection, or, subject to the terms hereof, the priority or enforceability of security interests held by the Subordinated Note Trustee, for itself and the ratable benefit of the Subordinated Debtholders, and that, as between Senior Lender, on the one hand, and the Subordinated Note Trustee and Subordinated Debtholders, on the other hand, the terms of this Agreement shall govern even if part or all of the Subordinated Obligations or the security interests securing payment and performance thereof are avoided, disallowed, set aside or otherwise invalidated in any judicial proceeding or otherwise. (e) Senior Lender shall have the exclusive right to manage, perform and enforce the terms of the Senior Loan Documents with respect to the Collateral, to exercise and enforce all privileges and rights thereunder according to its discretion and the exercise of its business judgment, including, without limitation, the exclusive right to take or retake control or possession of the Collateral and to hold, prepare for sale, process, sell, lease, dispose of, or liquidate the Collateral. (f) Notwithstanding anything to the contrary contained in any of the Senior Loan Documents or Subordinated Debt Documents, only Senior Lender shall have the right to restrict or permit, or approve or disapprove, the sale, transfer or other disposition of Collateral. The Subordinated Note Trustee, for itself and on behalf of each Subordinated Debtholder, shall, immediately upon the request of Senior Lender, release or otherwise terminate its and their security interests in the Collateral to the extent such Collateral is sold or otherwise disposed of either by Senior Lender, its agents, or by Borrower or any Senior Guarantor with the consent of Senior Lender; and Subordinated Note Trustee, for itself and on behalf of each Subordinated Debtholder, shall, as soon as practicable, execute and deliver such release documents as Senior Lender may reasonably require in connection therewith. -14- (g) Notwithstanding any rights or remedies available under any of the Subordinated Debt Documents, applicable law or otherwise, except as provided in Section 4(h) below, neither the Subordinated Note Trustee nor any Subordinated Debtholder shall, directly or indirectly, (i) seek to collect from Borrower or any Senior Guarantor (including, without limitation, from or by way of any Collateral or proceeds thereof) any of the Subordinated Obligations or exercise any of its rights or remedies upon a default or event of default under the Subordinated Debt Documents or otherwise, other than acceleration upon not less than ten (10) days prior written notice to Senior Lender, or (ii) seek to foreclose or realize upon (judicially or non-judicially) its lien on any Collateral or assert any claims or interests therein (including, without limitation, by setoff or notification of account debtors), or (iii) commence any action or proceeding against Borrower or any Senior Guarantor or its properties under the U.S. Bankruptcy Code or any state insolvency law or similar present or future statute, law or regulation or any proceedings for voluntary liquidation, dissolution or other winding up of any of them or their businesses, or the appointment of any trustee, receiver or liquidator for any of them or any part of any of their properties or any assignment for the benefit of creditors or any marshalling of assets of any of them, or (iv) take any other action against Borrower or any Senior Guarantor or the Collateral. (h) If any Permitted Payment is not made when due under the Subordinated Debt Documents as in effect on the date hereof, or if any other event of default not involving the failure to pay money when due occurs under the Subordinated Debt Documents as in effect on the date hereof and is not cured within the applicable grace or cure period thereunder and is continuing, then, upon not less than thirty (30) days prior written notice from Subordinated Note Trustee to Senior Lender, provided and so long as (x) no Payment Event of Default or Insolvency Event exists or has occurred and is continuing and (y) no Blockage Period is in effect, the Subordinated Note Trustee and, to the extent permitted in the Subordinated Debt Documents, the Subordinated Debtholders, may, subject to the provisions of the Subordinated Debt Documents, enforce their rights to payment of the Subordinated Obligations by way of suit for collection of a money debt against LFI or any Subordinated Guarantors and may continue such enforcement to judgment and execution thereon, subject, however, to (i) immediate cessation of such enforcement efforts upon the commencement of a Blockage Period, or the occurrence of a Payment Event of Default, or the occurrence of an Insolvency Event or if the Senior Lender at any time commences and thereafter takes reasonable steps to continue a Senior Liquidation, and (ii) in the absence of the commencement or such reasonable steps to continue a Senior Liquidation, the turnover to Senior Lender of all amounts collected and recovered by Subordinated Note Trustee or any Subordinated Debtholder upon such permitted enforcement for application by Senior Lender to payment or prepayment of the Senior Obligations, in such order -15- and manner as Senior Lender shall determine, until the Senior Obligations are fully and indefeasibly paid and satisfied and all obligations of Senior Lender to provide further financing under the Senior Loan Documents have been terminated or all such obligations have expired according to their terms. (i) In no event shall Senior Lender be required to take any action or refrain from taking any action in connection with the Senior Loan Documents or transactions thereunder based upon any term or provision of the Subordinated Debt Documents, and in no event shall Senior Lender have or incur any liability to any Subordinated Debtholder or Subordinated Note Trustee by reason of any failure by LFI or any Subordinated Guarantor to pay or perform any of its obligations, liabilities or indebtedness to Subordinated Debtholders or Subordinated Note Trustee whether or not such failure is known to Senior Lender or is directly or indirectly the result of actions taken or not taken by Senior Lender in connection with the Senior Loan Documents or transactions thereunder. 5. No Subrogation. Notwithstanding any claim for subrogation that the Subordinated Note Trustee or Subordinated Debtholders may otherwise have under applicable law, neither the Subordinated Note Trustee nor any of the Subordinated Debtholders shall be subrogated to the rights of the Senior Lender to receive payments or distributions of assets of LFI or any subsidiary in respect of the Senior Obligations until the Senior Obligations shall be indefeasibly paid and satisfied in full and the Senior Loan Documents have been terminated. For the purposes of such subrogation, payments or distributions to the Senior Lender of any money, property or securities to which the Subordinated Note Trustee or any Subordinated Debtholder would be entitled except for the provisions of this Agreement shall be deemed, as between LFI or any subsidiary and its creditors other than the Senior Lender and Subordinated Note Trustee or such Subordinated Debtholder, to be a payment by LFI or such subsidiary (as applicable) to or on account of Subordinated Obligations, it being understood that the provisions of this Agreement are, and are intended solely, for the purpose of defining the relative rights of the Subordinated Note Trustee and Subordinated Debtholders, on the one hand, and the Senior Lender, on the other hand. 6. Consents of Subordinated Note Trustee and Subordinated Debtholders. (a) Subordinated Note Trustee, for itself and on behalf of each Subordinated Debtholder, agrees and consents that, without the necessity of any reservation of rights against Subordinated Note Trustee or any Subordinated Debtholder, and without notice to or further assent by Subordinated Note Trustee or any Subordinated Debtholder: -16- (i) any demand for payment of any Senior Obligations made by Senior Lender may be rescinded in whole or in part by the Senior Lender, and the amount applied in payment of any Senior Obligation may be relent and the Senior Obligations, or the liability of the Borrower or any guarantor or any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, or any obligation or liability of the Borrower or any other party under the W/C Facility Agreement or any other agreement, may, from time to time, in whole or in part, be renewed, extended, modified, accelerated, compromised, waived, surrendered, or released by the Senior Lender; (ii) the W/C Facility Agreement, the other Senior Security Documents, the Senior Notes, the Senior Guarantees, and any other Senior Loan Document may be amended, modified, supplemented or terminated, in whole or in part, in accordance with the terms of such agreements from time to time; (iii) any Collateral may be sold, exchanged, waived, surrendered or released by Senior Lender or, with Senior Lender's prior written consent, by Borrower or any Senior Guarantor; in each case all without notice to or further assent by any Subordinated Debtholder or Subordinated Note Trustee, each of whom will remain bound under this Agreement, and all without impairing, abridging, releasing or affecting the subordination and other provisions provided for herein. (b) The Subordinated Note Trustee, for itself and on behalf of each Subordinated Debtholder, waives any and all notice of the creation, renewal, extension or accrual of any of the Senior Obligations and notice of or proof of reliance by the Senior Lender upon this Agreement. The Senior Obligations, and all of them, shall be deemed conclusively to have been created, contracted or incurred in reliance upon this Agreement, and all dealings between the Borrower, the Senior Guarantors and the Senior Lender shall be deemed to have been consummated in reliance upon this Agreement. The Subordinated Note Trustee, for itself and on behalf of each Subordinated Debtholder, acknowledges and agrees that the Senior Lender has relied upon the subordination and other provisions provided for herein in entering into certain amendments to the W/C Facility Agreement and in making Senior Loans available to the Borrower thereunder. The Subordinated Note Trustee, for itself and on behalf of each Subordinated Debtholder, waives notice of or proof of reliance on this Agreement and protest, demand for payment and notice of default. -17- 7. Representations. (a) The Subordinated Note Trustee represents and warrants to Senior Lender that the execution, delivery and performance of this Agreement by the Subordinated Note Trustee is within its powers in its capacity as Trustee for the Subordinated Debtholders, and has been duly directed pursuant to the Subordinated Note Indenture. (b) Senior Lender hereby represents and warrants to the Subordinated Note Trustee that the execution, delivery and performance of this Agreement by Senior Lender is within its powers and has been duly authorized by Senior Lender. 8. Further Assurances. The Borrower and the Subordinated Note Trustee, for itself and on behalf of each Subordinated Debtholder, at Borrower's expense and at any time from time to time, upon the written request of the Senior Lender, will promptly and duly execute and deliver such further instruments and documents (including amendments to their financing statements filed against Borrower or any Senior Guarantor stating that the rights of the Subordinated Note Trustee and Subordinated Debtholders are subject to the terms hereof) and take such further actions as the Senior Lender may reasonably request for the purposes of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted. 9. Provisions Define Relative Rights. This Agreement is intended solely for the purpose of defining the relative rights of the Senior Lender, on the one hand, and the Subordinated Note Trustee and Subordinated Debtholders, on the other, and no other Person shall have any right, benefit or other interest under or by virtue of this Agreement. 10. Powers Coupled With An Interest. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until the Senior Obligations are indefeasibly paid and satisfied in full and the Senior Loan Documents are terminated. 11. Notices. To be effective, all notices, requests and demands to or upon any Subordinated Debtholder or the Subordinated Note Trustee, for itself and/or on behalf of any Subordinated Debtholder, shall be in writing (or by fax or other similar electronic means of communicating a writing) and shall be deemed to have been duly given or made (i) when delivered by hand, or (ii) if given by certified mail, return receipt requested, then, upon receipt by the addressee, or (iii) if by fax or similar electronic means of communicating a writing, when such notice is sent and receipt has been confirmed, addressed as follows: -18- If to the Senior Lender: Congress Financial Corporation 1133 Avenue of the Americas New York, New York 10036 Attention: Mr. Andrew W. Robin Fax: (212) 545-4283 If to the Subordinated Note Trustee or to IBJ Schroder Bank and Trust Company any Subordinated One State Street Debtholder (in care of New York, New York the Subordinated Note Attention: Corporate Trust Trustee) Administration Fax: (212 858-2952 The Senior Lender and the Subordinated Note Trustee may change their addresses and transmission numbers for notices by notice in the manner provided in this Section. 12. Amendments in Writing. (a) None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Senior Lender and by the Subordinated Note Trustee upon the authorization of the holders of the requisite percentage (if any) of the Subordinated Notes then outstanding, as set forth in the Subordinated Note Indenture. (b) No failure to exercise, nor any delay in exercising, on the part of the Senior Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. (c) The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 13. Governing Law. This Agreement shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of New York, without giving effect to principles of conflicts of law. 14. Successors and Assigns. (a) This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of each of Senior Lender, the Subordinated Debtholders and the Subordinated Note Trustee, and their respective successors, participants and assigns. (b) Senior Lender acknowledges that each Subordinated Debtholder has the right to sell, assign, grant participations, -19- transfer or negotiate all or any part of, or any interest in, the Subordinated Obligations held by it; provided that (and Subordinated Note Trustee, on behalf of each Subordinated Debtholder hereby agrees that) each such buyer, assignee, participant, transferee or endorsee shall, by acceptance of such part of or interest in the Subordination Obligations, be bound by the obligations and liabilities hereunder of the Subordinated Debtholder from whom it acquired its interest and by the other terms hereof, in each case, as between Senior Lender and the Subordinated Note Trustee, on behalf of the transferor Subordinated Debtholder, without thereby releasing the transferor Subordinated Debtholder for purposes hereof with respect to events occurring prior to the transfer of such interest. (c) Senior Lender reserves the right to grant participations in, or otherwise sell, assign, transfer or negotiate all or any part of, or any interest in, the Senior Obligations and the Collateral securing same; provided, that, Subordinated Debtholders and Subordinated Note Trustee shall not be obligated to give any notices to or otherwise in any manner deal directly with any participant in the Senior Obligations and no participant shall be entitled to any rights or benefits under this Agreement except through Senior Lender. (d) In connection with any assignment or transfer of any or all of the Senior Obligations, or any or all rights of Senior Lender in the property of Borrower or Senior Guarantors (other than pursuant to a participation), Subordinated Note Trustee, for itself and on behalf of the Subordinated Debtholders, agrees to execute and deliver an agreement containing terms substantially identical to those contained herein in favor of any such assignee or transferee and, in addition, will execute and deliver an agreement containing terms substantially identical to those contained herein in favor of any third person who succeeds to, refinances or replaces any or all of Senior Lender's financing of Borrower, whether such successor financing, refinancing or replacement occurs by transfer, assignment, "takeout" or any other means or vehicle. No failure or refusal by Subordinated Note Trustee to execute or deliver any such agreement shall limit or impair the rights of any holder of Senior Obligations, including any such holder who succeeds to, refinances or replaces any or all Senior Obligations, whether by transfer, assignment, "take-out" or any other means or vehicle. 15. Bankruptcy. This Agreement shall be applicable both before and after the filing of any petition under the U.S. Bankruptcy Code by or against any entity comprising the Borrower or any Senior Guarantor and all converted or succeeding cases in respect thereof, and all references herein to Borrower or any Senior Guarantor shall be deemed to apply to a trustee for any of the entities comprising Borrower or a Senior Guarantor and such entity as debtor-in-possession. The relative rights of Senior -20- Lender, on the one hand, and Subordinated Note Trustee and Subordinated Debtholders, on the other hand, to repayment of the Senior Obligations and the Subordinated Obligations, respectively, and in or to any distributions from or in respect of Borrower or any Senior Guarantor or any Collateral or proceeds of Collateral, shall continue after the filing thereof on the same basis as prior to the date of the petition. Nothing in this Section 14 shall constitute a consent by the Subordinated Note Trustee or any Subordinated Debtholder to the use of cash collateral by Borrower or any Subordinated Guarantor in any case involving Borrower or any Subordinated Guarantor under the U.S. Bankruptcy Code or a consent by the Subordinated Note Trustee or any Subordinated Debtholder to any debtor-in-possession financing sought by Borrower or any Subordinated Guarantor in any such case, nor shall anything in this Section 15 limit Senior Lender's rights to consent or object to the use of cash collateral by Borrower or any Senior Guarantor or to provide or oppose debtor- in-possession financing to Borrower or any Senior Guarantor in any such case. 16. Consent to Jurisdiction; Waiver of Jury Trial. Each of the parties hereto hereby irrevocably consents to the non-exclusive jurisdiction of the Supreme Court of the State of New York for the County of New York and of the United States District Court for the Southern District of New York and waives trial by jury in any action or proceeding with respect to this Agreement or any matter arising herefrom or relating hereto. 17. Complete Agreement. This written Agreement is intended by the parties as a final expression of their agreement and is intended as a complete statement of the terms and conditions of their agreement with respect to the subject matter hereof; provided, that the rights of Senior Lender hereunder shall be supplementary to, and not in any manner limit or impair, or be limited or impaired by, the rights of Senior Lender as the holder of "Senior Indebtedness" as defined in and as provided under the Subordinated Note Indenture as in effect on the date hereof; and provided, further, that in no event shall any provision of the Subordinated Debt Documents limit, qualify or modify any provision of this Agreement. 18. Disclosures; Non-Reliance. Subordinated Note Trustee and each Subordinated Debtholder has the means to be, and shall, to the extent they deem it appropriate to do so, but without any obligation to do so, in the future, remain fully informed as to the financial condition and other affairs of Borrower and Senior Guarantors and Senior Lender shall not have any obligation or duty to disclose any such information to Subordinated Note Trustee or any Subordinated Debtholder. Except as expressly set forth in this Agreement, the parties hereto have not otherwise made to each other nor do they hereby make to each other any warranties, express or implied, nor do they assume any liability to each other. -21- 19. Subordinated Note Trustee. Pursuant to the Subordinated Debt Documents, each of the Subordinated Debtholders has appointed Subordinated Note Trustee to act as agent on behalf of the Subordinated Debtholders for all purposes in connection with this Agreement, and Subordinated Note Trustee hereby confirms and agrees that it has agreed to so act on behalf of Subordinated Debtholders as provided therein and herein. Notwithstanding any provisions of the Subordinated Debt Documents to the contrary, as between Senior Lender, on the one hand, and Subordinated Debtholders and Subordinated Note Trustee, on the other hand, Senior Lender shall not be required to inquire as to or verify the authority or power of the Subordinated Note Trustee to act on behalf of the Subordinated Debtholders, and Senior Lender may, without inquiry and without notice to any of the Subordinated Debtholders, rely upon any act taken or notice given or any document executed by Subordinated Note Trustee with respect to the matters covered hereby as the act, notice or document of the Subordinated Debtholders who shall be bound thereby (without prejudice, however, to any rights or obligations of the Subordinated Debtholders and the Subordinated Note Trustee inter se). The Subordinated Note Trustee shall not owe any fiduciary duty to the Senior Lender. 20. Term. This Agreement is a continuing agreement and shall remain in full force and effect until the indefeasible payment and satisfaction in full of all Senior Obligations and the termination or the expiration in accordance with their terms of all obligations of Senior Lender to provide further financing under the Senior Loan Documents. 21. Prior Intercreditor and Subordination Agreement. As among Senior Lender, the Subordinated Lenders that are parties to the "Old Debt Agreements" (as defined in the 1998 Master Restructuring Agreement) and the Subordinated Note Trustee, for itself and on behalf of the Subordinated Debtholders, the terms and provisions of this Agreement shall amend and restate the terms and provisions of the Intercreditor and Subordination Agreement, dated as of May 15, 1997, among Senior Lender, the Subordinated Lenders parties thereto and The Chase Manhattan Bank, as agent for the Subordinated Lenders, as acknowledged and agreed to by LFI and certain of its subsidiaries (the "Prior Subordination Agreement"); provided, however, that (i) to the extent any of the "Subordinated Obligations" (as defined in the Prior Subordination Agreement) are not either exchanged for Subordinated Obligations (as defined herein) or satisfied pursuant to the 1998 Master Restructuring Agreement, or if any of the "Subordinated Obligations" so exchanged or satisfied are revived or reinstated for any reason, then the Prior Subordination Agreement shall, to that extent, remain in effect or be revived or reinstated, as the case may be, and (ii) to the extent any of the "Subordinated Security Documents" or any "security interests" in favor of or held by the "Subordinated Agent" or any "Subordinated Lender" in the "Collateral" (as such quoted terms are defined in the Prior Subordination Agreement) -22- are not fully and effectively amended and restated so as to be limited to the Subordinated Security Documents and security interests in the Collateral held by the Subordinated Note Trustee for the benefit of the Subordinated Debtholders (each as defined herein), or are not for any reason subject to the subordination and other terms and provisions in favor of Senior Lender hereunder, then the Prior Subordination Agreement shall, to the extent required to give effect to such subordination and other terms and provisions, remain in effect or be revived or reinstated, as the case may be. 22. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original with the same force and effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. CONGRESS FINANCIAL CORPORATION By: --------------------------- Name: ------------------------- Title: ------------------------ IBJ SCHRODER BANK & TRUST COMPANY, not in its individual capacity, but solely as Subordinated Note Trustee, and on behalf of each of the Subordinated Debtholders By: --------------------------- Name: ------------------------- Title: ------------------------ -23- ACKNOWLEDGMENT AND AGREEMENT Each of the undersigned hereby acknowledges the foregoing Intercreditor and Subordination Agreement (the "Agreement"). By its signature below, each of the undersigned agrees that it will, together with its successors and assigns, be bound by the provisions of the Agreement. Each of the undersigned further acknowledges and agrees that: (i) although it may sign this Acknowledgment and Agreement it is not a party to the Agreement and does not and will not receive any right, benefit, priority or interest under or because of the existence of the Agreement, (ii) in the event of a breach by any of the undersigned of any of the terms and provisions contained in the foregoing Agreement, such a breach shall constitute an "Event of Default" as defined in and under the W/C Facility Agreement and (iii) it will execute and deliver such additional documents and take such additional action as may be necessary or desirable in the opinion of Senior Lender or Subordinated Note Trustee to effectuate the provisions and purposes of the foregoing Agreement. LONDON FOG INDUSTRIES, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- PACIFIC TRAIL, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- THE SCRANTON OUTLET CORPORATION By: -------------------------------- Name: ------------------------------ Title: ----------------------------- [SIGNATURES CONTINUE ON FOLLOWING PAGE] -24- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] PTI HOLDING CORP. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- PTI TOP COMPANY, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- STAR SPORTSWEAR MANUFACTURING CORP. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- MATTHEW MANUFACTURING CO., INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- WASHINGTON HOLDING COMPANY By: -------------------------------- Name: ------------------------------ Title: ----------------------------- [SIGNATURES CONTINUE ON FOLLOWING PAGE] -25- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] CLIPPER MIST, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- THE MOUNGER CORPORATION By: -------------------------------- Name: ------------------------------ Title: ----------------------------- LONDON FOG SPORTSWEAR, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- -26- EXHIBIT L ASSIGNMENT OF SECURITY INTERESTS ASSIGNMENT OF SECURITY INTERESTS (this "Assignment"), dated as of February 27, 1998, by and between THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), a New York banking corporation, as agent for the Lenders referred to below (in such capacity, the "Agent") under the Existing Agreements referred to below and IBJ SCHRODER BANK & TRUST COMPANY, a New York banking corporation, not in its individual capacity, but solely as trustee under the Indenture referred to below (in such capacity, the "Trustee"). W I T N E S S E T H : WHEREAS, pursuant to the Credit Agreement, dated as of May 20, 1994 (as amended, supplemented or otherwise modified prior to May 31, 1995, the "Original Credit Agreement"), among London Fog Industries, Inc., a Delaware corporation (the "Company"), The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Original Agent") for the several banks and other financial institutions from time to time parties thereto (the "Original Lenders") and the Original Lenders, the Original Lenders made certain loans and other extensions of credit to the Company; WHEREAS, in connection with the execution and delivery of the Original Credit Agreement, and to secure the obligations of the Company thereunder, the Company and its subsidiaries granted to the Original Agent security interests in substantially all of the assets of the Company and its subsidiaries; WHEREAS, the Company, the Original Agent and the Original Lenders agreed to restructure the obligations of the Company under the Original Credit Agreement by means of, among other things, the execution and delivery of the Master Restructuring Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Existing MRA"), among the Company, the Original Agent and the Original Lenders, among others; WHEREAS, in connection with the execution and the delivery of the Existing MRA, the Company executed and delivered (a) the Term Loan Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Term Loan Agreement"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity, the "Term Loan Agent") for the several banks and other financial institutions from time to time parties thereto (the "Term Loan Lenders") and the Term Loan Lenders and (b) the Note Agreement, dated as of May 31, 1995 (as heretofore amended, supplemented or otherwise modified, the "Note Agreement" and, together with the Term Loan Agreement, collectively, the "Existing Agreements"), among the Company, The Chase Manhattan Bank (formerly known as Chemical Bank), as agent (in such capacity and also in its capacity as the Term Loan Agent, the "Agent") for the several banks and other financial institutions from time to time parties thereto (the "Note Lenders" and, together with the Term Loan Lenders, collectively, the "Lenders") and the Note Lenders, pursuant to which the Lenders made certain loans to the Company; 2 WHEREAS, in connection with the execution and delivery of the Existing MRA and the Existing Agreements, the security interests granted by the Company and its subsidiaries to secure the obligations of the Company under the Original Credit Agreement continued in favor of the Agent, as successor to the Original Agent, for the benefit of the Lenders under the Existing Agreements; WHEREAS, the Company, the Agent and the Lenders have agreed to restructure the obligations of the Company under the Existing Agreements by means of, among other things, the execution and delivery of the Indenture, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Indenture"; capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Indenture), between the Company and the Trustee and the Master Restructuring Agreement, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "MRA"), among the Company, the Agent and the Lenders, among others; WHEREAS, in connection with the restructuring of the obligations of the Company under the Existing Agreements, concurrently herewith, the Company will issue secured subordinated notes under the Indenture which notes will be secured by the grant by the Company and its subsidiaries of security interests in substantially all of the assets of the Company and its subsidiaries pursuant to the Security Documents; and WHEREAS, the parties hereto agree that the security interests granted in connection with the Existing Agreements shall now continue in favor of the Trustee, for the benefit of the Holders, to secure the obligations of the Company and its subsidiaries under the Indenture and the Guarantees. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Assignment. The Agent hereby assigns, without representation or warranty, express or implied (other than the representation that the Agent has not previously taken any action intended to assign its interests therein), and without recourse to the Agent, all of its right, title and interest under the Security Documents (as defined in the Existing Agreements) (including, without limitation, all liens, security interests, pledges and assignments set forth therein) to the Trustee, together with any successors thereto. 2. Counterparts. This Assignment may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 3. Governing Law. THIS ASSIGNMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 3 IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the day and year first above written. THE CHASE MANHATTAN BANK, as Agent By: Charles O. Freedgood Vice President IBJ SCHRODER BANK & TRUST COMPANY, not in its individual capacity, but solely as Trustee By: Stephen J. Giurlando Assistant Vice President EXHIBIT M CONGRESS FINANCIAL CORPORATION 1133 Avenue of the Americas New York, New York 10036 February 27, 1998 IBJ Schroder Bank & Trust Company, as Trustee One State Street New York, New York 10004 Attention: Mr. W. Lance Wickel Re: Acknowledgement of Bailment for Stock Gentlemen: Reference is made to (a) the Intercreditor and Subordination Agreement, dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Intercreditor Agreement"), by and between Congress Financial Corporation ("Congress") and IBJ Schroder Bank & Trust Company, as Trustee (the "Trustee") under the Indenture, dated as of the date hereof, between London Fog Industries, Inc. ("LFI") and the Trustee in connection with the issuance of the 10% Senior Subordinated Notes due 2003 of LFI (the "Subordinated Notes"); (b) the Amended and Restated Company Pledge Agreement, dated as of the date hereof, as amended, supplemented or otherwise modified from time to time, by LFI in favor of the Trustee for the ratable benefit of the Subordinated Debtholders; and (c) the Pledge and Security Agreement, dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Congress Pledge Agreement"), by LFI in favor of Congress. Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Intercreditor Agreement. LFI has pledged to the Trustee, for the ratable benefit of the holders of the Subordinated Notes, sixty-five percent (65%) of the issued and outstanding shares of capital stock of London Fog Raincoats Limited evidenced by the certificate(s) described on Exhibit A hereto (together with the proceeds thereof, and all income, profits and distributions thereon, the "Pledged Stock"). LFI has also pledged the Pledged Stock to Congress as set forth in the Congress Pledge Agreement. The Pledged Stock is part of the Collateral under the Intercreditor Agreement. Congress and the Trustee hereby agree that: 1. Congress has agreed to act as bailee for the Trustee to hold physical custody of the certificates evidencing the Pledged Stock solely for purposes of the perfection of the pledge to the Trustee of the Pledged Stock; provided that such pledge by LFI in favor of the Trustee is and shall remain, in all respects, subject and subordinate to the pledge thereof by LFI in favor of Congress, as set forth in the Intercreditor Agreement. 2. Except as may be otherwise ordered by a court of competent jurisdiction, Congress agrees to deliver to the Trustee the certificates evidencing the Pledged Stock after the indefeasible payment and satisfaction in full of the Senior Obligations and all obligations of Congress to provide further financing under the Senior Loan Documents have been terminated or all such obligations have expired in accordance with their terms, except to the extent Congress has theretofore exercised its rights as senior pledgee with respect to the Pledged Stock or such stock is sold or otherwise disposed of by Congress or by LFI (with Congress' consent), in accordance with the Intercreditor Agreement. 3. Except with respect to Congress' obligation to deliver the certificates evidencing the Pledged Stock as set forth in paragraph 2 above and, if applicable, to apply proceeds in respect of any sale or disposition of the Pledged Stock in accordance with Section 4(b) of the Intercreditor Agreement, (a) Congress shall have no duty or liability to protect or preserve any rights pertaining to the Pledged Stock and (b) the Trustee, for itself and on behalf of the Subordinated Debtholders, hereby waives, and releases Congress from, all claims and liabilities arising pursuant to Congress' role as bailee for the Agent with respect to the certificates evidencing the Pledged Stock. This agreement may be signed in counterparts. The undersigned have caused this agreement to be executed and delivered by their duly authorized officers. Very truly yours, CONGRESS FINANCIAL CORPORATION By: --------------------------- Title: ------------------------ READ AND AGREED TO: IBJ SCHRODER BANK & TRUST COMPANY, as Trustee By: --------------------------- Title: ------------------------ CONSENTED TO: LONDON FOG INDUSTRIES, INC. By: --------------------------- Title: ------------------------ -2- EXHIBIT A OF ACKNOWLEDGEMENT OF BAILMENT FOR STOCK No. of Issuer Certificate No. Shares London Fog Raincoats Limited 4 4,615 -3- EX-10.1 9 EXHIBIT 10.1 1998 STOCK OPTION PLAN OF LONDON FOG INDUSTRIES, INC. 1. Purpose. The purpose of this 1998 Stock Option Plan is to advance the interests of the Company and its stockholders by providing the persons listed on Schedule A and other key management employees of the Company, upon whose judgment, initiative and efforts the successful conduct of the Company's business largely depends, with an additional incentive to continue their efforts on behalf of the Company, thereby attracting, retaining and rewarding people of experience and ability. 2. Definitions. When used in this Plan, unless the context otherwise requires: (a) "Committee" shall mean the Stock Option Committee, as described in Section 3. (b) "Company" shall mean London Fog Industries, Inc., a Delaware corporation. (c) "Fair Market Value" on a specified date shall mean (x) the last sales price reported for the Shares on the last trading day immediately preceding the applicable date (i) as reported on the principal national securities exchange on which the Shares are primarily traded, or (ii) if the Shares are not traded on a national securities exchange, as quoted on an automated quotation system or quotation service sponsored by The Nasdaq Stock Market ("Nasdaq") or (y) if the Shares are not traded on a national securities exchange or quoted on Nasdaq, but are publicly traded, the average of the last reported bid and ask prices on the last trading day immediately preceding the applicable date, or (z) if the Shares are not publicly traded, the Fair Market Value of the Shares as established by the Committee using any reasonable method of valuation and at such intervals, not less often than every six months, as the Committee shall determine. (d) "Options" shall mean the stock options issued pursuant to this Plan. (e) "Plan" shall mean this 1998 Stock Option Plan of the Company, as such Plan from time to time may be amended. (f) "Share" shall mean a share of common stock of the Company, par value $.01. 3. Administration of the Plan. The Plan shall be administered by a Committee of three members consisting of the Chief Executive Officer of the Company and two other members of the Board of Directors of the Company designated by the Board (who shall be members of the Compensation Committee of the Board if there is such a Committee). Each member of the Committee shall hold office until his successor is designated as a member of the Committee. Any vacancy in the Committee may be filled by a resolution adopted by a majority of the remaining members of the Committee. Any member of the Committee may be removed at any time, with or without cause, by resolution adopted by a majority of the remaining members of the Committee. A member of the Committee may resign from the Committee at any time by giving written notice to the Chairman or Secretary of the Company and, unless otherwise specified therein, such resignation shall take effect upon receipt thereof. The acceptance of such resignation shall not be necessary to make it effective. The Committee shall establish such rules and procedures as it considers necessary or advisable to administer the Plan and shall make such determinations and interpretations and take such action in connection with the Plan and any Options granted pursuant to the Plan as it considers necessary or advisable. 4. Participants. Except as hereinafter provided, the class of persons who are potential recipients of Options to be granted under this Plan consists of the persons listed on Schedule A and other key management employees of the Company or a subsidiary of the Company as determined by the Committee. The persons to whom Options are granted under this Plan and the number of Shares subject to each Option shall be determined by the Committee in its sole discretion, subject, however, to the terms and conditions of this Plan. Options may be granted to employees who are also officers and/or directors of the Company or a subsidiary. 2 5. Shares; Warrants. The Committee may, but shall not be required to, grant, in accordance with this Plan, Options to purchase Shares for an aggregate of up to 2,000,000 Shares (subject to adjustment as provided in Section 12), which may be either treasury Shares or authorized but unissued Shares. If an Option shall expire or terminate for any reason without having been exercised in full, then the Committee may grant Options with respect to any unpurchased Shares. Simultaneously with the grant of any Option granted pursuant to the Plan, the Company shall issue to the holder of the Option a Management Anti-Dilution Warrant in the form of Exhibit A to purchase a number of Shares, rounded to the nearest whole number, equal to .0418995 times the number of Shares subject to the Option. If any Option does not become exercisable or terminates in whole or in part in accordance with its terms, the Warrant shall expire proportionately. 6. Grant of Options. The form, terms and conditions of each Option shall be determined from time to time by the Committee and shall be set forth in writing in an agreement (the "Option Agreement") signed by the Option holder and on behalf of the Company by the Chairman, President or a Vice President of the Company. 7. Exercise Price for Options. The exercise price per share of the Shares to be purchased pursuant to any Option shall be 25% of the Fair Market Value of a share of the Company's Common Stock at the time the Option is granted. 8. Duration of Options and Rights. The duration of any Option granted under this Plan shall be ten years from the date upon which the Option is granted. 9. Option Holder Not a Stockholder. An Option holder shall not be deemed to be the holder of, or to have any of the rights of a stockholder with respect to, any Shares subject to that Option unless and until the Option shall have been exercised pursuant to the terms thereof, the Company shall have issued and delivered Shares to the Option holder, and the holder's name shall have been entered as a stockholder of record on the books of the Company. 3 Thereupon, the holder shall have full voting, dividend and other ownership rights with respect to those Shares. 10. Non-transferability of Options. Options may be exercised or surrendered during the holder's lifetime only by the holder thereof, and all rights thereunder shall be non-transferable and non-assignable by the holder thereof (or his personal representative), other than by will or the laws of descent and distribution. 11. Exercise of Options. Except as otherwise provided herein, an Option, after the grant thereof, shall be exercisable by the holder at such times as may be fixed by the Committee at the time the Option is granted and specified in the Stock Option Agreement. An Option shall be exercised by the delivery to the Secretary or another officer of the Company designated for the purpose of receiving the same of a written notice of exercise duly signed by the Option holder (or the legal representative of an incompetent Option holder or the representative of the estate or the heirs of a deceased Option holder), followed within five business days by delivery of the Option certificate and either (a) cash or a certified or bank check payable to the order of the Company if the holder has received payment pursuant to the Company's Deferred Compensation Plan, or (b) if the holder has not received such payment, a promissory note in the form of Exhibit A. No Option may be granted pursuant to this Plan or exercised at any time when that Option, or the granting or exercise thereof, may result in the violation of any law or governmental order or regulation. Within three business days after exercise of and payment for an Option, the Company shall cause to be delivered to the person entitled thereto a certificate for the Shares purchased pursuant to the exercise of the Option. If the Option shall have been exercised with respect to fewer than all of the Shares subject to the Option, the Company shall also cause to be delivered to the persons entitled thereto a new Option certificate, in replacement of the Option certificate surrendered at the time of the exercise of the Option, indicating the number of Shares with respect to which the Option remains available for exercise, or the original Option certificate shall be endorsed to give effect to the partial exercise thereof. 4 12. Adjustment of Shares. If, at any time during the term of this Plan, there shall be declared and paid a stock dividend upon the Shares or if the Shares shall be split up, converted, exchanged, reclassified, or in any way substituted for, the number of Shares then subject to the outstanding Options shall be proportionally adjusted as provided in the Stock Option Agreement evidencing such Options and the number of Shares referred to in Section 5 for which Options may be granted shall be adjusted to reflect such stock dividend, split-up, conversion, exchange, reclassification or substitution. If there is any other change in the Company's common stock, including recapitalization, reorganization, exchange of shares, offering of subscription rights, or a merger or consolidation in which the Company is the surviving corporation, such adjustment, if any, shall be made in the Shares then subject to this Option as the Board of Directors may in good faith consider equitable. The Board's failure to provide for an adjustment prior to the effective date of the action shall be conclusive evidence that no adjustment is required. If the Company shall issue shares of Common Stock to all holders at a price per share less than the then current market price per share of Common Stock or shall issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the then current market price per share of Common Stock or shall issue securities convertible into or exchangeable for Common Stock at a price per share less than the then current market price per share of Common Stock, or if the Company shall distribute to all holders of its Common Stock evidences of its indebtedness or other assets (excluding any cash dividends in the ordinary course of business paid out of the earnings of the Company during the last four full fiscal quarters of the Company ending prior to the payment date for the dividend), then in each such case the price per share at which this Option may thereafter be exercisable and the number of Shares issuable upon exercise of this Option shall be adjusted as provided in the Stock Option Agreement evidencing each Option. The Committee shall have the power, in the event of a transaction that constitutes a Change of Control pursuant to clause (B) of the definition of Change of Control in the Stock Option Agreements to be issued pursuant to this Plan, to amend all outstanding Options to permit the exercise of all such Options prior to the effectiveness of any such transaction and to terminate such Options as of such effectiveness. If the Committee, in its discretion, shall exercise that power, all Options then outstanding and subject to such requirement shall be deemed to have been amended to 5 permit the exercise thereof in whole or in part by the holder at any time prior to the effectiveness of such transaction and these Options shall be deemed to terminate upon such effectiveness. 13. No Right to Continued Service. Nothing contained herein or in any Option shall be construed to confer on any holder any right to continue in the service of the Company or any subsidiary or derogate from any right of the Company or any subsidiary to terminate, retire, request the resignation of or discharge such holder, at any time, with or without cause. 14. Issuance of Shares and Compliance with Securities Laws. Before issuing and delivering any Shares upon the exercise of an Option, the Company may: (i) require the holder to give satisfactory assurances that the Shares will not be transferred in violation of applicable securities laws; and (ii) restrict the transferability of the Shares in the absence of an effective registration statement covering the Shares and require a legend to that effect be endorsed on the certificate representing the Shares. As soon as practicable after the date hereof, the Company shall file a Registration Statement on Form S-8 registering the Shares to be issued pursuant to this Plan with the Securities and Exchange Commission under the Securities Act of 1933, and covering the reoffer and resale of Shares by holders of Options who may be deemed to be affiliates of the Company. The Company will cause such Registration Statement to become effective as soon as practicable after filing and to remain effective until all of the Options issued under this Plan have been exercised (or terminated) and all Shares acquired by holders of Options who may be deemed to be affiliates of the Company may be freely sold under Rule 144 under the Securities Act of 1933. 15. Income Tax Withholding. If the Company or a subsidiary shall be required to withhold any amounts by reason of any federal, state or local tax rules or regulations in respect of the issuance of Shares pursuant to the exercise of an Option, the holder shall make available to the Company or the subsidiary sufficient funds to meet the withholding requirements and the Company or the subsidiary shall be entitled to take and authorize any steps it deems advisable in order to have such funds made available to the Company or the subsidiary out of any funds or property due or to become due to the holder. If a holder elects and if the Company consents in its sole discretion to such election, any such taxes may be paid by delivering Shares acquired upon exercise of the Options (valued at fair market value as defined herein). 6 16. Administration and Amendment of this Plan. The Committee may at any time withdraw or from time to time amend this Plan as it relates to the terms and conditions of any Options not theretofore granted, and the Committee with the consent of each adversely affected holder of any Option may at any time withdraw or from time to time amend this Plan as it relates to the terms and conditions of any outstanding Option. The Committee may authorize and establish such rules, regulations and revisions thereof, not inconsistent with the provisions of this Plan, as it may deem advisable to make this Plan and any Options effective or provide for their administration, and may take such other action with regard to this Plan and any Options as it shall deem desirable to effectuate their purposes. 17. Term of Plan. No Option shall be granted pursuant to this Plan on or after the fifth anniversary of the date this Plan is adopted, but Options granted prior to such fifth anniversary may be exercised at any time within 10 years from the date of grant and the terms and conditions of this Plan shall continue to apply to those Options. 18. Arbitration. Any dispute or controversy arising under or in connection with this Plan shall be settled exclusively by arbitration to be held in the City of New York before a single arbitrator in accordance with the rules of the American Arbitration Association then in effect. If the holder of the Option prevails in the arbitration, in whole or in substantial part as determined by the arbitrator, the Company shall bear the fee and expenses of the American Arbitration Association and the cost of any transcript and shall reimburse the holder for the reasonable fees and disbursements of counsel to the holder in the arbitration. Judgment may be entered on the arbitrators' award in any court having jurisdiction, and the parties consent to the jurisdiction of the New York courts for that purpose. Any process or other papers under this provision may be served outside New York State by registered mail, return receipt requested, or by personal service, provided a reasonable time for appearance or response is allowed. 7 EX-10.2 10 EXHIBIT 10.2 LONDON FOG INDUSTRIES, INC. STOCK OPTION AGREEMENT ---------------------- FEBRUARY 27, 1998 London Fog Industries, Inc., a Delaware corporation with offices at 8 West 40th Street, New York, New York (the "Company"), hereby grants to ______________, with an address at ________________________________________ (the "Optionee"), an option under the Company's 1998 Stock Option Plan (a copy of which is attached to this agreement) to purchase up to _____ shares of the Company's common stock, par value $.01 per share, at the price of $2.00 per share, on the terms and conditions set forth in this agreement and in the Plan. 1. Exercise of Option. (a) The Optionee may exercise this option with respect to _______ shares on and after the date hereof, with respect to an additional ______ shares on and after the first anniversary of the date hereof, and with respect to an additional _______ shares on and after the second anniversary of the date hereof; provided, however, that this option shall become exercisable in full upon the death or Permanent Disability of the Optionee, the termination of the employment or services of the Optionee with the Company by the Company without Cause, or a Change in Control of the Company. As used in this Stock Option Agreement, (i) Permanent Disability means the inability as a result of a physical or mental illness or injury to perform substantially all of the duties or services for a continuous period of 360 days or more, (ii) Cause means the willful refusal of the Optionee substantially to perform the Optionee's duties or services for the Company (other than as a result of physical or mental illness or injury), the commission by the Optionee of a felony involving moral turpitude, or willful action by the Optionee involving malfeasance or gross misconduct in connection with his employment or services, and (iii) a Change in Control will be deemed to have occurred: (A) upon any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than any holder on the date hereof of the Company's 10% Senior Subordinated Notes due 2003, any holder of options granted under the Company's 1998 Stock Option Plan, or the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company), becoming the owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding securities; (B) upon the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered by the exceptions in (i) above) acquires more than 50% of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; (C) if the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of 80% or more of the Company's assets other than such a sale to a person or persons who beneficially own, directly or indirectly, at least 50% or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale; or (D) if the Company or a person or "group" of related persons purchases any shares of the Company's Common Stock pursuant to a tender offer pursuant to Section 14 of the Securities Exchange Act (provided this option shall become exercisable only to the extent shares issued upon exercise of this option are tendered in such tender offer). If the employment or services of the Optionee terminates for any reason other than the death or Permanent Disability of the Optionee or termination of the employment or services of the Optionee with the Company by the Company without Cause, then this option shall be exercisable with respect only to shares for which this option is exercisable at the time of termination of the Optionee's employment or services, and this option shall terminate with respect to any shares for which this option is not then exercisable. This option shall expire on, and may not be exercised after, the tenth anniversary of the date of this agreement (the "Termination Date"). (b) This option may be exercised only by the delivery to the Secretary or another designated officer of the Company, prior to the Termination Date, of a written notice of exercise duly signed by the Optionee (or the legal representative of the Optionee or his estate or his heirs) specifying the number of shares for which the option is being exercised. Within five business days after such notice, the Optionee shall deliver payment of the exercise price by either (i) delivery of a certified or bank check payable to the Company if the holder has received payment pursuant to the Company's Deferred Compensation Plan, or (ii) if the holder has not received such payment, delivery of a promissory note in the form of Exhibit A. (c) This option may be exercised for a minimum of 100 shares of the Company's Common Stock (or the remainder of the shares subject to this option, if less). 2. Anti-Dilution Provisions. (a) If there is any stock dividend, stock split or combination of shares of the Company's common stock, the number and amount of shares then subject to this option shall be proportionately and appropriately adjusted; no change shall be made in the aggregate purchase price to be paid for all shares subject to this option, but the aggregate purchase price shall be allocated among all shares subject to this option after giving effect to the adjustment. (b) If there is any other change in the Company's common stock, including recapitalization, reorganization, exchange of shares, offering of subscription rights, or, subject to section 2(g), a merger or consolidation in which the Company is the surviving corporation, such adjustment, if any, shall be made in the shares then subject to this option and the exercise price per share as the Company's Board of Directors may in good faith determine to be equitable, with no change in the aggregate purchase price to be paid for all shares subject to this option, and notice thereof given to the Optionee. The Board's failure to provide for an adjustment prior to the effective date of the action shall be conclusive evidence that no adjustment is required. (c) If the Company shall issue shares of Common Stock to all holders of its Common Stock at a price per share less than the current market price per share of Common Stock (determined as provided in section 2(f)) or shall issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share of Common Stock or shall issue securities convertible into or exchangeable for Common Stock at a price per share less than the current market price per share of Common Stock, the price per share at which this option may thereafter be exercised shall be adjusted by dividing the price per share for which this option was theretofore exercisable by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance plus the number of additional shares of Common Stock issued or offered for subscription or purchase or issuable upon conversion or exchange of such securities, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance plus the number of shares which the aggregate purchase price of the total number of shares so issued or for which such rights or warrants are issued or the aggregate purchase price for the convertible or exchangeable securities offered would purchase at such current market price. (d) If the Company shall distribute to all holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends in the ordinary course of business paid out of earnings of the Company during the last four full fiscal quarters of the Company ending prior to the payment date for the dividend) or rights or warrants to subscribe for Common Stock (excluding those referred to in section 2(c)), then in each such case the price per share at which this option may thereafter be exercisable shall be adjusted by dividing the price per share for which this option was theretofore exercisable by a fraction, of which the numerator shall be the current market price per share of Common Stock on the date of such distribution, and of which the denominator shall be such current market price per share of the Common Stock, less the then fair market value (as determined in good faith by the Board of Directors of the Company) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights or warrants applicable to one share of the Common Stock. (e) Upon any adjustment of the exercise price of this option pursuant to paragraph 2(c) or (d) above, the holder of this option shall thereafter be entitled to purchase, at the exercise price resulting from such adjustment, the number of shares obtained by multiplying the number of Shares for which this option was exercisable immediately prior to such adjustment by the fraction determined pursuant to paragraph 2(c) or (d), as the case may be. (f) For the purpose of any computation under section 2(c) or (d), the current market price per share of Common Stock shall be determined as follows: If the Common Stock is publicly traded, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for the thirty consecutive business days commencing forty-five business days before the day in question. The closing price for each day shall be (i) if the Common Stock is listed or admitted to trading on a national securities exchange, the last reported sales price on the principal national securities exchange on which the Common Stock is listed or admitted to trading (which shall be the national securities exchange on which the greatest number of shares of the Common Stock has been traded during such 30 consecutive business days), or (ii) if the Common Stock is not listed or admitted to trading on any such exchange, the average of the highest bid and lowest asked prices as reported by the National Quotations Bureau, Incorporated or a similar organization selected from time to time by the Company for the purpose. If the Common Stock is not publicly traded, the current market price shall be determined in good faith by the Board of Directors of the Company and notice thereof given to the Optionee. (g) In the event of a transaction described in paragraph (iii) or (iv) of the definition of Change of Control in section 1(a) of this Plan, at the Company's election either (i) the Company shall cause provision to be made for the continuance of this option after that event, or for the substitution for this option of an option covering the number and class of securities the Optionee would have been entitled to receive in the merger or consolidation or upon the sale if the Optionee had been the holder of record of a number of shares of the Company's common stock equal to the number of shares covered by the then unexercised portion of this option, or (ii) the Company shall give to the Optionee written notice of its election not to cause such provision to be made and this option shall become exercisable in full (or, at the election of the Optionee, in part) at any time during a period of 20 days to be designated by the Company, ending not more than 10 days prior to the effective date of the merger, consolidation or sale, in which case this option shall not be exercisable to any extent after the expiration of that 20 day period. In no event, however, shall this option be exercisable after the Termination Date. (h) The Company may engage a firm of independent certified public accountants of recognized standing, which may be the Company's regular auditors, to make any computation required under this section 2 and a certificate of that firm showing the required adjustment shall be conclusive and binding on the parties. If the Optionee disagrees with any computation by the Board of Directors pursuant to this section 2 by notice given to the Company within 30 days after the notice from the Company thereof, the Company shall cause its auditors to make such computation, and that firm's determination of the computation shall be conclusive and binding on the parties. (i) If at any time: (a) the Company shall propose to declare any cash dividend upon its Common Stock; (b) the Company shall propose to declare or make any dividend or other distribution to the holders of its Common Stock, whether in cash, property or other securities; (c) the Company shall propose to effect any reorganization or reclassification of the capital stock of the Company or any consolidation or merger of the Company with or into another corporation or any sale, lease or conveyance of all or substantially all of the assets of the Company; or (d) the Company shall propose to effect a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in any one or more of said cases, the Company shall give, by certified or registered mail, postage prepaid, addressed to the holder of this option at the address of such holder as shown on the books of the Company, (i) at least 30 days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend or distribution or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, lease, conveyance, dissolution, liquidation or winding-up, and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, lease, conveyance, dissolution, liquidation or winding-up, at least 30 days' written notice of the date when the same shall take place. 3. Registration Statement. The Shares issuable on exercise of this option shall be included in a Registration Statement on Form S-8 filed or to be filed by the Company registering all of the Shares to be issued pursuant to the Plan with the Securities and Exchange Commission under the Securities Act of 1933, and covering the reoffer and resale of Shares by holders of options granted under the Plan who may be deemed to be affiliates of the Company. The Company will cause such Registration Statement to become effective as soon as practicable after filing and to remain effective until all options held by the Optionee have been exercised (or terminated), and if the Optionee may be deemed to be an affiliate of the Company, until all Shares acquired upon exercise of this option may be freely sold under Rule 144 under the Securities Act of 1933. 4. Non-Transferability. This option may not be transferred by the Optionee other than by will or by the laws of descent and distribution, and during the lifetime of the Optionee is exercisable only by him (or his legal representative). 5. Certain Rights not Conferred by Option. (a) Nothing in this agreement or in the Plan shall (i) give the Optionee any right to continue in the employ of the Company or any subsidiary or interfere in any way with the right of the Company or any subsidiary to terminate the Optionee's employment at any time, (ii) limit the right of the Company's board of directors to manage the Company's business and affairs (including the authorization of the issuance of additional shares and the determination of the nature and amount of liabilities and obligations incurred by the Company or its subsidiaries) without regard for the effect of any action upon the Optionee or upon the value of the shares subject to, or acquired upon exercise of, this option, or (iii) give the Optionee any claim against the Company or any of its officers or directors with respect to any action or omission relating to the Company's business or affairs, whether or not that action or omission affects the value of the shares subject to, or acquired upon exercise of, this option. (b) The Optionee shall not, by virtue of holding this option, be entitled to any rights of a stockholder in the Company. The Optionee shall not be considered a record holder of any shares purchased upon exercise of the option until the date on which he is actually recorded as a holder of the shares upon the Company's stock records. 6. Expenses. The Company shall pay all fees and expenses necessarily incurred by the Company in connection with the issuance and registration of the Company's shares pursuant to this option. If the Company shall be required to withhold any amounts by reason of any federal, state or local tax rules or regulations in respect of the issuance of shares pursuant to the exercise of this option, the Optionee shall make available to the Company sufficient funds to meet the withholding requirements and the Company shall be entitled to take and authorize any steps it deems advisable in order to have those funds made available to the Company out of any funds or property due or to become due to the Optionee. 7. Acceptance of Provisions of Plan. The Optionee agrees to, and shall be bound by, all of the terms and conditions of the Plan. 8. No Right to Continued Service. Nothing contained in this Option Agreement or in any option shall be construed to confer on the Optionee any right to continue in the service of the Company or any subsidiary or derogate from any right of the Company or any subsidiary to terminate, retire, request the resignation of or discharge the Optionee, at any time, with or without cause. 9. Notices. Any notice or other communication under this agreement shall be in writing and shall be considered given when delivered personally or three days after being mailed by registered or certified mail, return receipt requested, to the parties at their respective addresses set forth above (or at such address as a party may specify by notice to the other). 10. Complete Agreement; Amendment. This agreement and the Plan contain a complete statement of all of the arrangements between the parties with respect to their subject matter, and this agreement cannot be changed or terminated orally. 11. Governing Law. This agreement shall be governed by and construed in accordance with the law of the State of New York applicable to agreements made and to be performed in New York. 12. Arbitration. Any dispute or controversy arising under or in connection with this agreement shall be settled exclusively by arbitration to be held in the city of New York before a single arbitrator in accordance with the rules of the American Arbitration Association then in effect. In addition, if the Optionee prevails in the arbitration, in whole or in substantial part as determined by the arbitrator, the Company shall pay the fee and expenses of the American Arbitration Association and the cost of any transcript and shall reimburse the Optionee for the reasonable fees and disbursements of counsel to the Optionee in the arbitration. Judgment may be entered on the arbitrators' award in any court having jurisdiction, and the parties consent to the jurisdiction of the New York courts for that purpose. Any process or other papers under this provision may be served outside New York State by registered mail, return receipt requested, or by personal service, provided a reasonable time for appearance or response is allowed. 13. Headings. The headings in this agreement are solely for convenience of reference and shall not affect its interpretation. LONDON FOG INDUSTRIES, INC. By: ------------------------------- AGREED: - ------------------------------- EX-10.3 11 EXHIBIT 10.3 LONDON FOG INDUSTRIES, INC. STOCK OPTION AGREEMENT ---------------------- FEBRUARY 27, 1998 London Fog Industries, Inc., a Delaware corporation with offices at 8 West 40th Street, New York, New York (the "Company"), hereby grants to Robert Gregory, Jr. with an address at 4 Columns Farm, 2125 Highway 14 East, Landrum, SC 29356 (the "Optionee"), an option under the Company's 1998 Stock Option Plan (a copy of which is attached to this agreement) to purchase up to 666,666 shares of the Company's common stock, par value $.01 per share, at the price of $2.00 per share, on the terms and conditions set forth in this agreement and in the Plan. 1. Exercise of Option. (a) The Optionee may exercise this option with respect to 133,333.20 shares on and after the date hereof and with respect to an additional 133,333.20 shares on each of the first four anniversaries of the date hereof; provided, however, that this option shall become exercisable in full upon the death or Permanent Disability of the Optionee, the termination of the employment or services of the Optionee with the Company by the Company without Cause or termination by the Executive for Good Reason as defined in his Employment Agreement with the Company, or a Change in Control of the Company. As used in this Stock Option Agreement, (i) Permanent Disability means the inability as a result of a physical or mental illness or injury to perform substantially all of the duties or services for a continuous period of 360 days or more, (ii) Cause means the willful refusal of the Optionee substantially to perform the Optionee's duties or services for the Company (other than as a result of physical or mental illness or injury), or illegal conduct or gross misconduct by the Optionee that is willful and results in material and demonstrable damage to the business or reputation of the Company, and (iii) a Change in Control will be deemed to have occurred: (A) upon any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than any holder on the date hereof of the Company's 10% Senior Subordinated Notes due 2003, any holder of options granted under the Company's 1998 Stock Option Plan, or the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company), becoming the owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50%of the combined voting power of the Company's then outstanding securities; (B) upon the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered by the exceptions in (i) above) acquires more than 50% of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; (C) if the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of 80% or more of the Company's assets other than such a sale to a person or persons who beneficially own, directly or indirectly, at least 50% or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale; or (D) if the Company or a person or "group" of related persons purchases any shares of the Company's Common Stock pursuant to a tender offer pursuant to Section 14 of the Securities Exchange Act (provided this option shall become exercisable only to the extent shares issued upon exercise of this option are tendered in such tender offer). If the employment or services of the Optionee terminates for any reason other than the death or Permanent Disability of the Optionee 2 or termination of the employment or services of the Optionee with the Company by the Company without Cause or termination by the Optionee for Good Reason as defined in his Employment Agreement with the Company, then this option shall be exercisable with respect only to shares for which this option is exercisable at the time of termination of the Optionee's employment or services, and this option shall terminate with respect to any shares for which this option is not then exercisable. This option shall expire on, and may not be exercised after, the tenth anniversary of the date of this agreement (the "Termination Date"). (b) This option may be exercised only by the delivery to the Secretary or another designated officer of the Company, prior to the Termination Date, of a written notice of exercise duly signed by the Optionee (or the legal representative of the Optionee or his estate or his heirs) specifying the number of shares for which the option is being exercised. Within five business days after such notice, the Optionee shall deliver payment of the exercise price by either (i) delivery of a certified or bank check payable to the Company if the holder has received payment pursuant to the Company's Deferred Compensation Plan, or (ii) if the holder has not received such payment, delivery of a promissory note in the form of Exhibit A. (c) This option may be exercised for a minimum of 100 shares of the Company's Common Stock. 2. Anti-Dilution Provisions. (a) If there is any stock dividend, stock split or combination of shares of the Company's common stock, the number and amount of shares then subject to this option shall be proportionately and appropriately adjusted; no change shall be made in the aggregate purchase price to be paid for all shares subject to this option, but the aggregate purchase price shall be allocated among all shares subject to this option after giving effect to the adjustment. (b) If there is any other change in the Company's common stock, including recapitalization, reorganization, exchange of shares, offering of subscription rights, or, subject to section 2(g), a merger or consolidation in which the Company is the surviving corporation, such adjustment, if any, shall be made in the shares then subject to this option and the exercise price per share as the Company's 3 Board of Directors may in good faith determine to be equitable, with no change in the aggregate purchase price to be paid for all shares subject to this option, and notice thereof given to the Optionee. The Board's failure to provide for an adjustment prior to the effective date of the action shall be conclusive evidence that no adjustment is required. (c) If the Company shall issue shares of Common Stock to all holders of its Common Stock at a price per share less than the current market price per share of Common Stock (determined as provided in section 2(f)) or shall issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share of Common Stock or shall issue securities convertible into or exchangeable for Common Stock at a price per share less than the current market price per share of Common Stock, the price per share at which this option may thereafter be exercised shall be adjusted by dividing the price per share for which this option was theretofore exercisable by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance plus the number of additional shares of Common Stock issued or offered for subscription or purchase or issuable upon conversion or exchange of such securities, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance plus the number of shares which the aggregate purchase price of the total number of shares so issued or for which such rights or warrants are issued or the aggregate purchase price for the convertible or exchangeable securities offered would purchase at such current market price. (d) If the Company shall distribute to all holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends in the ordinary course of business paid out of earnings of the Company during the last four full fiscal quarters of the Company ending prior to the payment date for the dividend) or rights or warrants to subscribe for Common Stock (excluding those referred to in section 2(c)), then in each such case the price per share at which this option may thereafter be exercisable shall be adjusted by dividing the price per share for which this option was theretofore exercisable by a fraction, of which the numerator shall be the current market price per share of Common Stock on the date of such distribution, and of which the denominator shall be such current market 4 price per share of the Common Stock, less the then fair market value (as determined in good faith by the Board of Directors of the Company) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights or warrants applicable to one share of the Common Stock. (e) Upon any adjustment of the exercise price of this option pursuant to paragraph 2(c) or (d) above, the holder of this option shall thereafter be entitled to purchase, at the exercise price resulting from such adjustment, the number of shares obtained by multiplying the number of Shares for which this option was exercisable immediately prior to such adjustment by the fraction determined pursuant to paragraph 2(c) or (d), as the case may be. (f) For the purpose of any computation under section 2(c) or (d), the current market price per share of Common Stock shall be determined as follows: If the Common Stock is publicly traded, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for the thirty consecutive business days commencing forty-five business days before the day in question. The closing price for each day shall be (i) if the Common Stock is listed or admitted to trading on a national securities exchange, the last reported sales price on the principal national securities exchange on which the Common Stock is listed or admitted to trading (which shall be the national securities exchange on which the greatest number of shares of the Common Stock has been traded during such 30 consecutive business days), or (ii) if the Common Stock is not listed or admitted to trading on any such exchange, the average of the highest bid and lowest asked prices as reported by the National Quotations Bureau, Incorporated or a similar organization selected from time to time by the Company for the purpose. If the Common Stock is not publicly traded, the current market price shall be determined in good faith by the Board of Directors of the Company and notice thereof given to the Optionee. (g) In the event of a transaction described in paragraph (iii) or (iv) of the definition of Change of Control in section 1(a) of this Plan, at the Company's election either (i) the Company shall cause provision to be made for the continuance of this option after that event, or for the substitution for this option of an option covering 5 the number and class of securities the Optionee would have been entitled to receive in the merger or consolidation or upon the sale if the Optionee had been the holder of record of a number of shares of the Company's common stock equal to the number of shares covered by the then unexercised portion of this option, or (ii) the Company shall give to the Optionee written notice of its election not to cause such provision to be made and this option shall become exercisable in full (or, at the election of the Optionee, in part) at any time during a period of 20 days to be designated by the Company, ending not more than 10 days prior to the effective date of the merger, consolidation or sale, in which case this option shall not be exercisable to any extent after the expiration of that 20 day period. In no event, however, shall this option be exercisable after the Termination Date. (h) The Company may engage a firm of independent certified public accountants of recognized standing, which may be the Company's regular auditors, to make any computation required under this section 2 and a certificate of that firm showing the required adjustment shall be conclusive and binding on the parties. If the Optionee disagrees with any computation by the Board of Directors pursuant to this section 2 by notice given to the Company within 30 days after the notice from the Company thereof, the Company shall cause its auditors to make such computation, and that firm's determination of the computation shall be conclusive and binding on the parties. (i) If at any time: (a) the Company shall propose to declare any cash dividend upon its Common Stock; (b) the Company shall propose to declare or make any dividend or other distribution to the holders of its Common Stock, whether in cash, property or other securities; (c) the Company shall propose to effect any reorganization or reclassification of the capital stock of the Company or any consolidation or merger of the Company with or into another corporation or any sale, lease or conveyance of all or substantially all of the assets of the Company; or 6 (d) the Company shall propose to effect a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in any one or more of said cases, the Company shall give, by certified or registered mail, postage prepaid, addressed to the holder of this option at the address of such holder as shown on the books of the Company, (i) at least 30 days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend or distribution or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, lease, conveyance, dissolution, liquidation or winding-up, and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, lease, conveyance, dissolution, liquidation or winding-up, at least 30 days' written notice of the date when the same shall take place. 