Demand Credit Facility

September 2, 1998


Maxwell Shoe Company Inc. 101 Sprague Street Hyde Park, Massachusetts 02136


RE: Demand Credit Facility
----------------------


Ladies and Gentlemen:


The purpose of this letter is to set forth our mutual understanding concerning a discretionary demand credit facility to be established in favor of Maxwell Shoe Company Inc., a Delaware corporation (the "BORROWER"), by
-------- BankBoston, N.A. (the "BANK") in a maximum principal amount of $35,000,000
---- (hereinafter, the "MAXIMUM CREDIT AMOUNT"). Capitalized terms used and not
--------------------- otherwise defined herein are defined in SCHEDULE A hereto.
----------


1. DEMAND LINE OF CREDIT.
---------------------


1.1 DEMAND LINE OF CREDIT. Subject to the terms and conditions contained
--------------------- in this Agreement, the Bank has established in favor of the Borrower a demand line of credit (the "LINE OF CREDIT") under which the Bank may make
-------------- discretionary advances (the "DEMAND LOANS") in such amounts as may be requested
------------ by the Borrower, provided that the sum of (a) the aggregate amount of Demand
-------- Loans outstanding hereunder (after giving effect to all amounts requested) plus
---- (b) the LC Exposure Amount, shall at no time exceed the Maximum Credit Amount. The Line of Credit shall expire on the Expiration Date, unless sooner terminated at the sole discretion of the Bank. The Demand Loans shall be evidenced by the Borrower's demand promissory note in the form attached as EXHIBIT 1 hereto (the
--------- "DEMAND NOTE"), payable to the order of the Bank, which Demand Note is hereby ----------- incorporated herein by reference and made a part hereof.


THE PARTIES ACKNOWLEDGE AND AGREE THAT DEMAND LOANS UNDER THE LINE OF CREDIT WILL BE MADE, AND THE LINE OF CREDIT MAY BE TERMINATED OR REDUCED AT ANY TIME, BY THE BANK IN ITS SOLE DISCRETION AND THAT THE BANK MAY MAKE DEMAND FOR REPAYMENT OF THE DEMAND LOANS AT ANY TIME IN ITS SOLE DISCRETION. WITHOUT LIMITING IN ANY WAY THE BANK'S DISCRETION REGARDING THE DEMAND LOANS OR THE LINE OF CREDIT, THE BORROWER ACKNOWLEDGES AND AGREES THAT THE AGREEMENTS SET FORTH IN THIS AGREEMENT ARE MADE SOLELY AS AN INDUCEMENT TO THE BANK TO ESTABLISH THE LINE OF CREDIT HEREUNDER AND SHALL NOT IN ANY WAY RESTRICT OR COMPROMISE THE BANK'S DISCRETIONARY RIGHTS TO


DEMAND PAYMENT UNDER THE DEMAND NOTE. YOU HEREBY FURTHER ACKNOWLEDGE AND AGREE THAT THE AGREEMENTS CONTAINED HEREIN ARE CONDITIONS PRECEDENT TO THE ESTABLISHMENT OF THE LINE OF CREDIT AND THE MAKING OF THE DEMAND LOANS, AND THAT SUCH AGREEMENTS SHALL NOT BE DEEMED FOR ANY REASON TO BE ALL INCLUSIVE OR TO APPLY TO OR GOVERN EVENTS OR CIRCUMSTANCES WHICH MAY OCCUR, OR CONCERNS WHICH MAY ARISE, AFTER THE DATE HEREOF.


The occurrence of a breach of any covenant of the Borrower herein, or the determination by the Bank that any representation or warranty now or hereafter made by the Borrower to the Bank was not true or accurate in any material respect when given, shall not be a prerequisite to the Bank's making demand or requiring payment of Demand Loans or refusing to make Demand Loans. The Bank agrees to notify the Borrower promptly following any reduction or termination of the Line of Credit.


1.2. DEMAND LOAN ACCOUNT. The Bank shall record in an account on its
------------------- books (the "DEMAND LOAN ACCOUNT") in accordance with customary accounting
------------------- practices (a) all Demand Loans, (b) all payments made by the Borrower on account of Demand Loans and other amounts payable by the Borrower hereunder, and (c) all interest, fees, charges and expenses payable by the Borrower hereunder. At the option of the Bank, prior to the Expiration Date, all payments of interest on the Demand Note and all LC Draw Obligations shall be charged directly to the Demand Loan Account. The debit balance of the Demand Loan Account shall reflect the amount of the Borrower's obligations to the Bank from time to time in respect of Demand Loans and other amounts payable by the Borrower hereunder. At least once each month the Bank may render a statement of account showing as of its date the debit balance of the Demand Loan Account which, unless within 30 days of such date notice to the contrary is received by the Bank from the Borrower, shall be deemed true and correct absent demonstrable error.