3. Registration Statement. The Shares issuable on exercise of this option shall be included in a Registration Statement on Form S-8 filed or to be filed by the Company registering all of the Shares to be issued pursuant to the Plan with the Securities and Exchange Commission under the Securities Act of 1933, and covering the reoffer and resale of Shares by holders of options granted under the Plan who may be deemed to be affiliates of the Company. The Company will cause such Registration Statement to become effective as soon as practicable after filing and to remain effective until all options held by the Optionee have been exercised (or terminated), and if the Optionee may be deemed to be an affiliate of the Company, until all Shares acquired upon exercise of this option may be freely sold under Rule 144 under the Securities Act of 1933. 4. Non-Transferability. This option may not be transferred by the Optionee other than by will or by the laws of descent and distribution, and during the lifetime of the Optionee is exercisable only by him (or his legal representative). 5. Certain Rights not Conferred by Option. 7 (a) Nothing in this agreement or in the Plan shall (i) give the Optionee any right to continue in the employ of the Company or any subsidiary or interfere in any way with the right of the Company or any subsidiary to terminate the Optionee's employment at any time, (ii) limit the right of the Company's board of directors to manage the Company's business and affairs (including the authorization of the issuance of additional shares and the determination of the nature and amount of liabilities and obligations incurred by the Company or its subsidiaries) without regard for the effect of any action upon the Optionee or upon the value of the shares subject to, or acquired upon exercise of, this option, or (iii) give the Optionee any claim against the Company or any of its officers or directors with respect to any action or omission relating to the Company's business or affairs, whether or not that action or omission affects the value of the shares subject to, or acquired upon exercise of, this option. (b) The Optionee shall not, by virtue of holding this option, be entitled to any rights of a stockholder in the Company. The Optionee shall not be considered a record holder of any shares purchased upon exercise of the option until the date on which he is actually recorded as a holder of the shares upon the Company's stock records. 6. Expenses. The Company shall pay all fees and expenses necessarily incurred by the Company in connection with the issuance and registration of the Company's shares pursuant to this option. If the Company shall be required to withhold any amounts by reason of any federal, state or local tax rules or regulations in respect of the issuance of shares pursuant to the exercise of this option, the Optionee shall make available to the Company sufficient funds to meet the withholding requirements and the Company shall be entitled to take and authorize any steps it deems advisable in order to have those funds made available to the Company out of any funds or property due or to become due to the Optionee. 7. Acceptance of Provisions of Plan. The Optionee agrees to, and shall be bound by, all of the terms and conditions of the Plan. 8 8. No Right to Continued Service. Nothing contained in this Option Agreement or in any option shall be construed to confer on the Optionee any right to continue in the service of the Company or any subsidiary or derogate from any right of the Company or any subsidiary to terminate, retire, request the resignation of or discharge the Optionee, at any time, with or without cause. 9. Notices. Any notice or other communication under this agreement shall be in writing and shall be considered given when delivered personally or three days after being mailed by registered or certified mail, return receipt requested, to the parties at their respective addresses set forth above (or at such address as a party may specify by notice to the other). 10. Complete Agreement; Amendment. This agreement and the Plan contain a complete statement of all of the arrangements between the parties with respect to their subject matter, and this agreement cannot be changed or terminated orally. 11. Governing Law. This agreement shall be governed by and construed in accordance with the law of the State of New York applicable to agreements made and to be performed in New York. 12. Arbitration. Any dispute or controversy arising under or in connection with this agreement shall be settled exclusively by arbitration to be held in the city of New York before a single arbitrator in accordance with the rules of the American Arbitration Association then in effect. In addition, if the Optionee prevails in the arbitration, in whole or in substantial part as determined by the arbitrator, the Company shall pay the fee and expenses of the American Arbitration Association and the cost of any transcript and shall reimburse the Optionee for the reasonable fees and disbursements of counsel to the Optionee in the arbitration. Judgment may be entered on the arbitrators' award in any court having jurisdiction, and the parties consent to the jurisdiction of the New York courts for that purpose. Any process or other papers under this provision 9 may be served outside New York State by registered mail, return receipt requested, or by personal service, provided a reasonable time for appearance or response is allowed. 13. Headings. The headings in this agreement are solely for convenience of reference and shall not affect its interpretation. LONDON FOG INDUSTRIES, INC. By: ------------------------------------- AGREED: - ------------------------------- 10 EX-10.4 12 EXHIBIT 10.4 LONDON FOG INDUSTRIES, INC. STOCK OPTION AGREEMENT ---------------------- FEBRUARY 27, 1998 London Fog Industries, Inc., a Delaware corporation with offices at 8 West 40th Street, New York, New York (the "Company"), hereby grants to C. William Crain, with an address at 10 Nutmeg Drive, Greenwich, CT 06831 (the "Optionee"), an option under the Company's 1998 Stock Option Plan (a copy of which is attached to this agreement) to purchase up to 333,333 shares of the Company's common stock, par value $.01 per share, at the price of $2.00 per share, on the terms and conditions set forth in this agreement and in the Plan. 1. Exercise of Option. (a) The Optionee may exercise this option with respect to 66,666.60 shares on and after the date hereof and with respect to an additional 66,666.60 shares on each of the first four anniversaries of the date hereof; provided, however, that this option shall become exercisable in full upon the death or Permanent Disability of the Optionee, the termination of the employment or services of the Optionee with the Company by the Company without Cause or termination by the Executive for Good Reason as defined in his Employment Agreement with the Company, or a Change in Control of the Company. As used in this Stock Option Agreement, (i) Permanent Disability means the inability as a result of a physical or mental illness or injury to perform substantially all of the duties or services for a continuous period of 360 days or more, (ii) Cause means the willful refusal of the Optionee substantially to perform the Optionee's duties or services for the Company (other than as a result of physical or mental illness or injury), or illegal conduct or gross misconduct by the Optionee that is willful and results in material and demonstrable damage to the business or reputation of the Company, and (iii) a Change in Control will be deemed to have occurred: (A) upon any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than any holder on the date hereof of the Company's 10% Senior Subordinated Notes due 2003, any holder of options granted under the Company's 1998 Stock Option Plan, or the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company), becoming the owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50%of the combined voting power of the Company's then outstanding securities; (B) upon the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered by the exceptions in (i) above) acquires more than 50% of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; (C) if the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of 80% or more of the Company's assets other than such a sale to a person or persons who beneficially own, directly or indirectly, at least 50% or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale; or (D) if the Company or a person or "group" of related persons purchases any shares of the Company's Common Stock pursuant to a tender offer pursuant to Section 14 of the Securities Exchange Act (provided this option shall become exercisable only to the extent shares issued upon exercise of this option are tendered in such tender offer). If the employment or services of the Optionee terminates for any reason other than the death or Permanent Disability of the Optionee 2 or termination of the employment or services of the Optionee with the Company by the Company without Cause or termination by the Optionee for Good Reason as defined in his Employment Agreement with the Company, then this option shall be exercisable with respect only to shares for which this option is exercisable at the time of termination of the Optionee's employment or services, and this option shall terminate with respect to any shares for which this option is not then exercisable. This option shall expire on, and may not be exercised after, the tenth anniversary of the date of this agreement (the "Termination Date"). (b) This option may be exercised only by the delivery to the Secretary or another designated officer of the Company, prior to the Termination Date, of a written notice of exercise duly signed by the Optionee (or the legal representative of the Optionee or his estate or his heirs) specifying the number of shares for which the option is being exercised. Within five business days after such notice, the Optionee shall deliver payment of the exercise price by either (i) delivery of a certified or bank check payable to the Company if the holder has received payment pursuant to the Company's Deferred Compensation Plan, or (ii) if the holder has not received such payment, delivery of a promissory note in the form of Exhibit A. (c) This option may be exercised for a minimum of 100 shares of the Company's Common Stock. 2. Anti-Dilution Provisions. (a) If there is any stock dividend, stock split or combination of shares of the Company's common stock, the number and amount of shares then subject to this option shall be proportionately and appropriately adjusted; no change shall be made in the aggregate purchase price to be paid for all shares subject to this option, but the aggregate purchase price shall be allocated among all shares subject to this option after giving effect to the adjustment. (b) If there is any other change in the Company's common stock, including recapitalization, reorganization, exchange of shares, offering of subscription rights, or, subject to section 2(g), a merger or consolidation in which the Company is the surviving corporation, such adjustment, if any, shall be made in the shares then subject to this option and the exercise price per share as the Company's 3 Board of Directors may in good faith determine to be equitable, with no change in the aggregate purchase price to be paid for all shares subject to this option, and notice thereof given to the Optionee. The Board's failure to provide for an adjustment prior to the effective date of the action shall be conclusive evidence that no adjustment is required. (c) If the Company shall issue shares of Common Stock to all holders of its Common Stock at a price per share less than the current market price per share of Common Stock (determined as provided in section 2(f)) or shall issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share of Common Stock or shall issue securities convertible into or exchangeable for Common Stock at a price per share less than the current market price per share of Common Stock, the price per share at which this option may thereafter be exercised shall be adjusted by dividing the price per share for which this option was theretofore exercisable by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance plus the number of additional shares of Common Stock issued or offered for subscription or purchase or issuable upon conversion or exchange of such securities, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance plus the number of shares which the aggregate purchase price of the total number of shares so issued or for which such rights or warrants are issued or the aggregate purchase price for the convertible or exchangeable securities offered would purchase at such current market price. (d) If the Company shall distribute to all holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends in the ordinary course of business paid out of earnings of the Company during the last four full fiscal quarters of the Company ending prior to the payment date for the dividend) or rights or warrants to subscribe for Common Stock (excluding those referred to in section 2(c)), then in each such case the price per share at which this option may thereafter be exercisable shall be adjusted by dividing the price per share for which this option was theretofore exercisable by a fraction, of which the numerator shall be the current market price per share of Common Stock on the date of such distribution, and of which the denominator shall be such current market 4 price per share of the Common Stock, less the then fair market value (as determined in good faith by the Board of Directors of the Company) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights or warrants applicable to one share of the Common Stock. (e) Upon any adjustment of the exercise price of this option pursuant to paragraph 2(c) or (d) above, the holder of this option shall thereafter be entitled to purchase, at the exercise price resulting from such adjustment, the number of shares obtained by multiplying the number of Shares for which this option was exercisable immediately prior to such adjustment by the fraction determined pursuant to paragraph 2(c) or (d), as the case may be. (f) For the purpose of any computation under section 2(c) or (d), the current market price per share of Common Stock shall be determined as follows: If the Common Stock is publicly traded, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for the thirty consecutive business days commencing forty-five business days before the day in question. The closing price for each day shall be (i) if the Common Stock is listed or admitted to trading on a national securities exchange, the last reported sales price on the principal national securities exchange on which the Common Stock is listed or admitted to trading (which shall be the national securities exchange on which the greatest number of shares of the Common Stock has been traded during such 30 consecutive business days), or (ii) if the Common Stock is not listed or admitted to trading on any such exchange, the average of the highest bid and lowest asked prices as reported by the National Quotations Bureau, Incorporated or a similar organization selected from time to time by the Company for the purpose. If the Common Stock is not publicly traded, the current market price shall be determined in good faith by the Board of Directors of the Company and notice thereof given to the Optionee. (g) In the event of a transaction described in paragraph (iii) or (iv) of the definition of Change of Control in section 1(a) of this Plan, at the Company's election either (i) the Company shall cause provision to be made for the continuance of this option after that event, or for the substitution for this option of an option covering 5 the number and class of securities the Optionee would have been entitled to receive in the merger or consolidation or upon the sale if the Optionee had been the holder of record of a number of shares of the Company's common stock equal to the number of shares covered by the then unexercised portion of this option, or (ii) the Company shall give to the Optionee written notice of its election not to cause such provision to be made and this option shall become exercisable in full (or, at the election of the Optionee, in part) at any time during a period of 20 days to be designated by the Company, ending not more than 10 days prior to the effective date of the merger, consolidation or sale, in which case this option shall not be exercisable to any extent after the expiration of that 20 day period. In no event, however, shall this option be exercisable after the Termination Date. (h) The Company may engage a firm of independent certified public accountants of recognized standing, which may be the Company's regular auditors, to make any computation required under this section 2 and a certificate of that firm showing the required adjustment shall be conclusive and binding on the parties. If the Optionee disagrees with any computation by the Board of Directors pursuant to this section 2 by notice given to the Company within 30 days after the notice from the Company thereof, the Company shall cause its auditors to make such computation, and that firm's determination of the computation shall be conclusive and binding on the parties. (i) If at any time: (a) the Company shall propose to declare any cash dividend upon its Common Stock; (b) the Company shall propose to declare or make any dividend or other distribution to the holders of its Common Stock, whether in cash, property or other securities; (c) the Company shall propose to effect any reorganization or reclassification of the capital stock of the Company or any consolidation or merger of the Company with or into another corporation or any sale, lease or conveyance of all or substantially all of the assets of the Company; or 6 (d) the Company shall propose to effect a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in any one or more of said cases, the Company shall give, by certified or registered mail, postage prepaid, addressed to the holder of this option at the address of such holder as shown on the books of the Company, (i) at least 30 days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend or distribution or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, lease, conveyance, dissolution, liquidation or winding-up, and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, lease, conveyance, dissolution, liquidation or winding-up, at least 30 days' written notice of the date when the same shall take place. 3. Registration Statement. The Shares issuable on exercise of this option shall be included in a Registration Statement on Form S-8 filed or to be filed by the Company registering all of the Shares to be issued pursuant to the Plan with the Securities and Exchange Commission under the Securities Act of 1933, and covering the reoffer and resale of Shares by holders of options granted under the Plan who may be deemed to be affiliates of the Company. The Company will cause such Registration Statement to become effective as soon as practicable after filing and to remain effective until all options held by the Optionee have been exercised (or terminated), and if the Optionee may be deemed to be an affiliate of the Company, until all Shares acquired upon exercise of this option may be freely sold under Rule 144 under the Securities Act of 1933. 4. Non-Transferability. This option may not be transferred by the Optionee other than by will or by the laws of descent and distribution, and during the lifetime of the Optionee is exercisable only by him (or his legal representative). 5. Certain Rights not Conferred by Option. 7 (a) Nothing in this agreement or in the Plan shall (i) give the Optionee any right to continue in the employ of the Company or any subsidiary or interfere in any way with the right of the Company or any subsidiary to terminate the Optionee's employment at any time, (ii) limit the right of the Company's board of directors to manage the Company's business and affairs (including the authorization of the issuance of additional shares and the determination of the nature and amount of liabilities and obligations incurred by the Company or its subsidiaries) without regard for the effect of any action upon the Optionee or upon the value of the shares subject to, or acquired upon exercise of, this option, or (iii) give the Optionee any claim against the Company or any of its officers or directors with respect to any action or omission relating to the Company's business or affairs, whether or not that action or omission affects the value of the shares subject to, or acquired upon exercise of, this option. (b) The Optionee shall not, by virtue of holding this option, be entitled to any rights of a stockholder in the Company. The Optionee shall not be considered a record holder of any shares purchased upon exercise of the option until the date on which he is actually recorded as a holder of the shares upon the Company's stock records. 6. Expenses. The Company shall pay all fees and expenses necessarily incurred by the Company in connection with the issuance and registration of the Company's shares pursuant to this option. If the Company shall be required to withhold any amounts by reason of any federal, state or local tax rules or regulations in respect of the issuance of shares pursuant to the exercise of this option, the Optionee shall make available to the Company sufficient funds to meet the withholding requirements and the Company shall be entitled to take and authorize any steps it deems advisable in order to have those funds made available to the Company out of any funds or property due or to become due to the Optionee. 7. Acceptance of Provisions of Plan. The Optionee agrees to, and shall be bound by, all of the terms and conditions of the Plan. 8 8. No Right to Continued Service. Nothing contained in this Option Agreement or in any option shall be construed to confer on the Optionee any right to continue in the service of the Company or any subsidiary or derogate from any right of the Company or any subsidiary to terminate, retire, request the resignation of or discharge the Optionee, at any time, with or without cause. 9. Notices. Any notice or other communication under this agreement shall be in writing and shall be considered given when delivered personally or three days after being mailed by registered or certified mail, return receipt requested, to the parties at their respective addresses set forth above (or at such address as a party may specify by notice to the other). 10. Complete Agreement; Amendment. This agreement and the Plan contain a complete statement of all of the arrangements between the parties with respect to their subject matter, and this agreement cannot be changed or terminated orally. 11. Governing Law. This agreement shall be governed by and construed in accordance with the law of the State of New York applicable to agreements made and to be performed in New York. 12. Arbitration. Any dispute or controversy arising under or in connection with this agreement shall be settled exclusively by arbitration to be held in the city of New York before a single arbitrator in accordance with the rules of the American Arbitration Association then in effect. In addition, if the Optionee prevails in the arbitration, in whole or in substantial part as determined by the arbitrator, the Company shall pay the fee and expenses of the American Arbitration Association and the cost of any transcript and shall reimburse the Optionee for the reasonable fees and disbursements of counsel to the Optionee in the arbitration. Judgment may be entered on the arbitrators' award in any court having jurisdiction, and the parties consent to the jurisdiction of the New York courts for that purpose. Any process or other papers under 9 this provision may be served outside New York State by registered mail, return receipt requested, or by personal service, provided a reasonable time for appearance or response is allowed. 13. Headings. The headings in this agreement are solely for convenience of reference and shall not affect its interpretation. LONDON FOG INDUSTRIES, INC. By: ------------------------------------ AGREED: - --------------------------------------- 10 EX-10.5 13 EXHIBIT 10.5 DEFERRED COMPENSATION PLAN The following are the terms of the deferred compensation plan (the "Plan") of London Fog Industries, Inc. (the "Company"). 1. PARTICIPATION. The participants (the "Participants") in the Plan shall be each person who receives options pursuant to the Company's 1998 Stock Option Plan (the "Stock Option Plan"). 2. AMOUNT OF BENEFIT. On the date of any grant of options to a Participant pursuant to the Stock Option Plan, the Company shall credit (via a non-cash bookkeeping entry) to an account in the name of the Participant (through a bookkeeping entry) an amount (the "Initial Amount") equal to the aggregate exercise price of the options granted to that Participant under the Stock Option Plan. The Initial Amount shall accrue interest at the rate of interest on 10-year Treasury Notes as reported in The Wall Street Journal, compounded annually. The initial rate of interest shall be determined on the date that the options are granted and the rate shall be reset on each anniversary thereof. 3. PAYMENT OF BENEFIT UPON EXERCISE. Upon any exercise of options granted to a Participant under the Stock Option Plan which exercise occurs while the Participant is employed by or providing services to the Company or its subsidiaries, unless the Participant elects not to then receive payment hereunder and to pay the exercise price for the options with a promissory note, the Participant shall be paid, within three business days thereafter, by certified or bank check, an amount equal to the Initial Amount with respect to the exercise price of those options, and any interest accrued thereon shall be forfeited. 4. PAYMENT OF BENEFIT WITH RESPECT TO UNEXERCISED OPTIONS IN TEN YEARS. If on the tenth anniversary of the date of grant of any options to a Participant under the Stock Option Plan, the Participant has not exercised all of the options granted to him and has been continuously employed by or continuously providing services to the Company or its subsidiaries during the ten-year period, then the Company shall pay to the Participant an amount equal to the portion of the Initial Amount that is equal to the aggregate exercise price of the unexercised options plus all accrued interest thereon. If, pursuant to section 3, a Participant elects not to then receive payment hereunder and to pay the exercise price for any options with a promissory note, then, on the tenth anniversary of the date of grant of those options to the Participant, the Company shall pay to the Participant an amount equal to the portion of the Initial Amount that is equal to the aggregate exercise price of those options plus accrued interest thereon, provided, however, that the amount of such accrued interest shall not exceed the amount of interest on the promissory note delivered upon exercise of the options. 5. PAYMENT OF BENEFIT WITH RESPECT TO EXERCISED OPTIONS IN TEN YEARS. Subject to section 6, if a Participant's employment by or services to the Company or its subsidiaries terminates prior to the exercise of all of the options granted to the Participant under the Stock Option Plan, and if the Participant subsequently exercises any options (the "Former Management Options") and pursuant to the terms of the Stock Option Plan is required to pay the exercise price for those Former Management Options by delivery of a Promissory Note (the "Option Note"), then, except as provided in section 6, on the tenth anniversary of the date of grant of the exercised options the Company shall pay to the Participant an amount equal to the portion of the Initial Amount that is equal to the aggregate exercise price of the Former Management Options plus accrued interest thereon, provided, however, that the amount of such accrued interest shall not exceed the amount of interest on the Option Note, and any additional accrued interest on the Initial Amount shall be forfeited. A Participant shall have no right of offset or right of recoupment under applicable bankruptcy law with respect to such payment if the Participant is required to make payment on the Option Note at a time when the Company is in bankruptcy. 6. PAYMENT ON SPECIFIED DATE FOR PARTICIPANTS NO LONGER EMPLOYED BY OR PROVIDING SERVICES TO THE COMPANY. Notwithstanding anything to the contrary in section 5, at the time a person becomes a Participant in this Plan, the Participant may elect, by notice to the Company, to receive the portion of the Initial Amount that is equal to the aggregate exercise price of any options that remain unexercised at the time his employment by or services to the Company and its subsidiaries terminates, plus accrued interest thereon to the extent required to repay the Option Note as provided in section 5, on a date specified in the election (the "Specified Date"), provided that the Participant will only receive such payment if (a) his employment by or services to the Company or its subsidiaries terminates prior to the Specified Date, and (b) he has exercised the options no later than 75 days prior to the Specified Date. If such a Participant's options are not exercised within the time period specified in clause (b) above, the Participant will forfeit the right to receive any payments under this Plan. Any designation of a Specified Date may be changed at any time thereafter, provided that no change will be effective if made within 12 months of the date of termination of employment or services. 7. FORFEITURE OF BENEFITS WITH RESPECT TO UNEXERCISED OPTIONS. If a Participant's employment by or services to the Company or its subsidiary terminates prior to the tenth anniversary of the date any options were granted to the Participant under the Stock Option Plan and if on such tenth anniversary the Participant has not exercised all of his options, the Participant shall forfeit the portion of the Initial Amount that is equal to the aggregate exercise price of the unexercised options and all accrued interest thereon. 2 8. CONSTRUCTION OF PLAN. (a) The Plan is "unfunded" and benefits payable hereunder shall be paid by the Company out of its general assets. The Participant shall not have any interest in any specific asset of the Company as a result of this Plan. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and the Participant or any other person. Any funds which may be invested under the provisions of this Plan shall continue for all purposes to be part of the general funds of the Company and no person other than the Company shall by virtue of the provisions of this Plan have any interest in such funds. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. The obligations to the Participant hereunder shall be that of the Company and no other entity shall have any obligations to him. (b) All expenses incurred by the Company in administering the Plan shall be paid by the Company. 9. LIMITATION OF RIGHTS. Nothing contained herein shall be construed as conferring upon the Participant the right to continue in the employ of the Company as an executive or in any other capacity or to interfere with the Company's right to discharge him at any time for any reason whatsoever. 10. PAYMENT NOT SALARY. No amount payable under this Plan shall be deemed salary or other compensation to the Participant for the purposes of computing benefits to which he may be entitled under any pension plan or other arrangement of the Company for the benefit of its employees. 11. SEVERABILITY. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision never existed. 12. WITHHOLDING. All payments under this Plan shall be subject to the withholding of such amounts relating to federal, state or local taxes, including, without limitation, taxes imposed pursuant to the Federal Insurance Contribution Act (FICA) and the Federal Unemployment Tax Act (FUTA), as the Company may reasonably determine it should withhold based on applicable law or regulations. If a Participant elects and if the Company consents in its sole discretion to such election, any such taxes may be paid by delivering shares of the Company's Common Stock acquired upon exercise of options under the Stock Option Plan (valued at fair market value as defined in the Plan). 3 13. ASSIGNMENT. This Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Participant and his heirs, executors, administrators and legal representatives. The Participant may not assign any of his rights under this Plan to any person other than by will or by the laws of descent and distribution. 14. NON-ALIENATION OF BENEFITS. The benefits payable under this Plan shall not be subject to alienation, transfer, assignment, garnishment, execution or levy of any kind, and any attempt to cause any benefits to be so subjected shall not be recognized. 15. GOVERNING LAW. This Plan shall be governed by the laws of the State of New York. 16. AMENDMENT OR TERMINATION OF PLAN. This Plan may be amended or withdrawn by the Stock Option Committee with respect to any amounts not yet credited under this Plan, and the Committee with the consent of each adversely affected Participant may at any time amend this Plan as it relates to the terms and conditions of any amounts previously credited under this Plan. 17. NON-EXCLUSIVITY. The adoption of the Plan by the Company shall not be construed as creating any limitations on the power of the Company to adopt such other supplemental retirement income arrangements as it deems desirable, and such arrangements may be either generally applicable or limited in application. 18. GENDER AND NUMBER. Wherever used in this Plan, the masculine shall be deemed to include the feminine and the singular shall be deemed to include the plural, unless the context clearly indicates otherwise. 19. HEADINGS AND CAPTIONS. The headings and captions herein are provided for reference and convenience only. They shall not be considered part of the Plan and shall not be employed in the construction of the Plan. 4 IN WITNESS WHEREOF, the Company has caused this Plan to be executed this 27th day of February, 1998. LONDON FOG INDUSTRIES, INC. By: -------------------------------- 5 EX-10.6 14 EXHIBIT 10.6 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR SUCH LAWS AND RULES AND REGULATIONS THEREUNDER. MANAGEMENT ANTI-DILUTION WARRANT TO PURCHASE SHARES OF COMMON STOCK OF LONDON FOG INDUSTRIES, INC. This certifies that ___________ (the "Holder"), for value received, is entitled to purchase from London Fog Industries, Inc., a Delaware corporation (the "Company"), _______________________ (____) fully paid and nonassessable shares of the Company's Common Stock, par value $.01 per share (the "Stock"), at a price of $15.72 per share (the "Stock Purchase Price") at any time or from time to time during the exercise period set forth in Section 1, upon surrender to the Company at its principal office at 8 West 40th Street, New York, New York 10018 (or at such other location as the Company may advise Holder in writing) of this Warrant with the Form of Subscription attached hereto duly filled in and signed and upon payment by cash, certified or bank check or wire transfer of the aggregate Stock Purchase Price for the number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. The Stock Purchase Price and the number of shares purchasable hereunder are subject to adjustment as provided in Section 3 of this Warrant. This Warrant is subject to the following terms and conditions: 1. Exercise; Issuance of Certificates; Payment for Shares. This Warrant is exercisable at the option of Holder at any time or from time to time on or after the first date on which any Warrants (the "Merger Warrants") issued pursuant to the Merger Agreement dated as of February 27, 1998 between the Company and LFI Merger Corp. are exercised and not later than 5:00 p.m. (New York time) on the Expiration Date (as defined below) for all or a portion of the shares of Stock which may be purchased hereunder. "Expiration Date" means the earlier of (i) the later of February 28, 2005 and seven days after receipt by the Holder of the Exercise Notice referred to below, or (ii) the occurrence of an event which causes termination of this Warrant under clause (d) of Section 3.4. The Company shall give the Holder prompt notice (the "Exercise Notice") of the exercise of any of the Merger Warrants. Notwithstanding the foregoing, this Warrant shall only be exercisable with respect to the same percentage of the aggregate shares subject to this Warrant as the percentage of the aggregate shares subject to the Stock Option Agreement between the Company and the Holder dated the date hereof which are then exercisable or have previously been exercised under the terms of the Stock Option Agreement. The Company agrees that the shares of Stock purchased under this Warrant shall be and are deemed to be issued to Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares. Subject to the provisions of Section 2, certificates for the shares of Stock so purchased, together with any other securities or property to which Holder is entitled upon such exercise, shall be delivered to Holder by the Company's transfer agent at the Company's expense within a reasonable time (but in no event more than three business days) after the rights represented by this Warrant have been exercised. Each stock certificate so delivered shall be in such denominations of Stock as may be requested by Holder and shall be registered in the name of Holder or such other name as shall be designated by Holder, subject to the limitations contained in Section 2. If, upon exercise of this Warrant, fewer than all of the shares of Stock evidenced by this Warrant are purchased prior to the Expiration Date, one or more new warrants substantially in the form of, and on the terms in, this Warrant will be issued for the remaining number of shares of Stock not purchased upon exercise of this Warrant. 2. Shares to be Fully Paid: Reservation of Shares. The Company covenants and agrees that all shares of Stock which may be issued upon the exercise of the rights represented by this Warrant (the "Warrant Shares") will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any stockholder and free of all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of authorized but unissued Stock for such exercise. The Company will take all such action as may be necessary to assure that such shares of Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange, automated quotation system or quotation service upon which the Stock may be listed. 3. Adjustment of Stock Purchase Price; Number of Shares. The Stock Purchase Price and the number of shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 3; provided, however, that if a certain event shall cause the Stock Purchase Price to be adjusted to a price less than the par value of the Stock, the Company prior to such event shall decrease the par value of the Stock so that the Stock Purchase Price shall not be less than the par value of the Stock following the occurrence of such event. Upon each adjustment of the Stock Purchase Price, the holder of this Warrant shall thereafter be entitled to purchase, at the Stock Purchase Price resulting from such adjustment, the number of shares obtained by multiplying the Stock Purchase Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Stock Purchase Price resulting from such adjustment. 3.1 Subdivision or Combination of Stock. In case the Company shall at any time subdivide its outstanding shares of Stock into a greater number of shares, the Stock Purchase Price in effect immediately prior to such subdivision shall be proportionately reduced, and the number of shares issuable upon exercise of this Warrant shall be proportionately increased. Conversely, in case the outstanding shares of Stock of the Company shall be combined into a smaller number of shares, the Stock Purchase Price in effect immediately prior to such combination shall be proportionately increased and the number of shares issuable upon exercise of this Warrant shall be proportionately reduced. 3.2 Stock Dividend. In case the Company shall at any time declare or pay a dividend upon its Stock payable in shares of Stock, the Stock Purchase Price in effect immediately prior to such dividend shall be proportionately reduced and the number of shares issuable upon exercise of this Warrant shall be proportionately increased. 3.3 Notice of Adjustment. Upon any adjustment of the Stock Purchase Price or any increase or decrease in the number of shares purchasable upon the exercise of this Warrant, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company. The notice shall be signed by the Company's Secretary or another designated officer and shall state the effective date of the adjustment and the Stock Purchase Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 3.4 Other Notices. If at any time: (a) the Company shall propose to declare any cash dividend upon its Stock; (b) the Company shall propose to declare or make any dividend or other distribution to the holders of its Stock, whether in cash, property or other securities; (c) the Company shall propose to effect any reorganization or reclassification of the capital stock of the Company or any consolidation or merger of the Company with or into another corporation or any sale, lease or conveyance of all or substantially all of the assets of the Company; or (d) the Company shall propose to effect a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in any one or more of said cases, the Company shall give, by certified or registered mail, postage prepaid, addressed to the holder of this Warrant at the address of such holder as shown on the books of the Company, (i) at least 30 days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend or distribution or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, lease, conveyance, dissolution, liquidation or winding-up, and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, lease, conveyance, dissolution, liquidation or winding-up, at least 30 days' written notice of the date when the same shall take place. Upon the occurrence of an event described in clause (c), the holder of this Warrant shall be entitled thereafter to receive upon exercise of this Warrant the kind and amount of shares of stock or other securities or assets which the holder would have been entitled to receive after the occurrence of such event had this Warrant been exercised immediately prior to such event; and in any such case, appropriate provision shall be made with respect to the rights and interests of the holder to the end that the provisions of this Warrant (including, without limitation, provisions with respect to changes in and adjustments of the Stock Purchase Price and the number of shares purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, or other securities or assets, thereafter deliverable upon the exercise of this Warrant. The Company will not effect any of the transactions described in clause (c) above unless, prior to the consummation thereof, each person (other than the Company) that may be required to deliver any cash, stock, securities or other assets upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to, and reasonably satisfactory to, the holder of this Warrant, (x) the obligations of the Company under this Warrant (and if the Company shall survive the consummation of any such transaction, such assumption shall be in addition to, and shall not release the Company from, any continuing obligations of the Company under this Warrant) and (y) the obligation to deliver to such holder such cash, stock, securities or other assets as such holder may be entitled to receive in accordance with the provisions of this Section 3. Upon the occurrence of an event described in clause (d), this Warrant shall terminate. The provisions of this Section 3.6 shall similarly apply to successive transactions. 4. Issue Tax. The issuance of certificates for shares of Stock upon the exercise of this Warrant shall be made without charge to the holder of this Warrant for any issue tax in respect thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then holder of the Warrant being exercised. 5. No Voting Rights; Limitation of Liability. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company. No provisions hereof, in the absence of affirmative action by the Holder to purchase shares of Stock, and no mere enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of such Holder for the Stock Purchase Price or as a stockholder of the Company whether such liability is asserted by the Company or by its creditors. 6. Restrictions on Transferability of Securities; Compliance With Securities Act. 6.1 Restrictions on Transferability. The Warrant and the Warrant Shares (collectively, the "Securities"), shall not be transferable in the absence of registration under the Act or an exemption therefrom under such Act. 6.2 Restrictive Legend. Each certificate representing the Securities or any other securities issued in respect of the Securities upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required under applicable state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR SUCH LAWS AND RULES AND REGULATIONS THEREUNDER. If, at the time of exercise, the Shares are registered pursuant to the Registrant Rights Agreement referred to in Section 7, the legend shall be modified accordingly. 6.3 Effect of Transfer. Subject to the provisions of Section 6.1 hereof, the Holder may transfer all or any portion of this Warrant by surrendering this Warrant to the Company together with a completed assignment in the form attached hereto as Exhibit B. Upon such surrender, the Company shall deliver a new Warrant or Warrants to the person or persons entitled thereto and, if applicable, shall deliver to the Holder a new Warrant evidencing the right of the Holder to purchase the balance of the Warrant Shares subject to purchase hereunder. The term "Holder" as used herein shall include any transferee to whom this Warrant has been transferred in accordance with this Section 6.3. 7. Registration Procedures. The Warrant Shares constitute "Registrable Securities" as defined in Section 1 of the Registration Rights Agreement, dated as of February 27, 1998, and shall be entitled to registration rights in accordance with such Agreement. 8. Income Tax Withholding. If the Company or a subsidiary shall be required to withhold any amounts by reason of any federal, state or local tax rules or regulations in respect of the exercise of this Warrant, the holder shall make available to the Company or the subsidiary sufficient funds to meet the withholding requirements and the Company or the subsidiary shall be entitled to take and authorize any steps it deems advisable in order to have such funds made available to the Company or the subsidiary out of any funds or property due or to become due to the Holder. If the Holder elects and if the Company consents in its sole discretion to such election, any such taxes may be paid by delivering Warrant Shares acquired upon exercise of this Warrant (valued at fair market value as defined in the Stock Option Agreement referred to in section 1). 9. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 10. Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder hereof or the Company shall be personally delivered or shall be sent by certified or registered mail, postage prepaid, to each such Holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant. Any notice given by personal delivery shall be deemed given upon receipt, and any notice given by certified or registered mail shall be deemed given five days after registration or certification thereof, as the case may be. 11. Descriptive Headings and Governing Law. The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York, without giving effect to rules governing conflicts of law. 12. Lost Warrants or Stock Certificates. The Company represents and warrants to, and agrees with, the Holder that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant or stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity, or in the case of any such mutilation, upon surrender and cancellation of such Warrant or stock certificate, the Company at its expense will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 13. Fractional Shares. No fractional shares shall be issued upon exercise of this Warrant. The Company shall, in lieu of issuing any fractional share, pay the Holder entitled to such fraction a sum in cash equal to such fraction multiplied by the market price of the Stock, which shall be, on any date, the closing price for the Stock or the closing bid if no sales were reported on the domestic securities exchange or automated quotation system or quotation service which is the principal market for the stock. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer, thereunto duly authorized this 27th day of February, 1998. LONDON FOG INDUSTRIES, INC. By: ------------------------------ Name: Title: FORM OF SUBSCRIPTION -------------------- (To be signed only upon exercise of Warrant) To: ___________________________ The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, _____________________ (_______) shares of Common Stock, par value $.__ per share (the "Stock"), of London Fog Industries, Inc. (the "Company") and herewith makes payment of _____________________________ Dollars ($__________) therefor and requests that the certificates for such shares be issued in the name of, and delivered to, ___________________________________ _____________________________________________________________, whose address is ____________________________________________. The undersigned represents, unless the exercise of this Warrant has been registered under the Securities Act of 1933, as amended (the "Securities Act"), that the undersigned is acquiring such Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof (except for any resale pursuant to a Registration Statement under the Securities Act). DATED: ----------------- ------------------------------------------------ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ------------------------------------------------ ------------------------------------------------ (Address) EXHIBIT B FORM OF ASSIGNMENT (To be executed by the registered Holder if such Holder desires to transfer the attached Warrant.) FOR VALUE RECEIVED, ____________________________ hereby sells, assigns, and transfers unto ___________________________ a Warrant to Purchase ____________ shares of Common Stock, par value $.__ per share, of London Fog Industries, Inc. (the "Company"), together with all right, title, and interest therein, and does hereby irrevocably constitute and appoint ___________ attorney to transfer such Warrant on the books of the Company, with full power of substitution. Dated: ------------------------ Signature ------------------ NOTICE This signature on the foregoing Assignment must correspond to the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatsoever. EX-10.7 15 EXHIBIT 10.7 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR SUCH LAWS AND RULES AND REGULATIONS THEREUNDER. WARRANT TO PURCHASE SHARES OF COMMON STOCK OF LONDON FOG INDUSTRIES, INC. This certifies that _________________ (the "Holder"), for value received, is entitled to purchase from London Fog Industries, Inc., a Delaware corporation (the "Company"), ___________ (_____) fully paid and nonassessable shares of the Company's Common Stock, par value $.01 per share (the "Stock"), at a price of $15.72 per share (the "Stock Purchase Price") at any time or from time to time on or after the date hereof but not later than 5:00 p.m. (New York time) on the Expiration Date (as defined below), upon surrender to the Company at its principal office at 8 West 40th Street, New York, New York 10018(or at such other location as the Company may advise Holder in writing) of this Warrant with the Form of Subscription attached hereto duly filled in and signed and upon payment by cash, certified or bank check or wire transfer of the aggregate Stock Purchase Price for the number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. The Stock Purchase Price and the number of shares purchasable hereunder are subject to adjustment as provided in Section 3 of this Warrant. "Expiration Date" means the earlier of (i) February 27, 2005, or (ii) the occurrence of an event which causes termination of this Warrant under clause (d) of Section 3.4. This Warrant is issued pursuant to the Merger Agreement, dated as of February 27, 1998, between the Company and LFI Merger Corp. This Warrant is subject to the following terms and conditions: 1. Exercise; Issuance of Certificates; Payment for Shares. This Warrant is exercisable at the option of Holder at any time or from time to time on or after the date hereof but not later than the Expiration Date for all or a portion of the shares of Stock which may be purchased hereunder. The Company agrees that the shares of Stock purchased under this Warrant shall be and are deemed to be issued to Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares. Subject to the provisions of Section 2, certificates for the shares of Stock so purchased, together with any other securities or property to which Holder is entitled upon such exercise, shall be delivered to Holder by the Company's transfer agent at the Company's expense within a reasonable time (but in no event more than three business days) after the rights represented by this Warrant have been exercised. Each stock certificate so delivered shall be in such denominations of Stock as may be requested by Holder and shall be registered in the name of Holder or such other name as shall be designated by Holder, subject to the limitations contained in Section 2. If, upon exercise of this Warrant, fewer than all of the shares of Stock evidenced by this Warrant are purchased prior to the Expiration Date, one or more new warrants substantially in the form of, and on the terms in, this Warrant will be issued for the remaining number of shares of Stock not purchased upon exercise of this Warrant. 2. Shares to be Fully Paid: Reservation of Shares. The Company covenants and agrees that all shares of Stock which may be issued upon the exercise of the rights represented by this Warrant (the "Warrant Shares") will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any stockholder and free of all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of authorized but unissued Stock for such exercise. The Company will take all such action as may be necessary to assure that such shares of Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange, automated quotation system or quotation service upon which the Stock may be listed. 3. Adjustment of Stock Purchase Price; Number of Shares. The Stock Purchase Price and the number of shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 3; provided, however, that if a certain event shall cause the Stock Purchase Price to be adjusted to a price less than the par value of the Stock, the Company prior to such event shall decrease the par value of the Stock so that the Stock Purchase Price shall not be less than the par value of the Stock following the occurrence of such event. Upon each adjustment of the Stock Purchase Price, the holder of this Warrant shall thereafter be entitled to purchase, at the Stock Purchase Price resulting from such adjustment, the number of shares obtained by multiplying the Stock Purchase Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Stock Purchase Price resulting from such adjustment. 3.1 Subdivision or Combination of Stock. In case the Company shall at any time subdivide its outstanding shares of Stock into a greater number of shares, the Stock Purchase Price in effect immediately prior to such subdivision shall be proportionately reduced, and the number of shares issuable upon exercise of this Warrant shall be proportionately increased. Conversely, in case the outstanding shares of Stock of the Company shall be combined into a smaller number of shares, the Stock Purchase Price in effect immediately prior to such combination shall be proportionately increased and the number of shares issuable upon exercise of this Warrant shall be proportionately reduced. 3.2 Stock Dividend. In case the Company shall at any time declare or pay a dividend upon its Stock payable in shares of Stock, the Stock Purchase Price in effect immediately prior to such dividend shall be proportionately reduced and the number of shares issuable upon exercise of this Warrant shall be proportionately increased. 3.3 Notice of Adjustment. Upon any adjustment of the Stock Purchase Price or any increase or decrease in the number of shares purchasable upon the exercise of this Warrant, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company. The notice shall be signed by the Company's Secretary or another designated officer and shall state the effective date of the adjustment and the Stock Purchase Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 3.4 Other Notices. If at any time: (a) the Company shall propose to declare any cash dividend upon its Stock; (b) the Company shall propose to declare or make any dividend or other distribution to the holders of its Stock, whether in cash, property or other securities; (c) the Company shall propose to effect any reorganization or reclassification of the capital stock of the Company or any consolidation or merger of the Company with or into another corporation or any sale, lease or conveyance of all or substantially all of the assets of the Company; or (d) the Company shall propose to effect a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in any one or more of said cases, the Company shall give, by certified or registered mail, postage prepaid, addressed to the holder of this Warrant at the address of such holder as shown on the books of the Company, (i) at least 30 days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend or distribution or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, lease, conveyance, dissolution, liquidation or winding-up, and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, lease, conveyance, dissolution, liquidation or winding-up, at least 30 days' written notice of the date when the same shall take place. Upon the occurrence of an event described in clause (c), the holder of this Warrant shall be entitled thereafter to receive upon exercise of this Warrant the kind and amount of shares of stock or other securities or assets which the holder would have been entitled to receive after the occurrence of such event had this Warrant been exercised immediately prior to such event; and in any such case, appropriate provision shall be made with respect to the rights and interests of the holder to the end that the provisions of this Warrant (including, without limitation, provisions with respect to changes in and adjustments of the Stock Purchase Price and the number of shares purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, or other securities or assets, thereafter deliverable upon the exercise of this Warrant. The Company will not effect any of the transactions described in clause (c) above unless, prior to the consummation thereof, each person (other than the Company) that may be required to deliver any cash, stock, securities or other assets upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to, and reasonably satisfactory to, the holder of this Warrant, (x) the obligations of the Company under this Warrant (and if the Company shall survive the consummation of any such transaction, such assumption shall be in addition to, and shall not release the Company from, any continuing obligations of the Company under this Warrant) and (y) the obligation to deliver to such holder such cash, stock, securities or other assets as such holder may be entitled to receive in accordance with the provisions of this Section 3. Upon the occurrence of an event described in clause (d), this Warrant shall terminate. The provisions of this Section 3.6 shall similarly apply to successive transactions. 4. Issue Tax. The issuance of certificates for shares of Stock upon the exercise of this Warrant shall be made without charge to the holder of this Warrant for any issue tax in respect thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then holder of the Warrant being exercised. 5. No Voting Rights; Limitation of Liability. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company. No provisions hereof, in the absence of affirmative action by the Holder to purchase shares of Stock, and no mere enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of such Holder for the Stock Purchase Price or as a stockholder of the Company whether such liability is asserted by the Company or by its creditors. 6. Restrictions on Transferability of Securities; Compliance With Securities Act. 6.1 Restrictions on Transferability. The Warrant and the Warrant Shares (collectively, the "Securities"), shall not be transferable in the absence of registration under the Act or an exemption therefrom under such Act. 6.2 Restrictive Legend. Each certificate representing the Securities or any other securities issued in respect of the Securities upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required under applicable state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR SUCH LAWS AND RULES AND REGULATIONS THEREUNDER. If, at the time of exercise, the Shares are registered pursuant to the Registrant Rights Agreement referred to in Section 7, the legend shall be modified accordingly. 6.3 Effect of Transfer. Subject to the provisions of Section 6.1 hereof, the Holder may transfer all or any portion of this Warrant by surrendering this Warrant to the Company together with a completed assignment in the form attached hereto as Exhibit B. Upon such surrender, the Company shall deliver a new Warrant or Warrants to the person or persons entitled thereto and, if applicable, shall deliver to the Holder a new Warrant evidencing the right of the Holder to purchase the balance of the Warrant Shares subject to purchase hereunder. The term "Holder" as used herein shall include any transferee to whom this Warrant has been transferred in accordance with this Section 6.3. 7. Registration Procedures. The Warrant Shares constitute "Registrable Securities" as defined in Section 1 of the Registration Rights Agreement, dated as of February 27, 1998, and shall be entitled to registration rights in accordance with such Agreement. 8. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 9. Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder hereof or the Company shall be personally delivered or shall be sent by certified or registered mail, postage prepaid, to each such Holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant. Any notice given by personal delivery shall be deemed given upon receipt, and any notice given by certified or registered mail shall be deemed given five days after registration or certification thereof, as the case may be. 10. Descriptive Headings and Governing Law. The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York, without giving effect to rules governing conflicts of law. 11. Lost Warrants or Stock Certificates. The Company represents and warrants to, and agrees with, the Holder that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant or stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity, or in the case of any such mutilation, upon surrender and cancellation of such Warrant or stock certificate, the Company at its expense will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 12. Fractional Shares. No fractional shares shall be issued upon exercise of this Warrant. The Company shall, in lieu of issuing any fractional share, pay the Holder entitled to such fraction a sum in cash equal to such fraction multiplied by the market price of the Stock, which shall be, on any date, the closing price for the Stock or the closing bid if no sales were reported on the domestic securities exchange or automated quotation system or quotation service which is the principal market for the stock. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer, thereunto duly authorized this 27th day of February, 1998. LONDON FOG INDUSTRIES, INC. By: ------------------------------- Name: Title: FORM OF SUBSCRIPTION -------------------- (To be signed only upon exercise of Warrant) To: ------------------------------- The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, _____________________ (_______) shares of Common Stock, par value $.__ per share (the "Stock"), of London Fog Industries, Inc. (the "Company") and herewith makes payment of _____________________________ Dollars ($__________) therefor and requests that the certificates for such shares be issued in the name of, and delivered to, __________________________________ _____________________________________________________________, whose address is ____________________________________________. The undersigned represents, unless the exercise of this Warrant has been registered under the Securities Act of 1933, as amended (the "Securities Act"), that the undersigned is acquiring such Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof (except for any resale pursuant to a Registration Statement under the Securities Act). DATED: --------------- ---------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ---------------------------------------- ---------------------------------------- (Address) EXHIBIT B FORM OF ASSIGNMENT (To be executed by the registered Holder if such Holder desires to transfer the attached Warrant.) FOR VALUE RECEIVED, ____________________________ hereby sells, assigns, and transfers unto ___________________________ a Warrant to Purchase ____________ shares of Common Stock, par value $.__ per share, of London Fog Industries, Inc. (the "Company"), together with all right, title, and interest therein, and does hereby irrevocably constitute and appoint ___________ attorney to transfer such Warrant on the books of the Company, with full power of substitution. Dated: ------------------------ Signature ------------------ NOTICE This signature on the foregoing Assignment must correspond to the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatsoever. EX-10.8 16 EXHIBIT 10.8 STANDARD FORM OF OFFICE LEASE THE REAL ESTATE BOARD OF NEW YORK, INC. Agreement of Lease, made as of this 4th day of May, 1994, between 40th Associates, a New York Limited Partnership having an address at 110 East 59th Street, New York, New York 10022 party of the first part, hereinafter referred to as OWNER, and/or LANDLORD, and LONDON FOG CORPORATION, a Delaware Corporation with offices located at 1332 Londontown Boulevard, Eldersburg, Maryland 21784-5399 party of the second part, hereinafter referred to as Tenant, WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner the entire 18th, 19th, 20th, 21st and Penthouse Floors (the "demised premises" or "Demised Premises") (See ARTICLE 62) in the building known as 8 West 40th Street (the "Building") in the Borough of Manhattan, City of New York, for a term of Fifteen (15) Years ("Term") (or until the Term shall sooner cease or expire pursuant to the terms of this lease or pursuant to law) to commence on October 1, 1994 (the "Commencement Date") and to end on September 30, 2009 (the "Expiration Date") at the fixed annual rent (the "Base Rent") of: See ARTICLE 43 which Tenant agrees to pay in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, in equal monthly installments in advance on the first day of each month during said term, at the office of Owner or such other place as Owner may designate, without any set off or deduction whatsoever, except that Tenant shall pay the first monthly installment(s) on the execution hereof (unless this lease be a renewal). In the event that, at the commencement of the term of this lease, or thereafter, Tenant shall be in default in the payment of rent to Owner pursuant to the terms of another lease with Owner or with Owner's predecessor in interest, Owner may at Owner's option and without notice to Tenant add the amount of such arrears to any monthly installment of rent payable hereunder and the same shall be payable to Owner as additional rent. The parties hereto, for themselves, their heirs distributees, executors, administrators, legal representatives, successors and assigns, hereby convenant as follows: RENT OCCUPANCY: 1. Tenant shall pay the rent as above and as hereinafter provided. 2. Tenant shall use and occupy demised premises for Executive and General Offices and Showrooms, and for no other purpose. TENANT ALTERATIONS: 3. Tenant shall make no changes in or to the demised premises of any nature without Owner's prior written consent. Subject to the prior written consent of Owner, which consent shall not be unreasonably withheld or delayed, and to the provisions of this article, Tenant at Tenant's expense, may make alterations, installations, additions or improvements which are nonstructural and which do not affect utility services or plumbing and electrical lines, in or to the interior of the demised premises by using contractors or mechanics first approved by Owner which consent shall not be unreasonably withheld or delayed. Tenant shall, before making any alterations, additions, installations or improvements, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof and shall deliver promptly duplicates of all such permits, approvals and certificates to Owner and Tenant agrees to carry and will cause Tenant's contractors and sub-contractors to carry such workman's compensation, general liability, personal and property damage insurance as Owner may reasonably require. If any mechanic's lien is filed against the demised premises, or the building of which the same forms a part, for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this article, the same shall be discharged by Tenant within thirty days after notice thereof, at Tenant's expense, by filing the bond requried by law. All fixtures and all paneling, partitions, railings and like installations, installed in the premises at any time, either by Tenant or by Owner in Tenant's behalf, shall, upon installation, become the property of Owner and shall remain upon and be surrendered with the demised premises. Nothing in this Article shall be construed to give Owner title to or to prevent Tenant's removal of trade fixtures, moveable office furniture and equipment, but upon removal of any such from the premises, Tenant shall immediately and at its expense, repair nad restore the premises to the condition existing prior to installation and repair any damage to the demised premises or the building due to such removal. All property premitted to be removed, by Tenant at the end of the term remaining in the premises after Tenant's removal shall be deemed abandoned and may, at the election of Owner, either be retained as Owner's property or may be removed from the premises by Owner, at Tenant's expense. MAINTENANCE and REPAIRS 4. Tenant shall, throughout the term of this lease, take good care of the demised premises and fixtures and appurtenances therein. Tenant shall be responsible for all damage or injury to the demised premises or any other part of the building and the systems and equipment thereof, whether requiring structural or nonstructural repairs caused by or resulting from carelessness, omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents, employees, invitees or licensees, or which arise out of any work, labor, service or equipment done for or supplied to Tenant or any subtenant or arising out of the installation, use or operation of the propety or equipment of Tenant or any subtenant. Tenant shall also repair all damage to the building and the demised premises caused by the moving of Tenant's fixtures, furniture and equipment. Tenant shall promptly make, at Tenant's expense, all repairs in and to the demised premises for which Tenant is responsible, using only the contractor for the trade or trades in question, selected from a list of at least four contractors per trade submitted by Owner. Any other repairs in or to the building or the facilities and systems thereof for which Tenant is responsible shall be performed by Owner at the Tenant's reasonable expense. Owner shall maintain in good working order and repair the exterior and the structural portions of the building, including the structural portions of its demised premises, and the public portions of the building interior and the building plumbing, electrical, heating and ventilating systems (to the extent such systems presently exist) serving the demised premises. Tenant agrees to give prompt notice of any defective condition in the premises for which Owner may be responsible hereunder. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or others making repairs, alterations, additions or improvements in or to any portion of the building or the demised premises or in and to the fixtures, appurtenances or equipment thereof. Owner agrees to perform any repair required pursuant to this Article with reasonable efforts to the extent practicable to minimize interference with Tenant's business, provided Owner shall not thereby be required to incur any additional expense for overtime labor, or otherwise. It is specifically agreed that Tenant shall not be entitled to any setoff or reduction of rent by reason of any failure of Owner to comply with the covenants of this or any other article of this Lease. Tenant agrees that Tenant's sole remedy at law in such instance wil be by way of an action for damages for breach of contract. The provisions of this Article 4 shall not apply in the case of fire or other casualty which are dealt with in Article 9 hereof WINDOW CLEANING: 5. Tenant will not clean nor require, permit, suffer or allow any window in the demised premises to be cleaned from the outside in violation of Section 202 of the Labor Law or any other applicable law or of the Rules of the Board of Standards and Appeals, or of any other Board or body having or asserting jurisdiction. REQUIREMENTS of LAW, FIRE INSURANCE, FLOOR LOADS: 6. Prior to the commencement of the lease term, if Tenant is then in possession, and at all times thereafter, Tenant, at Tenant's sole cost and expense, shall promptly comply after notice from Owner with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters, Insurance Services office, or any similar body which shall impose any violation, order or duty upon Owner or Tenant with respect to the demised premises, whether or not arising out of Tenant's manner of use (but not Tenant's mere use) thereof, (including Tenant's permitted use) or, with respect to the building if arising out of Tenant's manner of use (but not Tenant's mere use) of the premises or the building (including the use permitted under the lease). Nothing herein shall require Tenant to make structural repairs or alterations unless Tenant has, by its manner of actual use of the demised premises or method of operation therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. Tenant may, after securing Owner to Owner's reasonable satisfaction against all damages, interest, penalties and expenses, including, but not limited to, reasonable attorney's fees, by cash deposit or by surety bond in an amount and in a company reasonably satisfactory to Owner, contest and appeal any such laws, ordinances, orders, rules, regulations or requirements provided same is done with all reasonable promptness and provided such appeal shall not subject Owner to prosecution for a criminal offense or constitute a default under any lease or mortgage under which Owner may be obligated, or cause the demised premises or any part thereof to be condemned or vacated. Tenant shall not do or permit any act or thing to be done in or to the demised premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Owner with respect to the demised premises or the building of which the demised premises form a part, or which shall or might subject Owner to any liability or responsibility to any person or for property damage. Tenant shall not keep anything in the demised premises except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization or other authority having jurisdiction, and then only in such manner and such quantity so as not to increase the rate for fire insurance applicable to the building, nor use the premises in a manner which will increase the insurance rate for the building or any property located therein over that in effect or the dates possession of any portion of the demised premises is given to Tenant. Tenant shall pay all costs, expenses, fines penalties, or damages, which may be imposed upon Owner by reason of Tenant's failure to comply with the provisions of this article and if by reason of such failure the fire insurance rate shall, at the beginning of this lease or at any time thereafter, be higher than it otherwise would be, then Tenant shall reimburse Owner, as additional rent hereunder, for that portion of all fire insurance premiums thereafter paid by Owner which shall have been charged because of such failure by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a schedule or "make-up" of rate for the building or demised premises issued by the New York Fire Insurance Exchange, or other body making fire insurance rates applicable to said premises shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates then applicable to said premises. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Owner reserves the right to prescribe the weight and position of all safes, heavy business machines and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Owner's reasonable judgment, to absorb and prevent vibration, noise and annoyance. Subordination: 7. This lease is subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which demised premises are a part and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. This clause shall be self-operative and no further instrument of subordination shall be required by any ground or underlying lessor or by any mortgagee, affecting any lease or the real property of which the demised premises are a part. In confirmation of such subordination, Tenant shall execute promptly any certificate that Owner may request. Owner agrees that it shall promptly obtain and submit to Tenant a non-disturbance agreement for the benefit of the Tenant from the holders of any mortgages presently affecting the demised premises or hereafter created during the Term. Such non-disturbance agreement shall be in form and content then used by such holder, but shall provide, among other things, that so long as Tenant is not in default in the payment of rent or any other covenant or condition of this lease, (i) its right as Tenant hereunder shall not be affected or terminated, (ii) its possession of the demised premises shall not be disturbed, (iii) no action or proceedings shall be commenced to remove or evict Tenant, and (iv) this lease shall continue in full force and effect notwithstanding the foreclosure of the mortgage prior to the expiration or termination of this lease. Owner shall pay all costs and expenses incurred by Owner in connection with such non-disturbance agreement. The inability of the Owner to obtain such non-disturbance agreement shall not be deemed a default of Owner's obligations under this lease or impose any claim in favor of Tenant against Owner by reason thereof or affect the validity of this lease; provided, however, that this lease shall not be subordinate to any mortgage unless and until such non-disturbance agreement is obtained from the holder of any mortgage and submitted to Tenant. With respect to the existing Mortgage currently held by The Dime Savings Bank of New York, FSB (the "Dime"), in the event such non-disturbance agreement is not received from Dime within sixty (60) days from Lease execution, Tenant shall have the right to terminate and end this Lease (and the term hereby created is limited accordingly), by giving written notice to Landlord at the address designated in this Lease, sent by registered or certified mail, return receipt requested, and, upon the expiration of the time fixed in such notice, this Lease and the term hereby granted and all the rights of Landlord, shall terminate and come to an end without any other or further notice or act on the part of the Tenant, with the same force and effect as though the day fixed in said notice were the expiration of the original term of the instant Lease herein. Property--Loss, Damage, Reimbursement, Indemnity: 8. Owner or its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the building, nor for loss of or damage to any property of Tenant by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, unless caused by or due to the negligence or wilful act of Owner, its contractors, agents, servants or employees. Owner or its agents will not be liable for any such damage caused by other tenants or persons in, upon or about said building or caused by operations in construction of any private, public or quasi public work. If at any time any windows of the demised premises are temporarily closed or darkened due to requirements of law, Owner shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement or diminution of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction. Tenant shall indemnify and save harmless Owner against and from all liabilities, obligations, damages, penalties, claims, costs and expenses for which Owner shall not be reimbursed by insurance, including reasonable attorneys fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's agents, contractors, employees, invitees, or licensees of any covenant or condition of this lease, or the carelessness, negligence or wilful act of the Tenant, Tenant's agents, contractors, employees, invitees or licensees. Tenant's liability under this lease extends to the acts and omissions of any sub-tenant, and any agent, contractor, employee, invitee or licensee of any sub-tenant. In case any action or proceeding is brought against Owner by reason of any such claim, Tenant, upon written notice from Owner, will, at Tenant's expense, resist or defend such action or proceeding by counsel approved by Owner in writing, such approval not to be unreasonably withheld. Destruction, Fire and Other Casualty: 9. (a) If the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be repaired by and at the expense of Owner and the rent, until such repair shall be substantially completed, shall be apportioned from the day following the casualty according to the part of the premises which is usable. (c) If the demised premises are totally damaged or rendered wholly unusable for the conduct of Tenant's business by fire or other casualty, then the rent shall be proportionately paid up to the time of the casualty and thenceforth shall cease until the date when the premises shall have been repaired and restored by Owner, subject to Owner's right to elect not to restore the same as hereinafter provided. (d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Owner shall decide to demolish it or to rebuild it, then, in any of such events, Owner or Tenant may elect to terminate this lease by written notice to the other party given within sixty (60) days after such fire or casualty, specifying a date for the expiration of the lease, which date shall not be more than thirty (30) days after the giving of such notice. If this lease shall not be terminated pursuant to the foregoing provisions of this Article 9, then within sixty (60) days after the date when all or more than 30% of the demised premises are rendered unusable by Tenant for the ordinary conduct of its business due to a fire or other casualty, Owner shall deliver to Tenant a certification from a licensed architect or reputable contractor selected by Owner setting forth an estimate as to the time after such fire or other casualty reasonably required to repair the damage caused thereby. If the period set forth in any such estimate exceeds one (1) year, Tenant may elect to terminate this lease by notice to Owner given not later than thirty (30) days following Tenant's receipt of such estimate, time being of the essence with respect to such notice. If Tenant shall not have had the right to terminate this lease due to the estimated time for completion being not greater than one (1) year and Owner fails to complete the restoration within such one (1) year period (subject to the delay provisions of this Article 9), then Tenant shall have the right to terminate this lease by notice to Owner given not later than thirty (30) days following the expiration of such one (1) year period, time being of the essence with respect to such notice. If the demised premises are damaged by fire or other casualty during the last eighteen (18) months of the term of the lease, and such damage will require more than sixty (60) days to repair, Landlord or Tenant may terminate this lease by notice to the other party given not later than thirty (30) days following the occurrence of the fire or other casualty. Upon the date specified in any notice of termination given by Owner or Tenant pursuant to this Article 9 the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease and Tenant shall forthwith quit, surrender and vacate the premises without prejudice however, to Landlord's rights and remedies against Tenant under the lease provisions in effect prior to such termination, and any rent owing shall be paid up to such date and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be promptly returned to Tenant. Unless the party shall serve a termination notice as provided for herein, Owner shall make the repairs and restorations under the conditions of (b) and (c) hereof, with all reasonable expedition, subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Owner's control. After any such casualty, Tenant shall cooperate with Owner's restoration by removing from the premises as promptly as reasonably possible, all of Tenant's salvageable inventory and movable equipment, furniture, and other property. Tenant's liability for rent shall resume fifteen days after written notice from Owner that the premises are substantially ready for Tenant's occupancy. (e) Nothing contained hereinabove shall relieve Tenant from liability that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent that such insurance is in force and collectible and to the extent permitted by law, Owner and Tenant each hereby releases and waives all right of recovery against the other or any claiming through or under each of them by way of subrogation or otherwise. The foregoing release and waiver shall be in force only if both releasors' insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance. If, and to the extent, that such waiver can be obtained only by the payment of additional premiums, then the party benefitting from the waiver shall pay such premium within ten days after written demand or shall be deemed to have agreed that the party obtaining insurance coverage shall be free of any further obligation under the provisions hereof with respect to waiver of subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's furniture and/or furnishings or any fixtures or equipment, improvements, or appurtenances removable by Tenant and agrees that Owner will not be obligated to repair any damage thereto or replace the same. (f) Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof. EMINENT DOMAIN: 10. If the whole or any part of the demised premises shall be acquired or condemned by Eminent Domain for any public or quasi public use or purpose, then and in that event, the term of this lease shall cease and terminate from the date of title vesting in such proceeding and Tenant shall have no claim for the value of any unexpired term of said lease and assigns to Owner, Tenant's entire interest in any such award. Anything in this Article 10 to the contrary notwithstanding, Tenant shall have the right to make a separate claim in any such eminent domain proceeding for its property and moving expenses, provided that Tenant's claim shall not impair the ability of Owner to make its claim or reduce the amount of Owner's reward. ASSIGNMENT, MORTGAGE, ETC.: 11. Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, mortgage or encumber this agreement, nor underlet, or suffer or permit the demised premises or any part thereof to be used by others, without the prior written consent of Owner in each instance. Transfer of the majority of the stock of a corporate Tenant shall be deemed an assignment. If this lease be assigned, or if the demised premises or any part thereof be underlet or occupied by anybody other than Tenant, Owner may, after default by Tenant, collect rent from the assignee, under-tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Owner to an assignment or underletting shall not in no wise be construed to relieve Tenant from obtaining the express consent in writing of Owner to any further assignment or underletting. ELECTRIC CURRENT: 12. Tenant covenants and agrees that at all times its use of electric current shall not exceed the capacity of existing feeders to the building or the risers or wiring installation and Tenant may not use any electrical equipment which, in Owner's opinion, rasonably exercised, will overload such installations or interfere with the use thereof by other tenants of the building. The change at any time of the character of electric service shall in no wise make Owner liable or responsible to Tenant, for any loss, damages or expenses which Tenant may sustain unless caused by Owner's or its agents', employees', or contractors' negligence or wilful act. ACCESS TO PREMISES 13. Owner or Owner's agents shall have the right (but shall not be obligated) to enter the demised premises in any emergency at any time, and, at other reasonable times upon advance notice to Tenant (which need not be written) the same and to make such repairs, replacements and improvements as Owner may deem necessary and reasonably desirable to the demised premises or to any other portion of the building or which Owner may elect to perform. Tenant shall permit Owner to use and maintain and replace pipes and conduits in and through the demised premises and to erect new pipes and conduits therein provided they are concealed within the walls, floor, or ceiling. Owner may, during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall the Tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise. Owner agrees to use reasonable efforts to the extent practicable to minimize interference with Tenant's business in connection with any work performed pursuant to Articles 13 and 20; provided Owner shall not thereby be required to incur any additional expense for overtime labor or otherwise. Owner agrees, at its expense, to repair and restore the demised premises subsequent to conducting any work therein to the condition existing prior thereto. Throughout the term hereof Owner shall have the right to enter the demised premises at reasonable hours for the purpose of showing the same to prospective purchasers or mortgagees of the building, and during the last six months of the term for the purpose of showing the same to prospective tenants. If Tenant is not present to open and permit an entry into the premises, after notice (except in an emergency when no notice shall be required), Owner or Owner's agents may enter the same whenever such entry may be necessary or permissible by master key or forcibly and provided reasonable care is exercised to safeguard Tenant's property, such entry shall not render Owner or its agents liable therefor, nor in any event shall the obligations of Tenant hereunder be affected. If during the last month of the term Tenant shall have removed all of Tenant's propety therefrom Owner may immediately enter, alter, renovate or redecorate the demised premises without limitation or abatement of rent, or incurring liability to Tenant for any compensation and such act shall have no effect on this lease or Tenant's obligations hereunder. VAULT, VAULT SPACE, AREA: 14. No Vaults, vault space or area, whether or not enclosed or covered, not within the property line of the building is leased hereunder, anything contained in or indicated on any sketch, blue print or plan, or anything contained elsewhere in this lease to the contrary notwithstanding. Owner makes no representation as to the location of the property line of the building. All vaults and vault space and all such areas not within the property line of the building, which Tenant may be permitted to use and/or occupy, is to be used and/or occupied under a revocable license, and if any such license be revoked, or if the amount of such space or area be diminished or required by any federal, state or municipal authority or public utility, Owner shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, not shall such revocation, diminution or requisition be deemed constructive or actual eviction. Any tax, fee or charge of municipal authorities for such vault or area shall be paid by Tenant. OCCUPANCY: 15. Tenant will not at any time use or occupy the demised premises in violation of the certificate of occupancy issued for the building of which the demised premises are a part. Owner covenants that the uses of the demised premises are permitted pursuant to Article 2 hereof. Tenant has inspected the premises and accepts them as is, subject to the riders annexed hereto with respect to Owner's work, if any. In any event, Owner makes no representation as to the condition of the premises and Tenant agrees to accept the same subject to violations, whether or not of record. BANKRUPTCY: 16. (a) Anything elsewhere in this lease to the contrary notwithstanding, this lease may be cancelled by Owner by the sending of a written notice to Tenant within a reasonable time after the happening of any one or more of the following events: (1) the commencement of a case in bankruptcy or under the laws of any state naming Tenant as the debtor which case shall not have been dismissed within sixty (60) days after the commencement thereof; or (2) the making by Tenant of an assignment or any other arrangement for the benefit of creditors under any state statute. Neither Tenant nor any person claiming through or under Tenant, or by reason of any statute or order of court, shall thereafter be entitled to possession of the premises demised but shall forthwith quit and surrender the premises. If this lease shall be assigned in accordance with its terms, the provisions of this Article 16 shall be applicable only to the party then owning Tenant's interest in this lease. (b) it is stipulated and agreed that in the event of the termination of this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any other provisions of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between the rent reserved hereunder for the unexpired portion of the term demised and the fair and reasonable rental value of the demised premises for the same period. In the computation of such damages the difference between any installment of rent becoming due hereunder after the date of termination and the fair and reasonable rental value of the demised premises for the period for which such installment was payable shall be discounted to the date of termination at the rate of six (6%) percent per annum. If such premises or any part thereof be relet by the Owner for the unexpired term of said lease, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall be deemed to be the fair and reasonable rental value for the part or the whole of the premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice the right of the Owner to prove for and obtain as liquidated damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. DEFAULT: 17. (1) If Tenant defaults in fulfilling any of the covenants of this lease or if the demised premises become vacant or deserted; or if any execution or attachment shall be issued against Tenant or any of Tenant's property whereupon the demised premises shall be taken or occupied by someone other than Tenant; or if this lease be rejected under Section 235 of Title 11 of the U.S. Code (bankruptcy code); or if Tenant shall fail to take possession of the premises within sixty (60) days after the commencement of the term of this lease, then, in any one or more of such events, upon Owner serving a written five (5) days' notice in the case of any monetary default and twenty (20) days' notice in the case of any non monetary default days notice upon Tenant specifying the nature of said default and upon the expiration of said five (5) or twenty (20) days, as the case may be, if Tenant shall have failed to comply with or remedy such default, or if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within said twenty (20) day period, and if Tenant shall not have diligently commenced curing such default within such twenty (20) day period, and shall not thereafter with reasonable diligence and in good faith, proceed to remedy or cure such default, then Owner may serve a written five (5) days' notice of cancellation of this lease upon Tenant, and upon the expiration of said five (5) days this lease and the term thereunder shall end and expire as fully and completely as if the expiration of such five (5) day period were the day herein definitely fixed for the end and expiration of this lease and the term thereof and Tenant shall then quit and surrender the demised premises to Owner but Tenant shall remain liable as hereinafter provided. (2) If the notice provided for in (1) hereof shall have been given, and the term shall expire as aforesaid, then and in any of such events Owner may without further notice, re-enter the demised premises and dispossess Tenant by summary proceedings or otherwise, and the legal representative of Tenant or other occupant of demised premises and remove their effects and hold the premise as if this lease had not been made, and Tenant hereby waives the service of notice of this lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall make default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Owner may cancel and terminate such renewal or extension agreement by written notice. REMEDIES OF OWNER AND WAIVER OF REDEMPTION: 18. In case of any such default, re-entry, expiration and/or dispossess by summary proceedings or otherwise, (a) the rent shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner may re-let the premises or any part or parts thereof, either in the name of Owner or otherwise, for a term or terms, which may at Owner's option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease and may grant concessions or free rent or charge a higher rental than that in this lease, and/or (c) Tenant or the legal representatives of Tenant shall also pay Owner as liquidated damages for the failure of Tenant to observe and perform said Tenant's covenants herein contained, any deficiency between the rent hereby reserved and/or covenanted to be paid and the net amount, if any, of the rents collected on account of the lease or leases of the demised premises for each month of the period which would otherwise have constituted the balance of the term of this lease. The failure of Owner to re-let the premises or any part or parts thereof shall not release or affect Tenant's liability for damages. In computing such liquidated damages there shall be added to the said deficiency such expenses as Owner may incur in connection with re-letting, such as reasonable legal expenses, attorneys' fees, brokerage, advertising and for keeping the demised premises in good order or for preparing the same for re-letting. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent day specified in this lease and any suit brought to collect the amount of the deficiency, for any month shall not prejudice in any way the rights of Owner to collect the deficiency for any subsequent month by a similar proceeding. Owner, in putting the demised premises in good order or preparing the same for re-rental may, at Owner's option, make such alterations, repairs, replacements, and/or decorations in the demised premises as Owner, in Owner's reasonable judgment, considers advisable and necessary for the purpose of re-letting the demised premises, and the making of such alterations, repairs, replacements, and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid Owner shall in no event be liable in any way whatsoever for failure to re-let the demised premises, or in the event that the demised premises are re-let, for failure to collect the rent thereof under such re-letting, and in no event shall Tenant be entitled to receive any excess, if any, of such net rents collected over the sums payable by Tenant to Owner hereunder. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Owner shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this lease of any particular remedy, shall not preclude Owner from any other remedy, in law or in equity. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Owner obtaining possession of demised premises, by reason of the violation by Tenant of any of the covenants and conditions of this lease, or otherwise. FEES AND EXPENSES 19. If Tenant shall default after notice and applicable grace period in the observance or performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any article of this lease, then, unless otherwise provided elsewhere in this lease, Owner may immediately or at any time thereafter and without notice perform the obligation of Tenant thereunder. If Owner, in connection with the foregoing or in connection with any default by Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to attorney's fees, in instituting, prosecuting or defending any action or proceeding, then, to the extent that Owner prevails thereunder, Tenant will reimburse Owner for such sums so paid or obligations incurred with interest and costs. The foregoing expenses incurred by reason of Tenant's default shall be deemed to be additional rent hereunder and shall be paid by Tenant to Owner within five (5) days of rendition of any bill or statement to Tenant therefor. If Tenant's lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Owner as damages. BUILDING ALTERATIONS AND MANAGEMENT: 20. Owner shall have the right at any time without the same constituting an eviction and without incurring liability to Tenant therefor to change the arrangement and/or location of public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other public parts of the building (provided that, at all times, Tenant shall have reasonable access to the demised premises) and to change the name, number or designation by which the building may be known. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or other Tenants making any repairs in the building or any such alterations, additions and improvements. Owner agrees to use reasonable efforts to the extent practicable to minimize interference with Tenant's business in connection with any work performed pursuant to Articles 13 and 20; provided Owner shall not thereby be required to incur any additional expense for overtime labor or otherwise. Owner agrees, at its expense, to repair and restore the demised premises subsequent to conducting any work therein to the condition existing prior thereto. Furthermore, Tenant shall not have any claim against Owner by reason of Owner's imposition of such controls of the manner of access to the building by Tenant's social or business visitors as the Owner may deem necessary for the security of the building and its occupants. NO REPRESENTATIONS BY OWNER: 21. Neither Owner nor Owner's agents have made any representations or promises with respect to the physical condition of the building, the land upon which tion or any other matter or thing affecting or related to the premises except as herein expressly set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this lease. Tenant has inspected the demised premises and is thoroughly acquainted with their condition and agrees to take the same "as is" and acknowledges that the taking of possession of the demised premises by Tenant shall be conclusive evidence that the said premises and the building of which the same form a part were in good and satisfactory condition at the time such possession was so taken, except as to latent defects and reasonable matters not ascertainable after due diligence. All understandings and agreements heretofore made between the parties hereto are merged in this contract, which alone fully and completely expresses the agreement between Owner and Tenant and any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in whole or in part, unless such exectory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. END OF TERM: 22. Upon the expiration or other termination of the term of this lease, Tenant shall quit and surrender to Owner the demised premises, broom clean, in good order and condition, ordinary wear and damages which Tenant is not required to repair as provided elsewhere in this lease excepted, and Tenant shall remove all its property. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this lease. If the last day of the term of this Lease or any renewal thereof, falls on Sunday, this lease shall expire at noon on the preceding Saturday unless it be a legal holiday in which case it shall expire at noon on the preceding business day. QUIET ENJOYMENT: 23. Owner covenants and agrees with Tenant that upon Tenant paying the rent and additional rent and observing and performing all the terms, covenants and conditions, on Tenant's part to be observed and performed. Tenant may peaceably and quietly enjoy the premises hereby demised, subject, nevertheless, to the terms and conditions of this lease including, but not limited to, Article 31 hereof and to the ground leases, underlying leases and mortgages hereinbefore mentioned. FAILURE TO GIVE POSSESSION: 24. If Owner is unable to give possession of the demised premises on the date of the commencement of the term hereof, because of the holding-over or retention of possession of any tenant, undertenant or occupants or if the demised premises are located in a building being constructed, because such building has not been sufficiently completed to make the premises ready for occupancy or because of the fact that a certificate of occupancy has not been procured or for any other reason, Owner shall not be subject to any liability for failure to give possession on said date and the validity of the lease shall not be impaired under such circumstances, nor shall the same be construed in any wise to extend the term of this lease, but the rent payable hereunder shall be abated (provided Tenant is not responsible for Owner's inability to obtain possession) until after Owner shall have given Tenant written notice that the premises are substantially ready for Tenant's occupancy. If permission is given to Tenant to enter into the possession of the demised premises or to occupy premises other than the demised premises prior to the date specified as the commencement of the term of this lease, Tenant covenants and agrees that such occupancy shall be deemed to be under all the terms, covenants, conditions and provisions of this lease, except as to the covenant to pay rent. The provisions of this article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law. NO WAIVER: 25. The failure of Owner or Tenant to seek redress for violation of, or to insist upon the strict performance of any covenant or condition of this lease or of any of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Owner of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach and no provision of this lease shall be deemed to have been waived by either party unless such waiver be in writing signed by the other party. No payment by Tenant or receipt by Owner of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Owner may accept such check or payment without prejudice to Owner's right to recover the balance of such rent or pursue any other remedy in this lease provided. No act or thing done by Owner or Owner's agents during the term hereby demised shall be deemed an acceptance of a surrender of said premises, and no agreement to accept such surrender shall be valid unless in writing signed by Owner. No employee of Owner or Owner's agent shall have any power to accept the keys of said premises prior to the termination of the lease and the delivery of keys to any such agent or employee shall not operate as a termination of the lease or surrender of the premises. WAIVER OF TRIAL BY JURY: 26. It is mutually agreed by and between Owner and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of or in any way connected with this lease, the relationship of Owner and Tenant, Tenant's use of or occupancy of said premises, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Owner commences any summary proceeding for possession of the premises, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding including a counterclaim under Article 4 except for any compulsory counterclaim. INABILITY TO PERFORM: 27. This Lease and the obligation of Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on part of the Tenant to be performed shall in no wise be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease or to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make, or is delayed in making any repair, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment or fixtures if Owner is prevented or delayed from so doing by reason of strike or labor troubles or any cause whatsoever including, but not limited to, government preemption in connection with a National Emergency or by reason of any rule, order or regulation of any department or subdivision thereof of any government agency or by reason of the conditions of supply and demand which have been or are affected by war or other emergency. Owner shall exercise reasonable efforts to eliminate such inability, delay or prevention and to minimize its effect on Tenant's business. BILLS AND NOTICES: 28. Except as otherwise in this lease provided, a bill, statement, notice or communication which Owner may desire or be required to give to Tenant, shall be deemed sufficiently given or rendered if, in writing, delivered to Tenant personally or sent by registered or certified mail addressed to Tenant at the building of which the demised premises form a part or at the last known residence address or business address of Tenant or left at any of the aforesaid premises addressed to Tenant, and the time of the rendition of such bill or statement and of the giving of such notice or communication shall be deemed to be the time when the same is delivered to Tenant, mailed, or left at the premises as herein provided. Any notice by Tenant to Owner must be served by registered or certified mail addressed to Owner at the address first hereinabove given or at such other address as Owner shall designate by written notice. SERVICES PROVIDED BY OWNERS 29. As long as Tenant is not in default under any of the covenants of this lease, Owner shall provide: (a) necessary elevator facilities on business days from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m. to 1 p.m. and have one elevator subject to call at all other times; (b) heat to the demised premises when and as required by law, on business days from 8 a.m. to 6 p.m.; (c) water for ordinary lavatory purposes and for Tenant's pantry but if Tenant uses or consumes water for any other purposes or in unusual quantities (of which fact Owner shall be the sole judge), Owner may install a water meter at Tenant's reasonable expense which Tenant shall thereafter maintain at Tenant's expense in good working order and repair to register such water consumption and Tenant shall pay for water consumed as shown on said meter as additional rent as and when bills are rendered; (d) cleaning service for the demised premises on business days at Owner's expense provided that the same are kept in order by Tenant. (f) Owner reserves the right to stop services of the heating, elevators, plumbing, air-conditioning, power systems or cleaning or other services, if any, when necessary by reason of accident or for repairs, alterations, replacements or improvements necessary or desirable in the reasonable judgment of Owner for as long as may be reasonably required by reason thereof. If the building of which the demised premises are a part supplies manually-operated elevator service, Owner at any time may substitute automatic-control elevator service and upon ten days' written notice to Tenant, proceed with alterations necessary therefor without in any wise affecting this lease or the obligation of Tenant hereunder. The same shall be done with a minimum of inconvenience to Tenant and Owner shall pursue the alteration with due diligence. CAPTIONS: 30. The Captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this lease nor the intent of any provisions thereof. DEFINITIONS: 31. The term "office", or "offices", wherever used in this lease, shall not be construed to mean premises used as a store or stores, for the sale or display, at any time, of goods, wares or merchandise, of any kind, or as a restaurant, shop, booth, bootblack or other stand, barber shop, or for other similar purposes or for manufacturing. The term "Owner" means a landlord or lessor, and as used in this lease means only the owner, or the mortgagee in possession, for the time being of the land and building (or the owner of a lease of the building or of the land and building) of which the demised premises form a part, so that in the event of any sale or sales of said land and building or of said lease, or in the event of a lease of said building, or of the land and building, the said Owner shall be and hereby is entirely freed and relieved of all covenants and obligations of Owner hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the building, or of the land and building, that the purchaser or the lessee of the building has assumed and agreed to carry out any and all covenants and obligations of Owner, hereunder. The words "re-enter" and "re-entry" as used in this lease are not restricted to their technical legal meaning. The term "business days" as used in this lease shall exclude Saturdays (except such portion thereof as is covered by specific hours in Article 29 hereof), Sundays and all days observed by the State or Federal Government as legal holidays and those designated as holidays by the applicable building service union employees service contract or by the applicable Operating Engineers contract with respect to HVAC service. FOOTNOTES TO THE LEASE BETWEEN 40TH ASSOCIATES, as Landlord, and LONDON FOG CORPORATION, as Tenant dated May 4th, 1994 ================================================================================ 1. which consent shall not be unreasonably withheld or delayed, 2. which approval shall not be unreasonably withheld or delayed. 3. reasonably 4. after notice thereof, 4a. four 4b. reasonable 5. Owner agrees to perform any repair required pursuant to this Article 4 with reasonable efforts to the extent practicable to minimize interference with Tenant's business, provided Owner shall not thereby be required to incur any additional expense for overtime labor, or otherwise. 5a. after notice from Owner 5b. (but not Tenant's mere use) 6. actual 6a. reasonable 6b. reasonably 7. on the dates possession of any portion of the demised premises is given to Tenant. 7a. heavy 7b reasonable 8. Owner agrees that it shall promptly obtain and submit to Tenant a non-disturbance agreement for the benefit of the Tenant from the holders of any mortgages presently affecting the demised premises or hereafter created during the Term. Such non-disturbance agreement shall be in form and content then used by such holder, but shall provide, among other things, that so long as Tenant is not in default in the payment of rent or any other covenant or condition of this lease, (i) its right as Tenant hereunder shall not be affected or terminated, (ii) its possession of the demised premises shall not be disturbed, (iii) no action or proceedings shall be commenced to remove or evict Tenant, and (iv) this lease shall continue in full force and effect notwithstanding the foreclosure of the mortgage prior to the expiration or termination of this lease. Owner shall pay all costs and expenses incurred by Owner in connection with such non-disturbance agreement. The inability of the Owner to obtain such non-disturbance agreement shall not be deemed a default of Owner's obligations under this lease or impose any claim in favor of Tenant against Owner by reason thereof or affect the validity of this lease; provided, however, that this lease shall not be subordinate to any mortgage unless and until such non-disturbance agreement is obtained from the holder of any mortgage and submitted to Tenant. - i - With respect to the existing Mortgage currently held by The Dime Savings Bank of New York, FSB (the "Dime"), in the event such non-disturbance agreement is not received from Dime within sixty (60) days from Lease execution, Tenant shall have the right to terminate and end this Lease (and the term hereby created is limited accordingly), by giving written notice to Landlord at the address designated in this Lease, sent by registered or certified mail, return receipt requested, and, upon the expiration of the time fixed in such notice, this Lease and the term hereby granted and all the rights of Landlord, shall terminate and come to an end without any other or further notice or act on the part of the Tenant, with the same force and effect as though the day fixed in said notice were the expiration of the original term of the instant Lease herein. 9. or wilful act 9a. or 9b. due to requirements of law 10. contractors, 11. wilful act 12. for the conduct of Tenant's business 12a. or Tenant 12b. the other party 13. sixty (60) 14. thirty (30) 15. If this lease shall not be terminated pursuant to the foregoing provisions of this Article 9, then within sixty (60) days after the date when all or more than 30% of the demised premises are rendered unusable by Tenant for the ordinary conduct of its business due to a fire or other casualty, Owner shall deliver to Tenant a certification from a licensed architect or reputable contractor selected by Owner setting forth an estimate as to the time after such fire or other casualty reasonably required to repair the damage caused thereby. If the period set forth in any such estimate exceeds one (1) year, Tenant may elect to terminate this lease by notice to Owner given not later than thirty (30) days following Tenant's receipt of such estimate, time being of the essence with respect to such notice. If Tenant shall not have had the right to terminate this lease due to the estimated time for completion being not greater than one (1) year and Owner fails to complete the restoration within such one (1) year period (subject to the delay provisions of this Article 9), then Tenant shall have the right to terminate this lease by notice to Owner given not later than thirty (30) days following the expiration of such one (1) year period, time being of the essence with respect to such notice. If the demised premises are damaged by fire or other casualty during the last eighteen (18) months of the term of the lease, and such damage will require more than sixty (60) days to repair, Landlord or Tenant may terminate this lease by notice to the other party given not later than thirty (30) days following the occurrence of the fire or other casualty. 16. any notice of termination given by Owner or Tenant pursuant to this Article 9 - ii - 16a promptly 17. either party 18. fifteen 19. Anything in this Article 10 to the contrary notwithstanding, Tenant shall have the right to make a separate claim in any such eminent domain proceeding for its property and moving expenses, provided that Tenant's claim shall not impair the ability of Owner to make its claim or reduce the amount of Owner's reward. 20. unless caused by Owner's or its agents', employees' or contractors' negligence or wilful act 21. upon advance notice to Tenant (which need not be written) 22. Owner agrees to use reasonable efforts to the extent practicable to minimize interference with Tenant's business in connection with any work performed pursuant to Articles 13 and 20; provided Owner shall not thereby be required to incur any additional expense for overtime labor or otherwise. Owner agrees, at its expense, to repair and restore the demised premises subsequent to conducting any work therein to the condition existing prior thereto. 23. after notice (except in an emergency, when no notice shall be required), 23a. Owner covenants that the uses of the demised premises are permitted pursuant to Article 2 hereof. 24. which case shall not have been dismissed within sixty (60) days after the commencement thereof; 25. six (6%) percent 25a. sixty (60) 26. five (5) days' notice in the case of any monetary default and twenty (20) days' notice in case of any non-monetary default 27. five (5) or twenty (20) days, as the case may be, 28. twenty (20) 29. five (5) 30. further 31. reasonable 32. after notice and applicable grace period 33. to the extent that Owner prevails thereunder, 33a. (provided that, at all times, Tenant shall have reasonable access to the demised premises) 34. and seasonable matters not ascertainable after due diligence 35. or Tenant 35a. either party 35b. the other party - iii - 36. except for any compulsory counterclaim. 36a. Owner shall exercise reasonable efforts to eliminate such inability, delay or prevention and to minimize its effect on Tenant's business. 36b. and for Tenant's pantry 36c. reasonable 37. to Tenant at least thirty (30) days prior to the proposed implementation date thereof. 38. twenty (20) - iv - RIDER TO LEASE between 40TH ASSOCIATES, Landlord, and LONDON FOG CORPORATION, Tenant, dated as of the 4th day of May, 1994 Re: 8 West 40th Street New York, New York 18th, 19th, 20th, 21st and Penthouse Floors ================================================================================ If and to the extent that any of the provisions of this Rider conflict or are otherwise inconsistent with any of the printed provisions of this lease, whether or not such inconsistency is expressly noted in this Rider, the provisions of this Rider shall prevail. 37. Definitions The following terms contained in this Article 37 shall have the meanings hereinafter set forth as such terms are used throughout this lease, including the exhibits, schedules and riders hereto (if any): (A) "Base Tax Year" shall mean the Real Estate Taxes, as finally determined for the calendar year 1995 (to wit, the average of the Real Estate Taxes, as finally determined for the fiscal years July 1, 1994 through June 30, 1995 and July 1, 1995 through June 30, 1996). (B) "Tenant's Proportionate Share" shall mean 22.52%, subject to adjustment if additional space is leased to Tenant. (C) "Base Operating Expenses" shall mean the Operating Expenses incurred for 1995. (D) "Operational Year" shall mean each calendar year during the Term commencing with 1995. (E) "Operational Year Operating Expenses" shall mean the Operating Expenses incurred during the applicable Operational Year. (F) "Electric Factor" initially shall mean $60,000.00 per annum, subject to adjustment in accordance with the terms of Article 42. (G) "Net Rent" shall mean (i) $624,000 per annum from October 1, 1994 through September 30 1997; (ii) $696,000 per annum from October 1, 1997 through September 30, 2001; (iii) $768,000 per annum from October 1, 2001 through September 30, 2004; and the annual sum set forth in Article 45 from October 1, 2004 through September 30, 2009. (H) "Base Electric Date" shall mean April 1, 1994. (I) "Rent Commencement Date" shall mean April 1, 1995. 38. Rental Payments (A) All payments other than Base Rent to be made by Tenant pursuant to this lease shall be deemed additional rent and, in the event of any non-payment thereof, Landlord shall have all rights and remedies provided for herein or by law for non-payment of rent. Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street (B) All payments of Base Rent and additional rent to be made by Tenant pursuant to this Lease shall be made by checks drawn upon a bank located in New York City which is a member of the New York Clearing House Association or any other bank, provided the checks of such bank are required to clear within the same time periods as banks which are members of the New York Clearing House Association or any successor thereto. (C) If Landlord receives from Tenant any payment less than the sum of the Base Rent and additional rent then due and owing pursuant to this lease, Tenant hereby waives its right, if any, to designate the items to which such payment shall be applied and agrees that Landlord, in its sole discretion, may apply such payment in whole or in part to any Base Rent, any additional rent or to any combination thereof then due and payable hereunder. (D) Unless Landlord shall otherwise expressly agree in writing, acceptance of Base Rent or additional rent from anyone other than Tenant shall not relieve Tenant of any of its obligations under this lease, including the obligation to pay Base Rent and additional rent, and Landlord shall have the right at any time, upon notice to Tenant, to require Tenant to pay the Base Rent and additional rent payable hereunder directly to Landlord (provided that Landlord shall not be entitled to double payment of any Base Rent or additional rent). Furthermore, such acceptance of Base Rent or additional rent shall not be deemed to constitute Landlord's consent to an assignment of this lease or a subletting or other occupancy of the demised premises by anyone other than Tenant, nor a waiver of any of Landlord's rights or Tenant's obligations under this lease. (E) Landlord's failure to timely bill all or any portion of any amount payable pursuant to this lease for any period during the Term shall neither constitute a waiver of Landlord's right to ultimately collect such amount or to bill Tenant at any subsequent time retroactively for the entire amount so unbilled, which previously unbilled amount shall be payable within thirty (30) days after being so billed. Notwithstanding the foregoing, Landlord's failure to bill Tenant for any amount payable pursuant to this Lease for a period in excess of two (2) years shall constitute a waiver by Landlord of its right to collect such amounts, provided Landlord received bills or other proof of the items of which Tenant is being billed at least two (2) years prior to any such Tenant billing. 39. Tax Escalation (A) For purposes hereof: (1) "Real Estate Taxes" shall mean all the real estate taxes and assessments imposed by any governmental authority having jurisdiction upon the Building and land upon which it is located ("Land") or any tax or assessment hereafter imposed in whole or in part in substitution for such real estate taxes and/or assessments. (2) "Base Year Taxes" shall mean the Real Estate Taxes as finally determined for the Base Tax Year. Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street (3) "Subsequent Tax Year" shall mean any tax fiscal year commencing after the expiration of the Base Tax Year, except that Tenant shall be required to pay any increase in Real Estate Taxes under this Article 39 commencing as of July 1, 1995. (B) If the Real Estate Taxes for any Subsequent Tax Year during the Term exceed the Base Year Taxes (as initially imposed, if not finally determined when a payment is due pursuant to Section (C)), Tenant shall pay Landlord Tenant's Proportionate Share of such excess within fifteen (15) days after Landlord shall furnish to Tenant a statement setting forth the amount thereby due and payable by Tenant. If Real Estate Taxes are payable by Landlord to the applicable taxing authority in installments, then Landlord shall bill Tenant for Tenant's Proportionate Share of the Real Estate Taxes in corresponding installments, such that Tenant's payment is due not more than five (5) days prior to the date when Landlord is obligated to pay the Real Estate Taxes to the applicable taxing authority. If the actual amount of Real Estate Taxes are not known to Landlord as of the date of Landlord's statement, then Landlord may nevertheless bill Tenant for such installment on the basis of a good faith estimate, in which event Tenant shall pay the amount so estimated within fifteen (15) days after receipt of such bill, subject to prompt refund by Landlord, or payment by Tenant, upon a supplemental billing by Landlord once the amount actually owed by Tenant is determined. Together with its first bill for Real Estate Taxes for any Subsequent Tax Year, Landlord shall provide Tenant with a copy of the current New York City tax bill for the Land and Building which was used in the preparation of the settlement or other reasonable proof thereof. Together with its first bill for Real Estate Taxes, Landlord shall also provide Tenant with copies of the New York City tax bills for the Land and Building for the Base Year Taxes or other reasonable proof of the Base Year. (C) If the Base Year Taxes ultimately are less than the Real Estate Taxes initially imposed upon the Land and the Building for the Base Tax Year, Tenant shall pay Landlord, promptly upon demand, any additional amount thereby payable pursuant to Section (B) for all applicable Subsequent Tax Years. (D) If Landlord receives any refund of Real Estate Taxes for any Subsequent Tax Year for which Tenant has made a payment pursuant hereto, Landlord shall (after deducting from such refund all reasonable expenses incurred in connection therewith) pay Tenant, Tenant's Proportionate Share of the net refund. If Landlord succeeds in reducing any assessed valuation for the Land and the Building prior to the billing of Real Estate Taxes for any Subsequent Tax Year, Tenant shall pay Landlord Tenant's Proportionate Share of the reasonable expenses so incurred by Landlord. Landlord shall bring a certiorari proceeding for each Subsequent Tax Year in order to attempt to reduce the assessed valuation of the Land and the Building for such year, unless Landlord, has reasonable cause not to bring a certiorari proceeding for any Subsequent Year. (E) If any Subsequent Tax Year is only partially within the Term, all payments pursuant hereto shall be appropriately prorated, based on the portion of the Subsequent Tax Year which is within the Term. Except as otherwise provided herein: (1) Tenant's obligation to make the payments required by Sections (B), Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street (C) and (D) shall survive the Expiration Date or any sooner termination of this lease; and (2) Landlord's obligation to make the payments required by Section (D) shall survive the Expiration Date or any sooner termination of this lease. (F) Where a "transition assessment" is imposed by the City .of New York for any tax (fiscal) year, then the phrases "assessed valuation" and "assessments" shall mean the transition or actual assessment, whichever is lower, for that tax (fiscal) year. 40. Expense Escalation (A) For all purposes of this lease "Operating Expenses" shall mean all expenses incurred by Landlord, on an accrual basis, for the operation, cleaning and maintenance of the Building and its plazas, sidewalks and curbs (collectively, "Landlord's Property"), including all expenses incurred as a result of Landlord's compliance with any of its obligations hereunder, and shall include the following items (without limitation and without duplication): (i) salaries, wages, medical, surgical and general welfare benefits (including group life and medical insurance) and pension payments, payroll taxes, workmen's compensation, union benefits paid by employer, unemployment insurance, social security and other similar taxes of or with respect to employees of Landlord and/or independent contractors engaged in operation and maintenance; (ii) payments made to independent contractors for maintenance, cleaning and/or operation; (iii) the cost of uniforms, including dry cleaning thereof, for employees; (iv) the cost of all gas, steam, heat, ventilation, air conditioning and water (including sewer rental) for public areas of the Building, together with any taxes thereon; (v) the cost of all rent, casualty, war risk (if obtainable), liability, excess liability, property damage, indemnification, plate glass, multi-risk and other insurance covering Landlord and/or all or any portion of Landlord's Property; (vi) the cost of all supplies (including cleaning supplies), tools, materials and equipment; (vii) the cost of all charges to Landlord for electricity consumed for the public areas of the Building and Building systems and equipment, together with any taxes thereon; (viii) repairs or replacements of non-capital items made by Landlord, at its expense; (ix) straight line depreciation or amortization (including interest at the rate of two (2%) percent in excess of the "prime rate" or "base rate" of Citibank, N .A . at the time such expenditure is made) of any expenditure for a capital improvement which results in a reduction of Operating Expenses but only to the extent of such reduction; Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street (x) management fees customarily charged for similar office buildings in the Grand Central area of midtown Manhattan; (xi) vault, sales, use and frontage taxes; (xii) dues and fees for trade and industry associations relating to Land1ord's Property; (xiii) Building and home-office (reasonably allocable to the Building in accordance with generally acceptable accounting principles) administrative costs for bookkeeping and telephone; (xiv) attorney's fees and fees paid to other professionals for services rendered in connection with the maintenance and/or operation of Landlord's Property; (xv) any and all expenses incurred by Landlord in connection with compliance with any law, rule, order, ordinance, regulation or requirement of any governmental authority having or asserting jurisdiction or any order, rule, requirement or regulation of any utility company, insurer of Landlord or the Board of Fire Underwriters (or successor organization); and (xvi) any and all other expenses incurred by Landlord for operation and maintenance of Landlord's Property which are customary for similar buildings in New York City. (B) For purposes of this Lease, the term "Operating Expenses" shall not include: (i) expenses related to leasing space in the Building (including the cost of tenant improvements, leasing commissions, legal fees and advertising and promotional expenses); (ii) fees and disbursements of attorneys, accountants and other consultants incurred for the collection of tenant accounts, the negotiation of leases, disputes between Landlord and tenants or occupants of the Building or disputes with brokers with respect to brokerage commissions; (iii) the cost of electricity and other utilities and services furnished directly to the Demised Premises or to other space leased or available for lease in the Building; (iv) the cost of repairs or replacements incurred by reason of fire or other casualty or condemnation; (v) expenditures for refinancing and for mortgage debt service; (vi) Real Estate Taxes; (vii) costs and expenses otherwise includable in Operating Expenses, to the extent that Landlord is reimbursed from other sources for such costs and expenses; (viii) salaries, fringe benefits and bonuses for executives above the grade of building manager; Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street (ix) costs incurred with respect to removal or encapsulation of asbestos and other hazardous materials; (x) costs incurred in the transfer or disposition of all or any part of the Building or any interest herein; (xi) fees or expenditures paid by Landlord to any affiliate of Landlord to the extent that such payment exceeds the amount which would have been payable in the absence of such a relationship; (xii) basic rent, additional rent and other charges payable by Landlord under any lease or sublease to or assumed by Landlord; (xiii) arbitration expenses unrelated to the operation, cleaning and maintenance of the Building or in connection with leasing space, determining rentals or resolving disputes with tenants; and (xiv) costs and expenses incurred in relocating tenants within the Building. (C) In determining the amount of the Base Operating Expenses or the Operating Expenses for any Operational Year, if less than ninety-five (95%) percent of the rentable area of the Building shall have been occupied by tenants at any time during any such year, the Base Operating Expenses or the Operating Expenses for any such Operating Year shall be adjusted to an amount equal to the like expenses which would normally be expected to be incurred had the occupancy of the Building been ninety-five (95%) percent throughout the applicable year. All such adjustments shall be made by Landlord in a reasonable and consistent manner and a copy of Landlord's calculation shall be provided to Tenant upon written request. (D) If Landlord is not furnishing any particular work or service (the cost of which if performed by Landlord would constitute an Operating Expenses) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, the Operational Year Operating Expenses for each Operational Year during which such situation shall occur shall be increased by an amount equal to the additional Operating Expense which reasonably would have been incurred during such period by Landlord if it had at its own expense, furnished such service or services to such tenant. All such increases shall be computed by Landlord in a reasonable and consistent manner and a copy of Landlord's calculation shall be provided to Tenant. (E) In any Operational Year in which Operational Year Operating Expenses exceed Base Operating Expenses, Tenant shall pay to Landlord Tenant's Proportionate Share of such excess. (F) During or after the first Operational Year, Landlord shall forward Tenant an itemized statement prepared by Landlord's accountants ("Statement") of the Base Operating Expenses. Thereafter, during each succeeding Operational Year during the Term, Landlord shall forward to Tenant a Statement of the Operational Year Operating Expenses for the prior Operational Year and Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street a computation of the amount payable by Tenant pursuant to this Article for such Operational Year. (G) With each installment of Base Rent payable during the Operational Year 1996, Tenant shall pay Landlord the monthly sum of $750.00 on account of the amount due pursuant to this Article for such Operational Year. With each installment of Base Rent payable during the Term during and after the Operational Year 1997, Tenant shall pay to Landlord on account of the amount payable pursuant to this Article for the then Operational Year: (a) until Landlord forwards the applicable Statement for the preceding Operational Year, the amount of the monthly payment due during December of such Operational Year; and (b) after Landlord forwards the applicable Statement for the preceding Operational Year, one-twelfth (1/12th) of 105% of the amount payable pursuant to this Article for such preceding Operational Year. (H) Once Landlord forwards the applicable Statement for the preceding Operational Year, Landlord and/or Tenant, as the case may be, promptly shall make appropriate payment to the other (without interest) of any amount overpaid by Tenant or owing to Landlord for such Operational Year based on the amount due pursuant to such Statement and amounts theretofore paid by Tenant for such preceding Operational Year. (I) The parties' obligation to make any payment pursuant to this Article shall survive the Expiration Date or any sooner termination of this lease and shall be appropriately prorated for any Operational year which is only partially within the Term. (J) Each Statement given by Landlord pursuant to Section (E) shall be binding upon Tenant unless, within 180 days after its receipt of such Statement, Tenant notifies Landlord of its disagreement therewith, specifying the portion thereof with which Tenant disagrees. Pending resolution of such dispute, Tenant shall, without prejudice to its rights, pay all amounts determined by Landlord to be due, subject to prompt refund by Landlord (without interest) upon any contrary determination. (K) Tenant shall have the right, during the regular business hours of Landlord, on not less than five (5) days' notice, to examine the Landlord's books and records with respect to any Operating Expenses designated in accordance with the terms hereof, provided such examination is commenced within 180 days of such notice and completed within 240 days of rendition of Landlord's statements. 41. Name of Building At such time as this Lease is executed by Landlord and delivered to Tenant and continuing so long as Tenant occupies at least 18,500 square feet in the Building, the Building shall be known as "The London Fog Building" and Tenant shall be permitted to install, at Tenant's expense, a non-illuminating identification Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street plaque at the Building entrance containing Tenant's name, subject to Landlord's prior written approval as to type, nature of appearance and location, which approval shall not be unreasonably withheld or delayed ("Tenant's Name Period"). At all other times during the Term other than Tenant's Name Period, Landlord shall have the sole right to designate and change the name of the Building. In the event Landlord grants any such consent, said installation and the maintenance thereof throughout the Term of this Lease, shall be borne at Tenant's sole cost and expense as otherwise set forth in the instant Lease herein. Approval or disapproval by Landlord shall be given within ten (10) days after written request by Tenant. It shall be Tenant's obligation to comply, at Tenant's sole cost and expense, with all the laws, orders, rules and regulations of governmental authorities having jurisdiction thereof in connection with the installation and maintenance of such plaque. In the event Landlord or Landlord's representative shall deem it necessary to remove such plaque in order to paint or to make any repairs, alterations or improvements in or upon the Building or any part thereof, Landlord shall have the right to do so, provided same be removed and promptly reinstalled when the painting, repairs, alterations or improvements have been completed, at Landlord's expense. Tenant shall, at all times, keep the plaque in a neat and orderly condition and in such a manner as Landlord may reasonably approve. 42. Electricity (A) As an incident to this lease and as part of the Base Rent payable hereunder, Landlord shall furnish to Tenant, through transmission facilities installed by it in the Building, alternating electric current to be used by the Tenant in, or in connection with, the lighting fixtures and electrical receptacles installed in the demised premises. Landlord shall not be liable in any way to Tenant for any failure or defect in supply or character of electric current furnished to the demised premises, except where such failure or defect is attributable to the act or omission of Landlord. Landlord shall furnish and install all lighting tubes, ballasts, lamps and bulbs used in the demised premises and Tenant shall pay, promptly upon demand, Landlord's reasonable charges therefor. Tenant shall use said electric current for lighting and, insofar as applicable laws and insurance regulations permit, for operation of such equipment as is normally used in connection with the operation of a business office. (B) At all times during the term of this Lease, Landlord shall make available eleven (11) watts (connected load) of electrical energy per rentable square foot of the Demised Premises or the applicable Expansion Space, as the case may be to the Demised Premises (including any Expansion Space) to accommodate Tenant's Initial Installation. Tenant's use of electric current in the demised premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the demised premises. Tenant shall not make or perform, or Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street permit the making or performing of, any alterations to wiring installations or other electrical facilities in or serving the demised premises or any substantial additions to the business machines, office equipment or other appliances which it initially uses in the demised premises which utilize electrical energy without the prior written consent of Landlord in each instance, which consent shall not be unreasonably withheld or delayed. Should Landlord grant any such consent, all additional risers or other equipment required therefor, if any, shall be installed by Landlord and the reasonable cost thereof shall be paid by Tenant promptly upon demand. As a condition to granting any such consent, Landlord may require that Tenant agree to an increase in the Electric Factor (and the Base Rent) payable hereunder by an amount which will reflect the additional electricity to be used by Tenant for its additional business machines, office equipment or other appliances. If Landlord and Tenant cannot agree thereon, such amount shall be determined by a reputable independent electrical engineer or consultant, to be selected and paid by Landlord . The findings of the consultant or engineer in all such instances shall be conclusive upon the parties. When the amount of such increase is so determined, the parties shall execute and exchange an agreement supplementary hereto to reflect the increase in the amount of the Electric Factor (and the Base Rent) payable hereunder, effective from the date such additional electricity is used by Tenant, but such increase shall be effective from such date even if such supplementary agreement is not executed. (C) Landlord or Tenant may, at any time, retain a reputable independent electrical engineer or consultant, mutually selected and paid by Landlord and Tenant to make a survey of the electrical wiring and power load to determine what the value would be to Tenant if it were purchasing electricity directly from the utility company at Landlord's rate schedule. If the Electric Factor (and the Base Rent) then payable hereunder does not fairly reflect such value as determined by the consultant or engineer, the Electric Factor (and the Base Rent) shall be increased or decreased (but not below $2.50 per rentable square foot) by a sufficient amount such that the same shall fairly reflect such value. The findings of the consultant or engineer in all such instances shall be conclusive upon the parties. When the amount of such value is so determined, the parties shall execute and exchange an agreement supplementary hereto to reflect any appropriate increase or decrease in the amount of the Electric Factor (and the Base Rent) payable hereunder, effective from the date of such survey. (D) If any tax is imposed upon Landlord in connection with the furnishing of electric current to Tenant by any Federal, State or Local Government subdivision or authority, Tenant shall pay Landlord an amount equal to such tax, where permitted by law. (E) If, subsequent to the Base Electric Date, the public utility rate schedule or any portion of the charge for the supply of electric current to the Building is increased, or decreased or such rate schedule is superseded by another rate schedule, the Electric Factor (and the Base Rent) shall be increased or decreased by the percentage of increase or decrease in Landlord's cost for purchasing electricity for the Building provided, however, that in no event shall the Electric Factor be reduced to less than the amount set forth in Article 37, as such amount may be increased from time to time as a result of the addition of space to the RE: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street premises initially demised by this lease. If Landlord and Tenant cannot agree thereon, the amount of such adjustment shall be determined by a reputable independent electrical engineer or consultant, to be selected and paid by Landlord . The findings of the consultant or engineer, in all such instances, shall be conclusive upon the parties. Whenever the amount of any such adjustment is so determined, the parties shall execute and exchange an agreement supplementary hereto to reflect such adjustment in the amount of the Electric Factor (and the Base Rent) payable hereunder, effective from the effective date of such increase, decrease or change in such rate schedule or charge, but such adjustment shall be effective from such date whether or not a supplementary agreement is executed. (F) Anything in this Article to the contrary notwithstanding, if Tenant disputes any determination made by Landlord's electrical consultant or engineer ("Landlord's Electrical Consultant"), Tenant may challenge such determination only (but not any prior determination of Landlord's Consultant), within one hundred twenty (120) days after receipt thereof (time being of the essence), by submitting a different computation of the percentage of increase or decrease, if made pursuant to subsection (B) or (E), or by submitting a contrary survey, if made pursuant to subsection (C), made by Tenant's reputable independent electrical engineer or consultant ("Tenant's Electrical Consultant"), which shall be paid by Tenant. If Landlord's Electrical Consultant and Tenant's Electrical Consultant agree on a determination, such agreement shall be conclusive upon the parties. If Landlord's Electrical Consultant and Tenant's Electrical Consultant cannot agree, they shall select a third reputable independent electrical engineer or consultant to be paid equally by both parties, to make a binding determination with respect to such dispute. If Landlord's Electrical Consultant and Tenant's Electrical Consultant cannot agree upon a third electrical engineer or consultant, within thirty (30) days, upon the application of either party the same shall be selected by the Presiding Judge of the Appellate Division of the Supreme Court of the State of New York, First Department. No delay in the resolution of any such dispute shall affect the effective date of any such determination. (G) In no event shall the Base Rent be less than the Net Rent. (H) Landlord reserves the right to discontinue furnishing electric current to Tenant in the demised premises at any time upon not less than thirty (30) days' written notice to Tenant (or such longer period as Tenant reasonably requires to arrange for direct electrical service from the public utility company furnishing electric current to the Building), provided that Landlord also discontinues furnishing electric current to substantially all other similarly situated tenants in the Building. In addition, Tenant shall have the right, at any time upon not less than thirty (30) days prior written notice to Landlord, to arrange to obtain electric current directly from the public utility company furnishing electric current to the Building. If either party exercises such right of termination, this lease shall continue in full force and effect and shall not be affected thereby, except that, from and after the effective date of such termination, Landlord shall not be obligated to furnish electric current to Tenant and the Base Rent payable hereunder shall be reduced to and become the Net Rent. If Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street such electric service is so discontinued, Tenant shall arrange to obtain electric current directly from the public utility company furnishing electric current to the Building. Such electric current may be furnished to Tenant by means of the then existing Building system feeders, risers and wiring to the extent that the same are available, suitable and safe for such purposes. All meters and additional panel boards, feeders, risers, wiring and other conductors and equipment which may be required to obtain electric current directly from such public utility company shall be installed and maintained by Tenant, at its expense. (I) Tenant shall pay to Landlord a sum equal to one-twelfth (1/12th) of the Electric Factor (the "Interim Electric Charge") on or after the later to occur of July 1, 1994 or the date Tenant commences construction in the Demised Premises ("Electrical Commencement Date") and on the first day of each calendar month thereafter until the Rent Commencement Date, as additional rent representing the charge for electricity consumed within the demised premises for such period. If the Electrical Commencement Date occurs on a date other than the first day of a calendar month, the Interim Electric Charge for such month shall be an amount equal to such portion of the Interim Electric Charge as the number of days from and including the Commencement Date bears to the total number of days in such calendar month. 43. Restrictions on Use (A) Anything in Article 2 to the contrary notwithstanding, Tenant shall not use or permit all or any part of the demised premises to be used for the: (1) storage for purpose of sale of any alcoholic beverage in the demised premises; (2) storage for retail sale of any product or material in the demised premises; (3) conduct of a manufacturing, printing or electronic data processing business, except that Tenant may operate business office reproducing equipment, electronic data processing equipment and other business machines for Tenant's own requirements (but shall not permit the use of any such equipment by or for the benefit of any party other than Tenant); (4) rendition of any health or related services, conduct of a school or conduct of any business which results in the presence of the general public in the demised premises; (5) conduct of the business of an employment agency or executive search firm; (6) conduct of any public auction, gathering, meeting or exhibition; (7) conduct of a stock brokerage office or business; and (8) occupancy of a foreign, United States, state, municipal or other governmental or quasi-governmental body, agency or department or any authority or other entity which is affiliated therewith or controlled thereby. (B) Tenant shall not use or permit all or any part of the demised premises to be used so as to impair the Building's character or dignity or impose any unreasonable additional burden upon Landlord in its operation. (C) Tenant shall not obtain or accept for use in the demised premises ice, drinking water, food, beverage, towel, barbering, boot blacking, floor polishing, lighting maintenance, cleaning or other similar services from any party not theretofore approved by the Landlord (which party's charges shall not be Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street excessive). Such services shall be furnished only at such hours, in such places within the demised premises and .pursuant to such regulations a Landlord reasonably prescribes. Nothing contained in the foregoing shall prevent Tenant or its employees from bringing into the Building for consumption therein food or beverages purchased outside the Building. 44. Assignment, Etc. Supplementing Article 11: (A) Tenant shall neither: (i) publicly advertise to assign, sublet or permit the occupancy of all or any part of the demised premises at a rental rate less than the rental rate at which Landlord is then offering to lease comparable space in the Building (provided that such rental may be indicated in flyers circulated to the brokerage community); or (ii) assign this lease to or sublet to or permit the occupancy of all or any part of the demised premises by any other party which is then a tenant, subtenant, licensee or occupant of any space in the Building or which has negotiated with Landlord for space in the Building within the two (2) month period preceding the date of Landlord's receipt of Tenant's Notice pursuant to Section (B). (B) If Tenant wishes to assign this lease (a transfer of more than a fifty (50%) percent beneficial interest in Tenant, whether such transfer occurs at one time, or in a series of related transactions, and whether of stock, partnership interest or otherwise, by any party in interest being deemed an assignment of this lease, except where such transfers occur through trades on a recognized stock exchange or on the "over-the-counter" market), sublet all or any part of the demised premises or permit the demised premises to be occupied by any other party, Tenant shall first notify Landlord ("Tenant's Notice"), specifying the name of the proposed assignee, sublessee or occupant, the name of and character of its business, the terms of the proposed assignment, sublease or occupancy (including, without limitation, the commencement and expiration dates thereof) and current information as to the financial responsibility and standing of the proposed assignee, sublease or occupant and shall provide Landlord with such other information as it reasonably requests. If only a portion of the demised premises (not constituting an entire floor of the Building) is to be so sublet or occupied, Tenant's Notice shall be accompanied by a reasonably accurate floor plan, indicating such portion. The portion of the demised premises to which such proposed assignment, sublease or occupancy is to be applicable is hereinafter referred to as the "Space" (C) In the event Tenant desires to assign its lease or sublet all of the demised premises for the entire balance of the term of the Lease, Landlord may, within twenty (20) days after its receipt of Tenant's Notice, by notice to Tenant ("Landlord's Notice"), require Tenant to (i) sublease the demised premises to Landlord or its nominee, on the terms set forth in Section (D), or (ii) terminate this lease as of the proposed commencement date for such assignment, sublease or occupancy. If Tenant desires to sublet all of the demised premises for less than the entire balance of the term of the Lease or if Tenant desires to sublet a portion of the demised premises or if Landlord fails to exercise the Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street options set forth in this Section (C), Landlord shall not unreasonably withhold its consent to the proposed assignment, sublease or occupancy, but such consent shall be deemed of no effect if such assignment, sublease or occupancy is not consummated substantially upon the terms set forth in Tenant's Notice and within sixty (60) days after such consent is given. (D) If Landlord requires Tenant to execute a sublease ("Sublease") pursuant to clause (C) (i), the Sublease shall be upon the terms set forth in Tenant's Notice, except for such terms thereof as are inapplicable and except that: (i) the subtenant under the Sublease shall have the unrestricted right to assign the Sublease or any interest therein, to further sublet all or any part of the demised premises and/or to make any alterations, decorations, additions or improvements in and to the demised premises (all or any part of which may be removed, at Landlord's option, at any time, provided Landlord repairs all damage caused by such removal); (ii) the Sublease shall provide that the termination of this lease by merger is not thereby intended; and (iii) at the expiration of the Sublease, the demised premises shall be returned to Tenant as then existing (and Tenant, in turn, shall have the right to return the demised premises to Landlord as then existing). Landlord shall hold Tenant harmless from any claims, etc. relating to the demised premises during the term of the sublease; also, Landlord shall include Tenant as an additional insured under its insurance policies covering the demised premises during the term of the sublease. (E) Anything herein to the contrary notwithstanding, Tenant may not assign this Lease or sublet all or any part of the demised premises prior to the expiration of the first year of the Term. (F) No assignment of this lease shall be effective unless and until Tenant delivers to Landlord duplicate originals of the instrument of assignment (wherein the assignee assumes the performance of Tenant's obligations under this lease) and any accompanying documents. (G) In the event of any such assignment, Landlord and the assignee may modify this lease in any manner, without notice to Tenant or Tenant's prior consent, without thereby terminating Tenant's liability for the performance of its obligations under this lease, except that any such modification which, in any way, increases any of such obligations shall not, to the extent of such increase only, be binding upon Tenant. (H) No sublease of all or any part of the demised premises (except a Sublease) shall be effective unless and until Tenant delivers to Landlord duplicate originals of the instrument of sublease (containing the provision required by Section (I)) and any accompanying documents. Any such sublease shall be subject and subordinate to this lease. (I) Any such sublease shall contain substantially the following provisions: (i) "In the event of a default under any underlying lease of all or any portion of the premises demised hereby which results in the termination of such lease, the Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street subtenant hereunder shall, at the option of the lessor under any such lease ("Underlying Lessor"), attorn to and recognize the Underlying Lessor as landlord hereunder and shall, promptly upon the Underlying Lessor's request, execute and deliver all instruments necessary or appropriate to confirm such attornment and recognition. Notwithstanding such attornment and recognition, the Underlying Lessor shall not (i) be liable for any previous act or omission of the landlord under this sublease, (ii) be subject to any offset, not expressly provided for in this sublease, which shall have accrued to the subtenant hereunder against said landlord, or (iii) be bound by any modification of this sublease or by any prepayment of more than one month's rent, unless such modification or prepayment shall have been previously approved in writing by the Underlying Lessor. The subtenant hereunder hereby waives all rights under any present or future law to elect, by reason of the termination of such underlying lease, to terminate this sublease or surrender possession of the premises demised hereby." (ii) "This sublease may not be assigned or the premises demised hereunder further sublet, in whole or in part, without the prior written consent of the Underlying Lessor." (J) Landlord's consent to any assignment or sublease shall neither release Tenant from its liability for the performance of Tenant's obligations hereunder during the balance of the Term nor constitute its consent to any (i) further assignment of this lease or of any permitted sublease or (ii)further sublease of all or any portion of the premises demised hereunder or under any permitted sublease, but such consent shall not be unreasonably delayed or withheld provided that the proposed further assignment or further sublease satisfies all of the requirements therefor set forth in this Lease. If a sublease to which Landlord has consented is assigned or all or any portion of the premises demised thereunder is sublet without the consent of Landlord in each instance obtained, Tenant shall immediately terminate such sublease, or arrange for the termination thereof, and proceed expeditiously to have the occupant thereunder dispossessed. (K) Tenant shall pay to Landlord, promptly upon demand therefor, all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements) incurred by Landlord in connection with any assignment of this lease or sublease of all or any part of the demised premises. (L) If Landlord shall give its consent to any assignment of this lease or to any sublease or if Tenant shall otherwise enter into any assignment or sublease permitted hereunder, Tenant shall, in consideration therefor, pay to Landlord, as and when payable to Tenant: (i) in the case of an assignment, fifty (50%) percent of all sums and other considerations paid to Tenant by the assignee for or by reason of such assignment (including, but not limited to, sums paid for the sale of Tenant's leasehold improvements, after deduction of all reasonable and customary expenses incurred by Tenant in connection with the assignment, including, without limitation, advertising expenses, brokerage commissions and legal fees and disbursements); and Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street (ii) in the case of a sublease, fifty (50%) percent of the amount, if any, by which (1) any rents, additional charges or other consideration payable under the sublease to Tenant by the subtenant (including, but not limited to, sums paid for the sale or rental of Tenant's leasehold improvements, after deduction of (a) all reasonable and customary expenses incurred by Tenant in connection with the sublease, including, without limitation, advertising expenses, brokerage commissions and legal fees and disbursements and (b) the cost of any rent concessions and construction allowances granted to the subtenant) exceeds (2) the Base Rent and additional rent accruing during the term of the sublease in respect of the Space (at the rate per square foot payable by Tenant hereunder) pursuant to the terms of this lease. (M) Assignment to an Affiliate with Assumption Notwithstanding the provisions contained in Articles 11 and this Article 44 herein, and provided Tenant is not in default under the terms and provisions of the Lease, Tenant shall have the right to assign this Lease or sublet the Demised Premises to any corporation into or with which Tenant may be merged or consolidated or to any corporation which shall be an affiliate, subsidiary, parent or successor of Tenant or of a corporation into or with which Tenant may be merged or consolidated or to a partnership, the majority interest of which shall be owned by stockholders of Tenant or of any such corporation. For the purpose of this Article "subsidiary" or "affiliate" or a "successor" of Tenant shall mean the following: (a) An "affiliate" shall mean any corporation which, directly or indirectly, controls or is controlled by or is under common control with Tenant. For this purpose, "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership or voting securities or by contract or otherwise; (b) A "subsidiary" shall mean any corporation not less than 50% of whose outstanding stock shall, at the time, be owned directly or indirectly by Tenant; (c) A "successor" of Tenant shall mean: (i) a corporation in which or with which Tenant, its corporate successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions for merger or consolidation of corporations, provided that by operation of law or by effective provisions contained in the instruments of merger or consolidation, the liabilities of the corporations participating in such merger or consolidation are assumed by the corporation surviving such merger or created by such consolidation, or (ii) a corporation acquiring this Lease and the term hereby demised and a substantial portion of the property and assets of Tenant, its corporate successors or assigns,or (iii) any corporate successor to a successor corporation becoming such by either of the methods described in (i) or (ii), provided that on the completion of such merger, consolidation, acquisition or assumption, the successor shall have a net Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street worth no less than Tenant's net worth immediately prior to such merger, consolidation, acquisition or assumption. Acquisition by Tenant, its corporate successors or assigns, of a substantial portion of the assets, together with the assumption of all or substantially all the obligations and liabilities of any corporation, shall be deemed a merger of such corporation into Tenant for purpose of this Article. 