1.3. LOAN DISBURSEMENTS. The proceeds of Demand Loans made by the Bank
------------------ shall be deposited by the Bank in immediately available funds in the Borrower's primary operating account with the Bank.


2. INTEREST.
--------


2.1. INTEREST RATES.
--------------


(a) At the Borrower's option, subject to the terms hereof, each Demand Loan (or one or more portions thereof) shall bear interest from the date advanced until payment in full at (a) the Base Rate or (b) the Adjusted Eurodollar Rate plus one percent (1.0%).
----


(b) Interest on Demand Loans bearing interest based upon the Base Rate ("BASE RATE LOANS") shall be due and payable, without setoff, deduction or - ----------------- counterclaim, quarterly in arrears on the last day of each calendar quarter, beginning June 30, 1998, and ON DEMAND. The rate on Base Rate Loans shall change on the date of any change in the applicable Base Rate.


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(c) Interest on Demand Loans bearing interest based upon the Adjusted Eurodollar Rate ("EURODOLLAR LOANS") shall be due and payable, without setoff,
---------------- deduction or counterclaim, in arrears, on the last day of the related Interest Period, and ON DEMAND; provided, however, in the case of any Demand Loan having an Interest Period longer than three (3) months, such interest shall be due and payable every three (3) months after the beginning thereof and ON DEMAND.


(d) Interest on Eurodollar Loans shall be computed on the basis of the actual number of days elapsed over a 360-day year and interest on Base Rate Loans and fees and expenses hereunder shall be computed on the basis of the actual number of days elapsed over a 365-day year. Except as otherwise provided in the definition of the term "Interest Period" with respect to the Eurodollar Loans, if any payment hereunder or under the Demand Note shall be due and payable on a day which is not a Business Day, such payment shall be deemed due on the next following Business Day and interest shall be payable at the applicable rate specified herein through such extension period.


2.2. DEFAULT RATE. To the extent permitted by law, interest on overdue
------------ principal, interest and other amounts due under the Demand Note or this Agreement shall be payable on demand at a rate per annum equal to 2% above the otherwise applicable interest rate.


3. REQUESTS FOR DEMAND LOANS; TYPES OF DEMAND LOANS.
------------------------------------------------


(a) Except as otherwise provided in the Cash Management Agreement, requests by the Borrower for Demand Loans shall be made in a manner satisfactory to the Bank. Each such request shall be made by the Borrower no later than (a) 11:00 A.M. (Boston time) on the proposed date of any Base Rate Loan and (b) 1:00 P.M. (Boston time) on the third Business Day prior to the proposed date of any Eurodollar Loan. Each such request shall specify (i) the principal amount thereof, (ii) the proposed date thereof, (iii) if such Demand Loan is an Eurodollar Loan, the Interest Period thereof and (iv) whether a Base Rate Loan or a Eurodollar Loan. Each such request shall be irrevocable and binding on the Borrower and shall obligate the Borrower to accept (if the Bank, in its sole discretion, agrees to honor a request for a Demand Loan) the Demand Loan so requested on the proposed date. Each Eurodollar Loan requested shall be in a minimum amount of $1,000,000; provided, that at no time shall there be more than five separate Interest Periods applicable to outstanding Eurodollar Loans. The Borrower may elect from time to time to convert any outstanding Demand Loan to a Base Rate Loan or Eurodollar Loan, as the case may be, provided that (i) with
-------- respect to any such conversion of Eurodollar Loans to Base Rate Loans, the Borrower shall provide the Bank with notice in the form requested by the Bank by 11:00 A.M. (Boston time) on the date of such proposed conversion; (ii) with respect to any such conversion of Base Rate Loans to Eurodollar Loans, the Borrower shall provide such notice by 1:00 P.M. (Boston Time) at least two (2) Business Days prior to the date of such proposed conversion; (iii) with respect to any such conversion of a Eurodollar Loan into Base Rate Loan, such conversion shall only be made on the last day of the related Interests Period; (iv) no Base Rate Loans may be converted into Eurodollar Loans after the earlier of demand on the Demand Note or the Expiration Date; and (v) any conversion of less


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than all of the outstanding Base Rate Loans into Eurodollar Loans shall be in a minimum aggregate principal amount of $1,000,000.