45. Base Rent and Possession (A) The basic annual rental (Base Rent) due and payable under this Lease as provided on page 1 of the sleeve herein shall be as follows: (a) for the period commencing October 1, 1994 through and including September 30, 1997 at an annual rental rate of Six Hundred Eighty-four Thousand and 00/100 ($684,000.00) Dollars; (b) for the period commencing October 1, 1997 through and including September 30, 2001 at an annual rental rate of Seven Hundred Fifty-six Thousand and 00/100 ($756,000.00) Dollars; and (c) for the period commencing October 1, 2001 through and including September 30, 2004 at an annual rental rate of Eight Hundred Twenty-eight Thousand and 00/100 ($828,000.00) Dollars. (B) For the period commencing October 1, 2004 through and including September 30, 2009, the Base Rent shall be at the annual rental rate equivalent to ninety (90%) percent of the annual fair market rentable value, which fair market rental value shall be agreed upon by the parties by on or before April 1, 2004 or failure of the parties to so agree, then such fair market value shall be determined by arbitration as hereinafter set forth. (C) For the purposes of this Article, the annual fair market rental value of the Demised Premises shall be deemed to be the rental which a third party who wished to lease the Demised Premises for its own use and occupancy (highest and best use as Executive Offices and Showrooms) would pay the Owner of the Building of which the Demised Premises form a part, and which the Owner would accept, taking into consideration the following factors among others: (a) that Tenant will not receive any "free-rent", construction allowance or other rent concessions; (b) that Tenant will be required to pay, during the term of the Lease, its proportionate share of Real Estate Taxes and other escalations on the basis of the base years set forth in Paragraph (E) below and as otherwise set forth in this Lease and to perform the other obligations of Tenant under this Lease; (c) that a reduced brokerage commission will be payable in connection with the Lease transaction; (d) that Tenant shall not incur any moving or equipment relocation expenses by reason of its leasing the Demised Premises during the extended period involved herein; (e) that Landlord will be able to rent the demised premises without incurring the usual expenses of locating a new tenant and without any "down time" (i.e., time between the expiration of the old lease Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street and the start of the new lease); and (f) in no event, however, shall the annual Base Rent and additional rental due and payable under this Lease during the period October 1, 2004 through September 30, 2009, be less than the annual Base Rent and additional rent due and payable hereunder for the annual period ending on September 30, 2004, regardless of whether the annual fair market rental is determined by agreement between the parties or by arbitration. . (D) In the event that the parties are unable to agree on the fair market rental value by no later than April 1, 2004, either Landlord or Tenant may initiate the arbitration procedure specified in Article 61 below, by giving written notice to that effect and designating its arbitrator. Landlord and Tenant agree to cooperate so that any final determination by arbitration can be made expeditiously. When the fair market rental value of the Demised Premises is to be determined by agreement or arbitration in the circumstances described in this Article, such fair market rental value of the Demised Premises shall be as of October 1, 2004. In the event that a final determination of the fair market rental value has not been made or agreed upon on or before October 1, 2004, Tenant shall continue to pay its Base Rent and additional rent in the amount then in effect on September 30, 2004. Thereafter, once the fair market rental value is determined, Tenant shall pay to Landlord, within fifteen (15) days of its receipt of a statement therefor from Landlord, all amounts for the period from October 1, 2004 to the date of determination which would have been paid by Tenant, as Base Rent and additional rent, in excess of the Base Rent and additional rent actually paid by Tenant, if such fair market rental value, as finally determined, had been agreed upon or determined as of October 1, 2004. (E) Once the fair market rental value is determined, either by agreement between the parties or by arbitration as set forth above, Tenant shall thereafter continue to pay the escalations as set forth in Articles 39 and 40 and elsewhere in the instant Lease herein, except that the Taxes for the Base Year referred to in Article 39(A) (3) shall mean the Real Estate Taxes, as finally determined, for the fiscal years beginning July 1, 2004 and ending June 30, 2005 and July 1, 2005 through June 30, 2006, and the Base Operating Expenses referred to in Article 37(C) shall mean the Operating Expenses incurred for the calendar year 2005. (F) Notwithstanding the provisions of subparagraph (A) (a) above, Tenant shall be permitted to occupy the Demised Premises at such time as this Lease is executed and exchanged between Landlord and Tenant. At such time as Tenant occupies the Demised Premises for any reason whatsoever, Tenant shall otherwise comply with all the other terms and provisions of this Lease, except as otherwise set forth in this Articles 45 and 64 and elsewhere in this Lease, provided however, that Tenant's obligation to commence paying monthly Base Rent shall not commence until the Rent Commencement Date. 46. Broker Landlord and Tenant each represent that it has dealt with no broker in connection with the negotiations for the execution of Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street this Lease, except JULIEN J. STUDLEY, INC. and JACK RESNICK & SONS, INC. Landlord and Tenant each represent that it has dealt only with the aforementioned brokers in connection with this Lease and Landlord shall pay the Brokers' commission therefor pursuant to separate agreement. Each party shall indemnify the other party against any liability and expense (including reasonable attorney's fees) for any other claims for brokerage commission or finder's fee based on alleged actions of such party or its agents or representatives. Landlord's and Tenant's liability hereunder shall survive any expiration or termination of this Lease. 47. Building Directory (A) Landlord shall, upon Tenant's request, list on the Building's directory ("Directory") the names of the Tenant, any assignee or subtenant or any other party occupying any part of the demised premises pursuant hereto and their officers or employees, provided the number of Directory lines so provided by Landlord does not exceed Tenant's Proportionate Share of the Directory's capacity. (B) The listing of any party's name other than Tenant's shall neither grant such party any right or interest in this lease and/or the demised premises nor constitute Landlord's consent to any assignment or sublease to or occupancy by such party. Such listing may be terminated by Landlord at any time, without prior notice. The initial listing(s) in the Directory shall be provided by Landlord without charge to Tenant. Thereafter, Tenant shall pay Landlord's standard fee (which shall be reasonable) for any work performed in connection with any additions, deletions or changes to the Directory. 48. Exculpatory Clause (A) Anything herein to the contrary notwithstanding, the liability of Landlord and the partners of Landlord for negligence, failure to perform lease obligations or otherwise under or in connection with this lease shall be limited to their respective interests in the Land and Building. Tenant shall neither seek to enforce nor enforce any judgment or other remedy against any other asset of Landlord, any partner of Landlord or any party that holds any interest in Landlord. (B) In any claim made by Tenant against Landlord alleging that Landlord has acted unreasonably where Landlord had an obligation to act reasonably, Tenant's sole and exclusive recourse against landlord shall be an action seeking specific performance of Landlord's obligations under this lease. 49. Submission to Jurisdiction, Etc. (A) This lease shall be deemed to have been made in New York County, New York, and shall be construed in accordance with the laws of the State of New York. All actions or proceedings relating, directly or indirectly, to this lease shall be litigated Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street only in courts located within the County of New York. Landlord, Tenant, any guarantor of the performance of Tenant's obligations hereunder ("Guarantor") and their successors and assigns hereby subject themselves to the jurisdiction of any state or federal court located within such county, waive the personal service of any process upon them in any action or proceeding therein and consent that such process be served by certified or registered mail, return receipt requested, directed to the Landlord or Tenant and/or any successor at its address hereinabove set forth, to Guarantor and any successor at the address set forth in the instrument of guaranty and to any assignee at the address set forth in the instrument of assignment. Such service shall be deemed made two days after such process is so mailed. (B) Whenever any default by Tenant beyond any applicable notice and cure period causes Landlord to incur attorneys' fees and/or any other costs or expenses, Tenant agrees that it shall pay and/or reimburse Landlord for such reasonable fees, costs or expenses within ten (10) days after being billed therefor. (C) If any monies owing by Tenant under this lease are paid more than fifteen (15) days after the date such monies are payable pursuant to the provisions of this lease, Tenant shall pay Landlord interest thereon, at nine (9%) percent per annum, for the period from the date such monies were payable to the date such monies are paid. (D) The submission of this lease to Tenant shall not constitute an offer by Landlord to execute and exchange a lease with Tenant and is made subject to Landlord's acceptance, execution and delivery thereof. 50. Modifications Requested by Mortgagee (A) If any prospective mortgagee of the Land, Building or any leasehold interest therein requires, as a condition precedent to issuing its loan, the modification of this lease in such manner as does not lessen Tenant's rights or increase its obligations hereunder except to a de minimis extent, Tenant shall not unreasonably delay or withhold its consent to such modification and shall execute and deliver such confirming documents therefor as such mortgagee requires. (B) In the event of the enforcement by Mortgagee of any of its remedies provided for by law or under the Mortgage, Tenant agrees that, on the request of Mortgagee or any person succeeding to the interest of Landlord as a result of such enforcement, to automatically become the tenant of any such successor in interest without any change in the terms or other provisions of this lease; provided, however, that any such successor in interest shall not be (i) bound by any payment of rent or additional rent for more than one month in advance; (ii) bound by any amendment or modification of this lease entered into subsequent to such party becoming a Mortgagee or successor in interest, made without the consent of Mortgagee or such successor in interest; (iii) liable for any act or omission of any prior landlord; or (iv) subject to any offset or defenses which Tenant may have against any prior landlord. Upon the request by any such successor in interest, Tenant agrees to Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street execute and deliver an instrument or instruments confirming such attornment. 51. "As Is" Supplementing Article 21 the demised premises shall be leased to Tenant in their "as is" condition on the date hereof, reasonable wear and tear excepted, and Landlord shall not be required to perform any work to prepare the demised premises for Tenant's occupancy other than as set forth in Article 65 below. The taking of possession of the demised premises by Tenant shall be conclusive evidence as against Tenant that, at the time such possession was so taken, the demised premises were in good and satisfactory condition except (a) as notified by Tenant to Landlord within thirty (30) days of its taking of possession of the demised premises or (b) latent structural defects or defects which cannot then be determined due to the season of the year. 52. Insurance During the Term Tenant shall pay for and keep in force general liability policies in standard form protecting against any and all liability occasioned by accident or occurrence, subject to customary exclusions, such policies to be written by recognized and well-rated insurance companies authorized to transact business in the State of New York. The minimum limits of liability shall be a combined single limit with respect to each occurrence in an amount of not less than $5,000,000 for injury (or death) and damage to property. If at any time during the Term it appears that public liability or property damage limits in the City of New York for premises similarly situated, due regard being given to the use and occupancy thereof, are higher than the foregoing limits, then, at the written request of Landlord, Tenant shall increase the foregoing limits accordingly. Landlord shall be named as an additional insured in the aforesaid insurance policies and the policies shall provide that Landlord shall be afforded thirty days prior notice of cancellation of said insurance. Tenant shall deliver certificates of insurance evidencing such policies. All premiums and charges for the aforesaid insurance shall be paid by Tenant and if Tenant shall fail to make such payment when due, Landlord may make it and the amount thereof shall be repaid to Landlord by Tenant on demand and the amount thereof may, at the option of Landlord, be added to and become a part of the additional rent payable hereunder. Tenant shall not violate or permit to be violated any condition of any of said policies and Tenant shall perform and satisfy the requirements of the companies writing such policies. 53. Bankruptcy Without limiting any of the provisions of Articles 16, 17 or 18 hereof, if pursuant to the Bankruptcy Code, as the same may be amended, Tenant is permitted to assign this lease in disregard of the obligations contained in Articles 11 and 44 hereof, Tenant agrees that adequate assurance of future performance by the assignee permitted under such Code shall mean the deposit of cash security with Landlord in an amount equal to the sum of one year's Base Rent then reserved hereunder, plus an amount equal to all Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street additional rent payable under this lease for the calendar year preceding the year in which such assignment is intended to become effective, which deposit shall be held by Landlord, without interest, for the balance of the Term as security for the full and faithful performance of all of the obligations under this lease on the part of Tenant yet to be performed. If Tenant receives or is to receive any valuable consideration for such an assignment of this lease, such consideration, after deducting therefrom (A) the brokerage commissions, if any, and other expenses reasonably incurred by Tenant for such assignment and (B) any portion of such consideration reasonably designated by the assignee as paid for the purchase of Tenant's property in the demised premises, shall be and become the sole and exclusive property of Landlord and shall be paid over to Landlord directly by such assignee. In addition, adequate assurance shall mean that any such assignee of this lease shall have a net worth, exclusive of good will, equal to at least fifteen (15) times the aggregate of the Base Rent reserved hereunder, plus all additional rent for the preceding calendar year as aforesaid. 54. Local Law 5 Supplementing Article 6, (A) All work performed or installations made by Tenant (or by Landlord at Tenant's request and expense) in and to the demised premises shall be done in a fashion such that the demised premises and the Building shall be in compliance with the requirements of Local Law 5 of 1973 of The City of New York, as then in effect ("Local Law 5"). The foregoing shall include, without limitation, (i) compliance with the compartmentalization requirements of Local Law 5, (ii) relocation of existing fire detection devices, alarm signals and/or communication devices necessitated by the alteration of the demised premises, and (iii) installation of such additional fire control or detection devices as may be required by applicable governmental or quasi-governmental rules, regulations or requirements (including, without limitation, any requirements of the New York Board of Fire Underwriters) as a result of Tenant's manner of use of the demised premises. In addition, Tenant shall cause the demised premises to be connected to the Building Class "E" system and arrange to have the demised premises and Tenant added to the "Class E" computer. (B) Landlord shall not be responsible for any damage to Tenant's fire control or detection devices (except for damage caused by Landlord) nor shall Landlord have any responsibility for the maintenance or replacement thereof. Tenant shall indemnify Landlord from and against all loss, damage, cost, liability or expense (including, without limitation, reasonable attorneys' fees and disbursements, but not including special or consequential damages) suffered or incurred by Landlord by reason of the installation and/or operation of any such devices. (C) All work and installations required to be undertaken by Tenant pursuant to this Article shall be performed at Tenant's sole cost and expense and in accordance with plans and specifications and by contractors previously approved by Landlord, which approval shall not be unreasonably withheld or delayed. Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street (D) The fact that Landlord shall have heretofore consented to any installations or alterations made by Tenant in the demised premises shall not relieve Tenant of its obligations pursuant to this Article with respect to such installations or alterations. 55. Tenant's Alterations (A) Tenant shall not make or perform, or permit the making or performance of, any alterations, installations, improvements, additions or other physical changes (except decorative changes) in or about the demised premises (collectively, "Alterations") without Landlord's prior consent. Landlord agrees not to unreasonably withhold its consent to any Alterations which are nonstructural or for the staircases between Tenant's floors, or which do not affect the Building's systems and facilities proposed to be made by Tenant to adapt the demised premises for those business purposes permitted by Article 2 hereof, provided that such Alterations, do not affect any part of the Building other than the demised premises or for the staircases between Tenant's floors, do not adversely affect any service required to be furnished by Landlord to Tenant or to any other tenant or occupant of the Building and do not reduce the value or utility of the Building. Except as otherwise provided herein, all Alterations(including the staircases and bathrooms located on Tenant's floors) shall be done at Tenant's expense and at such times and in such manner as Landlord may from time to time reasonably designate pursuant to the conditions for Alterations prescribed by Landlord for the Building and shall comply with all laws, ordinances, orders, rules and regulations of each and every department and bureau of the City and State of New York and of the United States of America, and any other lawful authority asserting jurisdiction in the premises, including, but not limited to, compliance with the Americans With Disabilities. Act of 1990, as same may be amended from time to time ("ADA") and shall reimburse Landlord for any reasonable expenses incurred on account of the failure by Tenant to comply with any such requirements and promptly after completion of any work Tenant shall obtain and furnish to Landlord all required sign-offs, and any reasonable expenses so incurred by Landlord as aforesaid shall be deemed additional rent under this Lease and due and payable by Tenant to Landlord on the first day of the month immediately following the payment and request of the same by Landlord. Except as set forth above, it shall be Landlord's responsibility to comply with ADA as same relates to access to the Building and the common areas of the Building. Prior to making any Alterations, Tenant (i) shall submit to Landlord detailed plans and specifications (including layout, architectural, mechanical and structural drawings) for each proposed Alteration and shall not commence any such Alteration without first obtaining Landlord's approval of such plans and specifications, (ii) shall, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi- governmental bodies, and (iii) shall furnish to Landlord duplicate original policies of worker's compensation insurance (covering all persons to be employed by Tenant, and Tenant's contractors and subcontractors in connection with such Alteration) and comprehensive public liability (including property damage coverage) Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street insurance in such form, with such companies, for such periods and in such amounts as Landlord may reasonably require, naming Landlord and its agents as additional insureds. Upon completion of such Alteration, Tenant, at Tenant's expense, shall obtain certificates of final approval of such Alteration required by any governmental or quasi-governmental bodies and shall furnish Landlord with copies thereof and shall, within thirty (30) days of such completion, deliver a set of final "as built" drawings to Landlord reflecting the Alteration. All Alterations shall be made and performed in accordance with the Rules and Regulations; all materials and equipment to be incorporated in the demised premises as a result of all Alterations shall be new and first quality; no such materials or equipment shall be subject to any lien, encumbrance, chattel mortgage, title retention or security agreement. Tenant shall not, at any time prior to or during the Term, directly or indirectly employ, or permit the employment of, any contractor, mechanic or laborer in the demised premises, whether in connection with any Alteration or otherwise, if, in Landlord's sole discretion, such employment will interfere or cause any conflict with other contractors, mechanics or laborers engaged in the construction, maintenance or operation of the Building by Landlord, Tenant or others. In the event of any such interference or conflict, Tenant, upon demand of Landlord, shall cause all contractors, mechanics or laborers causing such interference or conflict to leave the Building immediately. Notwithstanding anything contained herein to the contrary, Landlord's approval to Tenant's plans and specifications shall be deemed granted if Landlord fails to respond within seven (7) business days after submission of complete plans and specifications, provided that along with such complete submission for approval, Tenant notifies Landlord, in writing, using bold lettering that Landlord's failure to respond within seven (7) business days will be deemed approval of the submitted plans and specifications. (B) No approval of any plans or specifications by Landlord or consent by Landlord allowing Tenant to make any Alterations or any inspection of Alterations made by or for Landlord shall in any way be deemed to be an agreement by Landlord that the contemplated Alterations comply with any legal requirements or insurance requirements or the certificate of occupancy for the Building nor shall it be deemed to be a waiver by Landlord of the compliance by Tenant of any provision of this lease. (C) Tenant shall promptly reimburse Landlord for all reasonable out-of-pocket fees, costs and expenses including, but not limited to, those of attorneys, architects and engineers, incurred by Landlord in connection with inspecting the Alterations, including Tenant's inter-floor staircases, to determine whether the same are being or have been performed in accordance with the approved plans and specifications therefor and with all legal requirements and insurance requirements, provided, however, such amount shall not exceed $1,000 if such Alterations consist of non-structural improvements and the staircases. 56. Estoppel Certificate Either party shall, at any time, and from time to time, upon at least fifteen (15) days' prior notice from the other party, shall execute, acknowledge and deliver to the requesting party, Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street and/or to any other person, firm or corporation specified by Landlord or Tenant ("Recipient"), a statement prepared by the Recipient or requesting party certifying that this lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect modified and stating the modifications), stating the dates to which the Base Rent and additional rent have been paid, stating whether or not there exists any defaults by Landlord or Tenant under this lease and, if so, specifying each such default and any other matters reasonably requested by Landlord, Tenant or the Recipient. 57. Holdover In the event Tenant shall hold over for more than sixty (60) days after the expiration of the Term, the parties hereby agree that Tenant's occupancy of the demised premises after the expiration of the Term shall be upon all of the terms set forth in this lease, except Tenant shall pay as use and occupancy charge for the holdover period an amount equal to the higher of (A) an amount equal to one and one-half (1-1/2) times the sum of (i) the pro rata Base Rent payable by Tenant during the last year of the Term and (ii) all monthly installments of additional rent payable by Tenant pursuant to the terms of this lease that would have been billable monthly by Landlord had the Term not expired; or (B) an amount equal to the then market rental value for the demised premises as shall be established by Landlord giving notice to Tenant of Landlord's good faith estimate of such market rental value (such estimate to be subject to challenge by Tenant and in such event, if the parties are unable to agree thereon, the then market rental value for the demised premises shall be established by arbitration). 58. Conditional Limitation In the event that twice in any twelve (12) month period (A) a default of the kind set forth in Section 17(1) shall have occurred or (B) Tenant shall have defaulted in the payment of Base Rent or additional rent, or any part of either, and Landlord shall have commenced a summary proceeding to dispossess Tenant in each such instance, then, notwithstanding that such defaults may have been cured at any time after the commencement of such summary proceeding, any further default by Tenant within such twelve (12) month period shall be deemed to be a violation of a substantial obligation of this lease by Tenant and Landlord may serve a written three (3) day notice of cancellation of this lease upon Tenant and, upon the expiration of said three (3) days, this lease and the Term shall end and expire as fully and completely as if the expiration of such three (3) day period were the day herein definitely fixed for the end and expiration of this lease and the Term and Tenant shall then quit and surrender the demised premises to Landlord, but Tenant shall remain liable as elsewhere provided in this Lease. 59. Limitation on Rent If on the Commencement Date, or at any time during the Term, the Base Rent or additional rent reserved in this lease is not fully collectible by reason of any Federal, State, County or Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street City law, proclamation, order or regulation, or direction of as public officer or body pursuant to law (collectively, "Law"), Tenant agrees to take such steps as Landlord may request to permit Landlord to collect the maximum rents which may be legally permissible from time to time during the continuance of such legal rent restriction (but not in excess of the amounts reserved therefor under this lease). Upon the termination of such legal rent restriction, Tenant shall pay to landlord, to the extent permitted by Law, an amount equal to the additional Base Rent and additional rent which would have been payable by Tenant to Landlord under this Lease during the period such legal rent restriction was in effect had such legal rent restriction not been in effect. 60. Acceptance of Keys If Landlord or Landlord's managing or rental agent accepts from Tenant one or more keys to the demised premises in order to assist Tenant in showing the demised premises for subletting or other disposition or for the performance of work therein for Tenant or for any other purpose, the acceptance of such key or keys shall not constitute an acceptance of a surrender of the demised premises nor a waiver of any of Landlord's rights or Tenant obligations under this lease including, without limitation, the provisions relating to assignment and subletting and the condition of the demised premises. 61. Arbitration (A) In each case in which arbitration is provided for in the Lease, such arbitration shall be conducted as provided in this Article 61. The party desiring such arbitration shall give written notice to that effect to the other party, specifying in said notice the name and address of the person designated to act as arbitrator on its behalf, which arbitrator shall have the qualifications described in the last sentence of this Article 61. Within ten (10) days after the service of such notice, the other party shall give written notice to the first party specifying the name and address of the person designated to act as arbitrator on its behalf, which arbitrator shall have the qualifications described in the last sentence of this Article 61. If the second party fails to so notify the first party of the appointment of its arbitrator, as aforesaid, within or by the time above specified, then appointment of the second arbitrator shall be made in the same manner as hereinafter provided for appointment of a third arbitrator in a case where neither the two arbitrators nor the parties are able to agree upon appointment of a third arbitrator. The arbitrators so chosen shall meet within ten (10) days after the second arbitrator is appointed and if, within fifteen (15) days after the second arbitrator is appointed, such two arbitrators shall not agree upon the question in dispute, each shall make a written determination of the issue being arbitrated and they shall themselves appoint a third arbitrator who shall be a competent and impartial person, which arbitrator shall have the qualifications described in the last sentence of this Article 61; and in the event of their being unable to agree upon such appointment within ten (10) days after the time aforesaid, the third arbitrator shall be selected by the parties themselves if they can agree thereon within a further period of fifteen (15) days. If the parties do not so agree, then Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street either party, on behalf of both, may apply to the American Arbitration Association in New York County or its successor for appointment of such third arbitrator, and the other party shall not raise any question as to the Association's full power and jurisdiction to entertain the application and make the appointment. Such third arbitrator shall select the determination of the one of the initial arbitrators which he considers most correct. The decision of the third arbitrator so chosen shall be given within a period of thirty (30) days after the appointment of such third arbitrator. A decision in which any two arbitrators so appointed and acting hereunder concur or the determination of the third arbitrator shall in all cases be binding and conclusive upon the parties. Each party shall pay the fees and expenses of the one of the two original arbitrators appointed by such party, or in whose stead as above provided, such arbitrator was appointed, and the fees and expenses of the third arbitrator, if any, shall be borne equally by both parties. In the case of any arbitration provided for in this Lease each arbitrator selected shall be engaged in leasing, owning, operating and/or selling commercial office space in the Borough of Manhattan, either as a Landlord, managing agent, broker or a consultant, and shall have been continuously so engaged for at least five (5) years prior to his or her selection. (B) Whenever Tenant alleges that Landlord has acted unreasonably with respect to a matter where arbitration is provided for, Tenant may send a notice to Landlord ("Hearing Notice"), specifying the matter with respect to which it alleges that Landlord has acted unreasonably ("Dispute") and electing to have the dispute resolved by an informal hearing ("Hearing") upon and subject to the terms and conditions hereinafter set forth: (a) The Hearing shall be held at the offices of an individual mutually selected by Landlord and Tenant within five (5) days after receipt of the Hearing Notice or, if the parties cannot so agree on such individual, then such selection shall be made by the then President of the Bar Association of the City of New York, or its successor, or if no such successor, or if such selection is not made within ten (10) days of a request therefor, then by the American Arbitration Association ("Hearing officer"); (b) The Hearing shall be held on the date specified in the Hearing Notice (which shall be no less than seven (7) nor more than ten (10) days after the selection of the Hearing officer ) and pursuant to substantive and procedural rules to be established by the Hearing officer; (c) The determination by the Hearing officer shall be conclusive upon the parties and shall be made within seven (7) days after the Hearing is completed whether or not a judgment of such determination shall be entered in any court; and (d) If Landlord is determined to have acted properly, Tenant shall pay the fees of the Hearing Officer. If Landlord is determined to have acted improperly, Landlord shall pay such fees. Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street 62. Definitions of "Landlord" and "Owner" The terms "Owner" and "Landlord", whenever used in this lease (including, without limitation, in Article 31), shall have the same meaning. 63. Landlord's Contribution (A) Tenant shall submit to Landlord complete and detailed architectural, mechanical and engineering plans and specifications showing the alterations and improvements required by Tenant to the demised premises to prepare the same for Tenant's occupancy ("Tenant's Initial Installation") consistent with the provisions of Article 55. Tenant shall provide Landlord with a copy of the final contract with the general contractor (or, if Tenant is performing Tenant's Initial Installation without a general contractor, then a copy of all contracts relating to Tenant's Initial Installation), which contract(s) shall be certified by Tenant and the general contractor (or contractors) as being true and complete. (B) Subject to the terms and conditions set forth below, Landlord shall reimburse Tenant up to a maximum amount of One Million Two Hundred Ten Thousand and 00/100 ($1,210,000.00) Dollars ("Landlord's Contribution") for costs incurred by Tenant in connection with Tenant's Initial Installation (inclusive of architectural, engineering, legal and other consulting fees, moving expenses, permit fees and interest). Landlord shall disburse from time to time, but not more often than once in any thirty (30) day period, within ten (10) business days of receipt of each Tenant's request, that portion of Landlord's Contribution equal to ninety percent (90%) of the amount set forth in Tenant's requisition, provided, however, that no advance shall be made if and so long as Tenant shall be in default under this lease beyond any applicable notice and cure period. No advance shall be made until receipt of a request therefor from Tenant and the submission by Tenant of the following: (i) A certificate signed by Tenant and Tenant's architect dated not more than fifteen (15) days prior to such request setting forth (a) the sum then justly due to contractors, subcontractors, materialmen, engineers, architects and other persons who have rendered services or furnished materials in connection with Tenant's Initial Installation, (b) a brief description of such services and materials and the amounts paid or to be paid from such requisition to each of such persons in respect thereof, (c) that the work described in the certificate has been completed substantially in accordance with the Final Plans, (d) that there has not been filed with respect to the demised premises or the Building or any part thereof or any improvements thereon, any vendor's, mechanic's, laborer's, materialmen's or other like liens arising out of Tenant's Initial Installation which has not been discharged of record or which Tenant is proceeding with diligence to have discharged of record, and (e) that Tenant has complied with all of the conditions set forth in Articles 3, 54 and 55 of this lease, including the requirement that Tenant comply with all applicable governmental and quasi-governmental laws, rules and regulations; and Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street (ii) Partial lien waivers, paid receipts or such other proof of payment as Landlord shall reasonably require for all work done and material supplied prior to the current requisition. Upon the substantial completion of Tenant's Initial Installation, Landlord shall, upon receipt of all of the foregoing, disburse to Tenant the amount, if any, equal to the amount by which ninety percent (90%) of the portion of Landlord's Contribution for which Tenant has submitted payment requests exceeds the amount of Landlord's Contribution theretofore disbursed. Landlord shall disburse the remaining ten percent (10%) balance of the portion of Landlord's Contribution for which Tenant has submitted payment requests upon receipt of all of the foregoing plus (w) final "as built" plans of the demised premises showing Tenant's Initial Installation, (x) delivery of Building Department filing documents, permits, approvals and Building and Fire Department signoffs, (y) delivery of lien waivers by the general contractor and all major subcontractors involved with the installation, and (z) the completion of an inspection by Landlord confirming that the work set forth in the Final Plans has been completed, which Landlord agrees to conduct within three (3) business days after Tenant's request. Notwithstanding the foregoing, Tenant's right to collect Landlord's Contribution shall exist only with respect to work performed by Tenant during the first twelve (12) months of the Term subject to delays beyond Tenant's control; to the extent not utilized within such period, Landlord's Contribution shall be deemed waived by Tenant and Landlord shall be under no further obligation to make any further payments to Tenant for Landlord's Contribution or otherwise with respect to Tenant's Initial Installation. (C) Notwithstanding anything to the contrary contained in this Article 63, Tenant may defer the 19th Floor portion of Tenant's Initial Installation until Landlord shall have delivered the possession of the entire 19th Floor to Tenant, and Tenant shall be entitled to receive all disbursements of Landlord's Contribution, including the final ten (10%) percent of Landlord's Contribution, even though the 19th Floor portion of Tenant's Initial Installation shall not be complete on the date of Tenant's request therefor. In the event that Tenant does not otherwise expend an amount sufficient to receive the entire amount of Landlord's Contribution, Tenant shall be entitled to apply the remaining balance of Landlord's Contribution to the 19th Floor portion of Tenant's Initial Installation and any request for disbursement in connection therewith may be made within twelve (12) months after the date on which Landlord has delivered possession of the entire 19th Floor to Tenant, subject to delays beyond Tenant's control. 64. Delivery of the 19th Floor Premises (A) Notwithstanding the reference on Page 1 of the sleeve of the Lease to the 19th Floor premises as being part of the Demised Premises, Tenant has been advised, and is fully aware, that the 19th Floor is currently leased to other tenants, as follows: 1. Consumer Graphic Resources (New York), Inc. (3,450 rentable square feet); lease expiration date May 31, 1994 Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street 2. Residential Capital Corp. (1,100 rentable square feet); lease expiration date June 30, 1995 3. Richard L. Purnick (950 rentable square feet); lease expiration date April 30, 1996 (B) Landlord agrees not to renew or extend any of the above captioned leases and to exercise its best efforts to obtain vacant, broom-clean and unencumbered possession of each such applicable space as soon as possible after the date of this Lease and deliver each unit to Tenant as same becomes available. Landlord agrees that, promptly after the date of this Lease, it will attempt to relocate Residential Capital Corp. and Richard L. Purnick within the Building by offering them attractive rents and/or other incentives. In the event that any of the present 19th Floor tenants fails to vacate its space immediately upon the expiration date of its lease (as set forth above), Landlord shall promptly commence holdover proceedings against such tenant(s) and diligently prosecute such proceedings until it obtains vacant, broom-clean and unencumbered possession of such space(s). Landlord shall not consent to any stay or extension of any time in any eviction proceeding(s) it may bring against any such tenant(s), without the prior written consent of Tenant, which consent Tenant agrees not to unreasonably withhold, condition or delay. (i) In the event Landlord is unable to deliver any portion of the 19th Floor premises to Tenant by July 1, 1994, at the request of Tenant, Landlord agrees to make available to Tenant temporary space ("Temporary Space") in the Building of approximately similar size of each unit which Landlord is unable to deliver possession of, for Tenant's use. Tenant shall pay to Landlord for any such Temporary Space rent at the rate of $12.50 per rentable square foot, including electricity, commencing ninety (90) days after actual possession of each such Temporary Space by Tenant, payable on the 1st day of each month. Each such Temporary Space shall be delivered to Tenant in its then "AS IS" condition and Landlord shall not be required to perform any work in connection therewith. (ii) Tenant agrees to, and shall, surrender such Temporary Space to Landlord at such time as Landlord obtains possession of the applicable space on the 19th Floor, demolishes same and completes removal of ACM in said applicable space on the 19th Floor in accordance with the provisions of Article 65. After completion of such work, Landlord shall promptly deliver possession of the applicable space to Tenant. (iii) In the event Landlord is unable to deliver possession of any portion of the 19th Floor premises on or before July 1, 1994, the Base Rent applicable to the 19th Floor premises shall be reduced at the rate of $28.50 per rentable square foot and additional rent in the form of Taxes and Operating Expenses shall be abated, applicable to such portion of the 19th Floor space which Landlord has not been able to deliver possession of to Tenant. The Commencement Date for each space shall be Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street four (4) months from the date possession for each such space is delivered to Tenant (the "19th Floor Commencement Date") and the Base Rent shall be increased at the same rate as the reduction referred to above as of the applicable 19th Floor Commencement Date, except that the Rent Commencement Date of each applicable 19th Floor Premises shall commence six (6) months after each applicable 19th Floor Commencement Date. (iv) Anything herein to the contrary notwithstanding, provided this lease shall be in full force and effect and Tenant shall not be in default of any material provision hereunder beyond any applicable notice and grace period, the Base Rent attributable to the 19th Floor shall abate from the Commencement Date through the date that is one day prior to the Rent Commencement Date, subject to the provisions of subparagraph (B) (iii) above. 65. Landlord's Work (A) Landlord agrees, within fifteen (15) days after the execution and delivery of this Lease to commence to demolish the Demised Premises and complete same and remove all asbestos-containing material ("ACM") therefrom within twenty (20) days thereafter, at Landlord's sole cost and expense and deliver to Tenant the required New York City DEP Form ACP5 in connection with Tenant's Initial Installation in the Demised Premises, executed by a New York City Certified Asbestos Investigator, certifying, with respect to the Demised Premises, either (i) the "surfaces of relevant structure(s) affected by an alteration are free of any known asbestos-containing material ('ACM')", i.e., material containing greater than 1% asbestos by weight or (ii) "cumulative surfaces of relevant structure(s) affected by an alteration contain 10 square feet or less and 25 linear feet or less of friable ACM or of normally nonfriable ACM that alteration may make friable" (neither (i) nor (ii) above shall be deemed to include floor tile or asbestos (ACM) enclosed behind plaster or similar type construction at columns and core areas not impacted by Tenant's construction), so as to enable Tenant to obtain its Building Department permit for Tenant's Initial Installation. (B) If, at any time Tenant discovers ACM materials or products, which would cause the certification described above to be untrue (unless installed by Tenant), Landlord will cause same to be promptly removed, at Landlord's expense. Landlord's sole obligation shall be to remove and dispose of such ACM as set forth above and to provide (i) any necessary fireproofing as required by law at the time of such removal, with reasonable diligence and (ii) the certificate referred to above. Such removal may be performed simultaneously with Tenant's Initial Installation. 66. Expansion Space Option(s) (A) Provided this Lease is then in full force and effect, Tenant shall have the right to lease from Landlord up to four (4) additional full floors, consisting of (i) any two (2) contiguous floors as designated by Landlord of floors 11, 12 and 14, plus (ii) either the 16th and/or 17th floors (collectively, the Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street "Expansion Space"), provided Tenant notifies Landlord of its option with respect to each Expansion Space, in writing, by registered or certified mail, return receipt requested, addressed to Landlord at its offices hereinbefore set forth, time being of the essence, by no later than July 31, 1994. Any such notice shall be deemed irrevocable. (B) Landlord has advised Tenant that the 11th, 12th and 14th floors are currently under lease to other tenants in the Building, whose leases, by their terms, expire on July 31, 1994. (C) In addition, portions of the 16th and 17th floor premises are currently occupied by the following Tenants: I. 16th Floor Premises: a. Classic Travel Service, Inc. (1,285 rentable square feet); lease expiration date 12/31/94; b. Mahandra Sheth (465 rentable square feet); lease expiration date 12/31/94; c. 1,090 vacant rentable square feet facing the 40th Street side of the Building; d. A.W.B., Ltd. (2,660 rentable square feet covering the rear half of the floor); lease expiration date 12/31/97. II. 17th Floor Premises: a. Overnite Transportation Company (2,495 rentable square feet in the front portion of the floor); lease expiration date 3/31/95; b. Brittany Fabrics, Inc. (940 rentable square feet covering the middle portion of the floor); lease expiration date 5/31/94, with one (1) option to extend through May 31, 1996; c. Initial Funding Corp. (2,065 rentable square feet covering the rear portion of the floor); lease expiration date 8/31/2000. (D) Provided Tenant has timely exercised its option to lease the applicable floors referred to in subparagraph (A) above, Landlord agrees to take reasonable efforts to obtain vacant, broom-clean and unencumbered possession of each such applicable space effective after the applicable lease expiration date(s) and deliver each unit to Tenant as same becomes available. In the event that the tenant of any such space fails to vacate its space immediately upon the expiration of its lease, Landlord shall promptly commence holdover proceedings against such tenant(s) and diligently prosecute such proceedings until it obtains vacant, broom-clean and unencumbered possession of such space(s). Upon obtaining possession of any such space, Landlord shall promptly demolish same and deliver to Tenant the ACP Certificates in accordance with the provisions of Article 65. Landlord shall not consent to any stay or extension of any time in any eviction proceeding it may bring against any such tenant(s), without the prior written consent of Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street Tenant, which consent Tenant agrees not to unreasonably withhold, condition or delay. 67. Base Rent Commencement Date, Etc. With Respect to Expansion Space (A) Landlord agree's to deliver possession of each applicable Expansion Space to Tenant promptly after (i) Landlord obtains possession of such Expansion Space from the then existing tenant(s) and (ii) Landlord demolishes such space, removes all ACM therefrom and delivers to Tenant the applicable ACP5 Certificate referred to in Article 65. The Commencement Date of each such applicable Expansion Space shall commence four (4) months after delivery of possession to Tenant and the Rent Commencement Date of each such Expansion Space shall commence six (6) months after each applicable Commencement Date. Except as set forth above, each such Expansion Space shall be delivered to Tenant, vacant, unencumbered, broom-clean and otherwise in their then "as is" condition. (B) If, as and when each Expansion Space shall become part of the Demised Premises, the Base Rent and additional rent per annum then in effect under this Lease shall be increased as to such Expansion Space as of the respective Rent Commencement Dates and the Base Rent step up dates of each Expansion Space shall be at the same rate per rentable square foot and the same dates as is then being charged for the 18th, 19th, 20th, 21st and Penthouse floors, but reduced by the sum of One ($1.00) Dollar per annum per rentable square foot applicable to each floor of Expansion Space or portion thereof, and shall also include the same Base Years and the additional allocable Proportionate Share(s) for purposes of Articles 39 and 40, and the additional allocable Electric Factor. By way of example: If Tenant timely and validly exercises its option to lease the entire 16th Floor Premises effective as of January 1, 1995, the annual Base Rent for the 16th Floor Premises shall be as follows: (a) for the period from January 1, 1995 through and including September 30, 1997 at an annual rate of $151,250.00, (b) for the period from October 1, 1997 through and including September 30, 2001 at an annual rate of $167,750.00 and (c) for the period October 1, 2001 through and including September 30, 2004 at an annual rate of $184,250. The Base Year for Real Estate Taxes and for Operating Expenses shall be calendar year 1995. The parties agree that each floor of Expansion Space (i) contains 5,500 rentable square feet, and (ii) has a Proportionate Share of 5.16% and an Electrical Factor of $13,750. (C) Such leasing shall otherwise be on the same terms and conditions as contained in this Lease for the remainder of the Lease Term herein, except that Tenant shall be allowed a work allowance in the sum of Forty ($40.00) Dollars per rentable square feet for each such rentable square foot of Expansion Space that becomes part of the Demised Premises, same to be payable to Tenant Re: 18th, 19th, 20th, 21st and Penthouse Floors 8 West 40th Street by Landlord in accordance with the terms and provisions of Article 64. 68. Execution of Expansion Space Documents If Tenant exercises its option to lease any such Expansion Space referred to in this Lease, then, Landlord and Tenant shall execute and exchange amendment(s) to this Lease confirming the inclusion of such space in the Demised Premises and the consequent changes in Base Rent and additional rent which are provided above, within thirty (30) days after same are submitted by Landlord ("Landlord's Notice"), in form reasonably acceptable to Landlord and Tenant for such applicable space(s). Failure of Tenant to execute any such documents shall not affect Tenant's obligations hereunder, including Tenant's obligation to pay the Base Rent and additional rent applicable to each such Expansion Space as herein set forth. 69. Stoppage or Suspension of Building Services If (i) any services to be provided to the Demised Premises are not provided (x) for five (5) consecutive Business Days because of a failure of Building systems or any other Building condition due to events arising or causes originating within the Building (and not due to the Tenant's acts, omissions or negligence) or (y) for ten (10) consecutive Business Days because of a failure of Building systems due to events arising or causes originating outside of the Building, and (ii) the Demised Premises or any portion thereof are rendered untenantable thereby, then Base Rent and additional rent shall be abated in proportion to the rentable area rendered untenantable from and after the day following such fifth or tenth Business Day, as the case may be, until such service is restored. For the purposes of this Article 69, if forty (40%) percent of the Demised Premises is rendered untenantable by virtue of the causes referred to in this Article 69 and the Tenant ceases to occupy the entire Demised Premises, then the entire Demised Premises shall be deemed to be untenantable and the Rent shall abate. If the entire Demised Premises is rendered untenantable by virtue of any of the causes referred to in this Article 69 for one hundred eighty (180) consecutive days, the Tenant may terminate this Lease upon thirty (30) days prior written notice given within thirty (30) days after the expiration of such 180-day period. Adjacent Excavation - Shoring 32. If an excavation shall be made upon land adjacent to the demised premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the demised premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the building of which demised premises form a part from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Owner, or diminution or abatement of rent. Rules And Regulations 33. Tenant and Tenant's servants, employees, agents, visitors, and licensees shall observe faithfully, and comply strictly with, the Rules and Regulations and such other and further reasonable Rules and Regulations as Owner or Owner's agents may from time to time adopt. Notice of any additional rules or regulations shall be given to Tenant at least thirty (30) days prior to the proposed implementation date thereof. In case Tenant disputes the reasonableness of any additional Rule or Regulation hereafter made or adopted by Owner or Owner's agents, the parties hereto agree to submit the question of the reasonableness of such Rule or Regulation for decision to the New York office of the American Arbitration Association, whose determination shall be final and conclusive upon the parties hereto. The right to dispute the reasonableness of any additional Rule or Regulation upon Tenant's part shall be deemed waived unless the same shall be asserted by service of a notice, in writing upon Owner within twenty (20) days after the giving of notice thereof. Nothing in this lease contained shall be construed to impose upon Owner any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, as against any other tenant and Owner shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. Estoppel Certification 35. Tenant, at any time, and from time to time, upon at lease 10 days' prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or to any other person, firm or corporation specified by Owner, a statement certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications,) stating the dates to which the rent and additional rent have been paid, and stating whether or not there exists any default by Owner under this Lease, and, if so, specifying each such default. Successors And Assigns: 36. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Owner and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this lease, their assigns. SEE RIDER ANNEXED HERETO AND MADE A PART HEREOF. IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed this lease as of the day and year first above written. 40th ASSOCIATES, Landlord BY: 8 W. 40th CORP., General Partner ------------------------------- Witness For Owner: BY: /s/ SCOTT RESNICK - ---------------------------------- ------------------------------- SCOTT RESNICK, V.P. LONDON FOG CORPORATION, Tenant Witness For Tenant: BY: /s/ ARNOLD P. COHEN - ---------------------------------- ------------------------------- ARNOLD P. COHEN, CHAIRMAN ACKOWLEDGEMENTS CORPORATE OWNER STATE OF NEW YORK, ss.: County of On this ____ day of _______________, 19__, before me presonally came __________________________ to me known, who being by me duly sworn, did depose and say that he resides in _____________________________________ that he is the __________________ of ______________________ the corporation described in and which executed the foregoing instrument, as OWNER: that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. - -------------------------------------------------------------------------------- INDIVIDUAL OWNER STATE OF NEW YORK, ss.: County of On this __________ day of ________________, 19__, before me personally came _______________________________ to me known and known to me to be the individual ___________________________ decribed in and who, as OWNER, executed the foregoing instrument and acknowledged to me that ___________________ he executed the same. - -------------------------------------------------------------------------------- CORPORATE TENANT STATE OF NEW YORK, ss.: County of On this ____ day of _______________, 19__, before me presonally came __________________________, to me known, who being by me duly sworn, did depose and say that he resides in _____________________________________ that he is the __________________ of ______________________ the corporation described in and which executed the foregoing instrument, as TENANT; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. - -------------------------------------------------------------------------------- INDIVIDUAL TENANT STATE OF NEW YORK, ss.: County of On this __________ day of ________________, 19__, before me personally came _______________________________ to me known and known to me to be the individual ___________________________ decribed in and who, as TENANT, executed the foregoing instrument and acknowledged to me that ___________________ he executed the same. - -------------------------------------------------------------------------------- GUARANTY FOR VALUE RECEIVED, and in consideration for, and as an inducement to Owner making the within lease with Tenant, the undersigned guarantees to Owner. Owner's successors and assigns, the full performance and observance of all the covenants, conditions and agreements, therein provided to be performed and observed by Tenant, including the "Rules and Regulations" as therein provided, without requiring any notice of non-payment, non-performance, or non-observance, or proof, or notice, or demand, whereby to charge the undersigned therefor, all of which the undersigned hereby expressly waives and expressly agrees that the validity of this agreement and the obligations of the guarantor hereunder shall in no wise be terminated, affected or impaired by reason of the assertion by Owner against Tenant of any of the rights or remedies reserved to Owner pursuant to the provisions of the within lease. The undersigned further covenants and agrees that the guaranty shall remain and continue in full force and effect as to any renewal, modification or extension of this lease and during any period when Tenant is occupying the premises as a "statutory tenant." As a further inducement to Owner to make this lease and in consideration thereof, Owner and the undersigned covenant and agree that in any action or proceeding brought by either Owner or the undersigned against the other on any matters whatsoever arising out of, under, or by virtue of the terms of this lease or of this guarantee that Owner and the undersigned shall and do hereby waive trial by jury. Dated 19 ------------------ ---- Guarantor -------------------------- Witness ---------------------------- Guarantor's Residence Business Address Firm Name STATE OF NEW YORK ) ss.: COUNTY OF ) On this day of , 19 , before me personally came to me known and known to me to be the individual described in, and who executed the foregoing Guaranty and acknowledged to me that he executed the same. ------------------------------ Notary IMPORTANT PLEASE READ RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF THIS LEASE IN ACCORDANCE WITH ARTICLE 33. 1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibles, stairways, corridors or halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than for ingress or egress from the demised premises and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Owner. There shall not be used in any space, or in the public hall of the building, either by any Tenant or by jobbers or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and sideguards. If said premises are situated on the ground floor of the building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk and curb in front of said premises clean and free from ice, snow, dirt and rubbish. 2. The water and wash closets and plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose clerks, agents, employees or visitors, shall have caused it. 3. No carpet, rug or other article shall be hung or shaken out of any window of the building; and no Tenant shall sweep or throw or permit to be swept or thrown from the demised premises any dirt or other substances into any of the corridors or halls, elevators, or out of the doors or windows or stairways of the building and Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the demised premises, or permit or suffer the demised premises to be occupied or used in a manner offensive or objectionable to Owner or other occupants of the building by reason of noise, odors, and/or vibrations, or interfere in any way with other Tenants or those having business therein, nor shall any animals or birds be kept in or about the building. Smoking or carrying lighted cigars or cigarettes in the elevators of the building is prohibited. 4. No awnings or other projections shall be attached to the outside walls of the building without the prior written consent of Owner. 5. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any Tenant on any part of the outside of the demised premises or the building or on the inside of the demised premises if the same in visible from the outside of the premises without the prior written consent of Owner, except that the name of Tenant may appear on the entrance door of the premises. In the event of the violation of the foregoing by any Tenant, Owner may remove same without any liability, and may charge the expense incurred by such removal to Tenant or Tenants violating this rule. Interior signs on doors and directory tablet shall be inscribed, painted or affixed for each Tenant by Owner at the expense of such Tenant, and shall be of a size, color and style acceptable to Owner. 6. No Tenant shall mark, paint, drill into, or in any way deface any part of the demised premises or the building of which they form a part. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Owner, and as Owner may direct. No Tenant shall lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the demised premises, and, if linoleum or other similar floor covering is desired to be used an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of comment or other similar adhesive material being expressly prohibited. 7. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any Tenant, nor shall any changes be made in existing locks or mechanism thereof. Each Tenant must, upon the termination of his Tenancy, restore to Owner all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to Owner the cost thereof. 8. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the premises only on the freight elevators and through the service entrances and corridors, and only during hours and in a manner approved by Owner. Owner reserves the right to inspect all freight to be brought into the building and to exclude from the building all freight which violates any of these Rules and Regulations of the lease or which these Rules and Regulations are a part. 9. Canvassing, soliciting and peddling in the building is prohibited and each Tenant shall cooperate to prevent the same. 10. Owner reserves the right to exclude from the building between the hours of 6 P.M. and 8 A.M. and at all hours on Sundays, and legal holidays all persons who do not present a pass to the building signed by Owner. Owner will furnish passes to persons for whom any Tenant requests same in writing. Each Tenant shall be responsible for all persons for whom he requests such pass and shall be liable to Owner for all acts of such persons. 11. Owner shall have the right to prohibit any advertising by any Tenant which in Owner's opinion, tends to impair the reputation of the building or its desirability as a as a building for offices, and upon written notice from Owner, Tenant shall refrain from or discontinue such advertising. 12. Tenant shall not bring or permit to be brought or kept in or on the demised premises, any inflammable, combustible or explosive fluid, material, chemical or substance, or cause or permit any odors of cooking or other processes, or any unusual or other objectionable odors to permeate in or emanate from the demised premises. 13. If the building contains central air conditioning and ventilation, Tenant agrees to keep all windows closed at all times and to abide by all rules and regulations issued by the Owner with respect to such services. If Tenant requires air conditioning or ventilation after the usual hours, Tenant shall give notice in writing to the building superintendent prior to 3:00 P.M. in the case of services required on week days, and prior to 3:00 P.M. on the day prior in the case of after hours service required on weekends or on holidays. 14. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky matter, or fixtures into or out of the building without Owner's prior written consent. If such safe, machinery, equipment, bulky matter or fixtures requires special handing, all work in connection therewith shall comply with the Administrative Code of the City of New York and all other laws and regulations applicable thereto and shall be done during such hours as Owner may designate. EX-10.9 17 EXHIBIT 10.9 40TH ASSOCIATES 110 East 59th Street o New York. New York 10022 o (212) 421-1300 August 11, 1994 London Fog Corporation 1332 London Town Boulevard Eldersberg, Maryland 21784-5399 Re: Lease dated May 4, 1994 ("Lease") between 40th Associates ("Landlord") and London Fog, Corporation ("Tenant") 18th, 19th, 20th, 21st & Penthouse Floors ("Demised Premises") 8 West 40th Street, New York, NY ("Building") and Leasing of 11th, 12th and 15th Floors Gentlemen: IT IS HEREBY AGREED by and between the parties hereto as follows: 1. Tenant has timely exercised its option to lease the 11th and 12th Floors in the Building in accordance with the provisions of Article 66 of the above captioned Lease and that such 11th and 12th Floor Premises shall be deemed incorporated into the Demised Premises in accordance with the terms and provisions of Articles 66 and 67 of the Lease. IT IS HEREBY FURTHER AGREED by and between the parties hereto that the above captioned Lease shall be deemed amended as follows: 2. (a) Reference in Article 66 of the Lease to the 16th and/or 17th floors shall be deemed deleted and of no further force and effect. (b) In lieu thereof, the parties agree that the 15th floor ("15th Floor Premises") shall be deemed incorporated into the Demised Premises as an Expansion Space as if Tenant had timely exercised its option to lease the 15th Floor Premises and said 15th Floor Premises were originally incorporated into Article 66 of the Lease in lieu of the 16th and/or 17th floors. All of the terms and provisions set forth in Articles 66 and 67 of the Lease, including, but not limited to the same rate of Base Rent, additional rent, Base Rent step up dates and amounts, rentable square feet, Proportionate Share and Electric Factor to be allocated to the 15th Floor Premises and any other applicable London Fog Corporation August 11 , 1994 Page # 2 provisions of the Lease relating thereto shall apply to the 15th Floor Premises. (c) Article 66(C) of the Lease shall be changed to read as follows: "In addition, portions of the 15th Floor Premises are currently occupied by the following tenants: "(i) Katsu Kawasaki, Inc. (4,630 rentable square feet); lease expiration date 12/31/96; "(ii)Accommodations, Inc. (870 rentable square feet); lease expiration date 12/31/96." (d) Landlord agrees not to renew or extend any of the above captioned leases and to exercise its best efforts to obtain vacant, broom-clean and unencumbered possession of each such applicable space as soon as possible after the date of this Lease Amendment Agreement ("Agreement") and deliver each unit to Tenant as same becomes available. Landlord agrees that, promptly after the date of this Agreement, it will attempt to either relocate Katsu Kawasaki, Inc. and Accommodations, Inc. within the Building by offering them attractive rents and/or other incentives or, in the alternative, to cancel and terminate their leases. In the event any of the present 15th Floor tenants fail to vacate their respective space(s) immediately upon the expiration date of their lease(s) (as set forth above), Landlord shall promptly commence holdover proceedings against such tenant(s) and diligently prosecute such proceedings until it obtains vacant, broom-clean and unencumbered possession of such space(s). Landlord shall not consent to any stay or extension of any time in any eviction proceeding(s) it may bring against any such tenant(s), without the prior written consent of Tenant, which consent Tenant agrees not to unreasonably withhold, condition or delay. (i) In the event Landlord is unable to deliver any portion of the 15th Floor Premises to Tenant by January31, 1995, at the request of Tenant, Landlord agrees to make available to Tenant temporary space ("Temporary Space") in the Building, of approximately similar size to each unit which Landlord is unable to deliver possession of, London Fog Corporation August 11, 1994 Page #3 for Tenant's use, provided Tenant notifies Landlord by the later of January31, 1995 or within fifteen (15) days after Landlord notifies Tenant of its failure to obtain possession from either or both of the existing 15th Floor tenants, of its intention to take such Temporary Space. Tenant shall pay to Landlord for any such Temporary Space, rent at the rate of $12.50 per rentable square foot, including electricity, commencing ninety (90) days after actual possession of each such Temporary Space by Tenant, payable on the 1st day of each month. Each such Temporary Space shall be delivered to Tenant in its then "AS IS" condition and Landlord shall not be required to perform any work in connection therewith. (ii) Tenant agrees to, and shall, surrender such Temporary Space to Landlord at such time as Landlord obtains possession of the applicable space on the 15th Floor, demolishes same and completes removal of ACM in said applicable space on the 15th Floor in accordance with the provisions of Article 65 of the Lease. After completion of such work, Landlord shall promptly deliver possession of said applicable space to Tenant. (e) There shall deemed deleted from Article 66(D) of the Lease, the first two (2) lines thereof. (f) Reference to "(See ARTICLE 62") in the first Witnesseth clause on Page 1 of the sleeve of the Lease shall be changed to read "(See ARTICLE 64"). (g) Reference on the second and third lines of the second paragraph of Article 67(B) to the 16th Floor Premises shall be changed to read the 15th Floor Premises. 3. Landlord agrees that Tenant shall be permitted, at its sole cost and expense, to have a lobby director or starter, with an identifying uniform, subject to complying with the Building's union requirements and Landlord's reasonable regulations. 4. Tenant shall be permitted signage on the south lobby wall in the Building, subject to Landlord's prior written approval. London Fog Corporation August 11, 1994 Page #4 5. Tenant represents that it has dealt with no broker in connection with the negotiations for the execution of this Agreement other than Julien J. Studley, Inc. and Landlord agrees to pay said Broker its commission pursuant to separate agreement. 6. This Agreement shall not be binding upon the parties unless and until it has been executed by both parties. 7. Except as set forth above, all of the other terms and provisions set forth in the above captioned Lease shall continue to remain in full force and effect. 40TH ASSOCIATES, Landlord By: 8 W. 40th Corp., Genera1 Partner By: /s/ ----------------------- THE FOREGOING IS CONSENTED AND AGREED TO LONDON FOG CORPORATION, By:/s/ -------------------------------- Name: Title: President Date: 8-11-94 EX-10.10 18 EXHIBIT 10.10 ASSIGNMENT AND ASSUMPTION OF LEASE The parties agree as follows: Date: As Of May 31, 1995 Parties: Assignor: London Fog Corporation Address: 8 West 40Th Street New York, NY 10018 Assignee: London Fog Industries, Inc. 1332 Londontown Boulevard, Eldersburg, Maryland 21784 If there are more than one Assignor or Assignee, the words "Assignor" and "Assignee" shall include them. Assigned: lease The Lease which is assigned herein is indentified as follows: Landlord 40Th Associates Tenant London Fog Corporation Date May 4, 1994 Premises: Floors 11,12,15,18,19,20,21 And * As Amended Mezzanine at 8 West 40Th Street New York, NY 10018 Consideration: Assignor has received One ($1.00) dollars and other good and valuable consideration for this Assignment. Assignment: Assignor assigns to the Assignee all the Assignor's right, title and interest in a) the Lease and b) the security deposit, if any, stated in the Lease. Assumption: Assignee agrees to pay the rent promptly and perform all of the terms of the Lease as of the date of this Assignment. Assignee assumes full responsibility for the Lease as if Assignee signed the Lease originally as Tenant. Indemnity: Assignee agrees to indemnify and hold Assignor harmless from any legal actions, damages and expenses including legal fees that the Assignor may incur arising out of the Lease. Benefit to landlord: Assignee agrees that the obligations assumed shall benefit the landlord named in the Lease as well as the Assignor. Assignor's statements: Assignor states that Assignor has the right to assign this Lease and that the premises are free and clear of any judgements, executions, liens, taxes and assessments. Assignee's statement: Assignee states that Assignee has read the Lease and has received the original or an exact copy of the Lease. Successors: This assignment is binding on all parties who lawfully succeed to the rights or take the place of the Assignor or Assignee. Margin Headings: The margin headings are for convenience only. Signatures: The Assignor and Assignee have signed this Assignment as of the date at the top of the first page. ASSIGNOR London Fog Corporation By:/s/ C. William Crain, President --------------------------------- Witness ASSIGNEE /s/ London Fog Industries, Inc. - ---------------------------------- By:/s/ C. William Crain, President Secretary --------------------------------- STATE OF COUNTY OF On the day of 19 , before me personally came to me known to be the individual described in and who executed the foregoing instrument, and acknowledged that executed the same. STATE OF NEW YORK COUNTY OF NEW YORK On the 6th day of July 1995 , before me personally came C. William Crain to me known who, being by me duly sworn, did depose and say that he resides at No. 10 Nutmeg Drive, Greenwich, CT; that he is the President and COO of London Fog Corporation and London Fog Industries, the corporations 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 so affixed by order of the board of directors of said corporation, and that he signed his name thereto by like order. /s/ RICHARD I. JANVEY --------------------- RICHARD I. JANVEY NOTARY PUBLIC, State of New York NO. 31-4650223 Qualified in New York County Commission Expires August 31, 1995 STATE OF NEW YORK COUNTY OF NEW YORK On the 6th day of July 1995 , before me personally came Stuart B. Fisher the subscribing witness to the foregoing instrument, with whom I am personally acquainted, who, being by me duly sworn, did depose and say that he resides at No. 285 Riverside Drive, New York, NY; that he knows C. William Crain to be the individual described in and who executed the foregoing instrument; that he, said subscribing witness, was present and saw execute the same; and that he, said witness, at the same time subscribed his name as witness thereto. /s/ RICHARD I. JANVEY --------------------- RICHARD I. JANVEY NOTARY PUBLIC, State of New York NO. 31-4650223 Qualified in New York County Commission Expires August 31, 1995 EX-10.11 19 EXHIBIT 10.11 OFFICE BUILDING LEASE TABLE OF CONTENTS PAGE ---- Article 1 LEASE OF PREMISES 3 Article 2 DEFINITIONS 3 Article 3 EXHIBITS AND ADDENDA 4 Article 4 DELIVERY OF POSSESSION 4 Article 5 RENT 5 Article 6 INTEREST AND LATE CHARGE 6 Article 7 SECURITY DEPOSIT 6 Article 8 TENANT'S USE OF THE PREMISES 6 Article 9 SERVICES AND UTILITIES 6 Article 10 CONDITION OF THE PREMISES 7 Article 11 CONSTRUCTION, REPAIRS AND MAINTENANCE 7 Article 12 ALTERATIONS AND ADDITIONS 8 Article 13 LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY 9 Article 14 RULES AND REGULATIONS 9 Article 15 CERTAIN RIGHTS RESERVED BY LANDLORD 9 Article 16 ASSIGNMENT AND SUBLETTING 10 Article 17 HOLDING OVER 11 Article 18 SURRENDER OF PREMISES 1l Article 19 DESTRUCTION OR DAMAGE 11 Article 20 EMINENT DOMAIN 12 Article 21 INDEMNIFICATION 12 Article 22 TENANT'S INSURANCE 13 Article 23 WAIVER OF SUBROGATION 14 Article 24 SUBORDINATION AND ATTORNMENT 14 Article 25 TENANANT ESTOPPEL CERTIFICATES 14 ARTICLE 26 TRANSFER OF LANDLORD'S INTEREST 14 Article 27 DEFAULT 15 Article 28 BROKERAGE FEES 16 Article 29 NOTICES 17 Article 30 GOVERNMENT ENERGY OR UTILITY CONTROLS 17 Article 31 RELOCATION OF PREMISES 17 Article 32 QUIET ENJOYMENT 17 Article 33 OBSERVANCE OF LAW 17 Article 34 FORCE MAJEURE' 17 Article 35 CURING TENANTS DEFAULT 18 Article 36 SIGN CONTROL 18 Article 37 HAZARDOUS WASTE 18 Article 38 MISCELLANEOUS 19 Article 39 OPTION TO EXTEND LEASE TERM 20 ACKNOWLEDGMENT OF LESSOR 22 ACKNOWLEDGMENT OF LESSEE (CORPORATE) 23 EXHIBIT A - FLOOR PLAN OF PREMISES 24 EXHIBIT B - LEGAL DESCRIPTION 25 EXHIBIT C - WORK LETTER 26 EXHIBIT D - RULES AND REGULATIONS 30 2 OFFICE BUILDING LEASE This Lease between The Bartell Drug Company ("Landlord"), and Pacific Trail, Inc. ("Tenant") is dated August 23, 1994 1. LEASE OF PREMISES. In consideration of the Rent (as defined at Section 5.4) and the provisions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises shown by diagonal lines on the floor plan attached hereto as Exhibit "A," and further described at Section 2.1. The Premises are located within the Building and Project described in Section 2m. Tenant shall have the non-exclusive right (unless otherwise provided herein) in common with Landlord, other tenants, subtenants and invitees to use the Common Areas (as defined at Section 2e). 2. DEFINITIONS As used in this Lease, the following terms shall have the following meanings: a. Base Rent: $ 329,657.51 per year b. Base Year: The calendar year of 1995 c. Brokers: Landlord's: Chiles & Company, Inc./Donoghue & Associates Tenant's: Cushman and Wakefield d. Commencement Date: March 1, 1995 e. Common Areas: the building lobbies, common corridors and hallways, common area restrooms and parking areas, stairways, elevators and other generally understood public or common areas. Landlord shall have the right to regulate or restrict the use of the Common Areas. f. Expense Stop: S NONE (No Pass Through Expenses) g. Expiration Date: 2/29/2000, unless otherwise sooner terminated or extended. h. Index (section 5.2): United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Consumers, Seattle Washington Average, Subgroup "All Items" i. Landlord's Mailing Address: (Rent Remittance) The Bartell Drug Company 4727 Denver Avenue South Seattle, WA 98134 (All other Correspondence and Documentation) Chiles & Company, Inc. 70l Fifth Avenue 670l Columbia Seafirst Center Seattle, WA 98104 3 TENANT'S MAILING ADDRESS: COPY TO: Mike Green Mark Goldstone, Esq., General Counsel Pacific Trail, Inc.- London Fog Industries 1310 Mercer Street 1332 Londontown Boulevard Seattle, WA 98109 Eldersburg, MD 21784-2395 j. Monthly Installments of Base Rent: $27,471.46 per month for first 12 months (one month free rent credited at the twelfth month) k. Parking: Tenant shall be permitted to park up to 35 cars, $40/uncovered, $50/covered-rental for one year only, and market rate thereafter-on a non-exclusive basis in the area(s) designated by Landlord for parking. Tenant shall abide by any and all parking regulations and rules established from time to time by Landlord or Landlord's parking operator. 1. Premises: That portion of the Building containing approximately 17,563 square feet of Rentable Area, shown by diagonal lines on Exhibit "A," located on the 1st & 2nd floor(s) of the Building and known as Suite 200 and Suite 100. m. Project: The building of which the Premises are a great part (the "Building") and any other buildings or improvement on the real property (the "Property'), excluding marina, located at 1700 Westlake Avenue North - Seattle, WA and further described as Exhibit "B". The Project is known as THE LAKE UNION BUILDING. n. Rentable Area: As to both the Premises and the Project, the respective measurements of floor area as may from time to time be subject to lease by Tenant and all tenants of the Project, respectively, as determined by Landlord and applied on a consistent basis throughout the Project. o. Security Deposit (Article 7): $ WAIVED p. State: The State of Washington. q. Tenant's Adjustment Date (Section 5.2): The first day of the calendar month following the Commencement Date plus 12 months. r. Tenant's Use Clause (Article 8): General office space, design, administration, and sample apparel making. s. Term: The Period commencing on the Commencement Date and expiring at midnight on the Expiration Date. 3. EXHIBITS AND ADDENDA. The exhibits and addenda listed below (unless lined out) are incorporated by reference in this Lease. a. Exhibit "A" - Floor Plan showing the Premises. b. Exhibit "B" - Legal Description. c. Exhibit "C' - Work Letter. d. Exhibit "D"- Rules and Regulations. 4. DELIVERY OF POSSESSION. If for any reason Landlord does not deliver possession of the Premises to Tenant on the Commencement Date, Landlord shall not be subject to any liability for such failure, the Expiration Date shall not change and the validity of this Lease shall not be impaired, but Rent shall be abated until delivery of possession. "Delivery of possession" shall 4 be deemed to occur on the date Landlord completes Landlord's Work as defined in Exhibit "C." If Landlord permits Tenant to enter into possession of the Premises before the Commencement Date, such possession shall be subject to the provisions of this Lease, including, without limitation, the payment of Rent. 5. RENT 5.1 Payment of Base Rent. Tenant agrees to pay the Base Rent for the Premises. Tenant shall pay Landlord the first month's Base Rent when Tenant executes the Lease. 5.2 ADJUSTED BASE RENT. a. The Base Rent (and the corresponding Monthly Installment of Base Rent) set forth at Section 2a shall be adjusted annually (the "Adjustment Date"), commencing on Tenant's Adjustment Date. Adjustments, if any, shall be based upon increases (if any) in the index, and shall not exceed 5% for any annual adjustment. The index in publication three (3) months before the Commencement Date shall be the "Base Index." The index in publication three (3) months before each Adjustment Date shall be the "Comparison Index." As of each Adjustment Date, the Base Rent payable during the ensuing twelve-month period shall be determined by increasing the Base Rent by a percentage equal to or less than the Comparison Index for the preceding Adjustment Date (or the Base Index) the Base Rent for the ensuing twelve-month period shall remain the amount of the Base Rent payable during the preceding twelve-month period. When the Base Rent payable as of each Adjustment Date is determined, Landlord shall promptly give Tenant written notice of such adjusted Base Rent and the manner in which it was computed. The Base Rent as so adjusted from time to time shall be the "Base Rent" for all purposes under this Lease. b. If at any Adjustment Date the index no longer exists in the form described in this Lease, Landlord may substitute any substantially equivalent official index published by the Bureau of Labor Statistics or its successor. Landlord shall use any appropriate conversion factors to accomplish such substitution. The substitute index shall then become the "index" hereunder. 5.3 Definition of Rent. All costs and expenses which Tenant assumes or agrees to pay to Landlord (other than base rent) under this Lease shall be deemed additional rent (which, together with the Base Rent is sometimes referred to as the "Rent"). The Rent shall be paid to The Bartell Drug Company (or other person) and at such place, as Landlord may from time to time designate in writing, without any prior demand therefore and without deduction or offset, in lawful money of the United States of America. 5.4 Rent Control. If the amount of Rent or any other payment due under this Lease violates the terms of any government restrictions on such Rent or payment, then the Rent or payment due during the period of such restrictions shall be the maximum amount allowable under those restrictions. Upon termination of the restrictions, Landlord shall, to the extent it is legally permitted, recover from the Tenant the difference between the amounts received during the period of the restrictions and the amounts Landlord would have received had there been no restrictions. 5.5 Taxes Payable by Tenant. In addition to the Rent and any other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes payable by Landlord (other than net income taxes) which are not otherwise reimbursable under this Lease, whether or not now customary or within the contemplation of the parties, where such taxes are upon, measured by or reasonably attributable to (a) the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises, or the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, other than Building Standard Work made by Landlord, regardless of whether title to such improvements performed after initial occupancy is held by Tenant or Landlord; (b)the gross or net Rent payable under this Lease, including, without limitation, any rental or gross receipts tax levied by any taxing authority 'with respect to the receipt of the Rent hereunder; (c) the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (d) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. If it becomes unlawful for Tenant to reimburse Landlord for any costs as required under this Lease, the Base Rent shall be revised to net Landlord the same net Rent after imposition of any tax or other charge upon Landlord as would have been payable to Landlord but for the reimbursement being unlawful. 5 6. INTEREST AND LATE CHARGES If Tenant fails to pay when due Rent or other amounts or charges which Tenant is obligated to pay under the terms of this Lease, the unpaid amounts shall bear interest at the maximum rate then allowed by law. Tenant acknowledges that the late payment of any Monthly Installment of Base Rent will cause Landlord to lose the use of that money and incur costs and expenses not contemplated under this Lease, including without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, in addition to interest, if any such installment is not received by, Landlord within ten (10) days from the date it is due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of such installment. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. Acceptance of any interest or late charge shall not constitute a waiver of Tenant's default with respect to such nonpayment by Tenant nor prevent Landlord from exercising any other rights or remedies available to Landlord under this Lease. 7. SECURITY DEPOSIT. (Paragraph deleted) 8. TENANT'S USE OF THE PREMISES. Tenant shall use the Premises solely for purposes of general office space, administration, design and apparel sample making. Tenant shall not use or occupy the Premises in violation of law or any covenant, condition or restriction affecting the Building or Project or the certificate of occupancy issued for the Building or Project, and shall, upon notice from Landlord, immediately discontinue any use of the Premises which is declared by any governmental authority having jurisdiction to be a violation of law or of occupancy. Tenant, at Tenant's own cost and expense, shall comply with all laws, ordinances, regulations, rules and/or any directions of any governmental agencies or authorities having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or its use or occupation. A judgment of any court of competent jurisdiction or the admission by Tenant in any action or proceeding against Tenant that Tenant has violated any such laws, ordinances, regulations, rules and/or any directions of any governmental agencies or authorities having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or its use or occupation. A judgment of any court of competent jurisdiction or the admission by Tenant in any action or proceeding against Tenant that Tenant has violated any such laws, ordinances, regulations, rules and/or directions in the use of the Premises shall be deemed to be a conclusive determination of that fact as between Landlord and Tenant. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any fire, extended coverage or other insurance policy covering the Building or Project and/or property located therein, and shall comply with all rules, orders, regulations, requirements and recommendations of the Insurance Services Office or any other organization performing a similar function. Tenant shall promptly upon demand reimburse Landlord for any additional premium charged for such policy by reason of Tenant's failure to comply with the provisions of this Article. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or Project or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. 9. SERVICES AND UTILITIES. Provided that Tenant is not in default hereunder, Landlord agrees to furnish to the Premises during generally recognized business days, and during hours determined by Landlord in its sole discretion, and subject to the Rules and Regulations of the Building or Project, electricity for normal desk top office equipment and normal copying equipment, and heating, ventilation and air conditions ("HVAC") as required in Landlord's judgment for the comfortable use and occupancy of the Premises. If Tenant desires HVAC at any other time, Landlord shall use reasonable efforts to furnish such service upon reasonable notice from Tenant and Tenant shall pay Landlord's charges therefore on demand. Landlord shall also maintain and keep lighted the common stairs, common entries and restrooms in the Building. Landlord shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the Rent be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) failure to furnish or delay in furnishing any such services where such failure or delay is caused by accident or any condition or event beyond the reasonable control of Landlord, or by the making of necessary repairs or improvements to the Premises, Building or Project, or (iii) the limitation, curtailment or rationing of, or restrictions on, use of water, electricity, gas or any other 6 form of energy serving the Premises, Building or Project. Landlord shall not be liable under any circumstances for a loss of or injury to property or business, however occurring, through or in connection with or incidental to failure to furnish any such services. If Tenant uses heat generating machines or equipment in the Premises which affect the temperature otherwise maintained by HVAC system, Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation, operation and maintenance thereof shall be paid by Tenant to Landlord upon demand by Landlord. Tenant shall not, without the written consent of Landlord, use any apparatus or device in the Premises, including without limitation, electronic data processing machines, punch card machines, or machines using in excess of 120 volts, which consumes more electricity than is usually furnished or supplied for the use of premises as general office space as determined by Landlord. Tenant shall not connect any apparatus with electric current except through existing electrical outlets in the Premises. Tenant shall not consume water or electric current in excess of that usually furnished or supplied for the use of premises as defined in paragraph 8(as determined by Landlord), without first procuring the written consent of Landlord, which Landlord may refuse, and in the event of consent, landlord may have installed a water meter or electrical current meter in the Promises to measure the amount of water or electric current consumed. The cost of any such meter and of its installation, maintenance and repair shall be paid for by the Tenant and Tenant agrees to pay to Landlord promptly upon demand for all such water and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility plus any additional expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not installed, the excess cost for such water and electric current shall be established by an estimate made by a utility company or electrical engineer hired by Landlord at Tenant's expense. Nothing contained in this Article shall restrict Landlord's right to require at any time separate metering of utilities furnished to the Premises. In the event utilities are separately measured, Tenant shall pay promptly upon demand for all utilities consumed at utility rates charged by the local public utility plus any additional expense incurred by Landlord in keeping account of the utilities so consumed. Tenant shall be responsible for the maintenance and repair of any such meters at its sole cost. Landlord shall furnish elevator service, lighting replacement for building standard lights, restroom supplies, window washing and janitor services in a manner that such services are customarily furnished to comparable office buildings in the area. 10. CONDITION OF THE PREMISES. Tenant's taking possession of the Premises shall be deemed conclusive evidence that as of the date of taking possession the Premises are in good order and satisfactory conditions, except for such matters as to which Tenant gave Landlord notice on or before the Commencement Date. No promise of Landlord to alter, remodel, repair or Improve the Premises, the Building or the Project and no representation, express or implied, respecting any matter or thing relating to the Premises, Building, Project or this Lease (including, without limitation, the condition of the Premises, the Building or the Project) have been made to Tenant by Landlord or its Broker or Sales Agent, other than as may be contained herein or in a separate exhibit or addendum signed by Landlord and Tenant. 11. CONSTRUCTION, REPAIRS AND MAINTENANCE. a. Landlord's Obligations. Landlord shall perform Landlord's Work to the Premises as described in Exhibit "C." Landlord shall maintain in good order, condition, and repair the Building and all other portions of the Premises not the obligation of Tenant or of any other tenant in the Building. b Tenant's Obligations. (1) Tenant shall perform Tenant's Work to the Premises as described in working drawings such as cables, telephone installation, wiring(non-electrical) and the like. (2) Tenant at Tenant's sole expense shall, except for services furnished by Landlord pursuant to Article 9 hereof, maintain the Premises in good order, condition and repair, including the interior surfaces of the ceilings, walls and floors, all doors, all interior windows, all plumbing, pipes and fixtures, electrical wiring, switches and fixtures, Building Standard furnishings and special items and equipment installed by or at the expense of Tenant. 7 (3) Tenant shall be responsible for all repairs and alterations in and to the Premises, Building and Project and the facilities and systems thereof, the need for which arises out of (i) Tenant's use or occupancy of the Premises, (ii) the installation, removal, use or operation of Tenant's Property (as defined in Article 13) in the Premises, (iii) the moving of Tenant's Property into or out of the Building, or (iv) the act, omission, misuse or negligence of Tenant, its agents, contractors employees or invitees. (4) If Tenant fails to maintain the Premises in good order, conditions and repair, Landlord shall give Tenant notice to do such acts as are reasonably required to so maintain the Premises. If Tenant fails to promptly commence such work and diligently prosecute it to completion, then Landlord shall have the right to do such acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord shall be paid by Tenant promptly after demand with interest at the prime commercial rate then being charged by Bank of America NT&SA plus 2 percent (2%) per annum, from the date of such work, but not to exceed the maximum rate then allowed by law. Landlord shall have no liability to Tenant for any damage, inconvenience, or interference with the use of the Premises by Tenant as a result for performing any such work. c. Compliance With Law. Landlord and Tenant shall each do all acts required to comply with all applicable laws, ordinances, and rules of any public authority relating to their respective maintenance obligations as set forth herein. d. Waiver by Tenant. Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford the Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair. e. Load and Equipment Limits. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry, as determined by Landlord or Landlord's structural engineer. The cost of any such determination made by Landlord's structural engineer shall be paid for by Tenant upon demand. Tenant shall not install Business machines or mechanical equipment which cause noise or vibration to such a degree as to be objectionable to Landlord or other Building tenants. f. Except as otherwise expressly provided in this Lease, Landlord shall have no liability to Tenant nor shall Tenant's obligations under this Lease be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted by this Lease or by any other tenant's lease or required by law to make in or to any portion of the Project, Building or the Premises. g Tenant shall give Landlord prompt notice of any damage to or defective condition in any part or appurtenance of the Building's mechanical, electrical, plumbing, HVAC or other systems serving, located in, or passing through the Premises. h. Upon the expiration or earlier termination of this Lease, Tenant shall return the Premises to Landlord clean and in the same condition as on the date Tenant took possession, except for normal wear and tear. Any damage to the Premises, including any structural damage, resulting from Tenant's use or from the removal of Tenant's fixtures, furnishings and equipment pursuant to Section 13b shall be repaired by Tenant at Tenant's expense. 12. ALTERATIONS AND ADDITIONS. a. Tenant shall not make any additions, alterations or improvements to the Premises without obtaining the prior written consent of Landlord. Landlord's consent may be conditioned on Tenant's removing any such additions, alterations or improvements upon the expiration of the Term and restoring the Premises to the same condition as on the date Tenant took possession. All work with respect to any addition, alteration or improvement shall be done in a good and workmanlike manner by properly qualified and licensed personnel approved by Landlord, and such work shall be diligently prosecuted to completion. Landlord may, at Landlord's option, require that any such work be performed by landlord's contractor, in which case 8 the cost of such work shall be paid for before commencement of the work. Tenant shall pay to landlord upon completion of any such work by Landlord's contractor, the cost of the work. b. Tenant shall pay the costs of any work done on the Premises pursuant to Section 12a and shall keep the Premises, Building and Project free and clear of liens of any kind. Tenant shall indemnify, defend against and keep Landlord free and harmless from all liability, loss, damage, costs, attorneys' fees and any other expense incurred on account of claims by any person performing work or furnishing materials or supplies for Tenant or any person claiming under Tenant. Tenant shall keep Tenant's leasehold interest, and any additions or improvements which are or become the property of Landlord under this Lease, free and clear of all attachment or judgment liens. Before the actual commencement of any work for which a claim or lien may be filed, Tenant shall give Landlord notice of the intended commencement date a sufficient time before that date to enable Landlord to post notices of non-responsibility or any other notices which Landlord deems necessary, for the proper protection of Landlord's interest in the Premises, Building or the Project, and Landlord shall have the right to enter the Premises and post such notices at any reasonable time. c. Landlord may require, at Landlord's sole option, that Tenant provide to Landlord, at Tenant's expense, a lien and completion bond in an amount equal to at least one and one-half (l 1/2) times the total estimated cost of any additions, alterations or improvements to be made in or to the Premises, to protect Landlord against any liability for mechanic's and material men's liens and to insure timely completion of the work. Nothing contained in this Section 12c shall relieve Tenant of its obligation under Section 12b to keep the Premises, Building and Project free of all liens. d. Unless their removal is required by Landlord as provided in Section 12a, all additions, alterations and improvements made to the Premises shall become the property of Landlord and be surrendered with the Premises upon the expiration of the Term; provided, however, Tenant's equipment, machinery and trade fixtures which can be removed without damage to the Premises shall remain the property of Tenant and maybe removed, subject to the provisions of Section 13b. 13. LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY. a. All fixtures, equipment, improvements and appurtenances attached to or built into the Premises at the commencement of or during the Term, whether or not by or at the expense of Tenant ("Leasehold Improvements"), shall be and remain a part of the Premises, shall be the property of Landlord and shall not be removed by Tenant, except as expressly provided in Section 13b. Antique apparel display boxes shall remain the exclusive property of tenant. b. All movable partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment located in the Premises and acquired by or for the account of Tenant, without expense to Landlord, which can be removed without structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Premises (collectively "Tenant's Property) shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided that if any of Tenant's Property is removed, Tenant shall promptly repair any damage to the Premises or to the Building resulting from such removal. 14. RULES AND REGULATIONS. Tenant agrees to comply with (and cause its agents, contractors, employees and invitees to comply with) the rules and regulations attached hereto as Exhibit "D" and with such reasonable modifications thereof and additions thereto as Landlord may from time to time make. Landlord shall not be responsible for any violation of said rules and regulations by other tenants or occupants of the Building or Project. 15. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord reserves the following rights, exercisable without liability to Tenant for (a) damage or injury to property, person or business, (b) causing an actual or constructive eviction from the Premises, or (c) disturbing Tenant's use or possession of the Premises: a. To name the Building and Project and to change the name or street address of the Building or Project; 9 b. To install and maintain all signs on the exterior and interior of the Building and Project; c. To have pass keys to the Premises and all doors within the Premises, excluding Tenant's vaults and safes; d. At any time during the Term, and on reasonable prior notice to Tenant, to inspect the Premises, and to show the Premises to any prospective purchaser or mortgagee of the Project, or to any assignee of any mortgage on the Project, or to others having an interest in the Project or Landlord, and during the last six months of the Term, to show the Premises to prospective tenants thereof; and e. To enter the Premises for the purpose of making inspections, repairs, alterations, additions or improvements to the Premises or the Building (including, without limitation, checking, calibrating, adjusting or balancing controls and other parts of the HVAC system), and to take all steps as may be necessary or desirable for the safety, protection, maintenance or preservation of the Premises or the Building or Landlord's interest therein, or as may be necessary or desirable for the operation or improvement of the Building or in order to comply with laws, orders or requirements of governmental or other authority. Landlord agrees to use its best efforts (except in any emergency) to minimize interference with Tenant's business in the Premises in the course of any such entry. 16. ASSIGNMENT AND SUBLETTING. No assignment of this Lease or sublease of all or any part of the Premises shall be permitted, except as provided in this Article 16. a. Tenant shall not, without the prior written consent of Landlord, assign or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use of the Premises by any party other than Tenant. Any of the foregoing acts without such consent shall be void and shall, at the option of Landlord, terminate this Lease. This Lease shall not, nor shall any interest of Tenant herein, be assignable by operation of law without the written consent of Landlord. b. If at any time, or from time to time, during the Term Tenant desires to assign this Lease or sublet all or any part of the Premises, Tenant shall give notice to Landlord setting forth the terms and provisions of the proposed assignment or sublease, and the identity of the proposed assignee or subtenant. Tenant shall promptly supply Landlord with such information concerning the business background and financial condition of such proposed assignee or subtenant as Landlord may reasonably request. Landlord shall have the option, exercisable by notice given to Tenant within twenty (20) days after Tenant's notice is given, either to sublet such space from Tenant at the rental and on the other terms set forth in this Lease for the term set forth in Tenant's notice, or, in the case of an assignment, to terminate this Lease. If Landlord does not exercise such option, Tenant may assign the Lease or sublet such space to such proposed assignee or subtenant on the following further conditions: (l) Landlord shall have the right to approve such proposed assignee or subtenant, which approval shall not be unreasonably withheld; (2) The assignment or sublease shall be on the same terms set forth in the notice given to Landlord; (3) No assignment or sublease shall be valid and no assignee or sublessee shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord; (4) No assignee or sublessee shall have a further right to assign or sublet except on the terms herein contained; and (5) Any sums or other economic consideration received by Tenant as a result of such assignment or subletting, however dominated under the assignment or sublease, which exceed, in the aggregate, (i) the total sums which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to any portion of the Premises subleased), plus (ii) any real estate brokerage commissions or fees payable in connection with such assignment or subletting, shall be paid to Landlord as additional rent under this Lease without affecting or reducing any other obligations of Tenant hereunder. 10 c. Not withstanding the provisions of paragraphs a and b above, Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent and without extending any recapture or termination option to Landlord, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that (i) the assignee or sublessee assumes, in full, the obligations of Tenant under this Lease, (ii) Tenant remains fully liable under this Lease, and (iii) the use of the Premises under Article 8 remains unchanged. d. No subletting or assignment shall release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the Rent and to perform all other obligations to be performed by Tenant hereunder. The acceptance of Rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by an assignee or subtenant of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. e. If Tenant assigns the Lease or sublets the Premises or requests the consent of Landlord to any assignment or subletting or if Tenant requests the consent of Landlord for any act that Tenant proposes to do, the Tenant shall, upon demand, pay Landlord any attorneys' fees reasonably incurred by Landlord in connection with such act or request. 17. HOLDING OVER. If after expiration of the Term, Tenant remains in possession of the Premises with Landlord's permission (express or implied), Tenant shall become a tenant from month to month only, upon all the provisions of this Lease (except as to term and Base Rent), but the "Monthly Installments of Base Rent" payable by Tenant shall be increased to one hundred twenty-five percent (125%) of the Monthly Installments of Base Rent payable by Tenant at the expiration of the Term or other amount agreed to by the parties. Such monthly rent shall be payable in advance on or before the first day of each month. If either party desires to terminate such month to month tenancy, it shall give the other party not less than thirty (30) days advance written notice of the date of termination. 18. SURRENDER OF PREMISES. a. Tenant shall peaceably surrender the Premises to Landlord on the Expiration Date, in broom-clean condition and in as good condition as when Tenant took possession, except for (i) reasonable wear and tear, (ii) loss by fire or other casualty and (iii) loss by condemnation. Tenant shall, on Landlord's request, remove Tenant's Property on or before the Expiration Date and promptly repair all damage to the Premises or Building caused by such removal. b. If Tenant abandons or surrenders the Premises, or is dispossessed by process of law or otherwise, any of Tenant's Property left on the Premises shall be deemed to be abandoned, and at Landlord's option, title shall pass to Landlord under this Lease as by a bill of sale. If Landlord elects to remove all or any part of such Tenant's Property; the cost of removal, including repairing any damage to the Premises or Building caused by such removal shall be paid by Tenant. On the Expiration Date, Tenant shall surrender all keys to the Premises. 19. DESTRUCTION OR DAMAGE a. If the Premises or the portion of the Building necessary for Tenant's occupancy is damaged by fire, earthquake, act of God, the elements or other casualty, Landlord shall, subject to the provisions of this Article, promptly repair the damage, if such repairs can, in Landlord's opinion, be completed within (90) ninety days. If Landlord determines that repairs can be completed within ninety (90) days, this Lease shall remain in full force and effect, except that if such damage is not the result of the negligence or willful misconduct of Tenant or Tenants agents, employees, contractors, licensees or invitees, the Rent shall be abated to the extent Tenant's use of the Premises is impaired, commencing with the date of damage and continuing unti1 completion of the repairs required of Landlord under Section 19d. b. If in Landlord's opinion, such repairs to the Premises or portion of the Building necessary for Tenant's occupancy cannot be completed within ninety (90)days, Landlord may elect, upon notice to Tenant given 11 within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not so elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. c. If any other portion of the Building or Project is totally destroyed or damaged to the extent that in Landlord's opinion repair thereof cannot be completed within ninety (90) days, Landlord may elect upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. d. If the Premises are to be repaired under this Article, Landlord shall repair at its cost any injury or damage to the Building and Building Standard Work in the Premises. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. Landlord shall not be liable for any loss of business, inconvenience or annoyance arising from any repair or restoration of any portion of the Premises, Building or Project as a result of any damage from fire or other casualty. 20. EMINENT DOMAIN. a. If the whole of the Building or Premises is lawfully taken by condemnation or in any other manner for any public or quasi-public purpose, this Lease shall terminate as of the date of such taking, and Rent shall be prorated to such date. If less than the whole of the Building or Premises is so taken, this Lease shall be unaffected by such taking, provided that (i) Tenant shall have the right to terminate this Lease by notice to Landlord given within ninety (90) days after the date of such taking if twenty percent (20%) or more of the Premises is taken and the remaining area of the Premises is not reasonably sufficient for Tenant to continue operation of its business, and (ii) Landlord shall have the right to terminate this Lease by notice to Tenant given within ninety (90) days after the date of such taking. If either Landlord or Tenant so elects to Terminate this Lease, the Lease shall terminate on the thirtieth (30th) day after either such notice. The Rent shall be prorated to the date of termination. If this Lease continues in force upon such partial taking, the Base Rent and Tenant's Proportionate Share shall be equitably adjusted according to the remaining Rentable Area of the Premises and Project. b. In the event of any taking, partial or whole, all of the proceeds of any award, judgment or settlement payable by the condemning authority shall be the exclusive property of Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any award, judgment or settlement from the condemning authority. Tenant, however, shall have the right, to the extent that Landlord's award is not reduced or prejudiced, to claim from the condemning authority (but not from Landlord) such compensation as may be recoverable by Tenant in its own right for relocation expenses and damage to Tenant's personal property. c. In the event of a partial taking of the Premises which does not result in a termination of this Lease, Landlord shall restore the remaining portion of the Premises as nearly as practicable to its condition prior to the condemnation or taking, but only to the extent of Building Standard Work. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. 21. INDEMNIFICATION. a. Tenant shall indemnify and hold Landlord harmless against and from liability and claims of any kind for loss or dam age to property of Tenant or any other person, or for any injury to or death of any person, arising out of: (l) Tenant's use and occupancy of the Premises, or any work, activity or other things allowed or suffered by Tenant to be done in, on or about the Premises; (2) any breach or default by Tenant of any of Tenant's obligations under this lease; or (3) any grossly negligent or otherwise tortious act or omission of Tenant, its agents, employees, invitees or contractors. Tenant shall at Tenant's expense, and by counsel satisfactory to Landlord, defend Landlord in any action or proceeding arising from any such claim and shall indemnify Landlord against all costs, attorneys' fees, expert witness fees and any other expenses incurred in such action or proceeding. As a material part of the consideration for Landlord's execution of this Lease, 12 Tenant hereby assumes all risk of damage or injury to any person or property in, on or about the Premises from any cause. b. Landlord shall not be liable for injury or damage which may be sustained by the person or property of Tenant, its employees, invitees or customers, or any other person in or about the Premises, caused by or resulting from fire, steam, electricity, gas, water or rain which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, whether such damage or injury results from conditions arising upon the Premises or upon other portions of the Building or Project or from other sources. Landlord shall not be liable for any damages arising from any act or omission of any other tenant of the Building or Project. 22. TENANT'S INSURANCE. a. All insurance required to be carried by Tenant hereunder shall be issued by responsible insurance companies acceptable to Landlord and Landlord's lender and qualified to do business in the State. Each policy shall name Landlord, and at Landlord's request any mortgagee of Landlord, as an additional insured, as their respective interests may appear. Each policy shall contain (i) a cross-liability endorsement, (ii) a provisions that such policy and the coverage evidenced thereby shall be primary and non-contributing with respect to any policies carried by Landlord and that any coverage carried by Landlord shall be excess insurance, and (iii) a waiver by the insurer of any right of subrogation against Landlord, its agents, employees and representatives, which arises or might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its agents, employees or representatives. A copy of each paid up policy (authenticated by the insurer) or certificate of the insurer evidencing the existence and amount of each insurance policy required hereunder shall be delivered to Landlord before the date Tenant is first given the right of possession of the Premises, and thereafter within thirty (30) days after any demand by Landlord therefore. Landlord may, at any time and from time to time, inspect and/or copy any insurance policies required to be maintained by Tenant hereunder. No such policy shall be cancelable except after twenty (20) days written notice to Landlord and Landlord's lender. Tenant shall furnish Landlord with renewals or "binders" of any such policy at least ten (10) days prior to the expiration thereof. Tenant agrees that if Tenant does not take out and maintain such insurance, Landlord may (but shall not be required to) procure said insurance on Tenant's behalf and charge the Tenant the premiums together with a twenty-five percent (25%) handling charge, payable upon demand. Tenant shall have the right to provide such insurance coverage pursuant to blanket policies obtained by the Tenant, provided such blanket policies expressly afford coverage to the Premises, Landlord, Landlord's mortgagee and Tenant as required by this Lease. b. Beginning in the date Tenant is given access to the Premises for any purpose and continuing until the expiration of the Term. Tenant shall procure, pay for and maintain in effect policies of casualty insurance covering (i) all Leasehold Improvements (including any alterations, additions or improvements as may be made by Tenant pursuant to the provisions of Article 12 hereof), and (ii) trade fixtures, merchandise and other personal property from time to time in, on or about the premises, in the amount not less than one hundred percent (l00%) of their actual replacement cost from time to time, providing protection against any peril included within the classification "Fire and Extended Coverage" together with insurance against sprinkler damage, vandalism and malicious mischief. The proceeds of such insurance shall be used for the repair or replacement of the property so insured. Upon termination of this lease following a casualty as set forth herein, the proceeds under (i) shall be paid to Landlord, and the proceeds under (ii) above shall be paid to Tenant. c. Beginning in the date Tenant is given access to the Premises for any purpose and continuing until the expiration of the Term. Tenant shall procure, pay for and maintain in effect workers' compensation insurance as required by law and comprehensive public liability and property damage insurance with respect to the construction of improvements on the Premises, the use, operation or condition of the Premises and the operation of Tenant in, on or about the Premises, providing personal injury and broad from property damage coverage for not less than One Million Dollars ($1,000.000.00) combined single limit for bodily injury, death and property damage liability. Tenant shall deposit the policy or policies of such required insurance or certificates thereof with Landlord prior to the Commencement Date, which policies shall name Landlord and Landlord's designee (Chiles & 13 Company, Inc.) as additional named insured and shall also contain a provision stating that such policy or policies shall not be canceled or materially altered except after thirty (30) days written notice to Landlord. d. Not less than every three(3) years during the Term, Landlord and Tenant shall mutually agree to increases in all Tenant's insurance policy limits for all insurance carried by Tenant as set forth in this Article. In the event Landlord and Tenant cannot mutually agree upon the amounts of said increases, then Tenant agrees that all insurance policy Limits as set forth in this Article shall be adjusted for increases in the cost of living in the same manner as is set forth in Section 5.2 hereof for the adjustment of the Base Rent 23. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive all rights of recovery against the other and against the officers, employees, agents and representatives of the other, on account of loss by or damage to the waiving party of its property or the property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of the loss or damage. Tenant shall, upon obtaining the policies of insurance required under this Lease, give notice to its insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 24. SUBORDINATION AND ATTORNMENT. Upon written request of Landlord, or any first mortgagee or first deed of trust beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in writing, subordinate its rights under this Lease to the lien of any first mortgage or first deed of trust, or to the interest of any lease in which Landlord is lessee, and to all advances made or hereafter to be made thereunder. However, before signing any subordination agreement, Tenant shall have the right to obtain from any lender or lessor or Landlord requesting such subordination, an agreement in writing providing that, as long as Tenant is not in default hereunder, this Lease shall remain in effect for the full Term. The holder of any security interest may, upon written notice to Tenant, elect to have this Lease prior to its security interest regardless of the time of the granting or recording of such security interest. In the event of any foreclosure sale, transfer in lieu of foreclosure or termination of the lease in which Landlord is lessee, Tenant shall attorn to the purchaser, transferee or lessor as the case may be, and recognize that party as Landlord under this Lease, provided such party acquires and accepts the Premises subject to this Lease. 25. TENANT ESTOPPEL CERTIFICATES. Within ten (10) days after written request from Landlord, Tenant shall execute and deliver to Landlord or Landlord's designee, a written statement certifying (a) that this Lease is unmodified and in full force and effect, or is in full force and effect as modified and stating the modifications; (b) the amount of Base Rent and the date to which Base Rent and additional rent have been paid in advance; (c) the amount of any security deposited with Landlord; and (d) that Landlord is not in default hereunder, or if Landlord is claimed to be in default, stating the nature of any claimed default. Any such statement may be relied upon by a purchaser, assignee or lender. Tenant's failure to execute and deliver such statement within the time required shall at Landlord's election be a default under this Lease and shall also be conclusive upon Tenant that: (1) this Lease is in full force and effect and has not been modified except as represented by Landlord; (2) there are not incurred defaults in Landlord's performance and that Tenant has no right of offset, counter-claim or deduction against Rent; and (3) not more than one month's Rent has been paid in advance. 26. TRANSFER OF LANDLORD'S INTEREST. In the event of any sale or transfer by Landlord of the Premises, Building or Project, and assignment of this Lease by Landlord, Landlord shall be and is hereby entirely freed and relieved of any and all liability and obligations contained in or derived from this Lease arising out of any act, occurrence or omission relating to the Premises, Building, Project or Lease occurring after the consummation of such sale or transfer, providing the purchaser shall expressly assume all of the covenants and obligations of Landlord under this Lease. If any security deposit or prepaid Rent has been paid by Tenant, Landlord may transfer the security deposit or prepaid Rent to Landlord's successor and upon such transfer, Landlord shall be relieved of any and all further liability with respect thereto. 14 27. DEFAULT. 27.1 Tenant's Default. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: a. If Tenant abandons or vacates the Premises; or b. If Tenant fails to pay any Rent or any other charges required to be paid by Tenant under this Lease three times during this lease, and such failure continues for ten (10) days after such payment is due and payable; or c. If Tenant fails to promptly and fully perform any other covenant, condition or agreement contained in this Lease and such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; or d. If a writ of attachment or execution is levied on this Lease or any of Tenant's Property; or e. If Tenant makes a general assignment for the benefit of creditors, or provides for an arrangement, composition, extension or adjustment with its creditors; or f. If Tenant files a voluntary petition for relief or if a petition against Tenant in a proceeding under the federal bankruptcy laws or other insolvency laws is filed and not withdrawn or dismissed within forty-five (45) days thereafter, or if under the provisions of any law providing for reorganization or winding up of corporations, any court of competent jurisdiction assumes jurisdiction, custody or control of Tenant or any substantial part of its property and such jurisdiction, custody or control remains in force unrelinquished, unstayed or unterminated for a period of forty-five (45) days; or g. If in any proceeding or action in which Tenant is a party, a trustee, receiver, agent or custodian is appointed to take charge of the Premises or Tenant's Property (or has the authority to do so) for the purpose of enforcing a lien against the Premises or Tenant's Property; or h. If Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or other person or entity is involved in any of the acts or events described in subparagraphs d through g above. 27.2 Remedies. In the event of Tenant's default hereunder, then in addition to any other rights or remedies Landlord may have under any law, Landlord shall have the right, at Landlord's option, without further notice or demand of any kind to do the following: a. Terminate this Lease and Tenant's right to possession of the Premises and re-enter the Premises and take possession thereof, and Tenant shall have no further claim to the Premises or under this Lease; or b. Continue this Lease in effect, re-enter and occupy the Premises for the account of Tenant, and collect any unpaid Rent or other charges which have or thereafter become due and payable; or c. Re-enter the premises under the provisions of subparagraph b, and thereafter elect to terminate this Lease and Tenant's right to possession of the Premises. If Landlord re-enters the Premises under the provisions of subparagraphs b or c above, Landlord shall not be deemed to have terminated this Lease or the obligation of Tenant to pay any Rent or other charges thereafter accruing, unless Landlord notifies Tenant in writing of Landlord's election to terminate this Lease. In the event of any reentry or retaking of possession by Landlord, Landlord shall have the right, but not the obligation, to remove all or any part of Tenant's Property in the Premises and to place such property in storage at a public warehouse at the expense and risk of Tenant. If Landlord elects to relet the Premises for the account of Tenant, the rent received by Landlord from such reletting shall be applied as follows: first, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such reletting; third, to the payment of the cost of any alterations or repairs to the Premises; fourth, to the payment of Rent due and unpaid hereunder; and the balance, if any, shall be held by Landlord and applied in payment of future Rent as it becomes due. If that portion of rent received from the reletting which is applied against the Rent due hereunder is less than 15 the amount of the Rent due, Tenant shall pay the deficiency to Landlord promptly upon demand by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as determined, any costs and expenses incurred by Landlord in connection with such reletting or in making alterations and repairs to the Premises, which are not covered by the rent received from the reletting. Should Landlord elect to terminate this Lease under the provisions of subparagraph a or c above, Landlord may recover as damages from Tenant the following: 1. Past Rent. The worth at the time of the award of any unpaid Rent which had been earned at the time of termination; plus 2. Rent Prior to Award. The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus 3. Rent After Award. The worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the rental loss that Tenant proves could be reasonably avoided; plus 4. Proximately Caused Damages. Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses (including attorneys fees), incurred by Landlord in (a) retaking possession of the Premises, (b) maintaining the Premises after Tenant's default, (c) preparing the Premises for reletting to a new tenant, including any repairs or alterations, and (d) reletting the Premises, including broker's commissions. "The worth at the time of the award" as used in subparagraph 3 above, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank situated nearest to the Premises at the time of the award plus one percent (1%). The waiver by Landlord of any breach of any term, covenant or condition of this Lease shall not be deemed a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition. Acceptance of Rent by Landlord subsequent to any breach hereof shall not be deemed a waiver of any preceding breach other than the failure to pay the particular Rent so accepted, regardless of Landlord's knowledge of any breach at the time of such acceptance of Rent. Landlord shall not be deemed to have waived any term, covenant or condition unless Landlord gives Tenant written notice of such waiver. 27.3 Landlord's Default. If Landlord fails to perform any covenant, condition or agreement contained in this Lease within thirty (30) days after receipt of written notice from Tenant specifying such default, or if such default cannot reasonably be cured within thirty (30) days, if Landlord fails to commence to cure within that thirty (30) day period, then Landlord shall be liable to Tenant for any damages sustained by Tenant as a result of Landlord's breach; provided, however, it is expressly understood and agreed that if Tenant obtains a money judgment against Landlord resulting from any default or other claim arising under this Lease, that judgment shall be satisfied only out of the rents, issues, profits, and other income actually received on account of Landlord's right, title and interest in the Premises, Building or Project, and no other real personal or mixed property of Landlord (or of any of the partners which comprise Landlord, if any) wherever situated, shall be subject to levy to satisfy such judgment. If, after notice to Landlord of default, Landlord (or any first mortgagee or first deed of trust beneficiary of Landlord) fails to cure the default as provided herein, then Tenant shall have the right to cure that default at Landlord's expense. Tenant shall not have the right to terminate this Lease or to withhold, reduce or offset any amount against any payments of Rent or any other charges due and payable under this Lease except as otherwise specifically provided herein. 28. BROKERAGE FEES. Tenant warrants and represents that it has not dealt with any real estate broker or agent in connection with this Lease or its negotiation except Chiles & Company, Cushman and Wakefield, and Donoghue and Associates. Tenant shall indemnify and hold Landlord harmless from any cost, expense or liability (including costs of suit and 16 reasonable attorneys' fees) for any compensation, commission or fees claimed by any other real estate broker or agent in connection with this Lease or its negotiation by reason of any act of Tenant. 29. NOTICES. All notices, approvals and demands permitted or required to be given under this Lease shall be in writing and deemed duly served or given if personally delivered or sent by certified or registered U.S. mail, postage prepaid, and addressed as follows: (a) if to Landlord, to Landlord's Mailing Address and to the Building manager, and (b) if to Tenant, to Tenant's Mailing Address; provided however, notices to Tenant shall be deemed duly served or given if delivered or mailed to Tenant at the Premises. Landlord and Tenant may from time to time by notice to the other designate another place for receipt of future notices. 30. GOVERNMENT ENERGY OR UTILITY CONTROLS. In the event of imposition of federal, state or local government controls, rules, regulations, or restrictions on the use or consumption of energy or other utilities during the Term, both Landlord and Tenant shall be bound thereby. In the event of a difference in interpretation by Landlord and Tenant of any such controls, the interpretation of Landlord shall prevail, and Landlord shall have the right to enforce compliance therewith, including the right of entry into the Premises to effect compliance. 31. RELOCATION OF PREMISES. (Paragraph deleted) 32. QUIET ENJOYMENT. Tenant, upon paying the Rent and performing all of its obligations under this Lease, shall peaceably and quietly enjoy the Premises, subject to the terms of this Lease and to any mortgage, lease, or other agreement to which this Lease maybe subordinate. 33. OBSERVANCE OF LAW, Tenants shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, and with the requirements of any board of rite insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant. It shall be the Landlord's responsibility to maintain compliance with the Americans With Disabilities Act on the exterior of the leased space, including all common areas. The inside of Tenant's leased property shall be Tenant's responsibility to fully comply with the provisions of the Americans With Disabilities Act. 34. FORCE MAJEURE. Any prevention, delay or stoppage of work to be performed by Landlord or Tenant which is due to strikes, labor disputes, inability to obtain labor, materials, equipment or reasonable substitutes therefore, acts of God, governmental restrictions or regulations or controls, judicial order, enemy or hostile government actions, civil commotion, fire or other casualty or other causes beyond the reasonable control of the party obligated to perform hereunder, shall excuse performance of the work by that party for a period equal to the duration of that prevention, delay or stoppage. Nothing in this Article 34 shall excuse or delay Tenant's obligation to pay Rent or other charges under this Lease. 17 35. CURING TENANT'S DEFAULTS. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord may (but shall not be obligated to) without waiving such default, perform the same for the account at the expense of Tenant. Tenant shall pay Landlord all costs of such performance promptly upon receipt of a bill therefore. 36. SIGN CONTROL. Tenant shall not affix, paint, erect, or inscribe any sign, projection, awning, signal or advertisement of any kind to any Part of the Premises, Building or Project, including without limitation, the inside or outside of windows or doors, without the written consent of Landlord. Landlord shall have the right to remove any signs or other matter, installed without Landlord's permission, without being liable to Tenant by reason of such removal, and to charge the cost of removal to Tenant as additional rent hereunder, payable within ten (10) days of written demand by Landlord. Tenant has the right to a monument sign on the grounds near the entrance door, as well as interior signage and interior apparel display cases visible from the second floor lobby. 37. HAZARDOUS WASTE. Tenant shall not transport, use, store, maintain, generate, manufacture, handle, dispose, release, or discharge any "Hazardous Material" (as defined below) upon or about the Property, or permit Tenant's employees, agents, contractors and other occupants of the Premises to engage in such activities upon or about the Property. However, the foregoing provisions shall not prohibit the transportation to and from, and use, storage, maintenance and handling within, the Premises of substances customarily used in offices (or such other business or activity expressly permitted to be undertaken in the Premises: (a) such substances shall be used and maintained only in such quantities as are reasonably necessary for such permitted use of the Premises, strictly in accordance with applicable law and the manufacturers' instructions therefore, (b) such substances shall not be disposed of, released or discharged on the Property, and shall be transported to and from the premises in compliance with all applicable Laws, and as Landlord shall reasonably require, (c) if any applicable Law of Landlord's trash removal contractor requires that any such substances be disposed of separately from ordinary trash, Tenant shall make arrangements at Tenant's expense for such disposal directly with a qualified and licensed disposal company at a lawful disposal site (subject to scheduling and approval by Landlord), and qualified and licensed disposal company at a lawful disposal site (subject to scheduling and approval by Landlord), and shall ensure that disposal occurs frequently enough to prevent unnecessary storage of such substances in the Premises, and (d) any remaining such substances shall be completely, properly and lawfully removed from the Property upon expiration or earlier termination of this Lease. Tenant shall promptly notify Landlord of: (i) any enforcement, cleanup or other regulatory action taken or threatened by any governmental or regulatory authority with respect to the presence of any Hazardous Material on the Premises of the migration thereof from or to other property, (ii) any demand claims made or threatened by any Party against Tenant or the Premises relating to any loss or injury resulting from any Hazardous Material, (iii) any release, discharge or non routine, improper or lawful disposal or transportation of any Hazardous Material on or from the Premises, and (iv) any matters where Tenant is required by Law to give a notice to any governmental or regulatory authority respecting any Hazardous Material on the Premises. Landlord shall have the right (but not the obligation) to join and participate as a party in legal proceedings or actions affecting the Premises initiated in connection with any environmental, health or safety Law. At such times as Landlord may reasonably request, Tenant shall provide Landlord with a written list identifying any Hazardous Material then used, stored, or maintained upon the Premises, the use and approximate quantity of each such material, a copy of any material safety data sheet ("MSDS") issued by the manufacturer therefore, written information concerning the removal, transportation and disposal of the same, and such other information as Landlord may reasonably require or as may be required by Law. The term "Hazardous Material" for purposed hereof shall mean any chemical, substance, material or waste or component thereof by any federal, state or local governing body having jurisdiction, or which would trigger any employee or community "right-to-know" requirements adopted by any such body, or for which any such body has adopted any requirements for the preparation or distribution of an MSDS. If any Hazardous Material is released, discharged or disposed of by Tenant or any other occupant of the Premises, or their employees, agents or contractors, on or about the Property in violation of the foregoing provisions, Tenant shall immediately, properly and in compliance with applicable Laws clean up and remove the Hazardous Material from the Property and any other affected property and clean or replace any affected personal property (whether or not owned by Landlord), at Tenant's expense. Such clean up and removal work shall be subject to Landlord's prior written approval (except in emergencies) and shall include, without limitation, any testing, investigation, and the 18 preparation and implementation of any remedial action plan required by any governmental body having jurisdiction or reasonably required by Landlord. If Tenant shall fail to comply with the provisions of this Article within five (5) days after written notice by Landlord, or such shorter time as may be required by Law or in order to minimize any hazard to Persons or property, Landlord may (but shall not be obligated to) arrange for such compliance directly or as Tenant's agent through contractors or other parties selected by Landlord, at Tenant's expense (without limiting Landlord's other remedies under this Lease or applicable Law). If any Hazardous Material is released, discharged or disposed of on or about the Property and such release, discharge or disposal is not caused by Tenant or other occupant of the Premises, or their employees, agents or contractors, such release, discharge or disposal shall be deemed casualty damage under Article 19 to the extent that the Premises or common areas serving the Premises are affected thereby; in such case, Landlord and Tenant shall have the obligations and rights respecting such casualty damage provided under Article 19. 38. MISCELLANEOUS. a. Accord and Satisfaction; Allocation of Payments. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent provided for in this Lease shall be deemed to be other than on account of the earliest due Rent, nor shall any endorsement or statement on any check or letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the provision contained in the addendum shall control, unless otherwise provided in the addendum balance of the Rent or pursue any other remedy provided for in this Lease. In connection with the foregoing, Landlord shall have the absolute right in its sole discretion to apply any payment received from Tenant to any account or other payment of Tenant then not current and due or delinquent. b. Addenda. If any provisions contained in an addendum to this Lease is inconsistent with any other provision herein, the provision contained in the addendum shall control, unless otherwise provided in the addendum. c. Attorneys' Fees. If any action or proceeding is brought by either party against the other pertaining to or arising out of this Lease, the finally prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred on account of such action or proceeding. d. Captions, Articles and Section Numbers. The captions appearing within the body of this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease. All references to Article and Section numbers refer to Articles and Sections in this Lease. e. Changes Requested by Lender. Neither Landlord nor Tenant shall unreasonably withhold its consent to changes or amendments to this Lease requested by the lender on Landlord's interest, so long as these changes do not alter the basic business terms of this Lease or otherwise materially diminish any rights or materially increase any obligations of the party from whom consent to such charge or amendment is requested. f. Choice of Law. This Lease shall be construed and enforced in accordance with the laws of the State of Washington g. Consent. Notwithstanding anything contained in this Lease to the contrary, Tenant shall have no claim, and hereby waives the right to any claim against Landlord for money damages by reason of any refusal, withholding or delaying by Landlord of any consent, approval or statement of satisfaction, and in such event, Tenant's only remedies therefore shall be an action for specific performance, injunction or declaratory judgment to enforce any right to such consent, etc. h. Corporate Authority. If Tenant is a corporation, each individual signing this Lease on behalf of Tenant represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the corporation, and that this Lease is binding on Tenant in accordance with its terms. Tenant shall, at Landlord's request, deliver a certified copy of a resolution of its board of directors authorizing such execution. i. Counterparts. This Lease may be executed in multiple counterparts, all of which shall constitute one and the same Lease. 19 j. Execution of Lease; No Option. The submission of this Lease to Tenant shall be for examination purposes only, and does not and shall not constitute a reservation of or option for Tenant to lease, or otherwise create any interest of Tenant in the Premises or any other premises within the Building or Project. Execution of this Lease by Tenant and its return to Landlord shall not be binding on Landlord notwithstanding any time interval, until Landlord has in fact signed and delivered this Lease to Tenant. k. Furnishing of Financial Statements; Tenant's Representations. In order to induce Landlord to enter into this Lease Tenant agrees that it shall promptly furnish Landlord, from time to time, upon Landlord's written request, with financial statements reflecting Tenants current financial condition. Tenant represents and warrants that all financial statements, records and information furnished by Tenant to Landlord in connection with this Lease are true, correct and complete in all respects. l. Further Assurances. The parties agree to promptly sign all documents reasonably requested to give effect to the provisions of this Lease. m. Mortgagee Protection. Tenant agrees to send by certified or registered mail to any first mortgagee or first deed of trust beneficiary of Landlord whose address has been furnished to Tenant, a copy of any notice of default served by Tenant on Landlord. If Landlord fails to cure such default within the time provided for in this Lease, such mortgagee or beneficiary shall have an additional ten (10) days to cure such default; provided that if such default cannot reasonably be cured within that ten (l0) day period, then such mortgagee or beneficiary, shall have such additional time to cure the default as is reasonably necessary under the circumstances. n. Prior Agreements; Amendments. This Lease contains all of the agreements of the parties with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties or their respective successors in interest. o. Recording. Tenant shall not record this Lease without the prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a "short form" memorandum of this Lease for recording purposes. p. Severability. A final determination by a court of competent jurisdiction that any provision of this Lease is invalid shall not affect the validity of any other provisions, and any provisions so determined to be invalid shall, to the extent possible, be construed to accomplish its intended effect. q. Successors and Assigns. This Lease shall apply to and bind the heirs, personal representatives, and permitted successors and assigns of the parties. r. Time of the Essence. Time is of the essence of this Lease. s. Waiver. No delay or omission in the exercise of any right or remedy of Landlord upon any default by Tenant shall impair such right or remedy or be construed as a waiver of such default. 39. OPTION TO EXTEND LEASE TERM. Grant of Options Landlord hereby grants to Tenant one option (the "Option") to extend the Lease Term for additional term of five years (the "Extension)", on the same terms and conditions as set forth in the Lease, but at an increased rent as negotiated. The Option shall be exercised only by written notice delivered to Landlord at least one hundred twenty (120) days before the expiration of the Lease Term. If Tenant fails to deliver Landlord written notice of the exercise of an Option within the prescribed time period, such Option shall lapse, and there shall be no further right to extend the Lease Term. The Option shall be exercisable by Tenant on the express conditions that (a) at the time of the exercise, and at all times prior to the commencement of such Extension, Tenant shall not be in default under any of the provisions of this Lease and (b) Tenant has not been ten (10) or more days late in the payment of rent more than a total of three (3) times during the Lease Term . The receipt and acceptance by Landlord of delinquent Rent shall not constitute a waiver of any other default; it shall constitute only a waiver of timely payment for the particular Rent payment involved. 20 No act or conduct of landlord, including, without limitation, the acceptance of keys to the Premises shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the Term. Only a written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of the Lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of the Lease. The parties hereto have executed this Lease as of the dates set forth below. LANDLORD TENANT THE BARTELL DRUG COMPANY PACIFIC TRAIL, INC./LONDON FOG INDUSTRIES By: By:/s/ William D. Richins --------------------------- ------------------------- Title: Title:EVP & CFO ------------------------ ---------------------- By: ------------------------- Title: ---------------------- CONSULT YOUR ADVISORS - This document has been prepared for approval by your attorney. No representation or recommendation is made by Chiles & Company as to the legal sufficiency or tax consequences of this document or the transaction to which it relates. These are questions for your attorney. In any real estate transaction, it is recommended that you consult with a professional, such as a civil engineer, industrial hygienist or other person, with experience in evaluating the condition of the property, including the possible presence of asbestos, hazardous materials and underground storage tanks. 21 ACKNOWLEDGMENT OF LESSOR STATE OF WASHINGTON ) ) SS. COUNTY OF KING ) On this ____________________ day of _____________________________ ,19__ , before the undersigned, a Notary Public in and for the State of Washington, personally appeared ____________________________________________________________________________ to me known to be the __________________________ and _______________________ of the corporation that executed the within and foregoing lease, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument and that the seal affixed is the corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. ------------------------------------- NOTARY PUBLIC in and for the State of Washington, residing at________________ 22 ACKNOWLEDGMENT OF LESSEE (Corporate) STATE OF CONNECTICUT ) ) ss. COUNTY OF FAIRFIELD ) On this 30 day of Sept. ,1994, before me personally appeared William D. Richins and to me known to be the Exec. V.P. & CFO and respectively, of the corporation that executed the within and foregoing lease, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument and that the seal affixed is the corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ ------------------------------------- NOTARY PUBLIC in and for the State of Connecticut, residing at Darien Fairfield County. 23 EXHIBIT A Floor Plan of Premises 24 [GRAPHIC OMMITTED] [GRAPHIC OMMITTED] EXHIBIT B Legal Description The Property, situated in the City of Seattle, County of King, State of Washington, is located at 1700 Westlake Avenue North, and further described as LAKE UNION SHORE LANDS ADDITION; LOT 1 THRU 10 BLOCK 92 25 EXHIBIT C Work Letter This workletter is dated August 23, 1994 between The Bartell Drug Company as Lessor and Pacific Trail, Inc. as Lessee. A. This workletter is attached to and forms a part of the certain office lease date August 23, 1994, pursuant to which landlord had leased to tenant office space in the building to be known as Lake Union Building. B. Landlord desires to make improvements to the premises, and tenant desires to have landlord make them, prior to occupancy, upon the terms and conditions contained in this workletter. 1. Definitions. In this workletter, some defined terms are used. They are: (a) Tenant's representative: Gary Hansen (b) Landlord's representative: Lyn Saucier (c) Turnkey improvements will be provided pursuant to preliminary space plan by Ken Slater of Marvin Stein & Associates dated August 8, 1994. (d) Programming information has been provided by architect regarding business manner of operation, number and size of rooms, special requirements, functional requirements, anticipated growth and the like. (e) Programming information provided is considered final. (f) Final space plan: a drawing of the premises clearly showing the layout and relationship of all departments and offices, depicting partitions, door locations, types of electrical and data and telephone outlets, and delineation of furniture and equipment. The final space plan has been preceded by preliminary space plans. (g) Preliminary estimates of construction costs have been received and serve as the basis for the negotiated rental rate. (h) Working drawings: construction documents detailing the improvements and conforming to codes, complete in form and content and containing sufficient information and detail to allow for competitive bidding or negotiated pricing by contractors selected and engaged by landlord. (s) Construction schedule: a schedule depicting the relative time frames for various activities related to the construction of the improvements in the premises. (j) Tenant improvement cost proposal: a final estimate of costs of the improvements that are depicted on the working drawings, including all architectural, engineering, contractor, and any other costs, and clearly indicating the cost, if any, that is to be paid by tenant pursuant to paragraph 7. (k) Maximum approved cost: $600,000 (l) Improvements: (1) The development of space plans and working drawings, including supportin engineering studies (that is, structural design or analysis, lighting or acoustical evaluations, or others as, determined by landlord's architect). (2) All construction work necessary to augment the base building, creating the details and partitioning shown on the space plan. The work will create finished ceilings, walls, and floor surfaces, as well as complete HVAC, lighting, electrical, and fire protection systems. (m) Cost of the improvements: the cost includes, but is not limited to, the following: (1) All architectural and engineering fees and expenses. (2) All contractor and construction manager costs and fees. (3) All permits and taxes. (n) Change order: any change, modification, or addition to the final space plan or working drawings after tenant has approved the same. 26 (o) Base building is in place and ready for demolition and new improvements. (p) Building standard: component elements utilized in the design and construction of the improvements that have been pre-selected by the landlord to ensure uniformity of quality, function, and appearance throughout the building. These elements include, but are not limited to, ceiling systems, doors, hardware, walls, unspecified floor coverings, window coverings, light fixtures, and HVAC components. 2 . Representative. Landlord appoints landlord's representative to act for landlord in all matters associated with this workletter. Tenant appoints tenant's representative to act for tenant in all matters associated with this workletter. All inquiries, requests, instructions, authorization, and other communications with respect to the matters covered by this workletter will be made to landlord's representative or tenant's representative, as the case may be. Tenant will not make any inquiries of or request to, and will not give any instructions or authorizations to, any employee or agent of landlord, including without limitation landlord's architect, engineers, and contractors, or any of their agents or employees, with regard to matters associated with this workletter. Either party may change its representative under this workletter at any time by providing 3 days' prior written notice to the other party. 3. Project Design and Construction. All work will be performed by designers and contractors selected and engaged by landlord. 4. Cost Responsibilities. (a) Landlord: Landlord will pay up to the amount of $600,000 for the cost of improvements. The conservative preliminary estimate is $575,000. Should total cost of tenant improvements fall below $573,000, landlord shall give tenant a dollar for dollar credit for free rent is available to tenant to be applied to the first months rent (or successive months rent) if tenant spends $573,000 or less for tenant improvements. (b) Tenant:: Tenant will pay for: (1)Tenant-initiated changes to the final space plan or working drawings after tenant's approval. (2) Tenant-initiated change orders, modifications, or additions to the improvements after tenant's approval of the working drawings. (3) All costs in excess of the $600,000 that are not included in (1) or (2). 5. Landlord's Approval. Landlord, in its sole discretion, may withhold the approval of any final space plan, working drawings, or change order that: (a) Exceeds or adversely affects the structural integrity of the building, or any part of the heating, ventilating, air conditioning, plumbing, mechanical, electrical, communication, or other systems of the building; (b) Is not approved by the holder of any mortgage or deed of trust encumbering the building at the time the work is proposed; (c) Would not be approved by a prudent owner of property similar to the building; (d) Violates any agreement that affects the building or binds landlord; (e) Landlord reasonably believes will increase the cost of operation or maintenance of any of the systems of the building; (f) Landlord reasonably believes will reduce the market value of the premises or the building at the end of the term; (g) Does not conform to applicable building code or is not approved by any governmental, quasi-governmental, or utility authority with jurisdiction over the premises; or (h) Does not conform to the building standard. 6. Schedule of Improvement Activities (a) After tenant's final approval of a preliminary space plan (which will then be the "final space plan"), landlord will promptly cause to be prepared an estimate of construction costs. If the estimated construction cost is less than the tenant finish allowance, the estimated construction cost will be deemed approved without a required response from tenant. If the estimated construction cost is more than the tenant finish allowance landlord will so notify tenant in writing and tenant will establish the maximum approved cost by either: 27 (1) Agreeing in writing to pay the amount by which the estimated construction cost exceeds the tenant finish allowance or; (2) Agreeing to have the space plan revised by landlord's architect in order to assure that the estimated construction cost is either: (A) No more than the tenant finish allowance; or (B) Exceeds the tenant finish allowance by an amount that the tenant agrees to pay pursuant to (1) Tenant will give immediate attention to establishing the maximum approved cost and respond to landlord within 2 business days. Upon tenant's timely fulfillment of its obligations in either clause (1) or clause (2), the maximum approved cost will be established. (b) Upon establishment of the maximum approved cost, landlord will cause to be prepared and delivered to tenant the working drawings, the construction schedule, and the tenant cost proposal for the improvements in accordance with the final space plan. If the tenant cost proposal is less than the maximum approved cost, the landlord will take steps necessary to commence construction of the improvements to the premises. If the tenant cost proposal is more than the maximum approved cost, landlord will so notify tenant in writing and tenant will (1) agree in writing to pay the amount by which the tenant cost proposal exceeds the maximum approved cost or (2) request landlord to revise the working drawings in order to assure that the tenant cost proposal is no more than the maximum approved cost. Tenant will give its immediate attention to the tenant cost proposal approval process and to respond to landlord within 3 business days after submissions. (c) Following approval of the working drawings, and tenant cost proposal, by landlord and tenant, landlord will cause application to be made to the appropriate governmental authorities for necessary approvals and building permits. Upon receipt of the necessary approvals and permits, landlord will begin construction of the improvements, subject to the rights of tenant in possession or upon vacation of premises by tenant in possession. 7. Payment by Tenant: The amount payable by tenant for tenant improvements above $600,000 will be billed periodically, as the work proceeds, and tenant agrees to pay each such invoice within 15 business days following its delivery. 8. Change Orders. Tenant may authorize changes to the improvements during construction only by written instructions to landlord's representative, on a form approved by landlord. All such changes will be subject to landlord's prior written approval in accordance with paragraph 5. Prior to commencing any change, landlord will prepare and deliver to tenant, for tenant's approval, a change order setting forth the total cost of such change, which will include associated architectural, engineering, construction contractor's costs and fees, completion schedule changes, and the cost of landlord's overhead. If tenant fails to approve such change order within 5 business days after delivery by landlord, tenant will be deemed to have withdrawn the proposed change and landlord will not proceed to perform the change. Upon landlord's receipt of tenant's approval, landlord will proceed with the change. 9. Completion and Commencement Date. Tenant's obligation for payment of rent pursuant to the lease will commence on date of possession, however, the commencement date and the date for the payment of rent may be delayed on a day-by-day basis for each day the substantial completion of the improvements are delayed by landlord or its contractors or agents. The payment of rent will not be delayed by a delay of substantial completion due to tenant. The following are some examples of delays that will not affect the commencement date and the date of which rent is to commence under the lease: (a) Late submissions of programming information; (b) Change orders requested by tenant; (c) Delays in obtaining non-building standard construction materials requested by tenant; 28 (d) Tenant's failure to approve timely any item requiring tenant's approval; and (e) Delays by tenant according to paragraph 6, in accordance of Article 2(d) in the lease. In the event that substantial completion of the improvements is delayed by landlord, its contractors, or agents, the commencement date will be the date of substantial completion of the improvements, subject only to the completion of landlord's punchlist items(that is, those items which do not materially interfere with tenant's use and enjoyment of the premises). Landlord and tenant will confirm the commencement date in accordance with Article 2(d) of the lease. 10. Condition of the Premises (a) Prior to the commencement date, tenant will conduct a walk-through inspection of the premises with landlord and prepare a punch-list of items needing additional work by landlord. Other than the items specified in the punch-list and latent defects (as defined below), by taking possession of the premises, tenant will be deemed to have accepted the premises in their condition on the date of delivery of possession and to have acknowledged that landlord has installed the improvements as required by this workletter and that there are no items needing additional work or repair. The punch-list will not include any damage to the premises caused by tenant's move-in or early access, if permitted. Damage caused by tenant will be repaired or corrected by landlord at tenant's expense. Tenant acknowledges that neither landlord nor its agents or employees have made any representation or warranties as to the suitability or fitness of the premises for the conduct of tenant's business or for any other purpose, nor has landlord or its agents or employees agreed to undertake any alterations or construct any tenant improvements to the premises except as expressly provided in this lease and this workletter. If tenant fails to submit a punch-list to landlord prior to the commencement date, it will be deemed that there are no items needing additional work or repair. Landlord's contractor will complete all reasonable punch-list items within 30 days after the walk-through inspection or as soon as practicable after such walk-through. (b) A "latent defect" is a defect in the condition of the premises, caused by landlord's failure to construct the improvements in a good and workmanlike manner and in accordance with the working drawings, which would not ordinarily be observed during a walk-through inspection. If tenant notifies landlord of a latent defect within one year following the commencement date, then landlord, at its expense, will repair the latent defect as soon as practicable. Except as set forth in this paragraph 10, landlord will have no obligation or liability to tenant for latent defects. 