(b) The Borrower may continue any Eurodollar Loan as such upon the expiration of the related Interest Period by providing the Bank with two (2) Business Days' written notice thereof in the form requested by the Bank; provided that no Eurodollar Loans may be continued after demand on the Demand - -------- Note or the Expiration Date. Base Rate Loans shall be deemed to continue as such until Bank's receipt of an appropriate notice requesting conversion thereof to Eurodollar Loans.


4. PAYMENTS AND PREPAYMENTS OF PRINCIPAL.
-------------------------------------


4.1. PREPAYMENTS, ETC. The principal amount of the Demand Note may be
---------------- prepaid, in whole or in part, at any time without premium or penalty, other than any payments due in accordance with SECTION 4.3 in respect of Eurodollar Loans so prepaid. Amounts so prepaid under the Demand Note may be borrowed and reborrowed from time to time, subject to the Bank's sole discretion. In the event the outstanding principal amount of Demand Loans plus the Letter of Credit Exposure exceeds the Maximum Credit Amount, the Borrower shall immediately pay such excess amount in cash to the Bank to be credited to the Demand Loan Account, together with any payments due in accordance with SECTION 4.3.


4.2. PAYMENTS. On demand, or if no demand is made prior to the Expiration
-------- Date, on the Expiration Date, the Borrower shall repay, without set-off, deduction or counterclaim, all outstanding principal under the Demand Note, together with all unpaid interest thereon and all fees and other amounts due hereunder


4.3. PAYMENTS BEFORE END OF INTEREST PERIOD. The Borrower agrees to
-------------------------------------- indemnify and hold the Bank harmless from and against any loss, cost or expense (including interest or fees payable to Banks of funds obtained by it in order to maintain any Eurodollar Loans less reinvestment income, and in any event
---- excluding loss of anticipated profits) it may sustain as a consequence of (a) the Borrower's failure to pay the principal amount of any Eurodollar Loan as and when due (whether at the Expiration Date, by reason of demand or otherwise) or the payment of any Eurodollar Loan on a date that is not the last day of the Interest Period applicable thereto, (b) default by the Borrower in making a borrowing or conversion after the Borrower has given a notice relating thereto, or (c) the making of any payment of a Eurodollar Loan or the making of any conversion of any such Eurodollar Loan to a Base Rate Loan on a day that is not the last day of the applicable Interest Period with respect thereto, including interest or fees payable to Banks of funds obtained in order to maintain any such Eurodollar Loans. The Borrower shall pay such amount within 15 days after presentation by the Bank of a statement setting forth the amount and the Bank's calculation thereof pursuant hereto, which statement shall be deemed true and correct absent demonstrable error.


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5. LETTERS OF CREDIT
-----------------


5.1. ISSUANCE OF LETTERS OF CREDIT. Subject to all the terms and
----------------------------- conditions of this Agreement, from time to time prior to the earlier of the Expiration Date or demand hereunder, the Bank may, in its sole discretion, issue for the account of the Borrower one or more irrevocable documentary or stand-by letters of credit (the "LETTERS OF CREDIT"). The sum of (a) the LC Exposure
----------------- Amount plus (b) the aggregate amount of Demand Loans outstanding shall at no
---- time exceed the Maximum Credit Amount. The occurrence of a breach of any covenant of the Borrower herein, or the determination by the Bank that any representation or warranty now or hereafter made by the Borrower to Bank was not true or accurate in any material respect when given, shall not be a prerequisite to the Bank's refusing to issue any Letter of Credit hereunder or to demand payment hereunder.


5.2 CONDITIONS TO ISSUANCE OF LETTERS OF CREDIT; ETC.
------------------------------------------------


(a) In its sole discretion, the Bank may, from time to time, agree to issue, extend or renew any Letter of Credit subject to the following conditions:


(i) Such Letter of Credit may provide for payment in U.S. Dollars
or other currencies as requested by the Borrower and shall
expire by its terms no later than the earlier to occur of (A)
five (5) Business Days prior to the Expiration Date and (B) one
year from the date of its issuance (which expiration date may
be extended in the sole discretion of the Bank for additional
one year periods ending prior to the date referred to in clause
(A), above);


(ii) The form and terms of each Letter of Credit shall be acceptable
to the Bank; and


(iii) Each Letter of Credit shall be issued to support obligations of
the Borrower incurred in the ordinary course of its business.