11. Adjustments upon Completion. As soon as practicable, upon completion of the improvements in accordance with this work-letter, landlord will notify tenant of the rentable area of the premises, the rentable area of the building, monthly rent, and tenant's share, if such information, was not previously determinable by landlord. Tenant, within 10 days of landlord's written request, will execute a certificate confirming such information. 12. Early Occupancy (a) If, prior to the commencement date of the lease, improvements are completed to tenant's satisfaction or by mutual agreement, tenant may occupy the space and pay rent and modify the commencement date of the lease. If tenant elects early occupancy for a portion of the space, tenant agrees to pay pro-rata share of the rent. LANDLORD: TENANT: /s/ William D. Richins - ------------------------------ ------------------------------ (For London Fog Industries) 9/23/94 - ------------------------------ ------------------------------ DATE DATE 29 EXHIBIT D RULES AND REGULATIONS 1. Landlord may from time to time adopt appropriate system(s) and procedures for the security and/or safety of the building, any person occupying, using, or entering the building, or any equipment, finishing, or contents of the building, and tenant will comply with landlord's reasonable requirements relative to such system s and procedures. 2. The sidewalks, halls, passages, exits, entrances, elevators, and stairways of the building will not be obstructed by any tenants or used by any of them for any purpose other than for ingress to and egress from their respective premises. The halls, passages, exits, entrances, elevators, and stairways are not for the general public, and landlord will in all cases retain the right to control and prevent access to such halls, passages, exits, entrances, elevators, and stairways of all persons whose presence in the judgment of landlord would be prejudicial to the safety of the building and its tenants, provided that nothing contained in these rules and regulations will be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. No tenant and no employee or invitee of any tenant will go upon the roof of the building. No tenant will be permitted to place or install any object (including without limitation radio and television antennas, loudspeakers, sound amplifiers, microwave dishes, solar devices or similar devices) on the exterior of the building or on the roof of the building. 3. No sign, placard, picture, name, advertisement, or written notice visible from the exterior of tenant's premises will be inscribed, painted, affixed, or otherwise displayed by tenant on any part of the building or the premises without the prior written consent of landlord. Landlord will adopt and furnish to tenant general guidelines relating to signs inside the building on the office floors. Tenant agrees to conform to such guidelines. All approved signs or lettering on doors will be printed, painted, affixed, or inscribed at the expense of the tenant by a person approved by landlord. Other than draperies expressly permitted by landlord and building standard mini-blinds, material visible from the outside the building will not be permitted. In the event of the violation of this rule by tenant, landlord may remove the violating items without any liability, and may charge the expense incurred by such removal to the tenant or tenants violating this rule. 4. No cooking will be done or permitted by any tenant on the premises, except in areas of the premises which are specially constructed for cooking and except that the use by the tenant of microwave ovens and Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate, and similar beverages will be permitted, provided that such use is in accordance with all applicable federal, state, and city laws, codes, ordinances, rules, and regulations. 5. No tenant will employ any person or persons other than the cleaning service of landlord for the purpose of cleaning the premises, unless otherwise agreed to by landlord in writing. Except with the written consent of landlord, no person or persons other than those approved by landlord will be permitted to enter the building for the purpose of cleaning it. No tenant will cause any unnecessary labor by reason of such tenant's carelessness or indifference in the preservation of good order and cleanliness. Should tenant's actions result in any increased expense for any required cleaning, landlord reserves the right to assesss tenant for such expenses. 6. The toilet rooms, toilets, urinals, wash bowls and other plumbing fixtures will not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags, or other foreign substances will be thrown in such plumbing fixtures. All damages resulting from any misuse of the fixtures will be borne by the tenant who, or whose servants, employees, agents, visitors, or licensees, caused the same. 7. No tenant will in any way deface any part of the premises or the building of which they form a part. In those portions of the premises where carpet has been provided directly or indirectly by landlord, tenant will 30 at its own expense install and maintain pads to protect the carpet under all furniture having caster other than carpet casters. 8. No tenant will alter, change, replace, or rekey any lock or install a new lock on any door of the premises. Landlord, its agents, or employees will retain a pass (master) key to all door locks on the premises. Any new door locks required by tenant or any change in keying of existing locks will be installed or changed by landlord following tenant's written request to landlord and will be at tenant's expense. All new locks and rekeyed locks will remain operable by landlord's pass (master) key. Landlord will furnish each tenant, free of charge, with two (2) keys to each door lock on the premises and two (2) building/access cards. Landlord will have the right to collect a reasonable charge for additional keys and cards requested by any tenant. Each tenant, upon termination of its tenancy, will deliver to landlord all keys and access cards for the premises and building that have been furnished to such tenant. 9. The elevator designated for freight by landlord will be available for use by all tenants in the building during the hours and pursuant to such procedures as landlord may determine from time to time. The moving company must be a locally recognized professional mover, whose primary business is the performing of relocation services, and must be bonded and fully insured. A certificate or other verification of such insurance must be received and approved by landlord prior to the start of any moving operations. Insurance must be sufficient, in landlord's sole opinion, to cover all personal liability, theft or damage to the project, including but not limited to floor coverings, doors, walls, elevators, stairs, foliage, and landscaping. Special care. must be taken to prevent damage to foliage and landscaping during adverse weather. All moving operations will be conducted at such times and in such a manner as landlord will direct, and all moving will take place during non-business hours unless landlord agrees in writing otherwise. Tenant will be responsible for the provision of building security during all moving operations, and will be liable for all losses and damages sustained by any party as a result of the failure to supply adequate security. Landlord will have the right to prescribe the weight, size, and position of all equipment, materials, furniture, or other property brought into the building. Heavy objects will, if considered necessary by landlord, stand on wood strips of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such property from any cause, and all damage done to the building by moving or maintaining such property will be repaired at the expense of tenant. Landlord reserves the right to inspect all such property to be brought into the building and to exclude from the building all such property which violates any of these rules and regulations or the lease of which these rules and regulations are a part. Supplies, goods, materials, packages, furniture, and all other items of every kind delivered to or taken from the premises will be delivered or removed through the entrance and route designated by landlord, and landlord will not be responsible for the loss or damage of any such property unless such loss or damage results from the negligence of landlord, its agents, or employees. 10. No tenant will use or keep in the premises or the building any kerosene, gasoline, or inflammable or combustible or explosive fluid or material or chemical substance other than limited quantities of such materials or substances reasonably necessary for the operation or maintenance of office equipment or limited quantities of cleaning fluids and solvents required in tenant's normal operations in the premises. Without landlord's prior written approval, no tenant will use any method of heating or air conditioning other than that supplied by landlord. No tenant will use or keep or permit to be used or kept any foul or noxious gas or substance in the premises. 11. Landlord will have the right, exercisable upon written notice and without liability to any tenant, to change the name and street address of the building. 12. Landlord will have the right to prohibit any advertising by tenant mentioning the building that, in landlord's reasonable opinion, tends to impair the reputation of the building or its desirability as a building for offices, and upon written notice from landlord, tenant will refrain from or discontinue such advertising. 13. Tenant will not bring any animals (except "Seeing Eye' dogs) or birds into the building, and will not permit bicycles or other vehicles inside or on the sidewalks outside the building except in areas designated from time to time by landlord for such purposes 14. All persons entering or leaving the building between the hours of 6pm and 7am Monday through Friday, and at all hours on Saturday, Sundays, and holidays will comply with such off-hour regulations as landlord 31 may establish and modify from time to time. Landlord reserves the right to limit reasonably or restrict access to the building during such time periods. 15. Each tenant will store all its trash and garbage within its premises. No material will be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage without being in violation of any law or ordinance governing such disposal. All garbage and refuse disposal will be made only through entryways and elevators provided for such purposes and at such times as landlord designates. Removal of any furniture or furnishings, large equipment, packing crates, packing materials, and boxes will be the responsibility of each tenant and such items may not be disposed of in the building trash receptacles nor will they be removed by the building's janitorial service, except at landlord's sole option and at the tenant's expense. No furniture, appliance, equipment, or flammable products of any type may be disposed of in the building trash receptacles. 16. Canvassing, peddling, soliciting, and distributing handbills or any other written materials in the building are prohibited, and each tenant will cooperate to prevent the same. 17. The requirements of the tenants will be attended to only upon application by written, personal, or telephone notice at the office of the property manager of landlord. Property manager may not do anything outside of their regular duties unless under special instructions from landlord. 18. A directory of the building will be provided for the display of the name and location of tenants. Any additional name(s) that tenant desires to place in such directory must first be approved by landlord, and if so approved, tenant will pay to landlord a charge, set by landlord, for each such additional name. All entries on the building directory display will conform to standards and style set by landlord in its sole discretion. Space on any exterior signage will be provided in landlord's sole discretion. No tenant will have any right to the use of any exterior sign. 19. Tenant will see that the doors of the premises are closed and locked and that all water faucets, water apparatus, and utilities are shut off before tenant or tenant's employees leave the premises, so as to prevent waste or damage, and for any default or carelessness in this regard tenant will make good all injuries sustained by other tenants or occupants of the building or landlord. On multiple-tenancy floors, all tenants will keep the doors to the building corridors closed at all times except for ingress and egress. 20. Tenant will not conduct itself in any manner that is inconsistent with the character of the building as a first quality building or that will impair the comfort and convenience of the tenants in the building. 21. Neither landlord nor any operator of the parking areas within the project, as the same are designated and modified by landlord, in its sole discretion, from time to time (the "parking areas") will be liable for loss of or damage to any vehicle or any contents of such vehicle or accessories to any such vehicle, or any property left in any of the parking areas, resulting from fire, theft, vandalism, accident, conduct of other users of the parking areas and other persons, or any other casualty or cause. Further, tenant understands and agrees that: (a) landlord will not be obligated to provide any traffic control, security protection or operator for the parking areas; (b) tenant uses the parking areas at its own risk; and (c) landlord will not be liable for personal injury or death, or theft, loss of, or damage to property. Tenant waives and releases landlord from any and all liability arising out of the use of the parking areas by tenant, its employees, agents, invitees, and visitors, whether brought by any of such persons or any other person. 22. Tenant (including tenant's employees, agents, invitees, and visitors) will use the parking spaces solely for the purpose of parking passenger model cars, small vans, and small trucks and will comply in all respects with any rules and regulations that may be promulgated by landlord from time to time with respect to the parking areas. The parking areas may be used by tenant, its agents, or employees, for occasional overnight parking of vehicles. Tenant will ensure that any vehicle parked in any of the parking spaces will be kept in proper repair and will not leak excessive amounts of oil or grease or any amount of gasoline. If any of the parking spaces are at any time used (a) for any purpose other than parking as provided above; (b) in any way or manner reasonably objectionable to landlord; or (c) by tenant after default by tenant under the lease, landlord, in addition to any other rights otherwise available to landlord, may consider such default an event of default under the lease. 32 23. Tenant's right to use the parking areas will be in common with other tenants of the project and with other parties permitted by landlord to use the parking areas. Landlord reserves the right to assign and reassign, from time to time, particular parking spaces for use by persons selected by landlord, provided that tenant's rights under the lease are preserved. Landlord will not be liable to tenant for any unavailability of tenant's designated spaces, if any, nor will any unavailability entitle tenant to any refund, deduction, or allowance. Tenant will not park in any space designated as: RESERVED, HANDICAPPED, VISITORS ONLY, or LIMITED TIME PARKING (or similar designation). 24. If the Parking areas are damaged or destroyed, or if the use of the parking areas is limited or prohibited by any governmental authority, or the use or operation of the parking areas is limited or prevented by strikes or other labor difficulties or other causes beyond landlord's control, tenant's inability to use the parking spaces will not subject landlord or any operator of the parking areas to any liability to tenant and will not relieve tenant of any of its obligations under the lease and lease will remain in full force and effect. 25. Tenant has no right to assign or sublicense any of its rights in the parking spaces, except as part of a permitted assignment or sublease of the lease; however tenant may allocate the parking spaces among its employees or contractors. 26. No act or thing done or omitted to be done by landlord or landlord's agent during the term of the lease in connection with the enforcement of these rules and regulations will constitute an eviction by landlord of any tenant nor will it be deemed an acceptance of surrender of the premises by any tenant, and no agreement to accept such termination or surrender will be valid unless in a writing signed by landlord. The delivery of keys to any employee or agent of landlord will not operate as a termination of the lease or a surrender of the premises unless such delivery of keys is done in connection with a written instrument executed by landlord approving the termination or surrender. 27. In these rules and regulations, tenant includes the employees, agents, invitees, and licensees of tenant and others permitted by tenant to use or occupy the premises. 28. Landlord may waive anyone or more of these rules and regulations for the benefit of any particular tenant or tenants, but no such waiver by landlord will be construed as a waiver of such rules and regulations in favor of any other tenant or tenants, nor prevent landlord from enforcing any such rules and regulations against any or all of the tenants of the building after such waiver. 29. These rules and regulations are in addition to, and will not be construed to modify or amend, in whole or in part, the terms, covenants, agreements, and conditions of the lease. 30. Tenant shall keep landlord advised of the current telephone numbers of tenants' employees who may be contacted in an emergency; i.e.. fire, break-in, vandalism, etc.. 31. Tenant will not smoke or permit its employee or invitees to smoke in the building. 33 February 21, 1995 Mr. Gary Hansen Pacific Trail, Inc. 1310 Mercer Street Seattle. WA 98109 RE: The Lake Union Building Pacific Trail Lease Commencement/T.I. Cost Dear Gary: This letter is attached to and made a part of that certain office "Lease" and "Work Letter" dated August 23, 1994, pursuant to which Landlord ("The Bartell Drug Company") has leased to Tenant ("Pacific Trail. Inc.") office space in The Lake Union Building. AMENDMENT TO LEASE AGREEMENT Lease Commencement Date and Lease Expiration Date Landlord as a result of unforeseen delays relating to tenant improvements herein agrees to change the "Commencement of Rent" date from March 1, 1995, to April 1, 1995, and further agrees to add one (1) month to the term of the agreement from February 29, 2000, to March 31, 2000. It is understood that rent commencement shall not be subject to "possession" or completion of tenant improvements, unless possession delayed solely by fault of landlord or landlords contractors. Also, please let this letter serve as a technical notification, pursuant to the "Lease" and "Work Letter" dated August 23, 1994, relating to paragraph six (6). page twenty-seven (27) entitled "Schedule of Improvement Activities." that the cost is more than the tenant finish allowance provided by Landlord. Tenant herein agrees to pay any amounts that exceed the maximum Landlord tenant finish allowance of $ 600.000.00. pursuant to terms described herein: provided, however, in no case shall tenant be required to pay more that the sum of $183.890.50 (tenant cost as of 2/21/95-see attached), unless tenant signs change orders for additional work. The total estimated cost of the improvements (as of this writing - per attached recapitulation) is $783.890.50 of which the Landlords participation approximates seventy-seventy percent (77%) and Tenants participation approximates twenty-three percent (23%). Should the total cost change, the pro-rata shares of the Landlord and Tenant will be adjusted for payment purposes, until the $600.000.00 maximum has been paid by the Landlord. Upon the $600.000.00 maximum being paid, the Tenant will be responsible for any additional amounts as defined in the "Work Letter." subject to the foregoing limitations. Paragraph seven (7). page twenty-eight (28)" Payment by Tenant" Beginning Feb. 28. 1995, and each month end thereafter until paid in full, Landlord will bill Tenant based on Tenants pro-rata share of tenant improvement cost, as of that date. Tenant agrees to promptly pay such invoices pursuant to paragraph seven (7) of the "Work Letter." The first invoice will include tenants share of the approximate amounts already paid by Landlord as of this writing. Mr. Gary Hansen February 17. 1995 Page Two It is understood that all change orders and requests for payments shall be directed to Ms Cindy Marks, for review and approval. London Fog Industries 1332 Londontown Boulevard Eldersburg, Maryland 21784 Telephone: 410 549-8111 Fax: 410 549-8026 All term and conditions of that certain "Lease" and 'Work Letter' dated August 23, 1994, not expressly changed herein remain in full force and effect. If this meets with your approval, please sign in the space provided below, and return two signed copies to me for Landlords signature. Upon full execution, I will return one copy to you. Sincerely, CHILES & COMPANY, INC. Lyn Saucier Property Manager Attachment cc: Ms. Cindy Marks - London Fog Industries Mr. Smart Fisher - London Fog Industries LANDLORD TENANT By /s/ Jean L. Barber By /s/ C. William Crain ----------------------------- ------------------------------ The Bartell Drug Company/ Pacific Trail, Inc. G. Henbart Company Date 2/27/95 Date 2/22/95 ----------------------------------- ---------------------------- EX-10.12 20 EXHIBIT 10.12 LEASE ADDENDUM (Additional Space/Lease Extension) This addendum is to the lease dated August 23, 1994, by and between The Bartell Drug Company, "Landlord," and Pacific Trail, Inc. "Tenant." All terms and conditions of this lease apply to the addition of 4,389 rentable square feet located in the Northeast corner of floor one. 1. Additional Space: Suite 100 (Northeast corner) Outline of space Attached as Exhibit "A" 2. Size: 4,389 rentable square feet; includes a 10% load factor 3. Term: Five (5) Years 4. Lease Commencement: October 1, 1998 (subject to the completion or substantial completion of tenant improvements) 5. Lease Expiration: September 30, 2003 (or 60 months after the Commencement Date) 6. Rental Rate Additional Space: The rental rate shall be the fully serviced rate charged Tenant by Landlord per Rentable Square Foot (RSF), as defined by the Building Owners and Managers Association International. Initial Term - The rental rate shall be as follows: RATE ANNUAL RATE PER RSF $ 7,040.69 $19.25 On each anniversary of the Lease Commencement Date ("The Adjustment Date"), for the additional 4,389 rentable square feet, the Rent shall be adjusted by multiplying the current Rent by a CPI Ratio, wherein the numerator is the applicable "Current CPI Index" and the denominator is the "Base CPI Index" provided, however, that the CPI Ratio shall not be less than one. Adjustments (if any) shall be based upon increases (if any) in the index, and shall not exceed 5% for any annual adjustment. The CPI index in PUBLICATION THREE (3) MONTHS BEFORE THE COMMENCEMENT DATE SHALL BE THE "BASE INDEX." THE CPI INDEX IN PUBLICATION THREE (3) MONTHS BEFORE EACH ADJUSTMENT DATE SHALL BE THE "COMPARISON Index." The CPI index shall be the Consumer Price Index for All Urban Consumers issued by the United States Department of Labor, or the most similar index available should this index no longer be published. Lease Addendum - Pacific Trail Page 2 July 6, 1998 7. Tenant Improvements - Additional Space: Landlord shall provide "turnkey" improvements based on a mutually acceptable space plan. Landlord shall make any necessary wall, window or ceiling repairs required prior to Tenant's occupancy. In addition, Landlord shall clean up any loose asbestos in the premises and if necessary, do any other asbestos abatement work required by law, prior to Tenant's occupancy. 8. Tenant Improvements - Suite 200: After April 1, 2000 and at Tenant's request, Landlord shall paint and re-carpet suite 200 as required. Painting and carpet replacement (subject to availability) shall commence within sixty (60) days of Tenant's request. 9. Space Planning: Landlord's architect shall provide reasonable space planning at Landlord's sole cost and expense. 10. Parking: Parking shall be available at the rate of 2 stalls per l,000 square feet leased (4,389 RSF = eight (8) spaces). The initial parking charge shall be $75.00 per month for covered spaces and $65.00 per month for uncovered parking spaces. The parking charge is subject to rate increases (pursuant to current market rates) during the lease term. Subject to availability, additional parking may be available on a month-to-month basis. Month-to-month parking spaces may be rescinded by the Landlord at any time during the lease term, by giving the Tenant thirty (30) days notice prior to rescinding such month-to-month parking spaces. If at the commencement of a lease the Tenant elects not to rent the eight (8) parking spaces allotted to them, or if during the lease term any of the eight (8) parking spaces are returned to the Landlord, reassignment of such spaces will be subject to availability, and may be reassigned on a month-to-month-basis. Landlord reserves the right to relocate parking spaces during the lease term. If relocation becomes necessary, Landlord will put forth effort to ensure that all newly assigned parking spaces will be on the same parking level as the previously assigned parking spaces. 11. Lease Cancellation - Suite 712 Upon full execution of a Lease Addendum between the Lake Union Building LLC and Pacific Trail, Inc., for 4,389 rentable square feet of suite 100, the Lake Union Building LLC shall release Pacific Trail, Inc. from it's Agreement executed March 2, 1998, for suite 712. 12. Suite 200 Lease Term Extension The Landlord shall agree to extend the lease term of the Lease dated August 21, 1994, between The Bartell Drug Company, "Landlord" and Pacific Trail, Inc., "Tenant." The extension term shall be three (3) years and six (6) months, commencing April 1, 2000, Lease Addendum - Pacific Trail Page 3 July 6, 1998 ending September 30, 2003. 13. Rental Rate Suite 200 and Northwest corner of floor one - Extension Period The rental rate shall be the fully serviced rate charged Tenant by Landlord per Rentable Square Foot (RSF), as defined by the Building Owners and Managers Association International The rental rate effective April 1, 2000 shall be as follows: $ 32,930.63 per month $ 22.50 per RSF On each anniversary of the Lease Commencement Date ("The Adjustment Date"), for the initial 17,563 rentable square feet, the Rent shall be adjusted by multiplying the current Rent by a CPI Ratio, wherein the numerator is the applicable "Current CPI Index" and the denominator is the "Base CPI Index" provided, however, that the CPI Ratio shall not be less then one. Adjustments (if any) shall be based upon increases (if any) in the index, and shall not exceed 5% for any annual adjustment. The CPI index in publication three (3) months before the Commencement Date of the Extension Period (January 2000) shall be the "Base Index." The CPI index in publication three (3) months before each Adjustment Date shall be the "Comparison Index." The CPI index shall be the Consumer Price Index for All Urban Consumers issued by the United States Department of Labor, or the most similar index available should this index no longer be published. 14. Asbestos: The following building materials were found to be asbestos-containing throughout The Lake Union Building: Spray-applies fireproofing and overspray: located above the suspended ceilings and throughout the building and in the parking structure (15-25% chrysotile asbestos, friable and in good condition, debris exist on suspended ceiling throughout). Hard pipe fitting insulation on fiberglass insulated pipes: located above ceiling, behind wall, and in fan rooms: friable and in good condition. Tenant acknowledges receipt of "Asbestos Notification" delivered May 8, 1998. Tenant understands the responsibilities of building tenants regarding performing work in their leased premises. Through September 30, 2003, Landlord shall pay up to $5,000.00 pet year for any spot abatement, pre-cleaning, air monitoring or other asbestos related work required due to Tenant's need for work above the ceiling, or Tenant's need for work that involves entering or demolition of walls within the leased premises. The $5,000.00 limit per year applies to all space occupied by Tenant and does not include any work required by the Landlord to comply with any law, statute, ordinance, or governmental rule, regulation or requirement. Lease Addendum - Pacific Trail Page 4 July 6, 1998 Any asbestos spot abatement, pre-cleaning, air monitoring or other asbestos related work required, as part of the Landlord's work in preparing the additional space shall not be included in the $5,000.00 limit stated above. 15. Option To Lease Southeast corner of floor one (balance of suite 100): Landlord shall provide Tenant a "Right Of First Opportunity," for the Southeast corner of floor one. The "Right Of First Opportunity" shall be exercised by written notice to Landlord within ten (10) business days of Tenant's receipt of notice from Landlord that the space is available. If tenant fails to deliver written notice to Landlord within ten (10) business days of receipt of notice from Landlord, such "Right Of First Opportunity" shall lapse, and there shall be no further "Right Of First Opportunity." In the event of any conflict between the terms of this Addendum and the Lease, the terms of this Addendum shall prevail. LANDLORD TENANT Lake Union Building LLC Pacific Trail, Inc. BY: BY: -------------------------- ----------------------------- ITS: ITS: ------------------------- ---------------------------- DATE: DATE: ------------------------ --------------------------- Lease Addendum- Pacific Trail Page 5 June 30,1998 ACKNOWLEDGMENT OF LANDLORD STATE OF WASHINGTON ) ) SS. COUNTY OF KING ) On this ______________________ day of ________________________________ ,19 ________ , before the undersigned, a Notary Public in and for the State of Washington, personally appeared _____________________________ and _______________________ to me known to be the ______________________________ and __________________________ of the corporation that executed the within and foregoing Lease Addendum, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument and that the seal affixed is the corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. ---------------------------------------- NOTARY PUBLIC in and for the State of Washington, residing at ________________ Lease Addendum - Pacific Trail Page 6 June 30, 1998 ACKNOWLEDGMENT OF TENANT (Corporate) STATE OF _______________ ) ) SS. COUNTY OF ______________ ) On this _________________ day of __________________ ,19 _______ , before the undersigned, a Notary Public in and for the State of________________ , personally appeared __________________________________ and ____________________________ to me known to be the ____________ _____________________ and ______________________________ of the corporation that executed the within and foregoing Lease Addendum, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument and that the seal affixed is the corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. ---------------------------------------- NOTARY PUBLIC in and for the State of ____________________________________, residing at____________ [GRAPHIC OMITTED] THE LAKE UNION BUILDING - FIRST FLOOR PLAN 1700 WESTLAKE AVENUE NORTH EX-10.13 21 EXHIBIT 10.13 DEED OF TRUST AND SECURITY AGREEMENT THIS DEED OF TRUST AND SECURITY AGREEMENT (the "Deed of Trust"), made this 27th day of December, 1989, by LONDONTOWN CORPORATION, a Delaware corporation having an office at Londontown Boulevard, Eldersburg, Maryland 21784 ("Borrower"), to DANIEL L. WIENEKE and JACK N. ZEMIL, as Trustees ("Trustees"), for the benefit of METLIFE CAPITAL CREDIT CORPORATION, a Delaware corporation having an office at Ten Stamford Forum, Stamford, Connecticut 06904 ("Lender"). WITNESSETH: WHEREAS, pursuant to the Loan Commitment dated October 16, 1989, between Borrower and Lender, Lender has agreed to loan to Borrower the maximum principal amount of up to $14,000,000.00 (the "Loan") the repayment of which is to be secured by the execution and delivery of this Deed of Trust; and WHEREAS, to evidence the terms of repayment of the Loan with interest, Borrower has duly executed and delivered a deed of trust note of even date herewith in the principal amount of $14,000,000.00 (the "Note"); and WHEREAS, this Deed of Trust was executed and delivered to secure: (i) the repayment of the Note and the monies advanced by Lender and evidenced by the Note, with interest thereon in accordance with the terms and conditions of the Note and this Deed of Trust, and (ii) the performance of covenants, agreements and conditions contained in any and all other documents which Borrower has executed and delivered or may hereafter execute and deliver to Lender in connection with the Loan, to evidence or secure any such sums advanced under any of the foregoing documents and including, without limitation, the Assignment of Leases and Rents and the Financing Statements, each of even date herewith which secure the payment and performance of all of the foregoing (which documents, as same may be modified or amended from time to time, are hereafter collectively referred to as the "Loan Documents"); and WHEREAS, all things necessary to make the Note a valid and binding obligation of Borrower, and to make this Deed of Trust a valid and binding instrument to secure the payment of the Note in accordance with its terms, have been duly performed and the execution and delivery of the Note and this Deed of Trust by Borrower have been duly authorized; and WHEREAS, Borrower is the fee simple owner of the Property (as hereinafter defined). NOW, THEREFORE, THIS DEED OF TRUST WITNESSETH: THAT, in consideration of the premises and of the acceptance by the Trustees of the trusts hereby created; and of the Loan, and the acceptance of the Note by Lender, and of the sum of $1.00 in hand paid by Trustees, at or before the ensealing and delivery of these presents, the receipt and sufficiency of which is hereby acknowledged, and in order to secure the payment of the principal of, and the interest and premiums, if any, on the Note, the payment of all other and further sums due or which may become due under the Note or the other Loan Documents, including future advances, if any, and the performance of the covenants, agreements, and provisions contained herein and in the other Loan Documents, Borrower has executed and delivered these presents and has irrevocably bargained, sold, granted, conveyed, assigned, transferred and set over, and by these presents does hereby irrevocably bargain, sell, grant, convey, assign, transfer and set over unto Trustees and their and each of their successors and assigns in trust with power of sale and the right of entry and possession, forever, all of its fee simple interest in the land, more particularly described in Exhibit A attached hereto and made a part hereof (the "Land"), and any buildings and improvements (including but not limited to site work, utilities conduits owned by Borrower, paving and landscaping), now or hereafter located thereon (the "Improvements") (the Land and the Improvements are together hereinafter referred to as the "Property"). TOGETHER WITH: (a) all and singular the rights, alleys, ways, waters, tenements, hereditaments, easements, appurtenances, riparian rights, advantages, accessions and privileges, whether public or private, now or hereafter belonging or appertaining to the Property or any part thereof, including, without limitation, all right, title and interest of Borrower, if any, in and to all streets, roads and public places, opened or proposed, whether presently owned or after-acquired and also all the estate, property, claim, right, title or interest now owned or hereafter acquired by Borrower in or to the Property and/or Collateral (as hereinafter defined) or any part thereof; (b) all fixtures, fittings, furnishings, appliances, apparatus, equipment, and machinery, and all articles of personal property of every kind and nature whatsoever now or hereafter located in or upon any interest or estate in land herein conveyed or any part thereof and used or usable in connection with any present or future operation of the Property and now owned or hereafter acquired by Borrower including, without limiting the generality of the foregoing, all screens, storm windows and doors, floor coverings, shrubbery, plants, boilers, tanks, machinery, wall racking and rail systems, conveyor systems, wiring, furnaces, radiators, blinds and all heating, lighting and flood lighting, plumbing, power, water, refrigerating, gas, electric, ventilating, air conditioning, fire protection, sprinkler, maintenance and incinerating systems and equipment, elevators and escalators and including all equipment now or hereafter installed and used in the operation of the Property and all building material, supplies and equipment now or hereafter delivered to the Property and now or hereafter installed therein; and all renewals or replacements thereof or articles in substitution thereof; and all proceeds and profits thereof; it being understood and agreed that, all of the estate, right, title and interest of Borrower in and to all property of any nature whatsoever now or hereafter situated on the Property and essential to the utilization and operation of the Property, to the extent permitted by law, shall be deemed to be fixtures and an accession to the freehold and a part of the realty as between the parties hereto, and shall be deemed to be a portion of the security for the indebtedness herein mentioned and secured by this Deed of Trust; provided, however, that notwithstanding the provisions of this subsection (b), furniture, equipment, machinery and personal property (including all replacements thereof) owned by lessees of -2- Borrower, if any, shall not be deemed to be subject to the lien of this Deed of Trust and the security interest created hereunder. If the lien of this Deed of Trust on any fixtures or personal property be subject to a lease agreement, conditional sale agreement or chattel mortgage covering such property, then in the event of any Default hereunder all the rights, title and interest of Borrower in and to any and all deposits made thereon or therefor are hereby assigned to Trustees, together with the benefit of any payments now or hereafter made thereon. There is also transferred, set over and assigned by Borrower to Trustees, their successors and assigns, all leases and use agreements of machinery, equipment and other personal property of Borrower in the categories hereinabove set forth, under which Borrower is the lessee of, or entitled to use, such items, and Borrower agrees to execute and deliver to Trustees or Lender specific separate assignments to Trustees or Lender of such leases and agreements when requested by Trustees or Lender; but nothing herein shall obligate Trustees or Lender to perform any obligations of Borrower under such leases or agreements unless they so choose, which obligations Borrower hereby covenants and agrees to punctually perform. The items set forth in this Paragraph (b) and in Paragraphs (c), (d), (e), (f) and (g) hereof are sometimes hereinafter separately referred to as "Collateral"; (c) all right, title and interest of Borrower in and to all rents, incomes, profits, security deposits, contract rights, plans and specifications, rights in action with respect to the Property, general intangibles and benefits under any and all leases or tenancies now existing or hereafter created on or for the Property or any part thereof with the right to receive and apply the same to said indebtedness; (d) all right, title and interest of Borrower in and to all judgments, awards of damages and settlements hereafter made as a result of or in lieu of any taking of the Property or any part thereof or interest therein under the power of eminent domain, or for any damage (whether caused by such taking or otherwise) to the Property or any part thereof or interest therein, including any award for change of grade of streets; (e) all proceeds of casualty, rent or business interruption insurance policies covering the Property or the Collateral or both; (f) all proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims; and (g) all licenses and permits from any governmental authority necessary for or reasonably appropriate to the use and operation of the Property. To the extent any individuals or corporations other than Borrower are licensees or permittees under any such licenses or permits, Borrower agrees to use reasonable efforts in good faith to cause each such individual or corporation to execute an assignment of such license or permit to Trustees in form and content reasonably satisfactory to Lender and to file such assignment with the appropriate governmental agency. Borrower further agrees that it will not allow any substitution or change in the licensees or permittees under any such license or permit without the prior written consent of Trustees and Lender, such consent not to be unreasonably withheld or delayed if such substitution or change in licensees or permittees is to a subsidiary or affiliate of the Borrower. - 3 - TO HAVE AND TO HOLD the Property and Collateral and all other interests described above unto Trustees, the survivors and the survivor of them and their or his successor or successors in the trust, in fee simple. BUT IN TRUST, NEVERTHELESS to secure to Lender and to Trustees for the benefit of Lender (a) the payment of all sums of money secured hereby, including all sums of principal and interest due or to become due under the Note, all other moneys now or hereafter advanced or expended by Trustees or Lender as provided for herein or in any other of the Loan Documents and all costs, expenses, commissions, and reasonable attorney's fees now or hereafter chargeable to, or incurred by, or disbursed by Trustees, Lender or Borrower as provided for herein, or in any other of the Loan Documents, or by applicable law, and (b) the performance of, observance of and compliance with, by Borrower, all of the terms, covenants, conditions, stipulations and agreements contained herein or in any of the Loan Documents. PROVIDED, HOWEVER, that until the occurrence of an Event of Default (as hereinafter defined) hereunder or under any of the other Loan Documents, and subject to any provisions hereof or the Assignment of Leases and Rents to the contrary, Borrower shall have the sole right to remain in peaceful possession of the Property, and to collect, receive and retain the rents, revenues, profits, proceeds, income and royalties therefrom. PROVIDED FURTHER, HOWEVER, that if Borrower shall pay or cause to be paid to Lender the principal and interest to become due thereupon at the time and in the manner stipulated in the Note, and shall pay or cause to be paid all other sums payable hereunder and under the other Loan Documents and all indebtedness hereby secured, then, in such case, the estate, right, title and interest of Trustees and Lender in the Property shall cease, determine and become void, and upon proof being given to the reasonable satisfaction of Lender that the Note, together with interest thereon have been paid or satisfied, and upon payment of all fees, costs, charges, expenses and liabilities chargeable or incurred or to be incurred by Trustees or Lender under the Loan Documents, and of any other sums as provided thereunder or hereunder, Trustees shall, upon receipt of the written request of Lender cancel, release and discharge this Deed of Trust and cause same to be cancelled and marked satisfied of record. AND THIS DEED OF TRUST FURTHER WITNESSETH, that Borrower, for itself, its successors and assigns, has covenanted and agreed and does hereby covenant and agree with Trustees, and their and each of their successor or successors in the trust, and each of their assigns, and Lender as follows: ARTICLE I Borrower's Covenants Borrower covenants and agrees with Trustees and Lender that: 1.01 Title. -4- (a) Borrower warrants that at the time of the execution and delivery of this Deed of Trust: (i) Borrower is the owner of the fee simple title to the Property and is lawfully seized and possessed of such interest in the Property subject to no liens, charges or encumbrances other than the exceptions to title in Schedule B of Title Commitment No. LTC 14982, issued by Transamerica Title Insurance Company, originally dated November 20, 1989, and redated effective as of the date hereof; (ii) this Deed of Trust is and shall remain a valid and enforceable first lien on Borrower's fee simple interest in the Property, subject only to those exceptions to title in Schedule B of Title Commitment No. LTC 14982, issued by Transamerica Title Insurance Company, originally dated November 20, 1989, and redated effective as of the date hereof; and (iii) Borrower and Borrower's successors and assigns shall warrant specially and defend the same forever against the lawful claims and demands of all persons whomsoever claiming by, through or under Borrower. (b) Borrower has and shall maintain title to the Collateral including any additions or replacements thereto free of all security interests, liens and encumbrances, other than as disclosed to and accepted by Lender in writing, and has good right to subject the Collateral to the security interest hereunder. (c) Borrower shall, at the cost of Borrower, and without expense to Lender, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, deeds of trust, assignments, notices of assignments, transfers and assurances as Lender shall from time to time reasonably require, for the better assuring, conveying, assigning, transferring and confirming unto Trustees or Lender the Property and rights hereby conveyed or assigned or intended now or hereafter so to be, or which Borrower may be or may hereafter become bound to convey or assign to Trustees or Lender, or for carrying out the intention of facilitating the performance of the terms of this Deed of Trust and, within fifteen (15) days after demand, shall execute and deliver, one or more financing statements, chattel mortgages or comparable security instruments, to evidence more effectively the lien hereof upon the Collateral or the Property. (d) Borrower forthwith upon the execution and delivery of this Deed of Trust, and thereafter from time to time as reasonably required by Lender, shall cause this Deed of Trust and any security instrument creating a lien or evidencing the lien hereof upon the Collateral and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect the lien hereof upon, and the interest of Trustees or Lender in, the Property and the Collateral. (e) Borrower shall pay all filing, registration or recording fees, and all reasonable expenses incident to the preparation, execution and acknowledgment of this Deed of Trust, any deed of trust supplemental hereto, any security instrument with respect to the Collateral, and any instrument of further assurance, and all federal, state, county and municipal stamp taxes and other taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of the Note, this Deed of Trust, any deed of trust supplemental hereto, any security instrument with respect to the Collateral or any instrument of further assurance whether imposed at the -5- time of executing the Note or imposed at any time prior to the Note being paid and satisfied in full. In the event of the passage after the date of this Deed of Trust of any law changing in any way the laws for the taxation of deeds of trust or debts secured by deeds of trust, or the manner of collection of any such taxation so as to affect this Deed of Trust, Lender may give thirty (30) days written notice to Borrower requiring the payment of the indebtedness secured hereby. If such notice be given, the indebtedness secured hereby shall become due and payable at the expiration of said thirty (30) days; provided, however, that such requirement of payment shall be ineffective if Borrower is permitted by law to pay the whole of such tax in addition to all other payments required hereunder, without any penalty or charge thereby accruing to Lender, and if Borrower in fact pays such tax prior to the date upon which payment is required by such notice. (f) Subject to the right of Borrower to contest such laws, as set forth in Paragraph 1.04 hereof, Borrower shall comply with all present and future regulations, rules, ordinances, statutes, orders and decrees of any governmental authority or court applicable to Borrower, to the Property, to the Collateral or any part thereof or to the use or operation thereof. 1.02 Payment of Note and Escrow Account. (a) Borrower shall promptly and punctually pay all installments of principal and interest, and all other sums to become due under the Note and the other Loan Documents, in the manner provided in the Note, this Deed of Trust and the other Loan Documents. (b) After the occurrence of an Event of Default as defined in Section 2.01 herein, by Borrower under the Note or any of the other Loan Documents, and upon Lender's demand, Borrower shall pay to Lender together with and in addition to the monthly payments of principal and interest payable under the terms of the Note secured hereby, on the first day of each month, until the Note is fully paid, a sum equal to: (i) the annual taxes, levies, charges, fees and special assessments due on the Property covered by this Deed of Trust; and (ii) the annual premiums for the insurance policies as may be required under Paragraph 1.05 hereof, Borrower agreeing to deliver promptly to Lender all bills and notices thereof, less all sums already paid therefor, divided by the number of months remaining before thirty (30) days prior to the date when such premiums, taxes, levies, charges, fees and special assessments, as the case may be, will become delinquent, such sums to be held by Lender to pay said premiums, taxes and special assessments. If the amounts to be paid for the taxes, levies, charges, fees and special assessments are not ascertainable at the time any deposit is required to be made, the deposit shall be made on the basis of the amounts of such payments for the prior year as adjusted for known or reasonably anticipated increases in such taxes, charges and premiums, and upon the amounts of such payments being fixed for the then current year, Borrower, upon notice from Lender, shall deposit any deficiency with Lender. Such payments, hereinafter referred to as "Reserves," may be held without any allowance of interest or dividend to Borrower and need not be kept separate and apart from other escrow funds of Lender. All payments mentioned in this paragraph and all payments to be made under the Note secured hereby shall be added together and the aggregate amount thereof shall be paid by Borrower each month in a single payment to be applied by - 6 - Lender to the payment of the following items in the order set forth:(i) taxes, levies, charges, fees, special assessments, fire and other hazard insurance premiums; (ii) interest on the Note secured hereby; and (iii) amortization of the principal of said Note. (c) The arrangement provided for in Paragraph 1.02(b) is solely for the added protection of Lender and entails no responsibility on Lender's part beyond the provision of notice to Borrower to make such payments to Lender and the allowance of due credit, without interest, for the sums actually received by it. Upon assignment of this Deed of Trust by Lender, any funds on hand pursuant to this Article 1 shall be turned over to the assignee, and any responsibility of the assignor with respect thereto shall terminate upon the making of such payment to such assignee. (d) If the total of the Reserves, described in Paragraph 1.02(b) hereof, shall exceed the amount of payments actually applied by Lender as set forth in Paragraph 1.02(b), such excess may be credited by Lender on subsequent payments to be made by Borrower or, at the option of Lender, refunded to Borrower or its successors in interest as may appear on the records of Lender, except to the extent that it may not do so under Title 12 of the Commercial Law Article of the Annotated Code of Maryland (1975 Replacement Volume and 1980 Cum. Supp.). If, however, the Reserves shall not be sufficient to pay the sums required when the same shall become due and payable, Borrower upon notice from Lender shall immediately deposit with Lender the full amount of any such deficiency. If there is an Event of Default under this Deed of Trust or any of the other Loan Documents, Lender may, but shall not be required to apply, at any time, the balance then remaining in the funds accumulated under Paragraph 1.02(b) hereof, less such sums as will become due and payable during the pendency of the proceedings, against the amounts due and payable under the Note, or under any other of the Loan Documents, except to the extent that it may not do so under Title 12 of the Commercial Law Article of the Annotated Code of Maryland (1975 Replacement Volume and 1980 Cum. Supp.). 1.03 Maintenance, Repair and Inspection. Borrower shall keep the Property and Collateral in good operating order, repair and condition and shall not commit or permit any waste thereof. Borrower shall, in accordance with all applicable building codes and regulations, make all repairs, replacements, renewals, additions and improvements and complete and restore promptly and in good workmanlike manner any building or improvements which may be constructed, damaged, or destroyed thereon, and pay when due all costs incurred therefor. Borrower shall not remove from the Property or demolish any of the Collateral, nor demolish or materially alter such Property or Collateral, except as permitted in accordance with Sections 1.11 and 1.16 herein, without the prior written consent of Lender, such consent not to be unreasonably withheld or delayed. Borrower shall permit Trustees or Lender or their agents the opportunity to inspect the Property, including the interior of any structures, at any reasonable times, as often as may be reasonably requested by Lender or Trustees, and upon reasonable prior notice to Borrower. Lender and Trustees shall observe Borrower's safety requirements during the conduct of such inspections. - 7 - 1.04 Compliance with Laws. Borrower shall comply with all laws, ordinances, regulations, permits, covenants, conditions, orders, decrees, and restrictions of any governmental boards, agencies, authorities or commissions affecting Borrower, the Property, the Collateral or the operation or use of the Property or Collateral, and shall pay all fees or charges of any kind in connection therewith. Borrower shall promptly after receipt thereof report to Lender all notices of violations of any laws, ordinances, regulations, permits, covenants and restrictions. Borrower shall have the right to postpone such compliance to contest in good faith the validity or applicability to Borrower, the Property, the Collateral or the uses thereof, of such laws, ordinances, regulations, orders and restrictions, so long as Borrower notifies Lender in writing of its intention to contest the validity or applicability of such laws, the validity or applicability thereof is being contested in good faith and the security of the Lender's lien on the Property and the Collateral shall not be impaired in the event such contest shall be unsuccessful. If compliance with such contested matter is required as a condition of the conduct of such contest or because the Property shall be in imminent danger of being forfeited or subject to any additional liens, Borrower shall comply with all requirements during the pendency of such contest. In any event, Borrower may pay to such governmental boards, agencies, authorities or commissions any amounts hereunder under protest, and if recovered, retain any refund of all or any part thereof after payment to Lender of any reasonable costs or expenses, including reasonable attorney's fees, incurred by Lender for its participation, voluntarily or involuntarily, in such contest. 1.05 Insurance. (a) Borrower shall at all times keep all buildings and improvements now or hereafter situated on or constituting said Property and all Collateral, to the extent insurable, insured against loss or damage by fire and other hazards including, without limitation, flood insurance (if the Property is located in a special flood or mudslide hazard area), vandalism, malicious mischief, sprinkler leakage and water damage, and boiler and machinery coverage whenever in the reasonable opinion of Lender such protection is necessary in an amount equal to ninety percent (90%) of the replacement value of all buildings and improvements constituting the Property (excluding excavations, foundations and footings), based upon the insurer's agreed value without co-insurance, with a demolition cost endorsement. Borrower shall provide insurance against loss or damage by fire or other hazard, including without limitation, loss by burglary, theft or mysterious disappearance on all on-site uninstalled and in transit building materials and supplies, and all fixtures, furniture, equipment and machinery to be constructed or installed on the Property in the amounts set forth on Schedule 1 attached hereto and made a part hereof. Borrower shall also provide general public liability insurance, naming the Lender as an additional insured, with limits for personal injury and death of $2,000,000 in the aggregate and such limits for property damage as Lender may reasonably require. During any construction, repair or restoration, Borrower shall obtain and keep in effect a standard builder's risk casualty insurance policy - 8 - in All Risk Builders 100% Completed Value Non-Reporting Form with extended coverage including vandalism and malicious mischief, naming the Lender as loss payee, in an amount equal to 100% of the value of such Improvements when completed. (b) Borrower shall maintain business interruption insurance in an amount reasonably required by, and in all respects reasonably satisfactory to, Lender. The business interruption insurance shall provide that in the event that the Property, or any portion thereof, shall be damaged or destroyed by fire and any other casualty, then the proceeds of this insurance shall be paid to Lender in an amount equal to the aggregate amount of the payments of interest, principal, and all other sums required to be paid by Borrower under the Note and the other Loan Documents during the period (the "Debt Service") that Borrower's business is deemed to have been interrupted because of the fire or other casualty. If the proceeds of the business interruption insurance exceed the Debt Service due to Lender during the period of interruption, Borrower shall be entitled to retain the excess insurance proceeds, provided that Borrower has paid the Debt Service to Lender. Nothing set forth in this Paragraph 1.05 shall be construed so as to relieve Borrower from its obligation to make full payment of the Debt Service if the amount of insurance proceeds paid to Borrower on account of the fire or other casualty shall be less than the amount of the Debt Service. (c) All policies of insurance to be furnished hereunder shall be in forms, companies and amounts reasonably satisfactory to Lender showing Lender as a loss payee or an additional named insured and with standard mortgagee clauses attached to all policies in favor of and in form reasonably satisfactory to Lender, including a provision requiring that the coverage evidenced thereby shall not be surrendered, terminated or modified without thirty (30) days' prior written notice to Lender, and copies of all such policies shall be furnished to Lender promptly upon request. As of the date hereof, Lender has approved the forms, companies and amounts of insurance maintained by Borrower, which forms, companies and amounts may be subject to periodic review and modification or revision as Lender may reasonably require, but not more than once in every twelve (12) month period. Borrower shall pay when due any and all premiums on all such insurance, deliver certificates of insurance to evidence all policies on or prior to the date hereof, to Lender, and, in the case of insurance about to expire, shall deliver certificates of insurance to evidence all renewal policies not less than thirty (30) days prior to their respective dates of expiration. (d) Borrower shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained hereunder unless Lender is included thereon under a standard mortgagee clause acceptable to Lender. Borrower shall promptly notify Lender whenever any such separate insurance is taken out and shall promptly deliver to Lender certificates of insurance to evidence the policy or policies of such insurance. In the event of a foreclosure or other transfer of title to the Property in lieu of foreclosure, or by purchase at the foreclosure sale, all interest in any insurance policies in force shall pass to Lender, transferee or purchaser, as the case may be. - 9 - 1.06 Casualty. Borrower shall promptly notify Lender of any loss resulting from casualty, whether covered by insurance or not. So long as there shall be no Event of Default existing, in case of loss or damage by fire or other casualty, Borrower is authorized to settle and adjust any claim for a casualty loss of less than all or substantially all of the then current value of tile Improvements, including the Collateral, on any of the parcels of real estate comprising the Property (hereinafter called a "Partial Loss"). In case of a casualty loss of all or substantially all of the then current value of the Improvements, including the Collateral, on any of the parcels of real estate comprising the Property (hereinafter called a " Total Loss"), Borrower is authorized to settle and adjust any claim under insurance policies insuring against such risks only after first obtaining Lender's written consent with respect to the amount to be paid in regard to such loss, such consent not to be unreasonably withheld or delayed. In case of all losses, Lender is authorized to collect and give receipt for any such insurance money. So long as there is no existing Event of Default, Lender shall provide to Borrower all insurance proceeds received by Lender whether with respect to a Partial Loss or a Total Loss for the rebuilding or restoration of the damaged Improvements on the Property, including the Collateral, in accordance with the procedure set forth in this Section 1.06, except that, to the extent such insurance proceeds shall be less than Five Hundred Thousand Dollars ($500,000.00), such amount, up to Five Hundred Thousand Dollars ($500,000.00), shall be paid directly to and held by Borrower for such rebuilding or restoration. In the event of a Total Loss, after reimbursing Borrower for the cost of the rebuilding or restoration of the Improvements on the Property or the Collateral in accordance with this Section 1.06, Lender may, at its option, with notice thereof to Borrower, apply the remaining amounts of any insurance proceeds received in reduction of the indebtedness secured hereby. In any case in which the insurance proceeds shall be in excess of $500,000 and Lender is holding such excess sums for reimbursement to Borrower for restoration or rebuilding, the following procedure shall apply: 1. Borrower shall not commence any reconstruction or repair having a cost in excess of Five Hundred Thousand Dollars ($500,000.00) (except temporary repairs, including without limitation fencing, as required to make the Property safe) without first obtaining Lender's approval of plans and specifications for such repair or reconstruction. Such approval shall not be unreasonably withheld or delayed, so long as the improvements are being restored to substantially the same condition as they were in immediately prior to the casualty. All reasonable costs incurred by Lender in reviewing such plans and specifications shall be paid by Borrower to Lender within thirty (30) days following demand. Such costs shall be paid to Lender out of insurance proceeds available for rebuilding or restoration of the Improvements on the Property, but only to the extent that the insurance proceeds are sufficient to complete such rebuilding or restoration. In the event that the insurance proceeds are not sufficient to pay the costs of restoration and Lender's costs, Borrower shall pay Lender's costs from other funds available to it. Lender's failure to approve or disapprove Borrower's plans and specifications within thirty (30) days after submission of same to Lender shall be deemed an approval of such plans. - 10 - 2. (a) The balance of the net insurance proceeds received by Lender shall be applied by Lender to pay or reimburse Borrower for the payment of the remaining costs of the restoration, repairs, demolition, replacement, rebuilding or alterations (including without limitation any temporary repairs) (all of which temporary and permanent repairs, replacements, rebuilding or alterations are herein collectively referred to as the "restoration"), and shall be paid out from time to time as such restoration progresses upon the written request of Borrower which shall be accompanied by the following: (i) A certificate, dated not more than thirty (30) days prior to such request, setting forth the following: (A) that the sum then requested either has been paid or is properly due to the contractors, subcontractors, materialmen, engineers, architects or other persons who have rendered services or furnished materials for the restoration therein specified, the names and addresses of such persons, a brief description of such services and materials, the several amounts so paid or due to each of said persons in respect thereof, that no part of such expenditure has been or is being made the basis, in any previous or then pending request, for the withdrawal of net insurance proceeds or has been made out of the net insurance proceeds and that sum then requested does not exceed the value of the services and materials described in the certificate; (B) that the cost, as estimated by the general contractor, architect and/or engineer referred to in Paragraph 1.06(2)(b), as the persons signing the certificate, of the restoration required to be done subsequent to the date of the certificate in order to complete the same does not exceed the net insurance proceeds, plus any amount deposited with Lender by Borrower to defray such cost and remaining in the hands of Lender after payment of the sum requested in the certificate; and (ii) a title company or official search, or other evidence satisfactory to Lender, showing that there have not been filed with respect to the Property any vendor's, contractor's, mechanic's, laborer's or materialman's statutory or similar lien which has not been bonded or otherwise discharged of record, except those which will be discharged upon payment of the sum requested in such certificate. (b) The certificate required by Paragraph 1.06(2)(a)(i) above shall be signed by the general contractor, architect and/or engineer in charge of the restoration who shall be selected by Borrower and approved by Lender, such approval not to be unreasonably withheld or delayed, and who shall be licensed to practice his profession in the State of Maryland. (c) Upon compliance with the foregoing provisions of this Paragraph 1.06, Lender shall, out of the net insurance proceeds received by Lender, pay or cause to be paid to Borrower or the person(s) named (pursuant to Paragraph 1.06(2)(a)(i)(A)) in such certificate, the respective amounts stated therein to have been paid or to be due to them, as tile case may be. - 11 - (d) If the net insurance proceeds, at the time available for the purpose, shall be insufficient to pay the entire cost of restoration, Borrower shall pay the deficiency and provide Lender with evidence, reasonably satisfactory to Lender prior to commencement of the restoration, of the availability of funds to pay any such deficiency. If all or any part of the net insurance proceeds are not used for restoration in accordance with the foregoing, such amount not used for restoration shall be retained and applied by Lender toward payment of the sums secured by this Deed of Trust (either interest, principal or both or other sums secured hereby) as Lender may determine. In the event that Lender receives and retains insurance monies for damage by fire or other hazards to the Property, the lien of this Deed of Trust shall be reduced only by an amount equal to the amount of such insurance monies received and retained by Lender and applied in reduction of the sums secured by this Deed of Trust. In no event shall any prepayment charge apply to any such application of insurance monies to reduction of the sums so secured. (e) The term "net insurance proceeds" shall mean insurance money paid to Lender on account of damage or destruction of or to all or any part of the Property or Collateral under the policies of insurance provided for in this Deed of Trust, less the reasonable costs incurred in connection with the adjustment of the loss and collection thereof, including reasonable attorneys' fees. (f) To the extent Lender makes the balance of such net insurance proceeds available for restoration of the Property, none of the net insurance proceeds received by Lender shall be deemed to be paid on account of the indebtedness secured hereby. 1.07 Condemnation. Promptly upon obtaining knowledge of the threat of the institution or the institution of any proceeding for the condemnation of the Property, the Collateral, or any portion of either, Borrower shall notify Lender of the pendency thereof. In accordance with the terms of this Section, Lender may, at its option, commence, appear in and prosecute, in its own name, any action or proceeding, or make any compromise or settlement in connection with such condemnation, taken under the power of eminent domain or sale in lieu thereof. Notwithstanding the foregoing, so long as there shall be no Event of Default, Borrower is authorized to make any compromise or settlement in connection with a condemnation in which the proceeds of such award (or settlement) shall be less than all or substantially all of the then current value of the parcel of Property condemned, including the Collateral thereon, (hereinafter called a "Partial Condemnation Loss"). In case of a condemnation in which the proceeds of such award or settlement shall be equal to all or substantially all of the then current value of the parcel of Property condemned, including the Collateral thereon, (hereinafter called a "Total Condemnation Loss"), Borrower is authorized to settle and adjust any such condemnation. In case of all condemnation awards or settlements, Lender is authorized to collect and give receipt for any such award or settlement money. Except in case of a Total Condemnation Loss, so long as there is no existing Event of Default, Lender shall provide to Borrower all proceeds of such award or settlement, less any expenses incurred by Lender in collecting - 12 - such award or settlement, received by Lender from a Partial Condemnation Loss for the rebuilding or restoration of damaged improvements on the Property, including the Collateral, in accordance with the procedure set forth in Paragraph 1.06 hereof, except that, to the extent such condemnation proceeds are less than Twenty-Five Thousand Dollars ($25,000.00), such amount, up to Twenty-Five Thousand Dollars ($25,000.00), shall be made available directly to Borrower without request. In the event of a Total Condemnation Loss, Lender may, at its option, with notice thereof to Borrower, either (i) apply the amounts received in reduction of the indebtedness secured hereby or (ii) hold such suns, without any allowance of interest and without obligation to see the sum so applied and used, to reimburse Borrower for the cost of rebuilding or restoration of the improvements on the Property, including the Collateral. In any case in which Lender is holding such sums for reimbursement to Borrower, the procedure set forth in Paragraph 1.06 shall apply. 1.08 Liens and Encumbrances. At all times Borrower (i) will keep the Property and Collateral free from all liens, mortgages, security interests, encumbrances and claims of every kind and nature, except as permitted by subclause (iii) herein, (ii) will not permit any lien, mortgage, security interest, encumbrance or claim to accrue or remain on the Property and/or Collateral or any part thereof which may be superior to the lien or security interest of this Deed of Trust, and (iii) will not, without first obtaining the written consent of the Lender permit any lien, mortgage, security interest, encumbrance or claim to accrue or remain on the Property and/or Collateral or any part thereof which may be inferior or junior to the lien or security interest of this Deed of Trust other than the second lien in favor of General Electric Capital Corporation, or its successors or assigns ("GECC"), and other mechanics' or materialmen's liens in an aggregate amount less than Three Hundred Thousand Dollars ($300,000.00). Borrower shall not permit any mechanics' or materialmen's liens in the amount of Three Hundred Thousand Dollars ($300,000.00) or more in the aggregate to remain on the Property for more than thirty (30) days after Borrower obtains actual knowledge thereof. Borrower shall pay or bond off or otherwise cause to be removed of record all such liens exceeding Three Hundred Thousand Dollars ($300,000.00) in the aggregate within thirty (30) days after Borrower obtains actual knowledge thereof. Borrower shall immediately give Lender notice of any default in any permitted junior or subordinated lien, mortgage, security interest or encumbrance on the Property and/or Collateral and notice of any foreclosure or threat of foreclosure of any permitted junior or subordinated lien, mortgage, security interest or encumbrance. Lender agrees that it shall not unreasonably withhold or delay its consent to Borrower's request to encumber the Property with easements, rights-of-way, or similar access agreements deemed necessary by Borrower for the further development of the Property or any portion thereof, unless Lender believes that the permitted encumbering of the said Property would be reasonably anticipated to have a materially adverse effect on the Property or the Lender's security in the Collateral. 1.09 Taxes and Assessments. Borrower shall pay in full before any penalty or interest attaches (and under protest in the manner provided by statute for any taxes which Borrower desires to contest), all general taxes and assessments, special taxes, special assessments, personal property taxes, water charges, sewer service charges, and all other charges or fees against - 13 - the Property and/or the Collateral or any part thereof or upon the rents, issues, income or profits thereof, regardless of the form of the levy and shall furnish to Lender within ten (10) days after receipt of Lender's request either official receipts or copies of cancelled checks evidencing the complete payment thereof, such form of evidence to be selected by Borrower. Borrower shall have the right to contest in good faith the levy or assessment of any such tax, assessment, fee or charge against the Property, the Collateral or the rents, issues, income or profits thereof so long as Borrower notifies Lender in writing of its intention to contest the validity of such tax or charge, the validity thereof is being contested in good faith, and Borrower deposits or causes to be deposited with Lender, if Lender so requests, an amount (in cash, by letter of credit, certificate of deposit, treasury bond or treasury note or other deposit reasonably acceptable to Lender in its sole discretion) deemed reasonably sufficient by Lender to make such tax payment if the contest is unsuccessful. Such deposited amount shall be returned to Borrower upon the full payment or other discharge of such tax payment. Provided, however, if payment is required during the pendency of such protest, Borrower shall make full payment of such taxes or charges during the pendency of such protest. If Borrower makes any such payment under protest and recovers a refund of all or any part thereof, Borrower shall be entitled to retain such refund after payment to Lender of any reasonable costs or expenses including reasonable attorney's fees incurred by Lender for its participation, voluntarily or involuntarily, in such tax contest. 1.10 Indemnification. (a) Borrower shall appear in and defend any suit, action or proceeding that might in any way and in the reasonable judgment of Lender affect the value of the Property or Collateral or the rights and powers of Trustees or Lender, if Borrower is a party to such suit, action or proceeding. Borrower will protect, indemnify and save harmless Trustees and Lender from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted against Trustees or Lender by reason of (i) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Property or the adjoining sidewalks, curbs, streets or ways unless caused by the negligence or willfull misconduct of Trustees, Lender or their agents; (ii) any use, nonuse or condition of any of the Property or the adjoining sidewalks, curbs, streets or ways or Collateral; (iii) any failure on the part of Borrower to perform or comply with any of the terms of this Deed of Trust, or any of the other Loan Documents or the Leases (as hereinafter defined), or (iv) performance of any labor or services or the furnishing of any materials or other property in respect of any portion of the Property or Collateral. Borrower shall promptly reimburse Lender within ten (10) days after demand for any reasonable legal expenses incurred by it in connection with advice sought by Lender after the occurrence of a Default by Borrower hereunder or under any of the other Loan Documents, during the term of the Note. (b) In case any action, suit or proceeding is brought against Trustees or Lender by reason of any such occurrence, if Borrower is not a party to such action, suit or proceeding Lender shall have the right at -14- 50596 94 - 14 - Borrower's expense to resist and defend against such action, suit or proceeding by counsel designated by Lender and approved by Borrower and Trustees, which approval will not be unreasonably withheld or delayed. Borrower shall, at all times, indemnify, hold harmless and, on demand, reimburse Lender for any and all loss, damage, expense or cost, including the cost of evidence of title and reasonable attorneys' fees, arising out of or incurred in connection with any such suit, action or proceeding, and the sum of such expenditures shall be secured by this Deed of Trust and shall be due and payable ten (10) days after demand. If Borrower has not paid to Lender within ten (10) days of demand any sums expended by Lender to which this indemnity applies, thereafter such sums shall bear interest at the default rate provided in the Note and secured hereby. The obligations of Borrower under this Paragraph 1.10 shall not survive any termination or satisfaction of this Deed of Trust unless such obligations pertain to those items set forth in Section 4.02 herein for which Borrower has recourse liability. 1.11 Sale of Property. (a) (i) In order to induce Lender to make the Loan, Borrower agrees that if the Property or any part thereof or interest therein is sold, assigned, transferred, or otherwise conveyed, mortgaged, pledged, placed in trust to secure a debt or otherwise alienated by Borrower, except to General Electric Capital Corporation and as permitted under Section 1.08 herein, including without limitation a lease of all or substantially all of the Property, by ground lease or otherwise, whether voluntarily or involuntarily or by operation of law, without first obtaining the written approval of Lender, Lender, at its option, may declare the Note secured hereby and all other obligations hereunder and under the Loan Documents to be forthwith due and payable. For purposes of this Paragraph 1.11, any change in the legal or equitable title of the Property or in the beneficial ownership of the Property, whether or not of record, whether or not for consideration, and whether or not such sale or transfer shall be to direct or indirect affiliates of the Borrower, who shall assume all of the Borrower's obligations under this Deed of Trust and all of the other Loan Documents, shall be deemed a sale or transfer of an interest in the Property. In the event of such proposed transfer, the Borrower shall provide Lender with written notice of such transfer not less than thirty (30) days prior to its proposed occurrence. Notwithstanding the foregoing, at any time and from time to time, any sales or transfers of all or any portion of the stock of Borrower, whether voluntarily, involuntarily, or by operation of law, shall be permitted without first obtaining the written approval of Lender, and shall not be deemed a sale or transfer of an interest in the Property. (ii) In connection herewith, the financial stability, managerial and operational ability of Borrower are a substantial and material consideration to Lender in its agreement to make the Loan to Borrower. The transfer of an interest in the Property or change in the entity operating the Property which results in a material change in the composition of the management of Borrower may significantly or materially alter or reduce Lender's security for the indebtedness secured hereby. For the purposes of this Section, "management" is defined as the executive officer group and the officer group. "Material changes in the composition of the management" of the Borrower shall not be deemed to include changes occurring in the ordinary course of Borrower's business, including, without limitation, retirement, - 15 - death and normal employee attrition. Therefore, any sale or transfer of an interest in the Property to a third party not a direct or indirect affiliate of the Borrower which results in a material change in the composition of the management of the Borrower prior to the third anniversary of the date hereof shall require Lender's prior written consent, to be made in its sole determination through the exercise of its reasonable business judgment. In the event that Lender consents to a transfer of the Property subject to the lien of this Deed of Trust, Borrower shall not be required to pay to Lender any transfer fee. (b) In the event ownership of the Property, or any part thereof, becomes vested in a person or persons other than Borrower, without first obtaining the written approval of Lender, Lender may, without notice to Borrower, waive Such default and deal with such successor or successors in interest with reference to this Deed of Trust and the Note and the Loan Documents in the same manner as with Borrower, without in any way releasing, discharging or otherwise affecting the liability of Borrower hereunder or under the Note or the other Loan Documents. No sale of the Property, no forbearance on the part of Lender, no extension of the time for the payment of the Loan or any change in the terms thereof consented to by Lender shall in any way whatsoever operate to release, discharge, modify, change or affect the original liability of Borrower herein, either in whole or in part. Any deed or assignment conveying the Property or any part thereof, shall provide that the grantee thereunder assumes or takes title subject to all of the grantor's obligations under this Deed of Trust, the Note and all other Loan Documents. In the event such deed or assignment shall not contain such assumption or an agreement to take title subject thereto, the grantee under such deed or assignment conveying the Property shall nevertheless be deemed to have agreed to take title subject to all of these obligations by acquiring the Property or such portion thereof subject to this Deed of Trust. (c) Borrower shall not voluntarily, involuntarily or by operation of law sell, assign, transfer or otherwise dispose of the Collateral or any interest therein, except in connection with any permitted transfer of the Property, and shall not otherwise do or permit anything to be done or occur that may impair the Collateral as security hereunder; except so long as this Deed of Trust and the other Loan Documents are not in default after provision of applicable notice and beyond any applicable grace period, Borrower shall be permitted to sell or otherwise dispose of the Collateral when obsolete, worn out, inadequate, unserviceable or unnecessary for use in the operation of the Property in the conduct of the business of Borrower, provided that within a reasonable period after such disposal, any such Collateral shall be replaced or substituted with other Collateral at least equal in value or utility to the initial value or utility of that disposed of (unless technological advances have made such replacements or substitutions with or for prior equivalents unnecessary) and in such a manner so that the Collateral shall be subject to the security interest created hereby and so that the security interest of Lender hereunder shall be the first priority security interest in the Collateral. In the event the Collateral is sold in connection with the sale of the Property, Borrower shall require, as a condition of the sale, that the buyer specifically agree to assume or agree to - 16 - take title to the Collateral subject to Borrower's obligations as to the security interest herein granted, and to execute whatever agreements and filings are deemed reasonably necessary by Lender to maintain its perfected security interest in the Collateral. (d) In the event of any name change by Borrower, and/or in the event of a change in the Borrower's corporate structure that renders the Financing Statement seriously misleading, Borrower shall, within thirty (30) days thereafter, file a new financing statement, pursuant to Section 9-402(7) of the Maryland Uniform Commercial Code. 1.12 Advances. (a) If Borrower shall fail (i) to make any payment or to perform any of the conditions or covenants herein contained or contained in any of the other Loan Documents or (ii) to pay any charge, fee or invoice for materials, supplies or services which failure has resulted in any mechanics' or materialmens' lien to be filed against the Property which has not been discharged by Borrower in accordance with the requirements of Section 1.08 hereunder, Trustees or Lender may, but without obligation to do so and without notice to Borrower, at any time thereafter make advances to perform same on its behalf, and all sums so advanced shall be secured by this Deed of Trust. Borrower shall repay within ten (10) days after demand all sums so advanced on its behalf with interest at the default rate provided for in the Note. No advance, action or payment by Lender hereunder shall relieve Borrower from any Event of Default (as hereafter defined). (b) Trustees or Lender may, without any obligation so to do, after and during a Default, make advances to or on behalf of Borrower or expend any sums for the benefit of the Property or Collateral or otherwise to protect or maintain the value or integrity of security provided by this Deed of Trust, as Lender shall, in its sole discretion, determine, and all sums so advanced or expended shall be within ten (10) days after demand repayable by Borrower and shall bear interest at the default rate under the Note until paid, and any such sums or sums so advanced or expended, with interest as aforesaid, shall become part of the indebtedness hereby secured. (c) Any sum or sums for which Borrower shall become obligated to pay or repay to Lender or Trustees hereunder or under the other Loan Documents and as to which terms for payment or repayment and accrual and payment of interest thereon are not otherwise specifically provided, shall be within ten (10) days after demand payable by Borrower and shall bear interest at the default rate until paid, and any such sums or sums, with interest as aforesaid, shall become part of the indebtedness hereby secured. 1.13 Time. Borrower agrees that time is of the essence hereof in connection with all obligations of the Borrower herein and in the Note and all of the other Loan Documents, including without limitation during any applicable grace or cure periods. 1.14 Estoppel Certificates. Either Borrower or Lender, within fifteen (15) days after written request by the other, shall furnish a duly acknowledged written statement setting forth the amount of the debt secured by - 17 - this Deed of Trust, the interest and other charges thereon then due and payable, the date to which interest has been paid, and whether or not, to the knowledge of the party delivering the certificate, the other party is in Default under the Note or this Deed of Trust or any of the other Loan Documents and whether any event has occurred which, with the giving of notice or passage of time, or both, would constitute such a Default, and if so, specifying each such Default or event. GECC shall have the right to obtain an estoppel certificate from Lender in the same form and within the same time periods in which an estoppel certificate is to be provided to Borrower hereunder. The requesting party or its designee to whom such a certificate is delivered shall be entitled to rely thereon. 1.15 Management and Business Records of Borrower. Borrower shall keep books of record and account in which full, true and correct entries in accordance with sound accounting practices shall be made of all dealings or transactions with respect to the Property and Collateral and shall permit Lender, its accountants, auditors, attorneys and advisors to inspect and examine these records and books and all supporting vouchers and data and to make copies and extracts therefrom or thereof at all reasonable times upon reasonable advance notice to Borrower and as often as may be reasonably requested by Lender (but in no event more than two (2) times in any one (1) fiscal year) at the offices of Borrower, or at the office of such other person or entity keeping and maintaining such books and records, or at some other location as may be mutually agreed upon. Lender shall, and shall cause its accountants, auditors, attorneys and advisors to hold in strict confidence all information contained in such books and records and examined by them. 1.16 Additions to Property and Security. Borrower will not construct any improvements or make any alterations to the real estate comprising the Property if the cost of such improvements or alterations on that occasion exceeds the greater of $25,000 or in the aggregate ten percent (10%) of the insurable value set forth on Schedule 1 attached hereto and made a part hereof without first obtaining the written consent of Lender, which consent shall not be unreasonably withheld or delayed in the event such additions or alterations do not materially change the current use of the Property or the Collateral as security for the Loan to Borrower. All right, title and interest of Borrower in and to all extensions, improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to, the Property and/or Collateral, hereafter acquired by or released to Borrower or constructed, assembled or placed by Borrower on the Property, and all conversions of the security constituted thereby, immediately upon such acquisition, release, construction, assembling, placement or conversion, as the case may be, and in each such case, without any further deed of trust, conveyance, assignment or other act by Borrower, shall become subject to the lien of this Deed of Trust as fully and completely, and with the same effect, as though now owned by Borrower and specifically described in the granting clauses hereof. 1.17 Subrogation. The beneficiary of this Deed of Trust and the Trustees, as additional security, are hereby subrogated to the lien or liens and to the rights of the owners and holders thereof of each and every mortgage, lien or other encumbrance on the Property, or any part thereof, or any claim or demand, whether or not same are paid or satisfied, in whole or in -18 - part, out of the proceeds of the Loan to the extent Lender or Trustees have paid such sums to the owners or holders of any junior lien or encumbrance and the respective liens of said mortgages, liens and other encumbrances and claims and demands shall pass to and be held by Trustees as additional security for the indebtedness to Lender to the same extent that they would have been preserved and would have been passed to and been held by Lender had they each been duly and regularly assigned, transferred, set over and delivered to Lender by separate deed of assignment, notwithstanding the fact the same may be or may have been satisfied and cancelled of record; provided, however, this Paragraph shall not be deemed or construed to obligate Lender to pay or discharge the same. 1.18 Covenants with Respect to any Lease. (a) Borrower shall not hereafter enter into any lease with respect to the Property or any portion thereof, now existing or hereafter made (referred to as a "Lease" or collectively as "Leases") without first obtaining the written consent of Lender. (b) Borrower shall, as and when required thereunder, perform and observe all of the terms, covenants and conditions required to be performed and observed by Borrower as lessor under any Lease, within the periods (inclusive of grace periods) provided in any such Lease, and will do all things reasonably necessary and required on behalf of the lessor thereunder to preserve and keep any such Lease free from default and to preserve and to keep unimpaired its rights under any such Lease. (c) Borrower shall not accept prepayments more than thirty (30) days prior to the due date of any installments of rents to become due and payable under any such Leases or tenancies, except prepayments in the nature of security for the performance of the terms, covenants and conditions required to be performed or observed by the lessees thereunder, or consent to an assignment or subletting thereof, in whole or in part, without first obtaining the Lender's written consent, such consent not to be unreasonably withheld or delayed. Any assignment or subletting of then existing Leases shall be made pursuant to written assignments or subleases which shall satisfy all of the conditions set forth in Section 1.19 herein and shall be, in all other respects, reasonably satisfactory to Lender. (d) Borrower shall not hereafter release, surrender or terminate any Lease nor will Borrower modify any Lease, including, without limitation, modifying the term of any Lease, the rentals payable thereunder or alter the provisions of any Lease relating to renewals or grace periods, without first obtaining the written consent of Lender. Any modifications of then existing Leases shall be made pursuant to written Leases and shall be, in all respects, reasonably satisfactory to Lender. (e) Borrower shall not enter into any additional Leases, nor renew any then existing Leases, without first obtaining the written consent of Lender. Any subsequent leasing of the Property and any renewals of then existing Leases shall be made pursuant to written Leases which shall be, in all respects, reasonably satisfactory to Lender. -19 - (f) Borrower shall promptly send to Lender after receipt by Borrower a copy of any notice from any lessee under any Lease noting or claiming any default by Borrower in the performance or observance of any of the terms, covenants or conditions on the part of Borrower to be performed or observed under any Lease. (g) If Borrower fails to make any payment required to be made under any Lease as and when required, or fails to perform or observe any other term, covenant, agreement or obligation required to be performed or observed by Borrower under any Lease, Lender shall have the right, at its option, and upon prior written notice to Borrower, to make any such payment or to perform any other act or take such action as may be appropriate to cause such other term, covenant, agreement or obligation to be performed or observed on behalf of Borrower to the end that Borrower's rights under any Lease be kept unimpaired and free from default. Subject to the reasonable provisions of any such Lease, Borrower shall permit Lender to enter the Property with reasonable notice and to do anything therein or thereto which Lender shall deem reasonably necessary or prudent in furtherance of the foregoing. (h) Borrower agrees that any and all Leases shall be subordinate in all respects to the lien of this Deed of Trust. (i) In each Lease of the Property or any portion thereof, Borrower shall (A) prohibit each lessee from engaging in any activity on the Property which will result in any environmental contamination to the Property, and (B) require each lessee to (i) promptly notify Lender and Borrower in writing upon each lessee's acquiring knowledge of the presence of any "hazardous waste" or "hazardous substance," as those terms are defined in Section 1.22 herein, on the Property or of any "hazardous materials contamination" (hereinafter defined) with a complete description thereof; (ii) promptly comply with any laws requiring the removal, treatment or disposal of such hazardous substances, hazardous wastes and hazardous materials contamination and to provide Lender and Borrower with satisfactory evidence of such compliance; (iii) provide Lender and Borrower within thirty (30) days after a demand by either, with a bond, letter of credit or similar financial assurance evidencing to the demanding party's satisfaction that the necessary funds are available to pay the cost of removing, treating and disposing of such hazardous substances or hazardous wastes and discharging any lien which may be established on the Property as a result thereof; and(iv) defend, indemnify and hold harmless Lender and the Trustees from any and all claims which may now or in the future (whether before or after the release of this Deed of Trust) be asserted as a result of the presence of any hazardous substances or wastes on the Property or any hazardous materials contamination as a result of or arising out of any such lessee's activities or occupation of the Property, except to the extent any of the same are the result of the Lender's and/or the Trustees' gross negligence or willful and intentional misconduct. "Hazardous materials contamination" means the contamination (whether presently existing or occurring after the date of this Deed of Trust) of the improvements, facilities, soil, ground water, air or other elements on, or off, the Property by hazardous substances or wastes, as defined in Section 1.22 herein, or the contamination of the buildings, facilities, soil, ground water, air or other elements on, or off, any other property as a result of such hazardous substances or wastes at any time -20- (whether before or after the date of this Deed of Trust) emanating from the Property. Provided however, that neither Borrower nor Borrower's lessees shall be liable to Lender hereunder for the presence of hazardous substances or wastes which are discharged after Lender, or any successful bidder in foreclosure, takes title to the Property. 1.19 Assignment of Leases and Rents. (a) Borrower hereby conveys, transfers, grants and assigns unto Lender all the rights, interest and privileges which Borrower may or shall have in any Lease now existing or hereafter made affecting the Property or any part thereof, as such Lease may from time to time hereafter be, modified, extended and renewed, together with all rents, income, security deposits and profits due or to become due thereunder. Lender grants to Borrower a license to collect all such rents, income, security deposits and profits, to be held in trust for Lender, with Borrower having the right to retain all such rents, income, security deposits, and profits as its sole property so long as there is no existing Event of Default. Each month, upon Borrower's compliance with the Note, this Deed of Trust and the other Loan Documents, Borrower may retain such rents, income, security deposits and profits as were collected that month and held in trust for Lender. If in any month, Borrower fails to meet the obligations imposed by the Note, this Deed of Trust and the other Loan Documents, said license to Borrower shall be automatically and immediately revoked, and no notice of revocation is required. Any rents collected by Borrower more than one month in advance, and any other sums (in the form of rent, additional rent or otherwise) collected by Borrower from lessees of the Property for use in payment of future obligations relating to the Property hereby are deemed to be, and shall be, held by Borrower in trust for the benefit of Lender, with Borrower having the right to retain all such rents, income, security deposits and profits as its sole property so long as there is no existing Event of Default. (b) Borrower agrees, within fifteen (15) days after request of Lender, to execute and deliver to Lender such assignments of Lease and rents applicable to the Property as Lender may from time to time reasonably request while this Deed of Trust and the debt secured hereby are outstanding. So long as there is no existing Event of Default, Lender agrees that it will not seek to effect any lien to which Borrower may be entitled upon the personal property and trade fixtures of Borrower's lessees. So long as there is no existing Event of Default, Lender further agrees that upon receipt of written requests from any of Borrower's lessees, Lender shall agree to waive its right to distrain against the personal property and trade fixtures of Borrower's lessees. So long as there is no existing Event of Default, Lender also agrees that upon receipt of an estoppel certificate from any of Borrower's lessees indicating that there are no existing defaults under such lessee's Lease, Lender shall promptly thereafter execute non-disturbance agreements, in customary form, reasonably satisfactory to Lender, Borrower and such lessee(s), with respect to use, possession and enjoyment of the premises occupied by such of Borrower's lessees. Such non-disturbance agreements shall include provisions to the effect that such lessee(s) shall not be named as a party to any action to foreclose this Deed of Trust or in any proceeding to sell the Property or any part thereof pursuant to power of sale and that such lessee's possession shall not be disturbed, provided that at the time any such - 21 - action or proceeding is commenced such lessee(s) shall not be in default beyond any applicable period of notice and/or grace period provided in such lessee's Lease. (c) Neither Lender nor Trustees shall be obligated to perform or discharge any obligation or duty to be performed or discharged by Borrower under any Lease, and Borrower hereby agrees to indemnify Lender and Trustees for, and to save them harmless from, any and all liability arising from any of the Leases or from this assignment, and this assignment shall not place responsibility for the control, care, management or repair of the Property upon Lender, or Trustees, or make Lender or Trustees responsible or liable for any negligence in the management, operation, upkeep, repair or control of the Property resulting in loss or injury or death to any lessee, licensee, employee, or stranger, except to the extent the same shall be the result of Lender's or Trustees' gross negligence or willful and intentional misconduct. Borrower hereby covenants and agrees that it shall at all times promptly and faithfully perform, or cause to be performed, all of the covenants, conditions and agreements contained in any Lease of the Property hereafter existing, on the part of the lessor thereunder to be kept and performed. In accordance with the provisions of Section 1.10 hereof, Borrower will, at its sole cost and expense, use its best efforts to enforce or secure, or cause to be enforced or secured, the performance of each and every obligation and undertaking of the respective lessees under any Lease of the Property, or any portion thereof, and will appear in and defend, at its sole cost and expense, any action, suit or proceeding to which it is a party arising under or in any manner connected with such Lease or the obligations and undertakings of any lessee thereunder. In the event that any action, suit or proceeding is brought against Trustees or Lender arising under or in any manner connected with such Lease or the obligations and undertakings of any Lessee thereunder and the Borrower is not a party to such action, suit or proceeding, Lender shall have the right, at Borrower's expense, to resist and defend such action, suit or proceeding by counsel designated by Lender and approved by Borrower and Trustees, which approval will not be unreasonably withheld or delayed. (d) Borrower shall furnish to Lender, within fifteen (15) days after a request by Lender to do so, a written statement containing the names of all lessees or occupants of the Property, the term of their respective Lease or tenancy, the space(s) occupied and the monthly fixed rentals required to be paid and, if not previously furnished to Lender, complete copies certified as true and correct by Borrower of each such Lease. (e) Borrower hereby authorizes Lender to give notice in writing of this assignment at any time to any lessee under any Lease of all or a part of the Property. Any payment of rent by any lessee pursuant to such notice shall constitute a full discharge of the lessee's rent obligation under its Lease to the extent of such payment. 1.20 Restrictive Re-Zoning. Borrower agrees not to initiate consent or enter into any private restrictive covenant or agreement, easement, zoning ordinance or other public or private restrictions that would limit, prohibit, or in any manner restrict the uses which may be made of any of the parcels of real property comprising the Property. -22- 1.21 Financial Statements. In addition to, or as part of, any financial information that Borrower may be required to provide to Lender, Borrower will provide to Lender annually, at the Borrower's cost and expense, a financial statement in reasonable detail, in as many copies (but not in excess of six (6) copies) and in form and content as will be reasonably satisfactory to Lender. The financial statements will include information which pertains to the Improvements, and will include but not be limited to a balance sheet and income and expense statement. The financial statements will be provided to Lender within one hundred twenty (120) days after the end of the Borrower's fiscal year. Any and all annual financial statements, balance sheets, and income and expense statements shall be prepared by an independent certified public accountant and certified to be true and correct by the Borrower. In addition, the Borrower shall provide Lender quarterly interim financial statements in Form 10Q format, within ninety (90) days after the end of each calendar quarter. 1.22 Hazardous Materials. The following terms shall have the meanings provided herein: (a) any "hazardous waste'" as defined by the Resource Conservation and Recovery Act of 1976, as amended from time to time, and regulations promulgated thereunder; (b) "hazardous substance," as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, and regulations promulgated thereunder ("CERCLA"); (c) "oil, petroleum products, and their by-products" as defined by the Maryland Environmental Code Ann. ss 4-411(a)(3), as amended from time to time; (d) "hazardous substance" as defined by the Maryland Environmental Code Ann., Title 7, subtitle 2, as amended from time to time, and regulations promulgated thereunder; and (e) any other hazardous substance or waste, the presence of which on the Property is prohibited or regulated by any law similar to those set forth in this Paragraph (all of such laws and regulations being hereinafter called "Environmental Laws"). Borrower shall keep the Property free of Hazardous Substances in quantities that would pose a threat to public health or to the environment or that would necessitate a "response action", as that term is defined in CERCLA, and shall not be used to generate, manufacture, refine, transport, treat, store, handle, dispose of, transfer, produce or process Hazardous Substances in quantities that would pose a threat to public health or to the environment or that would necessitate a "response action", as that term is defined in CERCLA. Borrower shall not cause or permit the installation of Hazardous Substances in, on, over or under the Property in quantities that would pose a threat to public health or to the environment or that would necessitate a "response action", as that term is defined in CERCLA, or a Release (as defined in Environmental Laws) of Hazardous Substances onto or from the Property in quantities that would pose a threat to public health or to the environment or that would necessitate a "response action", as that term is defined in CERCLA, or knowingly suffer the presence of Hazardous Substances in, on, over or under the Property in quantities that would pose a threat to public health or to the environment or that would necessitate a "response action," as that term is defined in CERCLA. Borrower shall comply with, and use its best efforts to ensure compliance by all lessees of the Property or any portion thereof with, all applicable Environmental Laws relating to or affecting the Property, and Borrower shall keep the Property free and clear of any liens imposed pursuant to any applicable Environmental Laws, all - 24 - Borrower's sole cost and expense. Borrower has obtained and will at all times continue to obtain and/or maintain all licenses, permits and/or other governmental or regulatory actions necessary to comply with all applicable Environmental Laws (hereinafter called the "Permits") and Borrower is and will continue to be and at all times remain in full compliance with the terms and provisions of the Permits. To the best knowledge of Borrower, the Property has not had any environmental notice or lien filed thereon. Borrower shall not knowingly acquire any real property upon which an environmental notice or lien has been filed, the existence of which would adversely affect the Property. Borrower shall promptly, following receipt thereof, give Lender written notice in the event that Borrower receives any notice from any governmental agency, entity, or any other party with regard to Hazardous Substances on, from or affecting the Property, promptly following receipt of such notice, and thereafter Borrower shall conduct and complete all investigations, studies, sampling, and testing, and all remedial, removal, and other actions necessary to clean up and remove all Hazardous Substances on, from or affecting the Property in accordance with all applicable Environmental Laws. Borrower hereby indemnifies Lender and agrees to hold Lender harmless from and against any and all liens, demands, defenses, suits, proceedings, disbursements, liabilities, losses, litigation, damages, judgments, obligations, penalties, injuries, costs, expenses (including, without limitation, reasonable attorneys' fees and reasonable experts' fees actually incurred) and claims of any and every kind whatsoever paid, incurred, suffered by, or asserted against Lender and/or the Property for, with respect to, or as a result of: (i) the presence in, on, over or under, or the escape, seepage, leakage, spillage, discharge, emission or Release (as defined in the Environmental Laws) on or from, the Property of any Hazardous Substances regardless of quantity and regardless of whether or not caused by or within the control of Borrower; (ii) the violation of any Environmental Laws relating to or affecting the Property or Borrower, whether or not caused by or within the control of Borrower; (iii) tile failure by Borrower to comply fully with the terms and provisions of this Paragraph 1.22; or (iv) any warranty or representation made by Borrower in this Paragraph 1.22 is or becomes false or untrue in any material respect. Tile obligations and liabilities of Borrower under this Paragraph 1.22 shall survive the exercise of power of sale under or foreclosure of this Deed of Trust, the delivery of a deed in lieu of foreclosure, the cancellation or release of record of this Deed of Trust, and/or the payment and cancellation of the Note; however, such indemnity shall not apply to any Hazardous Substances which escape, seep, leak, spill, discharge, emit or release on or from the Property after Lender or any successful bidder in foreclosure takes title to the Property (including without limitation a deed in lieu of foreclosure) or following the passage of title to the Property to a third party by sale, transfer, conveyance or assignment approved by Lender, unless such escape, spill, leak, seepage, discharge, emission or release occurred as a result of the acts or omissions of Borrower before the passage of title. In the event Borrower (i) does not commence to cure any failure to comply with this Paragraph 1.22, within thirty (30) days after written notice of such failure, subject to Unavoidable Delays (as hereinafter defined), or (ii) does not diligently pursue, subject to Unavoidable Delays - 24 - (as hereinafter defined), such cure to completion following commencement of such cure, or (iii) does not complete the cure within the cure period permitted under the applicable law, rule, regulation or order, then, after written notice to Borrower, Lender may either declare a Default under the terms of this Deed of Trust or cause the Property to be freed from the Hazardous Substances and the cost of the removal shall become a portion of the obligations secured hereby and shall become due and payable on demand and with interest thereon at the Default Rate (as defined in the Note). Borrower shall give to Lender, its agents and its employees access to the Property and hereby specifically grants to Lender a license, effective upon expiration of the applicable cure period, to remove the Hazardous Substances. "Unavoidable Delays" means delays due to strikes, lockouts, work stoppages, labor jurisdictional disputes, defaults by contractors, acts of God, inability to obtain labor or materials due to governmental preemptions or restrictions, enemy action, riot or other civil commotion, fire, casualty or other causes (whether similar or dissimilar) beyond the reasonable control of Borrower (other than Borrower's inability to pay), including, without limitation, condemnation and eminent domain. In the event any investigation or monitoring of site conditions or any clean-up, containment, restoration, removal or other remedial work (collectively, the "Remedial Work") is required under any applicable federal, state or local law or regulation, by any judicial order, or by any governmental entity, or in order to comply with any agreement entered into because of, or in connection with, any occurrence or event described in this Paragraph 1.22, Borrower shall perform or cause to be performed the Remedial Work in compliance with such law, regulation, order or agreement. All Remedial Work shall be performed by one or more contractors, selected by Borrower and approved in advance in writing by Lender, such approval not to be unreasonably withheld or delayed, and under the supervision of a consulting engineer, selected by Borrower and approved in advance in writing by Lender, such approval not to be unreasonably withheld or delayed. All costs and expenses of such Remedial Work shall be paid by Borrower including, without limitation, the charges of such contractor(s) and/or the consulting engineer, and Lender's reasonable attorneys' fees, architects' and/or consultants' fees and costs incurred in connection with monitoring or review of such Remedial Work. In the event Borrower shall fail to timely commence, or cause to be commenced, subject to Unavoidable Delays, or fail to diligently prosecute to completion, subject to Unavoidable Delays, such Remedial Work, Lender may, but shall not be required to, cause such Remedial Work to be performed, and all costs and expenses thereof, or incurred in connection therewith, shall be reimbursed to Lender in accordance with the terms hereof. 1.23 Special-Covenant. Borrower shall promptly notify Lender of any action taken by the grantor of a Deed recorded in Book 1122, Page 944 in the Land Records of Carroll County, Maryland to cancel and extinguish the use of the 50 foot wide right-of-way running along a portion of the southwesterly boundary of the Property, for the purpose of ingress, egress and regress to and from Maryland Route 32. Borrower shall provide such documents, instruments or agreements as Lender deems reasonably necessary to subject any alternate right-of-way providing similar access to said Maryland Route 32 to the lien, operation and effect of this Deed of Trust. After first obtaining Lender's written consent, such consent not to be unreasonably - 25 - withheld or delayed, to the alternate right-of-way, if any, to be provided by the grantor of such deed, Lender will acknowledge of record, the extinguishment of said original right-of-way. If any portion of the 50 foot wide right-of-way referred to herein that has not been previously conveyed to the County Commissioners of Carroll County, Maryland shall hereafter be so conveyed to create direct access to and from the Property to a public street or road leading to or adjoining Maryland Route 32, Lender will not require Borrower to provide an alternate right-of-way to and from the Property to said Maryland Route 32. ARTICLE II Default 2.01 Defaults. Each of the following shall be deemed to be a Default hereunder: (a) failure to make any payment required to be paid under the Note, this Deed of Trust or any other Loan Document within ten (10) days after receipt by Borrower of notice from Lender that such payment is due and unpaid, in accordance with the terms of the Note, this Deed of Trust, or any other Loan Document; or (b) failure to perform any of the other terms, covenants and conditions in the Note, this Deed of Trust or any other Loan Document which failure shall remain uncured for thirty (30) days following Borrower's receipt of written notice thereof from Lender to Borrower, unless such failure is not reasonably susceptible to cure within the thirty (30) day period, in which case a Default shall not be deemed to have occurred if Borrower has reasonably and in good faith commenced and diligently pursued action to cure such failure; or (c) material breach, as reasonably determined by Lender, of any warranties or representations contained in this Deed of Trust or any of the other Loan Documents; or (d) other than as permitted in Section 1.11 herein, the vesting of legal or equitable title to the Property in anyone other than Borrower without the consent of Lender; or (e) default continuing after applicable notice and beyond any applicable grace periods and acceleration of, or institution of foreclosure, eviction, and/or other proceedings to enforce, any junior deed of trust, mortgage or any security interest or other lien or encumbrance of any kind upon the Property, the Collateral or any portion thereof; or (f) failure to duly and promptly perform, comply with or observe the terms, covenants, conditions and agreements set forth in Paragraph 1.05 (with respect to Insurance); or - 26 - (g) if Borrower creates, incurs or suffers to exist any lien, pledge, mortgage or other encumbrance or attachment of any kind on the Property or the Collateral, except as permitted by this Deed of Trust or the Loan Documents; or (h) a Default occurs and continues after provision of applicable notice and beyond any applicable grace periods under any of the other Loan Documents; or (i) should Borrower or any successors and assigns of Borrower, including without limitation, the then-current owners of the Property; (i) file a voluntary petition in bankruptcy or for an arrangement or reorganization pursuant to the Federal Bankruptcy Act or any similar law, state or federal, whether now or hereafter existing (hereinafter referred to as a "Bankruptcy Proceeding"); (ii) file any answer admitting insolvency or inability to pay its debts; (iii) fail to obtain a vacation or stay of any involuntary Bankruptcy Proceeding within sixty (60) days, as hereinafter provided; (iv) be adjudicated a bankrupt, or declared insolvent, or suffer an order for relief in any Bankruptcy Proceeding; (v) commence any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization, or relief of debtors or seek to have a trustee, custodian, or receiver appointed for or have any court take jurisdiction of its property, or the major part thereof, in any involuntary proceeding for the purpose of reorganization, arrangement, dissolution, or liquidation, if such trustee, custodian or receiver shall not be discharged or such jurisdiction relinquished, vacated or stayed on appeal or otherwise within sixty (60) days; (vi) make an assignment or execute a deed of trust for the benefit of its creditors; (vii) generally not pay its debts or admit in writing its inability to pay its debts generally as they become due; or (viii) consent to an appointment of a trustee, custodian or receiver of all of its property or the major part thereof; or (ix) have an order for relief under any title of the United States Bankruptcy Code entered against it; or (j) if Borrower dissolves or terminates or permits its dissolution or termination and the Property and the Collateral are transferred in such dissolution or termination to persons or entities other than the present affiliates or owners of the Borrower or permitted transferees under Section 1.11 herein. - 27 - 2.02 Events of Default. Until the permitted junior lien to GECC is satisfied, discharged or otherwise terminated, the Defaults set forth above shall not be deemed to be Events of Default until the following occurs, at which time the Defaults shall be deemed to be Events of Default: (a) A Default under Section 2.01(a) herein which remains uncured for thirty (30) days following receipt by GECC of written notice thereof from Lender; or (b) any other Default under Sections 2.01(b) through 2.01(j) inclusive which remains uncured for sixty (60) days following receipt by GECC of written notice thereof from Lender. GECC shall have the right to cure any Default described in Section 2.01 herein, and Lender shall accept performance and/or payment by GECC to the same extent as if paid or performed by Borrower. When the permitted junior lien to GECC is satisfied, discharged or otherwise terminated, the occurrence of any of the Defaults set forth above in Section 2.01 shall be deemed to an Event of Default. 2.03 Remedies. (a) Upon and after any such Event of Default, Lender may declare the entire principal of the Note then outstanding (if not then due and payable), and all accrued and unpaid interest thereon, and all other obligations of Borrower hereunder and under the other Loan Documents due and payable immediately. (b) Upon and after any such Event of Default, Trustees or Lender personally, or by agents or attorneys, may enter into and upon all or any part of the Property, and each and every part thereof, and may exclude Borrower, its agents and servants or any one claiming by, through or under Borrower wholly therefrom; and having and holding the same, may use, operate, manage and control the Property and conduct the business thereof, either personally or by its superintendents, managers, agents, servants, attorneys or receivers; and upon every such entry, Trustees or Lender at the expense of Borrower and/or the Property from time to time, either by purchase, repairs or construction, may maintain and restore the Property, whereof it shall become possessed as aforesaid, may complete the construction of any improvements and in the course of such completion may make such changes in the contemplated improvements as it may deem desirable and may insure the same; and likewise, from time to time, at the expense of Borrower and/or the Property, Trustees or Lender may make all necessary or proper repairs, renewals and replacements and such useful alterations, additions, betterments and improvements thereto and thereon as to them may deem advisable; and in every such case Trustees or Lender shall have the right to manage and operate the Property and to carry on the business thereof and exercise all rights and powers of Borrower with respect thereto either in the name of Lender or otherwise as they shall deem best; and Trustees or Lender shall be entitled to collect and receive all earnings, revenues, rents, issues, profits and income of the Property and every part thereof, all of which shall for all purposes constitute property of Borrower; and after deducting the expenses of conducting the business thereof and of all maintenance, repairs, renewals, replacements, alterations, - 28 - additions, betterments and improvements and amounts necessary to pay for taxes, assessments, insurance and other proper charges upon the Property or any part thereof, as well as just and reasonable compensation for the services of Trustees or Lender and for all attorneys, agents and other employees by it or them properly engaged and employed, Lender shall apply the monies arising as aforesaid, to the payment of the principal of the Note and the interest thereon, when and as the same shall become due and payable and to the payment of any other sums required to be paid by Borrower under the Note, this Deed of Trust and the other Loan Documents in such priority as Lender in its sole discretion shall determine. In the event of such entry, Borrower, for itself and anyone claiming by, through, or under Borrower, covenants that it shall not seek to regain possession and control of the Property nor attempt to oust Trustees or Lender from possession and control of the Property or seek redress for such entry by the claim of any tortious conduct. (c) Upon and after any such Event of Default, Trustees and Lender shall have all of the remedies of a Secured Party under the Uniform Commercial Code of the State of Maryland, including, without limitation, the right and power to sell, or otherwise dispose of, the Collateral, or any part thereof, and for that purpose may take immediate and exclusive possession of the Collateral, or any part thereof, and with or without judicial process, enter upon any Property on which the Collateral, or any part thereof, may be situated and remove the same therefrom without being deemed guilty of trespass and without liability for damages thereby occasioned; or, at Lender's option, Borrower shall assemble the Collateral and make it available to Trustees or Lender at the place and at the time designated in the demand. (d) Upon and after any such Event of Default, Trustees or Lender shall be entitled to hold, maintain, preserve and prepare the Collateral for sale. Trustees or Lender, without removal, may render the Collateral unusable and dispose of the Collateral on the Property. To the extent permitted by law, Borrower expressly waives any notice of sale or other disposition of the Collateral and any other right or remedy of Trustees or Lender existing after default hereunder. To the extent any such notice is required and cannot be waived, Borrower agrees that such notice shall be deemed reasonable and shall fully satisfy any requirement for giving of said notice if such notice is mailed, postage prepaid, to Borrower at the above address at least five (5) days before the time of the sale or other disposition. (e) Upon and after any such Event of Default, Trustees may, and upon the written request of Lender shall, with or without entry, personally or by their agents or attorneys, insofar as applicable: (i) take possession of and sell all of Borrower's estate, right, title and interest in the Property and right of redemption thereof, at one or more sales as an entity or in parcels, and at such time and place and after such notice thereof as may be required or permitted by law at public auction to the highest bidder for cash, in lawful money of the United States, payable at the time of sale; and such sale may be made subject to any Lease of all or a part of the Property which Trustees elect and so advertise in accordance with Section 7-105(f) of the Real Property Article of the Annotated Code of Maryland or any substitution or replacements thereto, and Borrower - 29 - hereby authorizes and empowers Trustees to take possession and sell (or in the case of any default of any purchaser to resell) the Property as aforesaid. This power of sale shall not be exhausted in the event any proceeding is dismissed before all the indebtedness hereby secured and all other charges, costs, interests and expenses due under the Loan Documents are paid in full; (ii) proceed by suit or suits at law or in equity or by any other appropriate remedy to protect and enforce the rights of Lender whether for the specific performance of any covenant or agreement contained herein, or in aid of the execution of any power herein granted, or to foreclose the Deed of Trust, or to sell, as an entirety or in several parcels, the Property or Collateral under the judgment or decree of a court or courts of competent jurisdiction, or otherwise. Borrower, in accordance with Section 7-105 of the Real Property Article of the Annotated Code of Maryland and applicable provisions of the Maryland Rules of Procedure, or of any other general or local laws or rules or regulations of the State of Maryland relating to mortgages and deeds of trust, including any amendments thereof or supplements thereto which do not materially change or impair the remedy, does hereby declare and assent to the passage of a decree to sell the Property by the equity court having jurisdiction for the sale thereof and the trustees appointed by such decree of court shall have, subject to the terms of the decree of court, the same authority and power to sell on the terms and conditions herein set forth, and for such purposes the word "Trustees" shall be deemed to include the trustees so appointed. This assent to decree shall not be exhausted in the event any proceeding is dismissed before all the indebtedness hereby secured and all other charges, costs, interests and expenses due under the Loan Documents are paid in full; (iii) as a matter of right, without notice to Borrower, without regard to the adequacy of the security and whether incidental to a proposed sale of the Property and Collateral, or otherwise, seek the immediate appointment of a receiver of the Property and Collateral and of the earnings, revenues, rents, issues, profits and other income thereof and therefrom, with all such powers as the court or courts making the appointment shall confer, and the earnings, revenues, rents, issues and profits and other income thereof or therefrom are hereby assigned to Trustees as additional security under this Deed of Trust; or (iv) take such steps to protect and enforce their rights whether by action, suit or proceeding in equity or at law for the specific performance of any covenant, condition or agreement in the Note, this Deed of Trust or the other Loan Documents, or in aid of the execution of any power herein or therein granted, or for any foreclosure hereunder, or for the enforcement of any other appropriate legal or equitable remedy as Lender shall elect. (f) Borrower, in connection with the exercise of any remedy herein granted to Trustees and/or Lender, does hereby agree that Trustees or Lender may exercise their rights pursuant to any assignment of licenses or permits to cause the transfer of any licenses or permits included within the definition of Collateral herein, and to the extent there are any individuals or corporations or partnerships other than Borrower who are licensees or permittees under any such licenses or permits, Borrower shall cause each such - 30 - individual, corporation or partnership specifically to assent to the passage of a decree for transfer of their licenses or permits and to evidence their assent by written instrument satisfactory to Lender. (g) Trustees may adjourn from time to time any sale by them to be made under or by virtue of this Deed of Trust by announcement at the time and place appointed for a sale or for the adjourned sale or sales; and, except as otherwise provided by any applicable provision of law, Trustees may, without further notice or publication, make the sale at the time and place to which the same shall be so adjourned. (h) Upon the completion of any sale or sales made by Trustees under or by virtue of this Paragraph, Trustees shall execute and deliver to the accepted purchaser or purchasers a good and sufficient instrument, or good and sufficient instruments, conveying, assigning and transferring all estate, right, title and interest in and to the property and rights sold, but without any covenant or warranty, express or implied. The recitals in the instrument of any matters or facts shall be conclusive proof of-the truthfulness thereof. Any sale or sales made under or by virtue of this Paragraph whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale, shall operate to divest all the estate, right, title, interest, claim and demand whatsoever, whether at law or in equity, of Borrower in and to the properties and rights so sold, and shall be a perpetual bar both at law and in equity against Borrower and against any and all persons claiming or who may claim the same, or any part thereof from, through or under Borrower. (i) In the event of any sale made under or by virtue of this Paragraph, whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale, the entire principal of, and interest on, the Note, if not previously due and payable, and all other sums required to be paid by Borrower pursuant to the Note, this Deed of Trust and the other Loan Documents, immediately thereupon shall become due and payable, anything in the Note, this Deed of Trust or the other Loan Documents to the contrary notwithstanding. (j) Immediately upon the first insertion of the advertisement of the sale of the Property, or any part thereof, under this Deed of Trust, there shall be and become due and owing by Borrower to the person or persons inserting said advertisement or notice, all expenses incident to the sale, and a commission on the total amount of the indebtedness hereby secured equal to one-half (1/2) of the percentage allowed as commissions to trustees making sales under order or decrees in similar circumstances in Baltimore, Maryland, and such person or persons shall not be required to receive the principal and interest only of the indebtedness hereby secured in satisfaction thereof, but said sale may be proceeded with unless, prior to the day appointed therefor, tender is made of said principal, interest, expenses, costs and commissions. (k) The purchase money, proceeds or avails of any sale made under or by virtue of this Paragraph, together with any other sums which then may be held by Trustees or Lender under this Deed of Trust, whether under the provisions of this Paragraph or otherwise shall be applied as follows: - 31 - FIRST: To the payment of the costs and expenses of sale including reasonable compensation to Trustees, their agents and counsel, and of all expenses, liabilities and advances made or incurred by Trustees or Lender under this Deed of Trust or any of the other Loan Documents together with interest at the default rate specified in the Note on all advances made by Lender and all taxes or assessments, except any taxes, assessments or other charges subject to which the Property shall have been sold. SECOND: To the payment of the whole amount then due, owing or unpaid upon the Note for principal and interest, with interest on the unpaid principal at the rate specified in the Note from and after the happening of any Event of Default described above from the due date of any such payment of principal until the same is paid. THIRD: To the payment of any other sums required to be paid by Borrower pursuant to any provisions of this Deed of Trust, the Note or the other Loan Documents. FOURTH: To the payment of the surplus, if any, to whomsoever may be lawfully entitled to receive the same. (1) Upon any sale made under or by virtue of this Paragraph, whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale, Lender may bid for and acquire the Property, the Collateral, or any part thereof, and in lieu of paying cash therefor may make settlement for the purchase price by crediting upon the indebtedness of Borrower secured by this Deed of Trust the net sales price after deducting therefrom the expenses of the sale and the cost of the action and any other sums which Lender is authorized to deduct under this Deed of Trust. Lender upon so acquiring the Property, the Collateral, or any part thereof, shall be entitled to hold, lease, rent, operate, manage and sell the same in any manner provided by applicable laws. (m) Borrower agrees, to the extent that it may lawfully so agree, that in the case of Default on its part, as aforesaid, neither Borrower nor anyone claiming through or under it shall, or will, set up, seek or claim to take advantage of any appointment of receiver, valuation, stay or extension laws now or hereafter in force in the locality where the Property may be situated, in order to prevent or hinder the enforcement of foreclosure of this Deed of Trust, or the absolute sale of the Property and/or Collateral, or final or absolute putting into possession thereof, immediately after such sale, of the purchaser thereof, and Borrower, for itself and all who claim through or under it hereby waives, to the fullest extent that it may lawfully do so, the benefit of all laws and any and all right to have the estates comprised in the security intended to be created hereby marshalled upon any foreclosure of the lien hereof and agrees that Trustees or any court having jurisdiction to foreclose such lien may sell the Property and Collateral as an entirety. (n) Each right, power and remedy of Lender or Trustees as provided for in this Deed of Trust or in any of the other Loan Documents, shall be cumulative and concurrent and shall be in addition to every other - 32 - right, power or remedy provided for in this Deed of Trust or in any of the other Loan Documents, and the exercise or beginning of the exercise by Lender or Trustees of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by Lender or Trustees of any or all such other rights, powers or remedies. ARTICLE III Duties, Rights and Obligations of Trustees 3.01 Acceptance of Trust. Trustees accept this trust when this Deed of Trust, duly executed and acknowledged, becomes a public record as provided by law but only in accordance with the terms and conditions hereof. Trustees are not obligated to notify any party hereto of a pending sale under any other deed of trust or of any action or proceeding in which Borrower, Lender or Trustees shall be a party unless Trustees bring such action. Trustees shall not be obligated to perform any act required of them hereunder unless the performance of such act is requested in writing and Trustees are indemnified against loss, cost, liability and expense. 3.02 Liability of Trustees. Trustees shall be protected in acting upon any notice, request, consent, demand, statement, note or other paper or document believed by them to be genuine and to have been signed by the party or parties purporting to sign the same. Trustees shall not be liable for any error of judgment, nor for any act done or step taken or omitted, nor for any mistakes of law or fact, nor for anything which Trustees may do or refrain from doing in good faith, nor generally shall Trustees have any accountability hereunder except for willful misconduct or gross negligence. Trustees may at any time consult with counsel, and any opinion of counsel (an opinion in writing signed by counsel who shall be satisfactory to Trustees) shall be full and complete authorization and protection in respect of any action taken or suffered or not taken by Trustees in accordance with such opinion of counsel. The recitals and statements contained herein and in the Note shall be taken as recitals and statements of Borrower, and Trustees assume no responsibility for the correctness of the same. Trustees make no representations as to the validity, legality or sufficiency of this Deed of Trust, or the legality, genuineness or sufficiency of the Note issued hereunder, the security hereby or thereby afforded, the title of Borrower to the Property and the Collateral or the descriptions thereof, or the filing or recording of this Deed of Trust or any other document. Trustees shall not be accountable or under any duty or responsibility to serve as registrar of the Note, to see to the accounting for any payments by Borrower under the Note, or to see to the use or application by Borrower of the proceeds of the Note. 3.03 Powers of Trustees. From time to time upon written request of Lender and presentation of this Deed of Trust for endorsement, and without affecting the personal liability of any person for payment of any indebtedness or performance of the obligations secured hereby, Trustees may, without liability therefor and without notice: reconvey all or any part of the Property or Collateral; consent to the making of any map or plat thereof; join in granting any easement thereon; join in any declaration of covenants and restrictions; or join in any extension agreement or any agreement - 33 - subordinating the lien or charge hereof. Trustees or Lender may from time to time apply in any court of competent jurisdiction for aid and direction in the execution of the trusts hereunder and the enforcement of the rights and remedies available hereunder, and Trustees or Lender may obtain orders or decrees directing or confirming or approving acts in the execution of said trusts and the enforcement of said remedies. Trustees may act hereunder jointly, or either Trustee may act separately, and each Trustee shall have full power to exercise all powers and discretions herein granted to Trustees without the joinder of the other Trustee or Trustees; and Trustees or Trustee may sell and convey the Property or Collateral as herein provided although Trustees, or either of them, have been, may now be or may hereafter be attorneys or agents of Lender, in respect of any matter or business whatsoever. 3.04 Payment of Trustee Costs and Indemnification. Borrower shall pay all costs, charges and expenses, including reasonable attorneys' fees, which Lender and/or Trustees may incur in collecting any sum hereby secured or in enforcing any of the rights of Lender hereunder or in protecting the security of the Lender whether by suit or otherwise If one or more of the Events of Default shall happen, and, with or without such default, upon the taking of any actions required or authorized hereunder, Borrower shall pay to Trustees, on demand, all reasonable costs, charges, fees and disbursements of Trustees chargeable to or incurred in or about the administration and execution of the trusts hereby created and the performance of their powers and duties hereunder, including reasonable attorneys' fees. Borrower indemnifies Trustees and Lender against all losses, claims, demands, and liabilities which they may incur, suffer, or sustain in the execution of the trusts created hereunder or in the performance of any act required or permitted hereunder or by law, except those arising out of the willful and intentional misconduct or gross negligence of Trustees or the willful and intentional misconduct or gross negligence of Lender. 3.05 Substitution of Trustees. From time to time, by a Deed of Appointment signed and acknowledged by Lender and filed for record in the Office of the Clerk of the Circuit Court for the jurisdiction in which the Property is situated, Lender may appoint another trustee or trustees to act in the place and stead of Trustees or either of them or any successor to either of them. Such Deed of Appointment shall refer to this Deed of Trust and set forth the date, book and page of its recordation. The recordation of such Deed of Appointment shall discharge Trustees herein named and shall appoint the new trustee or trustees as the trustee or trustees hereunder with the same effect as if originally named Trustees herein. A writing recorded pursuant to the provisions of this Paragraph shall be conclusive proof of the proper substitution of such new trustees. ARTICLE IV General Provisions 4.01 Partial Release. Without affecting the liability of anyone for the payment of any indebtedness herein mentioned and without affecting the lien or priority hereof upon any property not released, Lender may, without notice, release any person so liable, extend the maturity or modify the terms - 34 - of any such obligation, or grant other indulgences, release or reconvey or cause to be released or reconveyed at any time all or any part of the Property or Collateral, take or release any other security or make compositions or other arrangements with debtors. Lender may also accept additional security, either concurrently herewith or hereafter, and sell same or otherwise realize thereon either before, concurrently with or after sale hereunder. 4.02 Non-Waiver. (a) By accepting payment of any sum secured hereby after its due date or later performance of any covenant or obligation secured hereby, Lender shall not waive its right against any person obligated directly or indirectly hereunder or on any indebtedness hereby secured, either to require prompt payment when due of all other sums so secured or to declare a Default (after provision of any applicable notice and the expiration of any applicable grace or cure periods) for failure to make such prompt payment or performance of any such covenant or obligation. No exercise of any right or remedy by Trustees or Lender hereunder shall constitute a waiver of any other right or remedy herein contained or provided by law. (b) No delay or omission of Trustees or Lender in the exercise of any right, power or remedy accruing hereunder or arising otherwise shall impair any such right, power or remedy, or be construed to be a waiver of any Default or acquiescence therein. (c) Receipt of rents, awards, and any other monies or evidences thereof pursuant to the provisions of this Deed of Trust and any disposition of the same by Trustees or Lender shall not constitute a waiver of the power of sale or right of foreclosure by Trustees or Lender in the event of a Default or failure of performance by Borrower of any covenant or agreement contained herein or in any of the other Loan Documents. 4.03 Protection of Security. Should Borrower fail to make any payment or to perform any covenant as herein provided (after provision of any applicable notice and/or passage of any applicable cure period), Lender (but without obligation so to do and without notice to or demand upon Borrower and without releasing Borrower from any obligation hereof) may: make or perform the same in such manner and to such extent as Lender may deem necessary to protect the security hereof, Lender being authorized to enter upon the Property for such purposes; commence, appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Lender; pay, purchase, contest, or compromise any encumbrance, charge or lien which in the judgment of Lender is prior or superior hereto and, in exercising any such power, incur any liability and expend whatever amounts in its reasonable discretion it may deem necessary therefor, including cost of evidence of title and reasonable attorneys' fees. Any expenditures in connection herewith shall constitute part of the indebtedness secured by this Deed of Trust and shall bear interest at the default rate specified in the Note. 4.04 Rules of Construction. When the identity of the parties hereto or other circumstances make it appropriate, the masculine gender includes the feminine and/or neuter, and the singular includes the plural. The headings of - 35 - each Paragraph and Article are for information and convenience only and do not limit or construe the contents of any provision hereof. 4.05 Severability. If fulfillment of any provision hereof or any transaction related hereto or to the Note, at the time performance of such provisions shall be due, shall be invalid under applicable law, then, without any further action, the obligation to be fulfilled shall be reduced to the limit of such validity; and if any clause or provision herein contained, other than the provisions requiring Borrower to pay interest, principal, principal and interest, or any other of the indebtedness secured by this Deed of Trust, operates or would prospectively operate to invalidate this Deed of Trust in whole or in part, then such clause or provision only shall be void, as though not herein contained, and the remainder of this Deed of Trust shall remain operative and in full force and effect. If such clause or provision which requires Borrower to pay interest, principal, principal and interest or any other of the indebtedness secured by this Deed of Trust shall be deemed void after an Event of Default, or shall be determined to be invalid or void in any action, suit or proceeding initiated by or on behalf- of Borrower, then at the option of Lender, the entire unpaid principal balance due under the Note, with all unpaid interest accrued thereon and all other unpaid indebtedness secured by this Deed of Trust shall become due and payable. 4.06 Successors in Interest. This Deed of Trust applies to, inures to the benefit of, and is binding not only on the parties hereto, but on their heirs, personal representatives, successors and assigns. The term "Lender" shall mean the holder and owner, including pledgees, of the Note secured hereby, whether or not named as Lender herein. 4.07 Notices. (a) Ail notices to be given pursuant to this Deed of Trust shall be in writing and shall be deemed to have been duly given or served on the date on which personally delivered, with signed receipt, or three (3) days after the same shall have been deposited with the United States mail, mailed postage prepaid, certified or registered mail, return receipt requested. All notices shall be addressed as follows: if to Lender at Ten Stamford Forum, P.O. Box 601, Stamford, Connecticut 06904, Attention: Daniel L. Wieneke, Esquire, with a copy to Jack N. Zemil, Esquire, Weinberg and Green, 100 South Charles Street, Baltimore, Maryland 21201; and if to Borrower at Londontown Boulevard, Eldersburg, Maryland 21784, Attention: Mark Lieberman, with a copy to Kaye, Scholer, Fierman, Hays & Handler, 425 Park Avenue, New York, New York 10022, Attention: Susan B. Rahm, Esquire, or to such other address as a party shall request in writing. (b) Lender shall provide to GECC, its successors or assigns, written notice of the Defaults by Borrower under Section 2.01 herein which require written notice be given to Borrower, within ten (10) days after - 36 - providing any such required notices to the Borrower. Such notice shall be provided to GECC in accordance with Section 4.07(a) herein, at the following address: General Electric Credit Corporation 292 Long Ridge Road Stamford, Connecticut 06902 Attention: Region Operations Manager with a copy to: General Electric Capital Corporation 292 Long Ridge Road Stamford, Connecticut 06902 Attention: Corporate Finance Services Division Legal Counsel 4.08 Modifications. This Deed of Trust may not be amended or modified nor shall any waiver of any provision hereof be effective except by an instrument in writing and signed by the party against whom enforcement of any waiver, amendment, modification or discharge is sought. 4.09 Governing Law. This Deed of Trust shall be construed according to and governed by the laws of the State of Maryland, without regard to principles of conflict of law. 4.10 Security Agreement. Borrower agrees that this Deed of Trust shall constitute a security agreement under the Uniform Commercial Code as the same is in force in the State of Maryland, and hereby grants to Trustees and Lender a security interest in all property to which Article 9 of said Uniform Commercial Code is applicable and which is described in the granting clauses hereof and the proceeds (cash and noncash) thereof. With respect to such Collateral, Lender shall have all the rights and remedies of a secured party under said Uniform Commercial Code. 4.11 Borrower's Warranty of Authority and Capacity. Borrower represents and warrants that (a) it is a corporation organized and in good standing under the laws of the State of Delaware, (b) the execution and delivery of, and the carrying out of the transactions contemplated by the Note, this Deed of Trust, and the other Loan Documents, and the performance and observance of the terms, covenants, agreements and provisions of the Note, this Deed of Trust and the other Loan Documents will not conflict with or result in a breach of the terms or provisions of any existing law or existing rule, regulation or order of any court or governmental body, or with any agreement to which Borrower is a party, and (c) the Note, this Deed of Trust, and the other Loan Documents constitute the valid and legally binding obligations of Borrower, and are fully enforceable against Borrower in accordance with their respective terms. 4.13 Commercial Loan. Borrower hereby warrants, represents, covenants and agrees that the Loan is being transacted solely for the purpose - 37 - of carrying on or acquiring a business or commercial enterprise and that the same constitutes a commercial loan within the meaning of ss. 12-101(c) and 12-103(e) of the Commercial Law Article of the Annotated Code of Maryland. IN WITNESS WHEREOF, this Deed of Trust and Security Agreement has been properly executed and sealed by Borrower on the day and year first written above. WITNESS/ATTEST: LONDONTOWN CORPORATION, a Delaware Corporation /s/ By: /s/ Zachary C.Goldman (SEAL) - --------------------------------- --------------------------- Assistant Secretary Zachary C.Goldman Vice President and Chief Financial officer STATE OF MD; City of Baltimore, to wit: I HEREBY CERTIFY that on this 27th day of December, 1989, before me, the subscriber, a Notary Public for the State aforesaid, personally appeared Zachary C. Goldman, who acknowledged himself to be the Vice-President and Chief Financial Officer of Londontown Corporation, a Delaware corporation, known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same for the purposes therein contained as the duly authorized vice president of said corporation by signing on behalf of the corporation as Vice-President and Chief Financial Officer. IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal. My Commission expires: July 1, 1990 /s/ Giovanna M. Young - ---------------------------------- ----------------------------------------- Notary Public THIS IS TO CERTIFY that the within instrument was prepared by or under the supervision of the undersigned, an attorney duly admitted to practice before the Court of Appeals of Maryland. /s/ Karen S. Koening ----------------------------------- Karen S. Koening ,Attorney - 38 - SCHEDULE 1 Insurance Property Amount Office and Warehouse/Distribution Facility $14, 000, 000.00 - 39 - EXHIBIT A DESCRIPTION OF REAL PROPERTY BEING A 35.733 ACRE TRACT AT LONDONTOWN BOULEVARD, EAST OF MARYLAND ROUTE 32, ELDERSBURG, CARROLL COUNTY, MARYLAND --------------------------------------------------------------- BEGINNING on the northeast side of the 50 foot wide right-of-way at the westernmost corner of parcel "A" containing 29.44 acres of land and shown on the plat titled "Londontown Manufacturing Company" as recorded among the Land Records of Carroll County in plat book 14 page 71, running thence binding on the west and north outlines of said parcel "A" six courses (1) North 51 degrees 00 minutes 00 seconds East 279.58 feet, (2) North 22 degrees 00 minutes 00 seconds East 997.85 feet, (3) South 46 degrees 55 minutes 54 seconds East 785.00 feet, (4) South 75 degrees 05 minutes 24 seconds East 692.44 feet, (5) South 15 degrees 53 minutes 44 seconds West 702.42 feet,(6) South 76 degrees 22 minutes 37 seconds West 734.39 feet to the northeast side of said 50 foot wide right-of-way, thence binding thereon and binding also on the southwest outlines of said parcel "A" four courses (7) North 60 degrees 44 minutes 21 seconds West 13.88 feet (8) Northwesterly by a curve to the left with a radius of 850.00 feet, the arc distance of 207.19 feet,(9) Northwesterly by a curve to the right with a radius of 1934.77 feet the arc distance of 800.38 feet and (10) North 51 degrees 00 minutes 00 seconds West 22.00 feet to the place of beginning. TOGETHER WITH the right and privilege to the use, in common with others entitled thereto, of such portion of a 50-foot-wide right-of-way running along a portion of the southwesterly boundary of parcel "A" described hereunder, and continuing along the southwesterly boundary of parcel "C", as shown on the aforementioned plat, to Maryland Route 32, for the purpose of ingress, egress - 40 - and regress to and from the parcels of land described hereunder and Maryland Route 32, as set forth in and subject to the terms, conditions and reservations regarding the same in the Deed dated November 26, 1988 from INTERCO INCORPORATED to INTERCO SUBSIDIARY, INC. and recorded among the Land Records of Carroll County, Maryland at Book 1122 Page 944, saving and excepting that portion of the 50 foot right-of-way conveyed to County Commissioners of Carroll County on January 31, 1977 by that certain Deed recorded among the Land Records of Carroll County, Maryland at Book 654 Page 119. BEING THE SAME parcels of land granted and conveyed in the Deed from INTERCO INCORPORATED to INTERCO SUBSIDIARY, INC., dated November 26, 1988 and recorded among the Land Records of Carroll County, Maryland at Book 1122, Page 944 and the Deed from INTERCO SUBSIDIARY, INC. to LONDONTOWN CORPORATION, dated November 26, 1988 and recorded among the Land Records of Carroll County, Maryland at Book 1122, Page 947. CONTAINING 35.733 acres of land. - 41 - EX-10.14 22 EXHIBIT 10.14 ASSIGNMENT OF LEASES AND RENTS THIS ASSIGNMENT OF LEASES AND RENTS (the "Assignment") is made this 27th day of December, 1989, by LONDONTOWN CORPORATION, a Delaware corporation, ("Assignor"), to METLIFE CAPITAL CREDIT CORPORATION, a Delaware corporation ("Assignee"). WITNESSETH FOR VALUE RECEIVED, Assignor does hereby SELL, ASSIGN, TRANSFER, SET OVER and DELIVER unto Assignee, its successors and assigns, and grant to Assignee, its successors and assigns all of Assignor's interest in any and all leases, present or future, (all present leases being identified on Exhibit B attached hereto and incorporated herein by reference), written or oral, and all agreements for use or occupancy of any portion of the buildings and improvements now or hereafter on the real property situate and lying in Carroll County, Maryland, respectively and more particularly described on Exhibit A attached hereto and incorporated herein by this reference (hereinafter collectively referred to as the "Property"). TOGETHER with any and all extensions and renewals thereof and any and all further leases, lettings or agreements (including subleases thereof and tenancies following attornment) upon or covering use or occupancy of all or any part of the Property (all such leases, agreements, subleases and tenancies heretofore mentioned are hereinafter collectively referred to as "Leases"). TOGETHER with any and all guarantees of any tenant's performance under any of the Leases. TOGETHER with the immediate and continuing right to collect and receive all of the rents, income, receipts, revenues, issues and profits now due or which may become due or to which Assignor may now or shall hereafter (including the period of redemption, if any) become entitled or may demand or claim, arising or issuing from or out of the Leases or from or out of the Property or any part thereof, including but not by way of limitation: (a) minimum rents, additional rents, percentage rents, parking maintenance, tax and insurance contributions, deficiency rents and liquidated damages following default, the premium payable by any tenant upon the exercise of any cancellation privilege originally provided in any of the Leases, and any rights and claims of any kind which Assignor may have against any tenant under the Leases or any subtenants or occupants of the Property, all proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by damage or destruction to the Property (sometimes hereinafter collectively referred to as "Rents"); (b) payment for loss or damage, and rebate, refund or return of any premium, now or hereafter paid or payable under any policy of insurance covering the whole or any part of the said Property (sometimes hereinafter referred to as "Losses or Rebates"); (c) any sum or sums now due or hereafter to become due by reason of any taking of the whole or any part of the Property for public purposes, by right of eminent domain or otherwise, or by reason of any claim now or hereafter existing against any and all parties whomsoever for compensation for real or alleged harm or damage done to or in connection with the Property (sometimes hereinafter referred to as "Damages"); and (d) any abatement, rebate, refund or return, whether now or hereafter payable, of the whole or any part of any tax, assessment or other charge levied or assessed upon the whole or any part of the Property whether heretofore or hereafter levied or assessed or that hereafter is paid (sometimes hereinafter referred to as "Abatements"). TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns forever, or for such shorter period as hereinafter may be indicated. The following covenants and agreements shall control the rights of Assignor and Assignee with respect to the Leases: 1. Upon or at any time after and during a Default (as that term is defined in the Deed of Trust and Security Agreement of even date herewith from Assignor to Jack N. Zemil and Daniel L. Wieneke, Trustees for the benefit of Assignee [the "Deed of Trust"]), Assignor irrevocably constitutes and appoints Assignee, as its lawful attorney in its name and stead: (a) to collect any and all of the Rents, Losses or Rebates, Damages and/or Abatements; (b) to use such measures, legal or equitable, as in its reasonable discretion may be deemed necessary or appropriate to enforce the payment of the Rents, Losses or Rebates, Damages, Abatements and/or any security given in connection therewith; (c) to secure and maintain the use and/or possession of the Property and/or any part thereof; (d) to fill any and all vacancies and to rent, lease and/or let the Property and/or any part thereof at its reasonable discretion; (e) to order, purchase, cancel, modify, amend and/or in any and all ways control and deal with any and all policies of insurance of any and all kinds now or hereafter on or in connection with the whole or any part of the Property at its reasonable discretion and to adjust any loss or damage thereunder and/or to bring suit at law or in equity therefor and to execute and/or render any and all instruments deemed by Assignee to be necessary or appropriate in connection therewith; (f) to adjust, bring suit at law or in equity for, settle or otherwise deal with any taking of any or all of the Property for public purposes as aforsaid or any claim for real or alleged harm or damage as aforesaid and to execute and/or render any and all instruments deemed by Assignee to be necessary or appropriate in connection therewith; (g) to adjust, settle or otherwise deal with any Abatements and to execute and/or render any and all instruments deemed by Assignee to be necessary or appropriate in connection therewith; - 2 - (h) to use and apply Rents, Losses or Rebates, Damages and/or Abatements to the payment of any taxes, assessments and charges of any nature whatsoever that may be levied or assessed in connection with the Property, to the payment of premiums on such policies of insurance on or in connection with the whole or any part of the Property as may be deemed advisable by Assignee, to the payment of any and all indebtedness, liability or interest of the Assignor and/or those secured by the Loan Documents (as hereinafter defined), whether now existing or hereafter to exist, to the payment of all expenses in the care and management of the Property, including such repairs, alterations, additions and/or improvements to the Property or any part thereof, as may be deemed necessary or advisable by Assignee, to the payment of reasonable attorneys' fees, court costs, labor, charges and/or expenses incurred in connection with any and all things which Assignee may do or cause to be done by virtue hereof, and to the payment of such interest on the indebtedness or on any of the foregoing, if any, as may be deemed necessary or advisable by Assignee; and (i) to make contracts for the care and management of the whole or any part of the Property in such form and providing for such compensation as may be deemed advisable by Assignee, and for the performance or execution of any or all of these presents, to constitute, appoint, authorize and in its place and stead put and substitute one attorney or attorneys, and to do, execute, perform and finish for Assignor and in Assignor's name all and singular those things which shall be necessary or advisable or which Assignor's said attorney or its substitute or substitutes shall deem necessary or advisable in and about, for, concerning these presents or the Property as thoroughly, amply and fully as Assignor could do concerning the same, being personally present, and whatsoever Assignor's said attorney, or its substitute or substitutes shall do or cause to be done in, about or concerning these presents or the Property or any part of any of them Assignor hereby ratifies and confirms; and also hereby granting to Assignee full power and authority to exercise at any and all times each and every right, privilege and power herein granted, without notice to Assignor. 