(b) Whenever the Borrower desires to have a Letter of Credit issued, extended or renewed, the Borrower will furnish to the Bank a written application (on the Bank's customary form) therefor which shall (A) be received by the Bank not less than three Business Days prior to the proposed date of issuance, extension or renewal in the case of a stand-by Letter of Credit, and one Business Day prior to the proposed date of issuance, extension or renewal, in the case of a documentary Letter of Credit (unless Borrower furnishes such request to the Bank through the Bank's "trade key services" procedures in which event such request shall be received by the Bank on the same Business Day) and (B) specify (1) such proposed date (which must be a Business Day), (2) the expiration date of such Letter of Credit, (3) the name and address of the beneficiary of the Letter of Credit, (4) the amount of such Letter of Credit, and (5) the purpose and proposed form of such Letter of Credit. Each Letter of Credit shall be subject to the Uniform Customs Act and, to the extent not inconsistent therewith, the laws of the Commonwealth of Massachusetts. In


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the event and to the extent that any provision of such application shall be inconsistent with any provision of this Agreement, then the provisions of this Agreement shall govern.


5.3. LC DRAW OBLIGATIONS OF THE BORROWER. In order to induce the Bank to
----------------------------------- issue, extend and renew each Letter of Credit (which the Bank may do in each instance in its sole discretion), the Borrower hereby agrees to reimburse or pay to the Bank:


(a) except as otherwise expressly provided in clause (b), after notice from the Bank that any draft presented under such Letter of Credit has been honored by the Bank (i) the amount paid by the Bank under or with respect to such Letter of Credit, plus interest accrued thereon as provided below, and (ii) the amount of any taxes, fees, charges or other reasonable costs and expenses incurred by the Bank in connection with any payment made by the Bank under or with respect to such Letter of Credit; and


(b) on the Expiration Date or earlier, if demand is made by the Bank, an amount equal to the LC Exposure Amount, which amount shall be held by the Bank as cash collateral for all existing unpaid and potential LC Draw Obligations.


Interest shall accrue on any and all amounts remaining unpaid by the Borrower under this Section 5.3 at any time from the date a draft under a Letter of Credit is honored until the date the LC Draw Obligation is paid by the Borrower at the rate of interest specified in Section 2.2 and shall be payable to the Bank on demand.


5.4. DEMAND LOANS TO SATISFY LC DRAW OBLIGATIONS. Unless the Borrower has
------------------------------------------- previously satisfied an LC Draw Obligation as demanded, the Bank, in its sole discretion, may make a Demand Loan which is a Base Rate Loan, and the Borrower shall be deemed to have elected to satisfy such LC Draw Obligation arising under Section 5.3 above by borrowing a Demand Loan which is a Base Rate Loan in the amount thereof and applying the proceeds thereto.


5.5. REFUNDED AMOUNTS. Unless the Borrower has otherwise failed to
---------------- satisfy its obligations hereunder upon demand, the Bank shall reimburse the Borrower upon the expiration of each Letter of Credit with respect to which the Borrower has satisfied an LC Draw Obligation pursuant to the cash collateral requirement of Section 5.3(b), an amount equal to the difference between the amount of such cash collateral delivered to the Bank for such Letter of Credit, less the amounts of such cash collateral used to pay LC Draw Obligations and taxes, fees, charges and other reasonable costs and expenses of the Bank in connection therewith.


5.6. BORROWER'S OBLIGATIONS ABSOLUTE. The Borrower assumes all risks in
------------------------------- connection with the Letters of Credit. The Borrower's obligations with respect to Letters of Credit under this Agreement shall be absolute and unconditional under any and all circumstances or any condition precedent whatsoever or any setoff, counterclaim or defense to payment which the Borrower may have or have had against the Bank or any beneficiary of a Letter of Credit. The Borrower also agrees that the Bank shall not be responsible for, and the Borrower's LC Draw Obligations shall not be affected by, among other things, (i) the validity, genuineness or


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enforceability of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged, or (ii) any dispute between or among the Borrower, the beneficiary of any Letter of Credit or any financing institution or other party to which any Letter of Credit may be transferred or any claims or defenses whatsoever of the Borrower against the beneficiary of any Letter of Credit or any such transferee. The Bank shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit. The Borrower agrees that any action taken or omitted by the Bank under or in connection with each Letter of Credit and the related drafts and documents, if done in good faith and in the absence of gross negligence and willful misconduct, shall be binding upon the Borrower and shall not subject the Bank to any liability to the Borrower. The Bank shall be entitled to rely, and shall be fully protected in relying upon, any Letter of Credit, draft, writing, resolution, notice, consent, certificate, affidavit, letter, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person and upon advice and statements of legal counsel, independent accountants and other experts selected by the Bank.