2. Assignor warrants and represents to Assignee that all Leases are valid and enforceable; that no rent reserved in the Leases has been paid more than thirty (30) days in advance or assigned (except to General Electric Capital Corporation); that, to its knowledge, no tenant thereunder is in default of the terms thereof; that all Leases shall have been approved by Assignee prior to execution by Assignor; that it will not modify, alter, amend, terminate, cancel or accept a surrender of any of the Leases prior to the end of the term thereof, without first obtaining the written consent of Assignee, such consent not to be unreasonably withheld or delayed; and that no request will be made of any tenant to pay any rents, and no rents will be accepted other than security deposits, more than thirty (30) days in advance of the dates upon which such rents become due and payable under the terms of the Leases, it being agreed between Assignor and the tenants under the Leases that rents shall be paid as provided in the Leases and not otherwise, and in no event for more than one month in advance. Assignor shall observe and perform all obligations imposed upon landlord under said leases and shall not do or suffer to be done anything to impair the security thereof. - 3 - 3. Notwithstanding any provision hereof, Assignee grants to Assignor (a) a license to collect all rents under the Leases, such rent to be held in trust for Assignee, and (b) a license to manage the Property under the Leases and to otherwise undertake those actions set forth in Sections l(a) through (i) above to the extent permitted and subject to any limiations therein contained or set forth in any of the other Loan Documents. Each month, upon Assignor's compliance with all of its obligations required under a certain Deed of Trust Note, and a Deed of Trust and Security Agreement of even date herewith (as those terms are defined in the Deed of Trust and Security Agreement, and other documents of even date herewith which evidence and secure a loan from Assignee to Assignor in the amount of $14,000,000.00 (hereinafter the "Loan Documents"), Assignor may retain such rents as were collected that mouth and held in trust for Assignee. If in any month, there is a Default (as defined in the Deed of Trust) by Assignor under the terms of any of the Loan Documents, said license granted to Assignor will be automatically and immediately revoked. No notification of revocation is required. 4. Upon revocation of said license, Assignee, its successors and assigns, shall promptly notify all lessees under the Leases that Assignee will forthwith collect all rents directly and not through its licensee. Assignee, its successors and assigns, may enter upon the Property and take possession thereof, and may do every act and thing that such Assignor or any subsequent owner of Property might or could do. 5. Upon payment of all indebtedness secured by the Loan Documents, this Assignment shall be null and void, and Assignee agrees to execute instruments, in form reasonably satisfactory to Assignor, which shall reassign the Leases to Assignor. 6. Assignor, as a condition of the license granted by Assignee, shall be responsible for the control, care and management of the Property and shall carry out all of the terms and conditions of the Leases. Assignee shall not be responsible for any waste committed or permitted on the Property by any tenant nor shall Assignee be liable by reason of any dangerous or defective condition on or about the Property, except if such condition is caused by the willful and intentional misconduct and gross negligence of Assignee. Assignor shall and does hereby agree to indemnify and to hold Assignee harmless of and from any and all liability, loss or damage which is made or might incur under any of the Leases or under or by reason of this Assignment and of and from any and all claims and demands whatsoever which may be asserted against it by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants or agreements contained in the Leases except if such condition is caused by the willful and intentional misconduct and gross negligence of Assignee; should Assignee incur any such liability, loss or damage under any of the Leases or under or by reason of this Assignment, or in the defense of any such claims or demands, the amount thereof, including costs, expenses and reasonable attorneys' fees, shall be secured hereby, and Assignor shall reimburse Assignee therefor within seven (7) days of demand. 7. Assignee shall not in any way be responsible for failure to do any or all of the things for which rights, interest, power and/or authority are herein granted to it; and Assignee shall be liable for only such monies as - 4 - it actually receives under the terms hereof, provided, however, that failure Of Assignee to do any of the things or exercise any of the rights, interest, powers and/or authorities hereunder shall not be construed to be a waiver of any of the rights, interests, powers or authorities hereby assigned and granted to Assignee. 8. Assignor will assign and transfer to Assignee any and all further leases upon all or any part of Property and will execute and deliver upon the request of Assignee any and all instruments from time to time reasonably requested by Assignee to carry these presents into effect or to accomplish any other purpose deemed by Assignee to be necessary or appropriate in connection with this Assignment or the Loan Documents. So long as there is no existing Default (as defined in the Deed of Trust), Assignee agrees that it will not seek to effect any lien to which Assignor may be entitled upon the personal property and trade fixtures of any of Assignor's lessees, and upon the receipt of a written request from any of Assignor's lessees, Assignee shall agree to waive its right to distrain against the personal property and trade fixtures of Assignor's lessees. 9. These presents shall in no way operate to prevent Assignee from pursuing any remedy which it now or hereafter may have because of any present or future breach of the terms or conditions of the Loan Documents or any extension thereof. 10. Assignor shall, within thirty (30) days after execution of this Assignment, notify all present tenants, and agrees to notify all future tenants, that Assignor collects and receives all rents under authority of a license granted to it by Assignee and that, if any tenant receives notice from Assignee that Assignor's license to collect and receive rents has been revoked, such tenant shall, upon receipt of said notice and from that time forward, pay all unpaid rent directly to Assignee or as instructed by Assignee. 11. The terms, covenants, conditions and warranties contained herein and the powers granted hereby shall run with the land, shall inure to the benefit of and bind all parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns, and all lessees, subtenants and assigns of same, and all occupants and subsequent owners of the Property, and all subsequent holders of the Loan Documents. 12. This Assignment is to construed and enforced according to, and governed by, the laws of the State of Maryland. 13. Assignor agrees that Assignee may exercise any and all of its rights hereunder through the trustees under the Deed of Trust for the Property, and Assignor hereby confirms to said trustees and their successors, that they shall have the same rights and interest as Assignee in the event of Assignee's direction that said trustees act hereunder. - 5 - IN WITNESS WHEREOF, this Assignment of Leases and Rents has been properly executed and sealed by Assignor on the day and year first written above. WITNESS/ATTEST: LONDONTOWN CORPORATION, a Delaware corporation /s/ By: /s/ Zachary C.Goldman (SEAL) - --------------------------------- --------------------------- Assistant Secretary Zachary C.Goldman Vice President and Chief Financial officer - 6 - EXHIBIT A DESCRIPTION OF REAL PROPERTY BEING A 35.733 ACRE TRACT AT LONDONTOWN BOULEVARD, EAST OF MARYLAND ROUTE 32, ELDERSBURG, CARROLL COUNTY, MARYLAND --------------------------------------------------------------- BEGINNING on the northeast side of the 50 foot wide right-of-way at the westernmost corner of parcel "A" containing 29.44 acres of land and shown on the plat titled "Londontown Manufacturing Company" as recorded among the Land Records of Carroll County in plat book 14 page 71, running thence binding on the west and north outlines of said parcel "A" six courses (1) North 51 degrees 00 minutes 00 seconds East 279.58 feet, (2) North 22 degrees 00 minutes 00 seconds East 997.85 feet, (3) South 46 degrees 55 minutes 54 seconds East 785.00 feet, (4) South 75 degrees 05 minutes 24 seconds East 692.44 feet, (5) South 15 degrees 53 minutes 44 seconds West 702.42 feet, (6) South 76 degrees 22 minutes 37 seconds West 734.39 feet to the northeast side of said 50 foot wide right-of-way, thence binding thereon and binding also on the southwest outlines of said parcel "A" four courses (7) North 60 degrees 44 minutes 21 seconds West 13.88 feet (8) Northwesterly by a curve to the left with a radius of 850.00 feet, the arc distance of 207.19 feet, (9) Northwesterly by a curve to the right with a radius of 1934.77 feet the arc distance of 800.38 feet and (10) North 51 degrees 00 minutes 00 seconds West 22.00 feet to the place of beginning. TOGETHER WITH the right and privilege to the use, in common with others entitled thereto, of such portion of a 50-foot-wide right-of-way running along a portion of the southwesterly boundary of parcel "A" described hereunder, and continuing along the southwesterly boundary of parcel "C", as shown on the aforementioned plat, to Maryland Route 32, for the purpose of ingress, egress - 7 - and regress to and from the parcels of land described hereunder and Maryland Route 32, as set forth in and subject to the terms, conditions and reservations regarding the same in the Deed dated November 26, 1988 from INTERCO INCORPORATED to INTERCO SUBSIDIARY, INC. and recorded among the Land Records of Carroll County, Maryland at Book 1122 Page 944, saving and excepting that portion of the 50 foot right-of-way conveyed to County Commissioners of Carroll County on January 31, 1977 by that certain Deed recorded among the Land Records of Carroll County, Maryland at Book 654 Page 119. BEING THE SAME parcels of land granted and conveyed in the Deed from INTERCO INCORPORATED to INTERCO SUBSIDIARY, INC., dated November 26, 1988 and recorded among the Land Records of Carroll County, Maryland at Book 1122, Page 944 and the Deed from INTERCO SUBSIDIARY, INC. to LONDONTOWN CORPORATION, dated November 26, 1988 and recorded among the Land Records of Carroll County, Maryland at Book 1122, Page 947. CONTAINING 35.733 acres of land. - 8 - EXHIBIT B LIST OF ALL LEASES 1. NO currently existing leases. - 9 - EX-10.15 23 EXHIBIT 10.15 DEED OF TRUST NOTE $14,000,000.00 Baltimore, Maryland December 27, 1989 FOR VALUE RECEIVED, LONDONTOWN CORPORATION, a Delaware corporation, (the "Borrower"), promises to pay to the order of METLIFE CAPITAL CREDIT CORPORATION, a Delaware corporation (the "Lender"), the principal sum of FOURTEEN MILLION DOLLARS AND NO CENTS ($14,000,000.00) (the "Principal Loan Amount") with interest thereon at the rate hereinafter set forth (the "Loan"). The repayment of interest and principal of the Principal Loan Amount shall be as follows: (1) (a) Beginning on the the date hereof, interest will be due on the unpaid Principal Loan Amount at the rate of ten and one-quarter percent (10.25%) per annum (the "Interest Rate"). (b) All interest will be calculated on the basis of a 360-day year factor applied to actual days elapsed. (2) Interest on the unpaid Principal Loan Amount will be payable, in arrears, commencing with interest only for the partial month in which the date hereof occurs, on the first day of the first full month after the date hereof, and continuing thereafter on the first day of each month until the entire unpaid Principal Loan Amount and all accrued and unpaid interest thereon is paid in full. (3) Principal and interest thereon as described above will be paid in one hundred thirteen (113) substantially equal consecutive monthly installments as set forth on Schedule 1 attached hereto and made a part hereof, in the amount needed to repay the Principal Loan Amount in full on the twentieth anniversary of the date hereof. Such monthly payments of principal and interest will begin on the first day of the second full month after the date hereof, and will continue on the first day of each and every month thereafter until the Loan matures. The Loan will mature and the outstanding Principal Loan Amount, all accrued and unpaid interest thereon, and any other sums due and payable in connection therewith (the "Balloon Payment"), unless paid in its entirety at an earlier date, will be due and payable on the first day of that month which is one hundred fourteen (114) months after the month in which the first payment of principal and interest occurs (the "Maturity Date"). (4) If any portion of the Principal Loan Amount and/or interest thereon remains unpaid after the Maturity Date such portion of the Principal Loan Amount and all unpaid interest will bear interest from the Maturity Date until such amount due is paid in full, at the rate of two percent (2%) per annum over the Interest Rate. (5) If the Borrower fails to make one or more required payments of principal and/or interest, as provided above, within ten (10) days after the date such payment is due, the Borrower will pay to the Lender a late charge equal to four percent (4%)of said-unpaid amount in order to defray the increased cost involved in handling such delinquent payments. Any such charges shall be payable on demand. (6) Any installment or other part payment made by or on behalf of the Borrower hereof will be applied first, to late payment charges due under paragraph (5) above; second, to interest accrued and payable at the stated rate and the penalty rate stated in paragraph (4) above, if applicable; and third, to the unpaid Principal Loan Amount hereof, in the inverse order of the maturity of the principal payments. (7) The Principal Loan amount may be prepaid, in whole, but not in part, on any regularly scheduled principal and interest payment date occurring on or after the third anniversary of the date hereof,, upon not less than thirty (30) days prior written notice to the Lender, but only in accordance with the terms and conditions of this paragraph (7). Any such optional prepayment will be accompanied by payment of accrued and unpaid interest on the Principal Loan Amount up to (but not including) the date of prepayment, and by payment to the Lender of a prepayment premium, if any, determined as follows: The prepayment premium shall be determined by (i) calculating the decrease, if any, expressed in basis points, in the current weekly average yield of ten (10) year United States Treasury Notes, as published in Federal Reserve Statistical Release H.15 (519) from the date of this Note to the prepayment date, (ii) dividing the difference, if any, by 10,000, (iii) multiplying the result by the outstanding Principal Loan Amount to be prepaid, (iv) multiplying the result in (iii) by the number of years remaining from the prepayment date to the Maturity Date, and (v) discounting the calculated result to the present value of such amounts utilizing a discount factor of 10.25% per annum. Expressed as a formula, the calculation would be made as follows: (Basis Point decrease in the index/10,000) x outstanding Principal Loan Amount equals the prepayment premium for each remaining year. Discount the prepayment premium for each year at 10.25% per annum for number of years remaining from the prepayment date to the Maturity Date. For example, if the prepayment premium for each remaining year from the prepayment date to the Maturity Date is $50,000.00 and seven (7) years are remaining from the prepayment date to the Maturity Date, the discounted prepayment premium would be $241,430.27. - 2 - (8) Notwithstanding anything to the contrary, the prepayment premium (as determined in accordance with paragraph (7) above but not exceeding $200,000.00) shall be due in the event that the Loan is accelerated as a result of: (i) a sale, transfer or conveyance, of any interest in the Property (as defined in the Deed of Trust) to a third party not directly or indirectly owned or affiliated with the Borrower, or (ii) a change in the ownership of the Borrower, whether by sale or acquisition, which results in a material change in the composition of the management of the Borrower, occurring prior to the third anniversary of the date hereof. For the purposes of this paragraph, "management" shall mean the Borrower's executive officer group and the officer group. A "material change in the composition of the management" shall not be deemed to include changes in management of the Borrower occurring in the ordinary course of the Borrower's business including, without limitation, retirement, death and normal employee attrition. Any such prepayment shall not delay, postpone, abate or recast the balance of the unpaid Principal Loan Amount, and the monthly payments thereunder shall continue in the same amount and in the same order as set forth on Schedule 1. All payments of principal, interest, late fees and premiums, if any, will be made during regular business hours at the principal office of the holder of this Note located at Ten Stamford Forum, Stamford, Connecticut 06904, or at such other place as the Lender shall designate in writing, and will be made by check (subject to collection), draft (subject to collection), or other instrument as may be approved from time to time by the holder hereof or may be paid in coin or currency of the United States of America which at the time of such payment is legal tender for the payment of public or private debts. Any payment by check or draft will be subject to the condition that any receipt issued therefor will be ineffective unless the amount due is actually collected by the Lender. This Note is secured inter alia by the first Deed of Trust and Security Agreement of even date herewith by and between Borrower, Daniel L. Wieneke and Jack N. Zemil, Trustees, and Lender covering certain property and premises situate and lying in Carroll County, Maryland (the "Deed of Trust"). The terms, covenants, conditions, provisions, stipulations, and agreements contained in the Deed of Trust are hereby made a part hereof to the same extent and with the same effect as if fully set forth herein; and, without limiting the foregoing, reference is hereby made to the Deed of Trust for a description of the property conveyed thereunder, the definition of certain terms, the nature and extent of the security and the rights of the Lender in respect of such security. This Note is also secured by an Assignment of Leases and Rents of even date herewith made by the Borrower to the Lender with respect to the property granted and conveyed under the Deed of Trust. If the Borrower defaults in the payment when due of any installment of interest and/or principal, or any and all other payments due hereunder, including, without limitation, late charges as herein provided, or in the performance of any of the terms, agreements, covenants or conditions contained in the Deed of Trust or any other instrument given to secure the payment hereof (all of which are hereinafter referred to as the "Loan Documents"), upon the giving of any applicable notice and expiration of any applicable cure period contained in the Loan Documents then, or at any time thereafter, the - 3 - entire principal of this Note, irrespective of the Maturity Date specified herein, together with the then accrued and unpaid interest thereon, may, at the Lender's election, become immediately due and payable. Time is of the essence of this Note in connection with all of the obligations of Borrower including without limitation during any applicable grace or cure periods. The rights or remedies of the Lender as provided in this Note, the Deed of Trust and the other Loan Documents will be cumulative and concurrent and may be pursued singly, successively, or together against the Borrower, the property or security held by the Lender for the payment hereof or otherwise at the sole discretion of the Lender. The failure to exercise any such right or remedy will in no event be construed as a waiver or release of said rights or remedies or of the right to exercise them at any later time. Except as may be otherwise expressly provided in this Note or in any of the other Loan Documents, the Borrower and all endorsers hereof severally waive diligence, presentment, protest and demand, and also notice of protest, of demand, of nonpayment, of dishonor and of maturity and consent that the time of payments or any part thereof may be extended by the Lender and that the real or collateral security or any part thereof may be released by the Lender, without in anywise modifying, altering, releasing, affecting or limiting their respective liability or the lien of the Deed of Trust (except to the extent so released). The Borrower agrees to be jointly and severally liable with any endorsers, sureties, accommodation parties hereof and all other persons liable or to become liable on this Note for the payment of all costs of collection, including reasonable attorneys' fees and all other costs of suit, in case the unpaid Principal Loan Amount, or any payment of interest only or principal and interest thereon, is not paid when due, and if the same remains unpaid for ten (10) days after written notice to Borrower, or for the foreclosure of the Deed of Trust or other Loan Documents, and whether through courts of original jurisdiction, as well as in courts of appellate jurisdiction, or through a Bankruptcy Court or other legal proceedings. The Borrower hereby waives trial by jury in any action or proceeding to which the Borrower and the Lender may be parties, arising out of or in any way pertaining to (a) this Note, (b) any other Loan Documents, or (c) the property securing the Deed of Trust other than personal injury actions or proceedings. It is agreed and understood that this waiver constitutes a waiver of trial by jury of all claims against all parties to such actions or proceedings, including claims against parties who are not parties to this Note. This waiver is knowingly, willfully and voluntarily made by the Borrower, and the Borrower hereby represents that no representations of fact or opinion have been made by any individual to induce this waiver of trial by jury or to in any way modify or nullify its effect. In case any provision (or any part of any provision) contained in this Note shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not - 4 - affect any other provision (or remaining part of the affected provision) of this Note, but this Note will be construed as if such invalid, illegal or unenforceable provision (or part thereof), had never been contained herein, but only to the extent it is invalid, illegal or unenforceable. This Note may not be amended, modified or terminated orally, but only by an agreement in writing signed by the party against whom enforcement of such amendment, modification or termination is sought. Whenever used herein, the words "Borrower" and "Lender" will be deemed to include their respective heirs, personal representatives, executors, successors and assigns. This Note will be construed according to and governed by the laws of the State of Maryland without regard to principles of conflict of laws. The Borrower hereby acknowledges that the loan evidenced by this Note is a Commercial Loan within the meanings of Sections 12-101(c) and 12-103(e) of the Commercial Law Article of the Annotated Code of Maryland (1975 edition, as amended). IN WITNESS WHEREOF, this Note has been properly executed and sealed by the Borrower on the day and year first written above. WITNESS/ATTEST: BORROWER: LONDONTOWN CORPORATION, a Delaware corporation /s/ By:/s/ Zachary C. Goldman (SEAL) - ---------------------------------- -------------------------------- Assistant Secretary Zachary C. Goldman, Vice President and Chief Financial Officer The within Deed of Trust Note is secured by a first lien Deed of Trust on property located in Carroll County, Maryland, by and among Borrower, Daniel L. Wieneke and Jack N. Zemil, Trustees, and Lender. I HEREBY CERTIFY that the within Deed of Trust Note is the Deed of Trust Note described in the Deed of Trust, such Deed of Trust and the within Deed of Trust Note having been executed in my presence. /s/ Giovanna M. Young --------------------------------- Notary Public My Commission Expires: July 1, 1990 - -------------------------- - 5 - AMORTIZATION SCHEDULE LONDONTOWN CORPORATION PAYMENT INTEREST PRINCIPAL BALANCE IRR CALCULATION ------- -------- --------- ------- --------------- 0 14,000,000.00 (14,000,000.00) 1 137,430.07 119,583.33 17,846.74 13,982,153.26 137,430.07 2 137,430.07 119,430.89 17,999.18 13,964,154.09 137,430.07 3 137,430.07 119,277.15 18,152.92 13,946,001.17 137,430.07 4 137,430.07 119,122.09 18,307.98 13,927,693.19 137,430.07 5 137,430.07 118,965.71 18,464.36 13,909,228.83 137,430.07 6 137,430.07 118,808.00 18,622.07 13,890,606.76 137,430.07 7 137,430.07 118,648.93 18,781.14 13,871,825.62 137,430.07 8 137,430.07 118,488.51 18,941.56 13,852,884.06 137,430.07 9 137,430.07 118,326.72 19,103.35 13,833,780.71 137,430.07 10 137,430.07 118,163.54 19,266.53 13,814,514.18 137,430.07 11 137,430.07 117,998.98 19,431.09 13,795,083.09 137,430.07 12 137,430.07 117,833.00 19,597.07 13,775,486.02 137,430.07 13 137,430.07 117,665.61 19,764.46 13,755,721.56 137,430.07 14 137,430.07 117,496.79 19,933.28 13,735,788.28 137,430.07 15 137,430.07 117,326.52 20,103.55 13,715,684.73 137,430.07 16 137,430.07 117,154.81 20,275.26 13,695,409.47 137,430.07 17 137,430.07 116,981.62 20,448.45 13,674,961.02 137,430.07 18 137,430.07 116,806.96 20,623.11 13,654,337.91 137,430.07 19 137,430.07 116,630.80 20,799.27 13,633,538.64 137,430.07 20 137,430.07 116,453.14 20,976.93 13,612,561.72 137,430.07 21 137,430.07 116,273.96 21,156.11 13,591,405.61 137,430.07 22 137,430.07 116,093.26 21,336.81 13,570,068.80 137,430.07 23 137,430.07 115,911.00 21,519.07 13,548,549.73 137,430.07 24 137,430.07 115,727.20 21,702.87 13,526,846.86 137,430.07 25 137,430.07 115,541.82 21,888.25 13,504,958.60 137,430.07 26 137,430.07 115,354.85 22,075.22 13,482,883.39 137,430.07 27 137,430.07 115.166.30 22,263.77 13,460,619.61 137,430.07 28 137,430.07 114,976.13 22,453.94 13,438,165.67 137,430.07 29 137,430.07 114,784.33 22,645.74 13,415,519.93 137,430.07 30 137,430.07 114,590.90 22,839.17 13,392,680.76 137,430.07 31 137,430.07 114,395.81 23,034.26 13,369.646.51 137,430.07 32 137,430.07 114,199.06 23,231.01 13,346,415.50 137,430.07 33 137,430.07 114,000.63 23,429.44 13,322,986.06 137,430.07 34 137,430.07 113,800.51 23,629.56 13,299,356.50 137,430.07 35 137,430.07 113,598.67 23,831.40 13,275,525.10 137,430.07 36 137,430.07 113,395.11 24,034.96 13,251,490.14 137,430.07 37 137,430.07 113,189.81 24,240.26 13,277,249.88 137,430.07 38 137,430.07 112,982.76 24,447.31 13,202,802.57 137,430.07 39 137,430.07 112,773.94 24,656.13 13,178,146.44 137,430.07 40 137,430.07 112,563.33 24,866.74 13,153,279.70 137,430.07 41 137,430.07 112,350.93 25,079.14 13,128,200.56 137,430.07 42 137,430.07 112,136.71 25,293.36 13,102,907.21 137,430.07 43 137,430.07 111,920.67 25,509.40 13,077,397.80 137,430.07 44 137,430.07 111,702.77 25,727.30 13,051,670.50 137,430.07 45 137,430.07 111,483.02 25,947.05 13,025,723.45 137,430.07 46 137,430.07 111,261.39 26,168.68 12,999,554.77 137,430.07 47 137,430.07 111,037.86 26,392.21 12,973,162.57 137,430.07 48 137,430.07 110,812.43 26,617.64 12,946,544.93 137,430.07 49 137,430.07 110,585.07 26,845.00 12,919,699.93 137,430.07 50 137,430.07 110,355.77 27,074.30 12,892,625.63 137,430.07 51 137,430.07 110,124.51 27,305.56 12,865,320.07 137,430.07 52 137,430.07 109,891.28 27,538.79 12,837,781.27 137,430.07 53 137,430.07 109,656.05 27,774.02 12,810,007.25 137,430.07 54 137,430.07 109,418.81 28,011.26 12,781,995.99 137,430.07 55 137,430.07 109,179.55 28,250.52 12,753,745.47 137,430.07 56 137,430.07 108,938.24 28,491.83 12,725,253.6 137,430.07 57 137,430.07 108,694.87 28,735.20 12,696,518.45 137,430.07 58 137,430.07 108,449.43 28,980.64 12,667,537.81 137,430.07 59 137,430.07 108,201.89 29,228.18 12,638,309.62 137,430.07 60 137,430.07 107,952.23 29,477.84 12,608,831.78 137,430.07 61 137,430.07 107,700.44 29,729.63 12,579,102.15 137,430.07 62 137,430.07 107,446.50 29,983.57 12,549,118.58 137,430.07 63 137,430.07 107,190.39 30,239.68 12,518,878.90 137,430.07 64 137,430.07 106,932.09 30,497.98 12,488,380.92 137,430.07 65 137,430.07 106,671.59 30,758.48 12,457,622.43 137,430.07 66 137,430.07 106,408.86 31,021.21 12,426,601.22 137,430.07 67 137,430.07 106,143.89 31,286.18 12,395,315.04 137,430.07 68 137,430.07 105,876.65 31,553.42 12,363,761.62 137,430.07 69 137,430.07 105,607.13 31,822.94 12,331,938.68 137,430.07 70 137,430.07 105,335.31 32,094.76 12,299,843.92 137,430.07 71 137,430.07 105,061.17 32,368.90 12,267,475.01 137,430.07 72 137,430.07 104,784.68 32,645.39 12,234,829.62 137,430.07 73 137,430.07 104,505.84 32,924.23 12,201,905.39 137,430.07 74 137,430.07 104,224.61 33,205.46 12,168,699.93 137,430.07 75 137,430.07 103,940.98 33,489.09 12,135,210.84 137,430.07 76 137,430.07 103,654.93 33,775.14 12,101,435.69 137,430.07 77 137,430.07 103,366.43 34,063.64 12,067,372.05 137,430.07 78 137,430.07 103,075.47 34,354.60 12,033,017.45 137,430.07 79 137,430.07 102,782.02 34,648.05 11,998,369.41 137,430.07 80 137,430.07 102,486.07 34,944.00 11,963,425.41 137,430.07 81 137,430.07 102,187.59 35,242.48 11,928,182.93 137,430.07 82 137,430.07 101,886.56 35,543.51 11,892,639.42 137,430.07 83 137,430.07 101,582.96 35,847.11 11,856,792.32 137,430.07 84 137,430.07 101,276.77 36,153.30 11,820,639.01 137,430.07 85 137,430.07 100,967.96 36,462.11 11,784,176.90 137,430.07 86 137,430.07 100,656.51 36,773.56 11,747,403.34 137,430.07 87 137,430.07 100,342.40 37,087.67 11,710,315.68 137.430.07 88 137,430.07 100,025.61 37,404.46 11,672,911.22 137.430.07 89 137,430.07 99,706.12 37,723.95 11,635,187.27 137.430.07 90 137,430.07 99,383.89 38,046.18 11,597,141.09 137,430.07 91 137,430.07 99,058.91 38,371.16 11,558,769.93 137,430.07 92 137,430.07 98,731.16 38,698.91 11,520,071.02 137.430.07 93 137,430.07 98,400.61 39,029.46 11,481,041.56 137,430.07 94 137,430.07 98,067.23 39,362.84 11,441,678.72 137.430.07 95 137,430.07 97,731.01 39,699.06 11,401,979.65 137,430.07 96 137,430.07 97,391.91 40,038.16 11,361,941.49 137,430.07 97 137,430.07 97,049.92 40,380.15 11,321,561.34 137,430.07 98 137,430.07 96,705.00 40,725.07 11,280,836.27 137,430.07 99 137,430.07 96,357.14 41,072.93 11,239,763.35 137,430.07 100 137,430.07 96,006.31 41,423.75 11,198,339.59 137,430.07 101 137,430.07 95,652.48 41,777.59 11,156,562.00 137,430.07 102 137,430.07 95,295.63 42,134.44 11,114,427.57 137,430.07 103 137,430.07 94,935.74 42,494.33 11,071,933.23 137,430.07 104 137,430.07 94,572.76 42,857.31 11,029,075.92 137,430.07 105 137,430.07 94,206.69 43,223.38 10,985,852.54 137,430.07 106 137,430.07 93,837.49 43,592.58 10,942,259.96 137,430.07 107 137,430.07 93,465.14 43,964.93 10,898,295.03 137,430.07 108 137,430.07 93,089.60 44,340.47 10,853,954.57 137,430.07 109 137,430.07 92,710.86 44,719.21 10,809,235.36 137,430.07 110 137,430.07 92,328.89 45,101.18 10,764,134.17 137,430.07 111 137,430.07 91,943.65 45,486.42 10,718,647.75 137,430.07 112 137,430.07 91,555.12 45,874.95 10,672,772.79 137,430.07 113 137,430.07 91,163.27 46,266.80 10,626,505.99 137,430.07 114 10,717,273.26 90,768.07 10,626,505.19 0.80 10,717,273.26 10.25 EX-10.16 24 EXHIBIT 10.16 SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT ------------------------------------------------ SECOND AMENDED AND RESTATED AGREEMENT by and among London Fog Industries, Inc., a Delaware corporation (the "Company"), and Robert E. Gregory, Jr. (the "Executive"), dated as of the 27th day of February, 1998. W I T N E S S E T H: WHEREAS, the Executive is Chairman and Chief Executive Officer of the Company; WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to continue to employ the Executive as Chairman and Chief Executive Officer of the Company; WHEREAS, the Executive desires to continue to serve in such capacities; WHEREAS, the Executive has completed his targeted assignment under his amended and restated employment agreement with the Company (the "Original Employment Agreement") as to the turnaround of the Company; and WHEREAS, the Company desires the Executive to continue employment with the Company pursuant to this Agreement in order to achieve certain other goals for the Company, but beyond the expiration of his Original Employment Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Employment Period. The Company shall continue to employ the Executive, and the Executive shall continue to serve the Company, on the terms and conditions set forth in this Agreement, for the period (the "Employment Period") commencing on the date hereof, and unless terminated earlier as provided in Section 5, terminating on February 28, 2002 (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, the Executive shall serve as Chairman and Chief Executive Officer of the Company and shall perform such duties as are commensurate with such positions as such duties may be assigned to him by the Board; it being understood that after the date hereof, such duties shall be consistent with the duties and responsibilities performed on and prior to the date hereof. (b) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote his full business activi ties to the business and affairs of the Company. It shall not be considered a violation of the foregoing for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures or fulfill speaking engagements, and (C) make and manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. 3. Compensation. (a) Annual Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary") at the rate of $1,389,150 per annum payable in accordance with the Company's normal payroll practices in effect from time to time. The then Annual Base Salary shall be increased by 5% (or such greater amount as the Board may determine) on December 30, 1998 and on each anniversary thereof during the Employment Period. Once increased, Annual Base Salary shall not be decreased. The Annual Base Salary, as increased, shall be deemed to be the new Annual Base Salary. (b) Bonus. For each fiscal year or portion thereof during the Employment Period commencing on or after February 28, 1999, the Executive shall be eligible to receive a cash bonus in an amount to be determined by the Board (or a sub-committee thereof) based on -2- the results of operations of the Company and the Executive's performance during that fiscal year (the "Bonus"). (c) Equity Enhancement Performance Program. The Executive shall receive for each full fiscal year or portion of a fiscal year prior to February 28, 1999 (regardless of whether such date is the end of a fiscal year of the Company) during the Employment Period, a bonus payment equal to 6% of the Company's Consolidated EBITA (as defined in the Amended and Restated Credit Agreement among the Company, the Several Lenders and Chemical Bank dated as of May 31, 1995, without regard to any amendments thereto after the date hereof) prorated for any portion of a fiscal year (the "Equity Bonus Payment"). Each Equity Bonus Payment shall be paid in a single cash lump sum no later than 30 days after the audited financial statements for such fiscal year are complete, but in no event later than 180 days after the Company's fiscal year end, unless the Executive elects in writing, before the beginning of the fiscal year for which the Equity Bonus Payment is to be awarded, to defer receipt of the Equity Bonus Payment on such terms as agreed by the Executive and the Company. (d) Other Benefits. During the Employment Period, the Executive shall be entitled to participate in all welfare benefit, savings and retirement plans and programs of the Company to the same extent as other executives of the Company, as well as in the special deferred compensation arrangement created for senior management. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in carrying out the Executive's duties under this Agreement, provided that the Executive complies with the applicable policies, practices and procedures of the Company. (f) Vacation. During the Employment Period, the Executive shall be entitled to four weeks annual paid vacation to be taken in accordance with Company policies. -3- 4. Common Equity. Simultaneous with execution of this Agreement, the Company shall grant the Executive a stock option to purchase 666,666 shares of common stock of the Company in accordance with the Company's 1998 Stock Option Plan and the draft stock option agreement annexed as Exhibit A hereto, as well as certain warrants to purchase common stock of the Company. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means that (i) the Executive has been unable, for a period of 90 consecutive business days, to perform the Executive's material duties under this Agreement, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and reasonably acceptable to the Executive or the Executive's legal representative, has determined that the Executive's incapacity is total and permanent. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective on the tenth day after receipt of such notice by the Executive (the "Disability Effective Date") , unless the Executive returns to substantially full-time performance of the Executive's duties before the Disability Effective Date. (b) By the Company. (i) The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. "Cause" means: A. the willful refusal of the Executive substantially to perform the Executive's duties under this Agreement (other than as a result of physical or mental illness or injury); or B. illegal conduct or gross misconduct by the Executive that is willful and results in material and demonstrable damage to the business or reputation of the Company. -4- (ii) Termination for Cause pursuant to Clause A above shall be effective upon the fifth business day following delivery to the Executive of a notice that the Board has determined that the Executive has engaged in conduct specified by Clause A above (which notice shall describe such conduct in reasonable detail), unless the Executive has cured the conduct prior to such time; provided that the Executive shall only have one such cure opportunity in any twelve month period. Termination for Cause pursuant to Clause B above shall be effective on the fifth business day following delivery to the Executive of a notice that the Board has determined that the Executive has engaged in conduct specified by Clause B (which notice shall describe such conduct in reasonable detail). In any dispute as to whether the determination of the Board was correct, the issue shall be a de novo determination of whether Cause existed and not a deter mination of whether the Board was arbitrary and capricious in finding that it existed. (c) Good Reason. (i) The Executive may terminate employment for Good Reason or without Good Reason. "Good Reason" means: A. the assignment to the Executive of any duties inconsistent in any respect with paragraph (a) of Section 2 of this Agreement, or any other action by the Company that results in a diminution in the Executive's position, authority, title, duties or responsibilities, other than an isolated and insubstantial action that is not taken in bad faith and that, if such isolated and insubstantial event is curable, is cured within a reasonable period after notice; B. any failure by the Company to comply with any provision of this Agreement, other than an isolated and insubstantial failure that is not taken in bad faith and that, if such isolated and insubstantial event is curable, is cured within a reasonable period after notice; C. any purported termination of the Executive's employment by the Company for a reason or in a manner not expressly permitted by this Agreement; or D. the occurrence of a Change in Control at the Company (as defined in Section 5(e) below). -5- Any good faith determination of "Good Reason" made by the Executive shall be conclusive, provided that the Executive gives notice to the Company of such determination within 45 days (in the case of an event described in Clause D of the definition of "Good Reason" above) or 90 days (in the case of any other event described in the definition of "Good Reason" above) of an event which constitutes Good Reason. Any failure to give such notice on a timely basis as specified above shall constitute a waiver of the right to treat such event as Good Reason under this Agreement. (ii) A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice ("Notice of Termination for Good Reason") of the termination, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relies. A termination of employment by the Executive for Good Reason shall be effective on the later of (i) the fifteenth business day following the date on which the notice is given or (ii) a later date set forth in such notice (which date shall in no event be later than 30 days after the notice is given). (iii) A termination of the Executive's employment by the Executive without Good Reason shall be effected by giving the Company written notice of the termination specifying a date of effectiveness not later than the tenth business day after the date such notice is given. (d) Date of Termination. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company for Cause or by the Executive with or without Good Reason is effective, as the case may be, or the date specified in a notice advising the Executive that his employment is being terminated without Cause (which date shall not be later than 30 days after such notice). -6- (e) A "Change in Control" of the Company shall be deemed to have occurred: (i) upon any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than any holder on the date hereof of the Company's 10% Senior Subordinated Notes due 2003, any holder of options granted under the Company's 1998 Stock Option Plan, or the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company), becoming the owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding securities; (ii) upon the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered by the exceptions in (i) above) acquires more than 50% of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (iii) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of 80% or more of the Company's assets other than such a sale to a person or persons who beneficially own, directly or indirectly, at least 50% or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale. 6. Obligations of the Company upon Termination. (a) Other than for Cause, Death or Disability; Good Reason. If, during the Employment Period, (1) the Company terminates the Executive's employment other than for Cause, death or Disability, or (2) the Executive terminates his employment for Good Reason, then the Executive shall receive the amounts described in subparagraphs (i) and (ii) below at the times specified therein and the Company shall continue the benefits described in subparagraph (iii) below until the earlier of (A) February 28, 2002, or (B) two years after the Date of Termination. The payments provided pursuant to this paragraph (a) of Section 6 are intended as severance payments for a termination -7- of the Executive's employment by the Company other than for Cause or Disability or for the actions of the Company leading to a termination of the Executive's employment by the Executive for Good Reason, and shall be the sole and exclusive remedy therefor. (i) In the events described in Section 6(a) above, there shall be paid to the Executive his accrued but unpaid cash compensation (the "Accrued Obligations"), which shall equal the sum of (1) any portion of the Executive's Annual Base Salary through the Date of Termination that has not yet been paid; (2) any unpaid Bonus and/or unpaid (and undeferred) Equity Bonus Payments for fiscal years completed prior to the Date of Termination; and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) that has not yet been paid and any expenses not previously reimbursed by the Company. The amounts due under this subparagraph (i) shall be paid in a lump sum within 30 days of the Date of Termination. (ii) In the events described in Section 6(a) above, the Company shall pay to the Executive (1) a lump sum, within 10 days of the Date of Termination, equal to two times the sum of his then current Annual Base Salary and the highest annual Bonus paid to him for either of the prior two completed fiscal years of the Company; and (2) a Bonus, or if the Date of Termination is prior to March 1, 1999, an Equity Bonus Payment, for the fiscal year during which the Date of Termination occurs (paid in a lump sum when such payment would otherwise be paid) based on actual achievement of performance goals or Consolidated EBITA, as applicable, for such fiscal year and pro-rated to reflect the portion of the fiscal year during which the Executive was employed by the Company. In addition, in such event all outstanding options and equity interests shall immediately vest and, if options, shall remain exercisable for the remainder of their stated term. (iii) The benefits to be continued as described above are health and welfare benefits to the Executive and/or the Executive's family at least as favorable (and with the same tax consequences to the Executive) as those that would have been provided to them under -8- paragraph (d) of Section 3 of this Agreement if the Executive's employment had continued until the second anniversary of the Date of Termination; provided, however, that during any period when the Executive and/or his family is eligible to receive such benefits under another employer- provided plan, the benefits provided by the Company under this subparagraph may be made secondary to those provided under such other plan. (b) Death or Disability. If the Executive's employment is terminated by reason of the Executive's death or Disability during the Employment Period, the Company shall pay the Executive or the Executive's estate or legal representative, as applicable (1) any Accrued Obligations as provided in Section 6(a)(i); and (2) a Bonus or, if the Date of Termination is prior to March 1, 1999, an Equity Bonus Payment, for the fiscal year during which the Date of Termination occurs (paid in a lump sum when such payment made otherwise be paid) based on actual achievement of performance goals or Consolidated EBITA, as applicable, for such fiscal year and pro-rated to reflect the portion of the fiscal year during which the Executive was employed by the Company. In addition, in such event all outstanding options and equity interests shall immediately vest and, if options, shall remain exercisable for the remainder of their stated term. The Company shall have no further obligations under this Agreement other than pursuant to Sections 13 and 14 hereof. (c) Cause; Other than for Good Reason. If the Executive's employment is terminated by the Company for Cause during the Employment Period, or if the Executive terminates his employment other than for Good Reason, the Company shall pay the Executive any Accrued Obligations and unreimbursed expenses through the Date of Termination, to the extent not yet paid. The Company shall have no further obligations under this Agreement other than pursuant to Sections 13 and 14 hereof. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies for which the Executive may qualify, -9- nor shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company or any of its affiliated companies on or after the Date of Termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. The Executive shall not be obligated to seek other employment or to take action by way of mitigation of the amounts payable to the Executive under the provisions of this Agreement, and no amounts received by the Executive from sub sequent employment shall offset amounts payable to the Executive hereunder. 9. Noncompetition; Confidentiality; Work Product. (a) During the Employment Period and for one year thereafter the Executive shall not, in any capacity, engage or participate in, or become employed by or render advisory, consulting or other services to or in connection with, or make any financial investment (whether in the form of equity or debt) or own any direct or indirect interest in, any Competitive Business (as defined below); provided, that nothing in this Section 9(a) shall prevent the Executive from making any investment in up to one percent of the total outstanding equity of any company whose stock is listed on an established securities market and whose annual sales exceed $150 million. "Competitive Business" means a company, other than Starter, whose outerwear and/or rainwear sales for the fiscal year ended immediately prior to the Executive's commencing work are more than 37.5% of that company's total sales for such fiscal year. -10- (b) If any restriction set forth with regard to competition is found by any court of competent jurisdiction, or an arbitrator, to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend over the maximum period of time, range of activities or geographic area as to which it may be enforceable. (c) The Executive shall hold in a fiduciary capacity for the benefit of the Company all information, knowledge or data relating to the Company or any of its affiliated companies and their respective businesses that the Executive obtains during the Executive's employment by the Company or any of its affiliated companies and that is not public knowledge (other than as a result of the Executive's violation of this Section 9(c)) or is otherwise learned from third parties ("Confidential Information"). The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Company, except (i) as may be necessary and appropriate in carrying out his duties under this Agreement, (ii) with the prior written consent of the Company, or (iii) as otherwise required by law or legal process. (d) Any intellectual property, including without limitation trade secrets, know-how, trademarks, trade names, and copyrighted material, developed by the Executive while employed by the Company shall be the exclusive property of the Company. Upon termination of the Executive's employment for any reason, the Executive shall immediately surrender to the Company all letters, papers, documents, instruments, records, books, products, and any other material owned by the Company. (e) In the event of a breach or potential breach of this Section 9, the Executive acknowledges that the Company and its affiliates will be caused irreparable injury and that money damages may not be an adequate remedy and agrees that the Company and its affiliates shall be entitled to injunctive or other equitable relief (in addition to its other remedies at law) to have the provisions of this Section 9 enforced. -11- 10. Arbitration; Attorneys' Fees. Except with regard to injunctive and equitable relief provided in Section 9, all claims by the Company or the Executive under this Agreement shall be subject to arbitration in New York City under the rules of the American Arbitration Association. The decision of the arbitrators shall be final and binding as between the parties and may be entered in any court having jurisdiction over the parties. The Company shall reimburse the Executive for all costs and expenses, including without limitation attorneys' fees, that the Executive may reasonably incur in connection with any contest between the Company and the Executive of the validity or enforceability of, or liability under, any provision of this Agreement, provided that the Executive obtains more than a de minimis portion of the relief he sought in such contest. The Company shall reimburse the Executive for the reasonable fees of one law firm retained by the Executive to assist in the negotiation of this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and permitted assigns. This Agreement may not be assigned by the Company except by operation of law through a merger or consolidation or in connection with a sale of assets constituting 90% or more of the assets of the Company. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. -12- 12. Miscellaneous. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: -------------------- Robert E. Gregory, Jr. 2125 Highway 14 East Landrum, South Carolina 29356 If to the Company: ------------------ London Fog Industries, Inc. 8 West 40th Street New York, New York 10018 Attention: General Counsel or to such other address as either party furnishes to the other in writing in accordance with this paragraph (b) of Section 12. Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such -13- provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) Neither the Executive's nor the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement (including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to paragraph (c) of Section 5 of this Agreement shall be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement), except as specified in the last sentence of Section 5(c)(i). (f) The Executive and the Company acknowledge that this Agreement supersedes: (i) the amended and restated employment agreement dated as of May 31, 1995 by and among the Executive, the Company and London Fog Corporation, and (ii) any other agreement between them concerning the subject matter hereof. 13. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive payable or distributed or distributable pursuant to the terms of this Agreement, but determined without regard to any additional payments required under this Section 13 (a "Payment"), would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all income taxes and Excise Tax imposed -14- upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 13(c), all determinations required to be made under this Section 13, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") and which shall be reasonably acceptable to the Company, which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 13, shall be paid by the Company to the Executive within ten days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 13(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred, together with the amount of any interest and penalties imposed as a result thereof, and any such amounts shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the -15- Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such repre sentation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 13(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the -16- Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount; and further provided that at any time when the Company fails to pay any material amount that it is obligated to pay under this Section 13(c) within 30 days after such amount becomes due (except to the extent the Company is contesting its obligation to pay such amount in good faith), the Executive rather than the Company shall thereafter have control over such proceeding and may make all determinations (provided that the foregoing shall not relieve the Company of its liability under this Section 13.) Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 13(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 13(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 13(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. -17- 14. Insurance and Indemnity. During the Employment Period, the Company shall maintain in effect (i) directors' and officers' liability insurance in an amount no less than in effect as of the date hereof, and (ii) to the maximum extent permitted by law, indemnification provisions in favor of the Executive no less favorable than those contained in the Company's certificate of incorporation and bylaws as in effect as of December 30, 1994. -18- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. --------------------------------------- Robert E. Gregory, Jr. LONDON FOG INDUSTRIES, INC. By ------------------------------------ Name: Title: -19- Exhibit A --------- [Stock Option Agreement] EX-10.17 25 EXHIBIT 10.17 SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT SECOND AMENDED AND RESTATED AGREEMENT by and among London Fog Industries, Inc., a Delaware corporation (the "Company"), and C. William Crain (the "Executive"), dated as of the 27th day of February, 1998. W I T N E S S E T H: WHEREAS, the Executive is President and Chief Operating Officer of the Company; WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to continue to employ the Executive as President and Chief Operating Officer of the Company; and WHEREAS, the Executive desires to continue to serve in such capacities. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Employment Period. The Company shall continue to employ the Executive, and the Executive shall continue to serve the Company, on the terms and conditions set forth in this Agreement, for the period (the "Employment Period") commencing on the date hereof, and unless terminated earlier as provided in Section 5, terminating on February 28, 2002 (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, the Executive shall serve as President and Chief Operating Officer of the Company and shall perform such duties as are commensurate with such positions as such duties may be assigned to him by the Board or by the Chief Executive Officer of the Company; it being understood that after the date hereof, such duties shall be consistent with the duties and responsibilities performed on and prior to the date hereof. (b) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote his full business activities to the business and affairs of the Company. It shall not be considered a violation of the foregoing for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures or fulfill speaking engagements, and (C) make and manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. 3. Compensation. (a) Annual Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary") at the rate of $781,396.88 per annum payable in accordance with the Company's normal payroll practices in effect from time to time. The then Annual Base Salary shall be increased by 5% (or such greater amount as the Board may determine) on December 30, 1998 and on each anniversary thereof during the Employment Period. Once increased, Annual Base Salary shall not be decreased. The Annual Base Salary, as increased, shall be deemed to be the new Annual Base Salary. (b) Bonus. For each fiscal year or portion thereof during the Employment Period commencing on or after February 28, 1999, the Executive shall be eligible to receive a cash bonus in an amount to be determined by the Board (or a sub-committee thereof) based on the results of operations of the Company and the Executive's performance during the fiscal year (the "Bonus"). (c) Equity Enhancement Performance Program. The Executive shall receive for each full fiscal year or portion of a fiscal year prior to February 28, 1999 (regardless of whether such date is the end of a fiscal year of the Company) during the Employment Period, a bonus payment equal to 4% of the Company's Consolidated EBITA (as defined in the Amended -2- and Restated Credit Agreement among the Company, the Several Lenders and Chemical Bank dated as of May 31, 1995, without regard to any amendments thereto after the date hereof) prorated for any portion of a fiscal year (the "Equity Bonus Payment"). Each Equity Bonus Payment shall be paid in a single cash lump sum no later than 30 days after the audited financial statements for such fiscal year are complete, but in no event later than 180 days after the Company's fiscal year end, unless the Executive elects in writing, before the beginning of the fiscal year for which the Equity Bonus Payment is to be awarded, to defer receipt of the Equity Bonus Payment on such terms as agreed by the Executive and the Company. (d) Other Benefits. During the Employment Period, the Executive shall be entitled to participate in all welfare benefit, savings and retirement plans and programs of the Company to the same extent as other executives of the Company, as well as in the special deferred compensation arrangement created for senior management. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in carrying out the Executive's duties under this Agreement, provided that the Executive complies with the applicable policies, practices and procedures of the Company. (f) Vacation. During the Employment Period, the Executive shall be entitled to four weeks annual paid vacation to be taken in accordance with Company policies. 4. Common Equity. Simultaneous with execution of this Agreement, the Company shall grant the Executive a stock option to purchase 333,333 shares of common stock of the Company in accordance with the Company's 1998 Stock Option Plan and the draft stock option agreement annexed as Exhibit A hereto, as well as certain warrants to purchase common stock of the Company. -3- 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means that (i) the Executive has been unable, for a period of 90 consecutive business days, to perform the Executive's material duties under this Agreement, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and reasonably acceptable to the Executive or the Executive's legal representative, has determined that the Executive's incapacity is total and permanent. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective on the tenth day after receipt of such notice by the Executive (the "Disability Effective Date") , unless the Executive returns to substantially full-time performance of the Executive's duties before the Disability Effective Date. (b) By the Company. (i) The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. "Cause" means: A. the willful refusal of the Executive substantially to perform the Executive's duties under this Agreement (other than as a result of physical or mental illness or injury); or B. illegal conduct or gross misconduct by the Executive that is willful and results in material and demonstrable damage to the business or reputation of the Company. (ii) Termination for Cause pursuant to Clause A above shall be effective upon the fifth business day following delivery to the Executive of a notice that the Board has determined that the Executive has engaged in conduct specified by Clause A above (which notice shall describe such conduct in reasonable detail), unless the Executive has cured the conduct prior to such time; provided that the Executive shall only have one such cure opportunity in any twelve month period. Termination for Cause pursuant to Clause B above shall be effective on -4- the fifth business day following delivery to the Executive of a notice that the Board has determined that the Executive has engaged in conduct specified by Clause B (which notice shall describe such conduct in reasonable detail). In any dispute as to whether the determination of the Board was correct, the issue shall be a de novo determination of whether Cause existed and not a determination of whether the Board was arbitrary and capricious in finding that it existed. (c) Good Reason. (i) The Executive may terminate employment for Good Reason or without Good Reason. "Good Reason" means: A. the assignment to the Executive of any duties inconsistent in any respect with paragraph (a) of Section 2 of this Agreement, or any other action by the Company that results in a diminution in the Executive's position, authority, title, duties or responsibilities, other than an isolated and insubstantial action that is not taken in bad faith and that, if such isolated and insubstantial event is curable, is cured within a reasonable period after notice; B. any failure by the Company to comply with any provision of this Agreement, other than an isolated and insubstantial failure that is not taken in bad faith and that, if such isolated and insubstantial event is curable, is cured within a reasonable period after notice; C. any purported termination of the Executive's employment by the Company for a reason or in a manner not expressly permitted by this Agreement; D. the occurrence of a Change in Control at the Company (as defined in Section 5(e) below). E. the Company shall have terminated the employment of Robert E. Gregory, Jr. without Cause or Robert E. Gregory, Jr. shall have terminated his employment with Good Reason. Any good faith determination of "Good Reason" made by the Executive shall be conclusive, provided that the Executive gives notice to the Company of such determination within 45 days (in the case of an event described in Clause D of the definition of "Good Reason" above) or 90 days (in the case of any other event described in the definition of "Good Reason" above) of an event which constitutes Good Reason. Any failure to give such notice on a timely basis as -5- specified above shall constitute a waiver of the right to treat such event as Good Reason under this Agreement. (ii) A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice ("Notice of Termination for Good Reason") of the termination, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relies. A termination of employment by the Executive for Good Reason shall be effective on the later of (i) the fifteenth business day following the date on which the notice is given or (ii) a later date set forth in such notice (which date shall in no event be later than 30 days after the notice is given). (iii) A termination of the Executive's employment by the Executive without Good Reason shall be effected by giving the Company written notice of the termination specifying a date of effectiveness not later than the tenth business day after the date such notice is given. (d) Date of Termination. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company for Cause or by the Executive with or without Good Reason is effective, as the case may be, or the date specified in a notice advising the Executive that his employment is being terminated without Cause (which date shall not be later than 30 days after such notice). (e) A "Change in Control" of the Company shall be deemed to have occurred: (i) upon any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than any holder on the date hereof of the Company's 10% Senior Subordinated Notes due 2003, any holder of options granted under the Company's 1998 Stock Option Plan, the Company, any trustee or other fiduciary holding -6- securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company), becoming the owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding securities; (ii) upon the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered by the exceptions in (i) above) acquires more than 50% of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (iii) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of 80% or more of the Company's assets other than such a sale to a person or persons who beneficially own, directly or indirectly, at least 50% or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale. 6. Obligations of the Company upon Termination. (a) Other than for Cause, Death or Disability; Good Reason. If, during the Employment Period, (1) the Company terminates the Executive's employment other than for Cause, death or Disability, or (2) the Executive terminates his employment for Good Reason, then the Executive shall receive the amounts described in subparagraphs (i) and (ii) below at the times specified therein and the Company shall continue the benefits described in subparagraph (iii) below until the earlier of (A) February 28, 2002, or (B) two years after the Date of Termination. The payments provided pursuant to this paragraph (a) of Section 6 are intended as severance payments for a termination of the Executive's employment by the Company other than for Cause or Disability or for the actions of the Company leading to a termination of the Executive's employment by the Executive for Good Reason, and shall be the sole and exclusive remedy therefor. -7- (i) In the events described in Section 6(a) above, there shall be paid to the Executive his accrued but unpaid cash compensation (the "Accrued Obligations"), which shall equal the sum of (1) any portion of the Executive's Annual Base Salary through the Date of Termination that has not yet been paid; (2) any unpaid Bonus and/or unpaid (and undeferred) Equity Bonus Payments for fiscal years completed prior to the Date of Termination; and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) that has not yet been paid and any expenses not previously reimbursed by the Company. The amounts due under this subparagraph (i) shall be paid in a lump sum within 30 days of the Date of Termination. (ii) In the events described in Section 6(a) above, the Company shall pay to the Executive (1) a lump sum, within 10 days of the Date of Termination, equal to two times the sum of his then current Annual Base Salary and the highest annual Bonus paid to him for either of the prior two completed fiscal years of the Company; and (2) a Bonus, or if the Date of Termination is prior to March 1, 1999, an Equity Bonus Payment, for the fiscal year during which the Date of Termination occurs (paid in a lump sum when such payment would otherwise be paid) based on actual achievement of performance goals or Consolidated EBITA, as applicable, for such fiscal year and pro-rated to reflect the portion of the fiscal year during which the Executive was employed by the Company. In addition, in such event all outstanding options and equity interests shall immediately vest and, if options, shall remain exercisable for the remainder of their stated term. (iii) The benefits to be continued as described above are health and welfare benefits to the Executive and/or the Executive's family at least as favorable (and with the same tax consequences to the Executive) as those that would have been provided to them under paragraph (d) of Section 3 of this Agreement if the Executive's employment had continued until the second anniversary of the Date of Termination; provided, however, that during any period when the Executive and/or his family is eligible to receive such benefits under another employer- -8- provided plan, the benefits provided by the Company under this subparagraph may be made secondary to those provided under such other plan. (b) Death or Disability. If the Executive's employment is terminated by reason of the Executive's death or Disability during the Employment Period, the Company shall pay the Executive or the Executive's estate or legal representative, as applicable (1) any Accrued Obligations as provided in Section 6(a)(i); and (2) a Bonus or, if the Date of Termination is prior to March 1, 1999, an Equity Bonus Payment, for the fiscal year during which the Date of Termination occurs (paid in a lump sum when such payment made otherwise be paid) based on actual achievement of performance goals or Consolidated EBITA, as applicable, for such fiscal year and pro-rated to reflect the portion of the fiscal year during which the Executive was employed by the Company. In addition, in such event all outstanding options and equity interests shall immediately vest and, if options, shall remain exercisable for the remainder of their stated term. The Company shall have no further obligations under this Agreement other than pursuant to Sections 13 and 14 hereof. (c) Cause; Other than for Good Reason. If the Executive's employment is terminated by the Company for Cause during the Employment Period, or if the Executive terminates his employment other than for Good Reason, the Company shall pay the Executive any Accrued Obligations and unreimbursed expenses through the Date of Termination, to the extent not yet paid. The Company shall have no further obligations under this Agreement other than pursuant to Sections 13 and 14 hereof. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies for which the Executive may qualify, nor shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any -9- plan, policy, practice or program of, or any contract or agreement with, the Company or any of its affiliated companies on or after the Date of Termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. The Executive shall not be obligated to seek other employment or to take action by way of mitigation of the amounts payable to the Executive under the provisions of this Agreement, and no amounts received by the Executive from subsequent employment shall offset amounts payable to the Executive hereunder. 9. Noncompetition; Confidentiality; Work Product. (a) During the Employment Period and for one year thereafter the Executive shall not, in any capacity, engage or participate in, or become employed by or render advisory, consulting or other services to or in connection with, or make any financial investment (whether in the form of equity or debt) or own any direct or indirect interest in, any Competitive Business (as defined below); provided, that nothing in this Section 9(a) shall prevent the Executive from making any investment in up to one percent of the total outstanding equity of any company whose stock is listed on an established securities market and whose annual sales exceed $150 million. "Competitive Business" means a company, other than Starter, whose outerwear and/or rainwear sales for the fiscal year ended immediately prior to the Executive's commencing work are more than 37.5% of that company's total sales for such fiscal year. (b) If any restriction set forth with regard to competition is found by any court of competent jurisdiction, or an arbitrator, to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be -10- interpreted to extend over the maximum period of time, range of activities or geographic area as to which it may be enforceable. (c) The Executive shall hold in a fiduciary capacity for the benefit of the Company all information, knowledge or data relating to the Company or any of its affiliated companies and their respective businesses that the Executive obtains during the Executive's employment by the Company or any of its affiliated companies and that is not public knowledge (other than as a result of the Executive's violation of this Section 9(c)) or is otherwise learned from third parties ("Confidential Information"). The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Company, except (i) as may be necessary and appropriate in carrying out his duties under this Agreement, (ii) with the prior written consent of the Company, or (iii) as otherwise required by law or legal process. (d) Any intellectual property, including without limitation trade secrets, know-how, trademarks, trade names, and copyrighted material, developed by the Executive while employed by the Company shall be the exclusive property of the Company. Upon termination of the Executive's employment for any reason, the Executive shall immediately surrender to the Company all letters, papers, documents, instruments, records, books, products, and any other material owned by the Company. (e) In the event of a breach or potential breach of this Section 9, the Executive acknowledges that the Company and its affiliates will be caused irreparable injury and that money damages may not be an adequate remedy and agrees that the Company and its affiliates shall be entitled to injunctive or other equitable relief (in addition to its other remedies at law) to have the provisions of this Section 9 enforced. 10. Arbitration; Attorneys' Fees. Except with regard to injunctive and equitable relief provided in Section 9, all claims by the Company or the Executive under this -11- Agreement shall be subject to arbitration in New York City under the rules of the American Arbitration Association. The decision of the arbitrators shall be final and binding as between the parties and may be entered in any court having jurisdiction over the parties. The Company shall reimburse the Executive for all costs and expenses, including without limitation attorneys' fees, that the Executive may reasonably incur in connection with any contest between the Company and the Executive of the validity or enforceability of, or liability under, any provision of this Agreement, provided that the Executive obtains more than a de minimis portion of the relief he sought in such contest. The Company shall reimburse the Executive for the reasonable fees of one law firm retained by the Executive to assist in the negotiation of this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and permitted assigns. This Agreement may not be assigned by the Company except by operation of law through a merger or consolidation or in connection with a sale of assets constituting 90% or more of the assets of the Company. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. -12- 12. Miscellaneous. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: -------------------- C. William Crain 10 Nutmeg Drive Greenwich, Connecticut 06831 If to the Company: ------------------ London Fog Industries, Inc. 8 West 40th Street New York, New York 10018 Attention: General Counsel or to such other address as either party furnishes to the other in writing in accordance with this paragraph (b) of Section 12. Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such -13- provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) Neither the Executive's nor the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement (including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to paragraph (c) of Section 5 of this Agreement shall be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement), except as specified in the last sentence of Section 5(c)(i). (f) The Executive and the Company acknowledge that this Agreement supersedes: (i) the amended and restated employment agreement dated as of May 31, 1995 by and among the Executive, the Company and London Fog Corporation, and (ii) any other agreement between them concerning the subject matter hereof. 13. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive payable or distributed or distributable pursuant to the terms of this Agreement, but determined without regard to any additional payments required under this Section 13 (a "Payment"), would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all income taxes and Excise Tax imposed -14- upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 13(c), all determinations required to be made under this Section 13, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") and which shall be reasonably acceptable to the Company, which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 13, shall be paid by the Company to the Executive within ten days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 13(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred, together with the amount of any interest and penalties imposed as a result thereof, and any such amounts shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the -15- Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 13(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the -16- Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount; and further provided that at any time when the Company fails to pay any material amount that it is obligated to pay under this Section 13(c) within 30 days after such amount becomes due (except to the extent the Company is contesting its obligation to pay such amount in good faith), the Executive rather than the Company shall thereafter have control over such proceeding and may make all determinations (provided that the foregoing shall not relieve the Company of its liability under this Section 13.) Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 13(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 13(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 13(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. -17- 14. Insurance and Indemnity. During the Employment Period, the Company shall maintain in effect (i) directors' and officers' liability insurance in an amount no less than in effect as of the date hereof, and (ii) to the maximum extent permitted by law, indemnification provisions in favor of the Executive no less favorable than those contained in the Company's certificate of incorporation and bylaws as in effect as of December 30, 1994. -18- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. ---------------------------- C. William Crain LONDON FOG INDUSTRIES, INC. By ------------------------ Name: Title: -19- Exhibit A --------- [Stock Option Agreement] EX-12.1 26 EXHIBIT 12.1 EXHIBIT 12.1 LONDON FOG INDUSTRIES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED -------------------------------------------------------------------------- FEBRUARY 26, FEBRUARY 25, FEBRUARY 24, FEBRUARY 22, FEBRUARY 28, 1994 1995 1996 1997 1998 -------------- -------------- -------------- -------------- -------------- EARNINGS Income (loss) before extraordinary items and cumulative effect of accounting change ........................ $ (42,383) $ (212,051) $ (34,583) $ (1,796) $ (11,028) Add back- ................................ Fixed Charges ........................... 28,657 34,291 21,816 17,340 20,192 --------- ---------- --------- -------- --------- Total earnings ........................ $ (13,726) $ (177,760) $ (12,767) $ 15,544 $ 9,164 ========= ========== ========= ======== ========= FIXED CHARGES Interest Expense .......................... $ 24,625 $ 29,620 $ 17,249 $ 13,073 $ 14,959 Interest factor in rental expense ......... 4,032 4,671 4,567 4,267 5,233 --------- ---------- --------- -------- --------- Total fixed charges ................... $ 28,657 $ 34,291 $ 21,816 $ 17,340 $ 20,192 ========= ========== ========= ======== ========= Coverage Deficiency ................... $ (42,383) $ (212,051) $ (34,583) $ (1,796) $ (11,028) ========= ========== ========= ======== ========= FOURTEEN THIRTEEN WEEKS ENDED WEEKS ENDED MAY 31, MAY 30, 1997 1998 ------------- ------------ EARNINGS Income (loss) before extraordinary items and cumulative effect of accounting change ........................ $ (12,445) $ (13,191) Add back- ................................ Fixed Charges ........................... 5,363 2,883 --------- --------- Total earnings ........................ $ (7,082) $ (10,308) ========= ========= FIXED CHARGES Interest Expense .......................... $ 4,044 $ 1,460 Interest factor in rental expense ......... 1,319 1,423 --------- --------- Total fixed charges ................... $ 5,363 $ 2,883 ========= ========= Coverage Deficiency ................... $ (12,445) $ (13,191) ========= =========
EX-21.1 27 EXHIBIT 21.1 Exhibit 21.1 List of Subsidiaries Name of Jurisdiction of Subsidiary Incorporation ---------- ------------- Clipper Mist, Inc. Maryland London Fog Sportswear, Delaware Inc. Matthew Manufacturing Maryland Co., Inc. Pacific Trail, Inc. Washington PTI Holding Corp. Nevada PTI Top Company, Inc. Nevada Star Sportswear Delaware Manufacturing Corp. The Mounger Corporation Washington The Scranton Outlet Delaware Corporation London Fog Raincoats United Kingdom Limited EX-23.1 28 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ARTHUR ANDERSEN LLP As independent public accountants, we hereby consent to the use of our reports (and to all references to our firm) included in or made a part of this Prospectus. ARTHUR ANDERSEN LLP Baltimore, Maryland August 27, 1998 EX-27 29 FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1 US DOLLARS 12-MOS 3-MOS FEB-28-1998 FEB-28-1998 MAR-01-1998 MAR-01-1998 FEB-28-1998 MAY-30-1998 1 1 566,000 2,714,000 0 0 30,168,000 5,675,000 1,237,000 1,248,000 69,729,000 124,829,000 106,114,000 139,623,000 52,363,000 52,675,000 16,016,000 17,974,000 215,091,000 246,232,000 57,114,000 101,890,000 161,322,000 161,200,000 0 0 0 0 80,000 80,000 (4,669,000) (17,481,000) 215,091,000 246,232,000 335,621,000 36,627,000 339,676,000 37,487,000 227,405,000 22,753,000 98,499,000 21,754,000 27,060,000 6,171,000 (490,000) 29,000 14,664,000 1,455,000 (11,028,000) (13,191,000) (5,932,000) 51,000 (5,096,000) (13,242,000) 0 0 160,855,000 0 0 0 155,759,000 (13,242,000) 15.99 (1.66) 15.99 (1.66)
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