5.7. LETTER OF CREDIT FEE. In order to induce the Bank to issue, extend
-------------------- and renew each Letter of Credit, the Borrower hereby agrees to pay a fee (in each case, a "LETTER OF CREDIT FEE") to the Bank, for each day on the undrawn
-------------------- amount under such Letter of Credit on such day at a rate per annum equal to the standard set forth on the Letter of Credit Fee Schedule attached hereto and made a part hereof. In addition, the Borrower shall pay to the Bank any and all standard charges customarily made by the Bank in connection with such issuance, extension or renewal.


6. CHANGED CIRCUMSTANCES.
---------------------


6.1. EURODOLLAR LOANS. In the event that:
----------------


(a) on any date on which the Adjusted Eurodollar Rate would otherwise
be set, the Bank shall have determined in good faith (which
determination shall be final and conclusive) that adequate and
fair means do not exist for ascertaining the Interbank Offered
Rate in the interbank eurodollar market where the eurodollar and
foreign currency and exchange operations of the Bank in respect
of its Eurodollar Loans are then being conducted, or


(b) at any time the Bank shall have determined in good faith (which
determination shall be final and conclusive) that:


(i) the making or continuation of, or conversion of any Base
Rate Loan to, a Eurodollar Loan has been made
impracticable or unlawful by (1) the occurrence of a
contingency that materially and adversely affects the
interbank eurodollar market by reference to which the Bank
determined an applicable Adjusted Eurodollar Rate or where
the eurodollar and foreign currency and exchange


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operations in respect of the Bank's Eurodollar Loans are
then being conducted or (2) compliance by the Bank in good
faith with any future applicable law or governmental
regulation, guideline or order or interpretation or change
thereof by any governmental authority charged with the
interpretation or administration thereof or with any
request or directive of any such governmental authority
(whether or not having the force of law); or


(ii) the Adjusted Eurodollar Rate shall no longer represent the
effective cost to the Bank for U.S. dollar deposits in the
interbank market for eurodollar deposits where the
eurodollar and foreign currency and exchange operations in
respect of the Bank's Eurodollar Loans are then being
conducted;


then, and in any such event, the Bank shall so notify the Borrower. Until the Bank notifies the Borrower that the circumstances giving rise to such notice no longer apply, the obligation of the Banks to allow selection by the Borrower of Eurodollar Loans shall be suspended. If at the time the Bank so notifies the Borrower, the Borrower has previously given the Bank a request for a Eurodollar Loan or has notified the Bank of the Borrower's intention to convert Base Rate Loans to one or more Eurodollar Loans but such Demand Loans have not yet gone into effect, such notification shall be deemed to be void and the Borrower may choose not to borrow such Demand Loans or to borrow, convert or continue such Loans as Base Rate Loans. Upon such date as the Bank shall specify in such notice, the Borrower shall prepay all outstanding Eurodollar Loans, together with interest thereon (but with no obligation to pay any amounts required to be paid pursuant to Section 5.3(b)). In the event that the Bank determines at any time following the giving of notice pursuant to this clause that the Bank may lawfully make Eurodollar Loans, the Bank shall give notice to the Borrower of such determination, whereupon the Borrower's right to request Eurodollar Loans shall be restored.


6.2. ALL CREDIT EXTENSIONS. (i) If any change the date hereof in any
--------------------- existing or any new law, regulation, treaty or official directive or the interpretation or application thereof by any court or by any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law):


(A) subjects the Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by
the Borrower or otherwise with respect to the transactions
contemplated hereby (except for taxes on the overall net income
of the Bank imposed by the United States of America or any
political subdivision thereof or the jurisdiction in which the
Bank is organized or in which it maintains its principal office
or in which it maintains the Demand Loans), or


(B) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets
held by, or deposits in


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or for the account of, or Eurodollar Loans or Letters of Credit
issued by the Bank (other than such requirements as are already
included in the determination of the Adjusted Eurodollar Rate),
or


(C) imposes upon the Bank any other adverse condition with respect to
the Eurodollar Loans or the Letters of Credit or otherwise with
respect to its performance under this Agreement, ...